rating company buy hikvision...

Deutsche Bank Markets Research

Rating

Buy Asia

China

Technology

Hardware & Equipment

Company

Hikvision Digital

Date

21 September 2015

Initiation of Coverage

Global footprint, gaining share, expanding business

Reuters Bloomberg Exchange Ticker 002415.SZ 002415 CH SHZ 002415

Forecasts And Ratios

Year End Dec 31 2013A 2014A 2015E 2016E 2017E

Sales (CNYm) 10,746 17,233 26,265 38,569 51,839

EBIT (CNYm) 3,065 4,406 6,571 10,079 13,578

Reported NPAT (CNYm) 3,067 4,665 6,681 9,868 13,103

DB EPS FD(CNY) 0.76 1.15 1.64 2.43 3.22

DB EPS growth (%) – 50.2 43.2 47.7 32.8

Source: Deutsche Bank estimates, company data 1 DB EPS is fully diluted and excludes non-recurring items 2 Multiples and yields calculations use average historical prices for past years and spot prices for current and future years, except P/B which uses

the year end close

Initiating with Buy, with 44% potential share price upside to our TP at CNY46

________________________________________________________________________________________________________________

Deutsche Bank AG/Hong Kong

Deutsche Bank does and seeks to do business with companies covered in its research reports. Thus, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. DISCLOSURES AND ANALYST CERTIFICATIONS ARE LOCATED IN APPENDIX 1. MCI (P) 124/04/2015.

Price at 18 Sep 2015 (CNY) 31.90

Price target - 12mth (CNY) 46.00

52-week range (CNY) 52.30 - 18.28

Shenzhen Index 1,756

Andrew-C Chang

Research Analyst

(+886) 2 2192 2845

[email protected]

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Hikvision Digital

Shenzhen Index (Rebased)

Performance (%) 1m 3m 12m

Absolute -1.5 -23.8 71.9

Shenzhen Index -22.8 -42.4 31.4

Source: Deutsche Bank

Stock data

Market cap (CNYm) 129,801

Market cap (USDm) 20,398

Shares outstanding (m) 4,069.0

Free float (%) 71


Key indicators (FY1)

ROE (%) 39.6

Net debt/equity (%) -44.8

Book value/share (CNY) 4.65

Price/book (x) 6.86

Net interest cover (x) –

Operating profit margin (%) 25.0


There is a significant growth opportunity in the video surveillance industry, and we believe Hikvision should be one of the major beneficiaries of new demand for smart city and IoT (Internet of Things) applications, the ongoing upgrade product cycle, and consolidation of the industry. We forecast a 2015-2018 CAGR of 41% in sales and 39% in EPS for Hikvision, with ROE rising from 36% in 2014 to 43.6% in 2018. Its solid home-base advantage in China, successful overseas market expansion, and rising net cash position should boost its earnings upside and share price performance.

Five reasons why we are more optimistic than the Street (1) Exciting opportunity for smart city and IoT business: Investors may

underestimate the demand for video surveillance applications in the smart city and IoT markets. We expect this segment’s sales contribution to increase from 12% in 2014 to 25% in 2018 (sales CAGR of 70%).

(2) Robust upgrade demand for its front-end (analog to IP cameras, 2015-2018E sales CAGR of 44%) and back-end (DVR to NVR, 2015-2018E sales CAGR of 37%) products plus integrated software lead to our higher 2016-2018 OPM forecasts of 26.1-26.7% than the Street’s 25-26%.

(3) Ongoing market share gains in China (on a sales basis) from 28% in 2014 to 48% in 2018E, helped by its competitive sales footprints, its solid relationships with system integrators and commercial customers, and the government’s encouraging policies for safe city and Made in China 2025.

(4) Successful overseas market expansion for its brand business in 20 countries, ahead of Chinese peers, further boosting its EPS momentum.

(5) Potential growth in other security business (access control, total solution).

Valuation and risks We base our valuation of CNY46 on 19x our 2016E EPS, which is lower than Hikvision’s historical P/E (23x) since 2011 (when it became a total solutions supplier). Our 10-year DCF valuation model suggests a fair price of CNY51. Downside risks: weaker demand, order loss to peers, and inventory.

