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China’s Hikvision Rises As Surveillance Gets Hot
Feb 08, 2018

The centerpiece of President Trump’s State of Union address last week was his vow to build the wall along the Mexican border. It wasn’t just the president’s supporters or immigration hawks applauding the wall, but the global security and surveillance sector.


The hottest player in that sector right now is China’s Hangzhou Hikvision Digital Technology (ticker: 002415.China), by far the world’s largest maker of surveillance cameras. Hikvision not only makes people and identification-matching cameras, it manages back-end storage, develops surveillance software for governments, cities, companies, not to say airports, ports, highways, and utilities. It has over 15% share of the global video-surveillance market and over 35% of the booming security market in surveillance-obsessed China, where government and corporations watch just about every move people make.


Hikvision, as it’s called, is controversial because it is a subsidiary of China Electronics Technology Group, which is directly controlled by the Chinese government, which raises concerns that Beijing could use its products to gather information. Last year, the U.S. Army pulled security cameras from Fort Leonard Wood in Missouri on reports that Hikvision was a key supplier of surveillance equipment there; the U.S. Embassy in Kabul also removed its Hikvision cameras. A Congressional committee recently began hearings on risks posed by security and surveillance companies. Hikvision insists its equipment isn’t used to spy for the Chinese government, that it doesn’t have access to cameras sold to customers, and that Beijing has no influence in its day-to-day operations.


China’s Hikvision Rises as Surveillance Gets Hot 

Overseas saves account for 30% of Hikvision revenues, with the U.S. accounting for just under 10%; sales to the Pentagon, Department of Homeland Security, and other U.S. entities amount to less than 3%. “If the Trump administration bans Hikvision from selling to government entities, it will be a drag on earnings, but won’t derail Hikvision,” says Jay Huang, a Sanford Bernstein analyst in Hong Kong. “We are seeing a reacceleration in their core video-surveillance business in China, following a strong investment cycle, and concerns about price competition and a growth slowdown haven’t played out.” Moreover, he adds, Hikvision is using artificial intelligence not just to maintain its edge in smart surveillance but also developing a range of other products and services.


GLOBAL SALES SHOULD GROW over 31% in 2018 and 30% in 2019, with net profits estimated to rise 35% this year and 33% next year. Hikvision shares rose a whopping 141% last year and nine-fold since its initial public offering in 2010. The stock trades at more than 28 times this year’s forecast earnings and over 20 times 2019’s, and has a market cap of $60 billion. Bernstein’s Huang has a 12-month price target of 55 renminbi ($8.73) on the stock, for some 36% upside.


“It’s a playñ on smart cities, surveillance, and the security theme,” says Nomura analyst Joel Ying, who sees growth opportunities outside China, a shift from supplying cameras to developing customer solutions, and new frontiers in AI, driver-assistance systems, robotics, automation, and home surveillance.


Whether Hikvision gets to install cameras along Trump’s Mexican wall is irrelevant. Analysts say the wall’s construction will dramatically boost the global surveillance industry and, as the world’s No.1 player, Hikvision will be a beneficiary.