Matters:

The company announced its 2024 semi-annual report. In the first half of 2024, the company achieved revenue of 41.209 billion yuan (9.68% YoY) and net profit attributable to shareholders of listed companies of 5.064 billion yuan (-5.13% YoY).

Ping An's point of view:

Domestic market demand is weak, and overseas markets are generally stable: in the first half of 2024, the company achieved revenue of 41.209 billion yuan (9.68% YoY), net profit attributable to shareholders of listed companies of 5.064 billion yuan (-5.13% YoY), and net profit of 5.243 billion yuan (4.11% YoY) after deducting net income from the mother. The company's overall gross margin and net margin for the first half of 2024 were 45.05% (-0.13pctYOy) and 13.69% (-1.63pctYOy), respectively. Domestic market demand was weak, and overseas markets were generally stable. Looking at the business classification: 1) Domestic business segment: PBG revenue for the public service business group was 5.693 billion yuan, a year-on-year decrease of 9.25%; revenue for the enterprise business group EBG was 7.489 billion yuan, up 7.05% year on year; SMBG revenue for the SME business group was 5.789 billion yuan, up 0.64% year on year. 2) Overseas business revenue of 11.441 billion yuan, a year-on-year increase of 15.46%. 3) Innovation business revenue was 10.328 billion yuan, up 26.13% year over year. Overall, in the first half of 2024, the company's downstream diversification was obvious, and demand for industries that relied on local financial investment was weak (such as public security, traffic police, etc.); industries that mainly developed with their own capital maintained a certain level of investment resilience (such as industrial enterprises, petrochemical and coal industries). Expense side: In the first half of 2024, the company's sales expense ratio, management expense ratio, R&D expense ratio, and financial expense ratio were 13.50% (0.49pcTyoY), 3.55% (0.16pctYOy), 13.83% (-0.24pcTYoy), and -0.61% (0.9pcTYoy), respectively. The cost ratio was basically stable. In terms of technology and product layout: The company focuses on promoting the development of sensing technology, imaging technology, optical technology, etc., to form a technology set covering many fields and with certain advanced features. Among them, in terms of sensing technology, it has initially built a full-spectrum sensing technology platform from visible light to far infrared, X-ray, and millimeter waves. Through years of product engineering refinement, the company currently sells more than 0.03 million product models, forming the company's great advantage in meeting users' fragmentation needs.

Strengthen technological innovation and fully form an open ecological enabling system: Technological innovation is the most important means of business for the survival and development of the company. In order to meet various challenges and meet new opportunities, the company's R&D expenditure rates in 2018-2023 were 8.99%, 9.51%, 10.04%, 10.13%, 11.80% and 12.75%, respectively, and the R&D expenses rate increased steadily. The company can provide full open capabilities including devices, platforms, data and applications to provide comprehensive support for industry application developers. The company's integrated operation and maintenance service platform provides equipment probes to support access to third-party sensing devices; in addition, the IoT integrated data resource platform supports access to third-party data storage management systems or data formats while providing mainstream data access methods; the provided IoT data governance tools support element management and point layout evaluation of multiple vendors and types of IoT devices; and the data service interface supports the development of business applications.

AI is leading industry transformation, and the company continues to promote innovative business development: Intelligent IoT is a basic capability that provides the possibility of connecting and interacting between people and objects. Under the trend of intelligent security upgrading, the core competitiveness of the industry is gradually transforming into technical architecture and the ability to implement solutions. Enterprises with deep technical strength will keep pace with industry changes. Raising the industry threshold is expected to further increase industry concentration, and the industry pattern will continue to be optimized. At the same time, with the development of artificial intelligence technology, computer video image processing technology will greatly increase the efficiency of use of video surveillance and the utilization rate of big data values, and the function of cameras to collect images will no longer be limited to safety prevention purposes. Therefore, while “artificial intelligence+security” helps customers improve business efficiency, it also greatly expands the market space for video technology to meet business management requirements. In the context where data is king, the company has huge data resources and will have an absolute natural advantage in intelligent security transformation. In addition, Hikvision has invested and accumulated a large amount of basic computing power and large-scale model construction. Relevant capabilities have not only been applied in hardware products and software products, but also implemented in user-oriented algorithm training, including Hikvision's AI open platform.

Investment advice: The company is the world's leading provider of security surveillance products and content services. The products and services have achieved full coverage of all major equipment in video surveillance systems.

Considering the overall weak demand in the domestic market, we lowered the company's profit forecast. The company's net profit for 2024-2026 is estimated to be 15.567/17.866/20.649 billion yuan, respectively (the original value was 16.618/19.845/22.82 billion yuan,), and the corresponding PE is 16/14/12 times. Maintain the company's “recommended” rating, considering that the company's current valuation is still attractive.

Risk warning: 1) Technology replacement risk: As technologies such as cloud computing, big data, and artificial intelligence continue to evolve, industry business and application requirements may evolve along with it.

Failure to closely track updates and changes in cutting-edge technology in the industry will increase uncertainty about the company's future development; 2) Exchange rate fluctuation risk: The company operates in many countries and regions with different currencies in overseas markets. Exchange rate risk mainly comes from foreign currency exposure and exchange rate fluctuations arising from sales, procurement, and financing settled in non-RMB (mainly US dollars), which may affect the company's profit level. 3) Global market development risk: The company's business covers more than 150 countries and regions around the world. If trade protection, debt problems, political conflicts, etc. occur in the country where the business is carried out, it may adversely affect the company's business development.