21 September 2015


Hikvision Digital


M odel updated: 16 September 2015 Fiscal year end 31-Dec 2013 2014 2015E 2016E 2017E 2018E

Sales revenue 10,746 17,233 26,265 38,569 51,839 68,132

Gross profit 5,189 7,763 11,554 17,026 22,910 30,530

EBITDA 3,137 4,515 6,754 10,344 13,931 18,676

Depreciation 66 97 164 236 315 401

Amortisation 5 13 19 28 38 50

EBIT 3,065 4,406 6,571 10,079 13,578 18,225

Net interest income(expense) 0 0 0 0 0 0

Associates/affiliates 39 151 134 88 101 105

Exceptionals/extraordinaries 0 0 0 0 0 0

Other pre-tax income/(expense) 282 649 899 1,011 1,157 1,207

Profit before tax 3,386 5,205 7,604 11,178 14,836 19,537

Income tax expense 309 526 907 1,302 1,724 2,270

M inorities 10 15 16 8 9 13

Other post-tax income/(expense) 0 0 0 0 0 0

Net profit 3,067 4,665 6,681 9,868 13,103 17,253

DB adjustments (including dilution) 0 0 0 0 0 0

DB Net profit 3,067 4,665 6,681 9,868 13,103 17,253

Cash Flow (CNYm)

Cash flow from operations 1,863 3,706 4,870 7,042 10,008 13,388

Net Capex -390 -605 -672 -726 -784 -862

Free cash flow 1,474 3,101 4,198 6,317 9,224 12,526

Equity raised/(bought back) 2 489 0 0 0 0

Dividends paid -602 -1,030 -2,338 -3,454 -4,586 -6,039

Net inc/(dec) in borrowings 181 426 48 53 57 62

Other investing/financing cash flows -1,995 -381 49 38 50 68

Net cash flow -941 2,606 1,957 2,954 4,745 6,617

Change in working capital -1,625 -1,374 -2,191 -3,311 -3,568 -4,440

Balance Sheet (CNYm)

Cash and other liquid assets 4,593 7,200 9,156 12,111 16,856 23,473

Tangible fixed assets 1,030 1,529 2,037 2,527 2,995 3,456

Goodwill/intangible assets 171 214 214 214 214 214

Associates/investments 128 325 459 547 648 753

Other assets 8,150 12,022 16,289 22,251 28,683 36,477

Total assets 14,072 21,291 28,156 37,650 49,397 64,374

Interest bearing debt 184 607 656 708 766 828

Other liabilities 2,775 5,804 8,534 11,862 14,761 18,162

Total liabilities 2,959 6,411 9,190 12,570 15,527 18,990

Shareholders' equity 11,087 14,842 18,914 25,019 33,800 45,302

M inorities 26 37 52 60 69 82

Total shareholders' equity 11,113 14,879 18,966 25,080 33,870 45,384

Net debt -4,409 -6,593 -8,501 -11,402 -16,090 -22,645

Key Company Metrics

Sales growth (%) na 60.4 52.4 46.8 34.4 31.4

DB EPS growth (%) na 50.2 43.2 47.7 32.8 31.7

EBITDA M argin (%) 29.2 26.2 25.7 26.8 26.9 27.4

EBIT M argin (%) 28.5 25.6 25.0 26.1 26.2 26.7

Payout ratio (%) 32.8 34.9 35.0 35.0 35.0 35.0

ROE (%) 27.7 36.0 39.6 44.9 44.6 43.6

Capex/sales (%) 3.6 3.5 2.6 1.9 1.5 1.3

Capex/depreciation (x) 5.5 5.6 3.7 2.7 2.2 1.9

Net debt/equity (%) -39.7 -44.3 -44.8 -45.5 -47.5 -49.9

+886-2-2192 2845 Net interest cover (x) nm nm nm nm nm nm

Source: Company data, Deutsche Bank estimates

Running the Numbers Financial Summary

Asia DB EPS (CNY) 0.76 1.15 1.64 2.43 3.22 4.24

Reported EPS (CNY) 0.76 1.15 1.64 2.43 3.22 4.24

China DPS (CNY) 0.25 0.40 0.57 0.85

Technology/Hardware BVPS (CNY) 2.76 3.65 4.65 6.15

4,069 4,069 4,069 4,069

1.13 1.48

8.31 11.13

4,069

Average market cap (CNYm) 80,540 77,998 129,801 129,801 129,801 129,801

Weighted average shares (m) 4,017

Hikvision Digital Enterprise value (CNYm) 76,029 71,117 120,893 117,912 113,132 106,485

