Hangzhou Hikvision Digital Technology:Faster earnings growth on improving demand

类型：公司研究机构：瑞银证券有限责任公司研究员：Billy Feng 日期：2016-07-26

Faster earnings growth.

    Hikvision reported H116 revenue/net profit of Rmb12.6bn/2.6bn, up 29%/18% YoY.

    Q2 revenue/net profit jumped 33%/26% YoY to Rmb7.4bn/1.5bn. Earnings have beenrising steadily. Overseas revenue grew c40% YoY in H1, and its share in total revenuerose to 29%. Factoring in the acquisition of British security firm SHL in May, weforecast the company to maintain fast overseas earnings growth in H2.

    Steadily higher gross margin.

    Hikvision had an overall gross margin of 40% in H116, up from 38% in H215. Grossmargin on front-end audio and video products, the biggest revenue contributor, was47%, up 2ppt from H215; gross margins on other major products (eg, back-end audioand video products) were flat. Meanwhile, the overseas business posted a 5ppt HoHincrease in gross margin to 48%, the historical average, helping boost overall GM.

    Likely to enjoy 10% tax rate again.

    Recently, the Ministry of Finance, State Administration of Taxation, NDRC and MIITissued a circular saying companies meeting the criteria of a national key softwareenterprise may enjoy a preferential tax rate in 2015 and 2016. We estimate Hikvisioncould see its applicable tax rate fall to 10% from the current 15% from H216 onwards.

    Also, the company could obtain a refund for taxes it overpaid in 2015, which would beaccretive to earnings.

    Valuation: Maintain Buy rating.

    Hikvision is trading at 18x 2016E PE and 14x 2017E PE (historical average -1 S.D.),respectively. Our DCF-based price target of Rmb31.00 assumes a WACC of 6.8%. Wemaintain our Buy rating.