Morningstar | Hikvision’s Prelim FY18 Earnings Beat Expectations, but Top Line Missed; Shares Remain Undervalued
Hangzhou Hikvision announced preliminary full-year 2018 earnings that beat our expectations, but the top line came in below our forecast as year-over-year sales growth of 12.9% in fourth-quarter 2018 further decelerated from the third quarter’s 14.6%. The slowdown in revenue growth is disappointing, in our view, as we were expecting a recovery following soft revenue growth in the preceding two quarters due to weak investment confidence, which led to rollout delays for government and enterprise projects and de-stocking activity among distributors. We think that the growth deceleration in the fourth quarter could be due to the spillover effect of the ongoing U.S.-China trade war, which has triggered a softer business environment as well as continued price competition in overseas markets. At this point, we maintain our fair value estimate pending further clarity on its full-year results, which are expected to be announced in April. Our narrow moat and stable moat trend ratings on the firm remain intact. We still think that Hikvision’s current share price is undervalued and that the firm will be a key beneficiary of the secular growth of video surveillance in China, which represents 70% of its sales.Full-year net profit increased 20.5% year over year to CNY 11.3 billion versus our expectation of CNY 10.8 billion. This implies that for fourth-quarter 2018, Hikvision’s net profit was CNY 3.9 billion, up 20.9% from the same period last year. Hikvision’s earnings were in line with management’s midpoint guidance of 20% comparable net income growth (range between 10% and 30%). Full-year sales of CNY 49.8 billion, up 18.9% year over year, missed our forecast of CNY 51.0 billion. Management attributed the fourth-quarter revenue growth slowdown to a stricter control on the quality of order books, as they passed on orders with lower profitability and customers (both domestic and overseas) with weak cash flow.
HANGZHOU HIKVISION DIGITAL TECHNOLOGY CO., LTD. is a China-based company, principally engaged in the research and development, manufacture and distribution of video products, as well as the provision of video services. The Company mainly provides front-end products, back-end products and center control products. The Company's products include video encoders, video decoders, video optical transceivers, network optical transceivers, mixed video recorders (XVRs) and network video recorders (NVRs), among others. The Company also provides construction engineering services and innovation business. The Company conducts its businesses within domestic and overseas markets.
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