Reuters: 002415.SZ Bloomberg: 002415 CH Valuation MetricsP/E (DB) (x) 26.3 16.7 19.4 13.2 9.9 7.5

Buy P/E (Reported) (x) 26.3 16.7 19.4 13.2 9.9 7.5

P/BV (x) 8.10 6.06 6.86 5.19 3.84 2.87

Price (18 Sep 15) CNY 31.90FCF Yield (%) 1.8 4.0 3.2 4.9 7.1 9.6

3.06

Target price CNY 46.00 Dividend Yield (%) 1.2 2.1 1.8

5.7

2.7 3.5 4.7

52-week Range CNY 18.28 – 52.30EV/Sales (x) 7.08 4.13 4.60

16.1 18.4

2.18 1.56

EV/EBITDA (x) 24.2 15.8 17.9 11.4 8.1

11.7 8.3 5.8

US$ 20,387mIncome Statement (CNYm)

C o mpany P ro f ile

Market Cap CNY 129,801mEV/EBIT (x) 24.8

[email protected]

Hangzhou Hikvision Digital Technology Co., Ltd

develops, produces and sells video surveillance

equipments. The Company manufactures video card,

network video recorders, digital video recorders,

video servers, cameras, storage, and other products.

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21 September 2015


Hikvision Digital


Investment thesis

Business outlook

Our positive view on sector demand and Hikvision

We are positive on the growth of the video surveillance business. We forecast

a 2015-2018 revenue CAGR of 13.5% for the sector, higher than IHS's forecast

of 12.0%, given our optimistic outlook on the following:

more, new applications for smart city and IoT business,

robust upgrade in sales of video surveillance products, and

rising shipments to emerging countries.

We believe Hikvision should benefit from these trends and be one of the

winners in the video surveillance sector. We estimate a 2015-2018 CAGR of

41% in revenue and 39% in EPS for the company, thanks to its (a) market

share gains from peers, (b) successful expansion in overseas markets, (c) rising

project-based orders from government and state-owned enterprises in China,

and (d) new service and solutions demand.

We assume Hikvision’s ROE will increase from 36% in 2014 to 43.6% in 2018

on increasing shipment scale, improving cost structures, and higher margins

and profits for project-based orders (for hardware, software, and services). The

company’s rapidly growing earnings and solid balance sheet (rising net cash)

should support its share price performance going forward.

Rising sales for smart city and IoT business

We are seeing Hikvision aggressively leverage its outstanding R&D capability,

competitive product portfolio, and lower cost structure than peers to penetrate

the smart city and IoT market. We estimate that the sales contribution from

this segment could rise from 12% in 2014 to 25% in 2018, implying a 2015-

2018 sales CAGR of 70% for the smart city and IoT business. This is one of the

major growth drivers because its growth is higher than our forecast 2015-2018

CAGR of 41% for Hikvision’s total revenue. We believe the Street may be

underestimating the demand for video surveillance applications in the smart

city and IoT markets.

Solid demand for the upgrade product cycle

There is ongoing upgrade demand for both front-end video surveillance

products, from analog to IP (Internet Protocol) cameras, and back-end

hardware devices, from DVR (digital video recorder) to NVR (networking video

recorder) – and integrated software and solutions sales can easily help

Hikvision’s business momentum. We forecast 2015-2018 sales CAGRs of 44%

and 37% for Hikvision’s front-end and back-end products, respectively, and we

expect the solid upgrade demand to help its gross (GM) and operating (OPM)

margins increase from 43.3% and 25% in 2015E to 43.5-44.1% and 26.1-26.7%

in 2016-2018E. Our assumptions for its 2016-2018 GM and OPM are higher

than consensus expectations of 42-43% and 25-26%, respectively, due to

higher sales and margins for its smart city and IoT business.

21 September 2015


Hikvision Digital


Market share gainer in China

With its well-established logistics and sales footprints, sufficient R&D

resources to develop new products quickly and competitively, good

relationships with customers (system integrators, value-added retailers, state-

own enterprises, and other corporate clients), and slimmer cost structures than

peers, we expect Hikvision’s market share for video surveillance sales in China

to increase from 28% in 2014 to 48% in 2018, with the company set to

maintain its No. 1 position. The strategic policy incentives offered by the

Chinese government to push investment in safe city, Made in China 2015, and

smart factory for automation businesses should lead to further upside for

Hikvision’s video surveillance sales in China.

Emerging countries – the next key driver of growth

Hikvision’s business expansion into overseas markets was earlier and more

successful than its Chinese peers’. Its better global footprint with brand

operations in 20 counties, rising shipment scale, and ongoing improvement in

cost structures should help its robust sales growth outside China. We expect

the sales contribution from overseas markets to increase from 25% in 2014 to

39% in 2018.

New investment in other security business and services

We think it makes sense for Hikvision to gradually expand its core operational

scope from the video surveillance business to access control, integrated

solutions, and security-related services for existing customers. This could offer

operational leverage benefits for Hikvision to further boost its sales and profit

growth.

Valuation

We base our target price of CNY46 on 19x our 2016E EPS, which reflects

Hikvision’s robust business growth and earnings momentum on new sales of

smart city and IoT applications, upgrade demand in video surveillance

products, and successful overseas expansion. Our target P/E multiple is lower

than its historical P/E multiple (23x) since 2011, when the company launched

its new fully integrated solutions for clients, and also below the current trading

P/E multiple (24x) for the Shenzhen CSI (China Securities Index) 300

Information Technology Index. Our cautious target P/E assumption reflects the

weaker outlook for the Chinese economy. However, our target P/E multiple is

higher than consensus P/E for its global peers (17x), given Hikvision’s higher

2016 EPS growth (47.7% YoY) and ROE (44.9%) than the global peer average

(13% YoY and 25%).

On 10 February 2015, Canon paid ~30x consensus 2016E P/E (a total amount

of US$2.64bn) to acquire 84.83% of Axis Communications (AXIS SS, 2016E

ROE at 52.9%), the third-largest global video surveillance vendor. The 2016E

PE-to-ROE ratio for Hikvision (0.51x) is close to the deal payment (0.56x).

Hence, we think our target P/E multiple for Hikvision is rational.

Our 10-year DCF valuation model suggests a fair stock price of CNY51. We

take the more conservative P/E valuation as the basis of our final target price of

CNY46.

21 September 2015


Hikvision Digital


Downside risks

Any market share loss to peers in video surveillance products would

result in lower sales and EPS vs. our assumptions.

Weaker demand from system integrators, governments, and/or

corporate customers could have a negative impact on shipments,

margins, and earnings momentum.

Higher inventory and component cost hikes.

21 September 2015


Hikvision Digital


Valuation and risks

Initiating with Buy and 12-month target price of CNY46

Target price basis

P/E methodology: We adopt a P/E methodology for our valuation, as we

believe it best reflects Hikvision’s robust growth in the video surveillance

business and new total solutions for the security industry and smart city. Our

target price of CNY46 is based on 19x our 2016E EPS; this is below its

historical P/E multiple (23x) since 2011, when Hikvision became a total

solutions supplier for the video surveillance sector, and lower than the current

trading P/E multiple (24x) for the Shenzhen CSI (China Securities Index) 300

Information Technology Index. Our lower target P/E reflects the risk of slower-

than-expected improvement in the Chinese economy. However, our target P/E

multiple for Hikvision is higher than the consensus target P/E multiple (17x) for

its global peers, given its higher 2016E EPS growth (47.7% YoY) and ROE

(44.9%) than the global peer average (13% YoY and 25%).

DCF methodology: We also use a 10-year DCF methodology (Figure 3) to

evaluate Hikvision’s fair price. Our analysis suggests a valuation of CNY51,

implying 21x P/E on our 2016E EPS.

Canon’s acquisition of Axis Communications: On 10 February 2015, Canon

reportedly paid SEK19.62bn (US$2.64bn) for an 84.83% stake in Axis

Communications. The acquisition price is SEK340 per share or 30x P/E (Figure

4) on consensus 2016E EPS. Axis (AXIS SS, 2016E ROE at 52.9%) is the third-

largest video surveillance industry supplier, next to Hikvision and Dahua. Our

analysis shows that the 2016E P/E-to-ROE ratio for Hikvision (0.51x) is close to

Canon’s payment for the Axis acquisition (0.56x). Hence, we believe our target

P/E multiple of 19x for Hikvision is reasonable.

Based on our analysis above, we take the most conservative valuation (P/E) as

the basis of our final target price of CNY46 for Hikvision.

Figure 1: Forward P/E band of Hikvision Figure 2: Forward P/B band of Hikvision

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Source: Deutsche Bank, estimates, Company data, Bloomberg Finance LP

Source: Deutsche Bank, estimates, Company data, Bloomberg Finance LP

21 September 2015


Hikvision Digital


Figure 3: DCF methodology for Hikvision valuation

Valuation data Assumptions

Share & Market Information

Valuation date 2016

Current Stock Price (CNY) 31.90

Shares (m) 4,069 Weighted average shares

DCF Target Price (CNY) 50.87

Implied Upside (Downside) 59.5%

FY16 PER 21.0

FY16 PBR 8.3

Cost of Equity 11.45%

Risk Free Rate (%) 3.55% China risk-free rate from Bloomberg

Beta 0.96 2-year CAPM linear regression from Bloomberg

Market Risk Premium (%) 8.26% China market risk premium from Bloomberg

Cost of Debt (after tax) 3.12%

Cost of Debt 3.55% Long-term borrowing rate from Bloomberg

Tax Rate 12.00% DBe

Target Debt / (Debt + Equity) 10.00% DBe target D/(D+E) ratio

WACC 10.62%

Gordon Growth Model LT growth 1.5% Assume lower long-term growth due to market saturation and consolidation Source: Deutsche Bank estimates, Bloomberg Finance LP

Figure 4: Consensus P&L assumptions for Axis Communciations

( In SEK millio n) 2014 2015E 2016E 2017E

Revenue 5,450 6,563 7,454 8,454

Gross M argin (%) 51.8% 50.9% 50.3% 50.0%

Operating M argin (%) 13.1% 13.5% 14.0% 13.8%

Net Income 542 676 787 865

EPS 7.81 9.69 11.29 12.38

ROE (%) 53.0% 53.9% 52.9% 48.9%

P/E 43.3 34.9 29.9 27.3 Source: Deutsche Bank, Bloomberg Finance LP

Sensitivity analysis of target price

Our analysis indicates favorable risk/reward for Hikvision, with 119% upside

potential under a bull-case valuation of CNY70 if we assume 2016 sales

growth of 67% YoY and a consolidated operating margin (OPM) of 36.1%. Our

target price of CNY46 is based on a 2016E sales growth rate of +47% YoY and

a consolidated OPM of 26.1%. On the downside, 2016 sales growth of 27%

YoY and an OPM of 16.1% would generate a valuation of CNY27. These

sensitivities assume the same target P/E in each case.

Figure 5: EPS sensitivity analysis based on 2016

assumptions

Figure 6: Target price sensitivity analysis based on 2016

assumptions

2016E Sales growth (%)

2 7 % 3 7 % 4 7 % 5 7 % 6 7 %

16 .1% 1.4 1.5 1.6 1.7 1.8

2016 OPM 21.1% 1.8 1.9 2.0 2.1 2.2

(%) 26 .1% 2.1 2.3 2.4 2.6 2.7

31.1% 2.5 2.7 2.8 3.0 3.2

36 .1% 2.9 3.1 3.3 3.5 3.7

2016E Sales growth (%)

2 7 % 3 7 % 4 7 % 5 7 % 6 7 %

16 .1% 27 28 30 32 34

2016 OPM 21.1% 34 36 38 40 43

(%) 26 .1% 40 43 46 49 52

31.1% 47 51 54 57 61

36 .1% 54 58 62 66 70

Source: Deutsche Bank estimates, Company data


21 September 2015


Hikvision Digital


Risks

Weaker orders from system integrators, value-added retailers,

governments, and/or corporate clients would lead to lower shipments,

margins, and EPS results than we forecast.

Any market share loss to video surveillance peers would have a

negative impact on our sales and EPS forecasts.

A slower macro demand recovery in China and/or other countries

could negatively influence the expenditure of governments and state-

owned enterprises.

Higher component costs or labor cost hikes in China.

21 September 2015


Hikvision Digital


Strong earnings growth

New drivers of growth for smart city and IoT business

2015-2018E CAGR for smart city and IoT business sales at 70.1%

Hikvision is leveraging its outstanding design capability (5,300 engineers, or

44% of its total manpower), competitive product portfolio, and slimmer cost

structure advantages than peers to grow new smart city and IoT fields. These

products have accounted for 12% of group revenue, but we forecast a revenue

CAGR of 70% for this division, raising its share of total revenue to 25% by 2018

(Figures 7 and 8). This compares with an increase of 41% for the core products

of the group. We believe the Street may underestimate the robust demand and

Hikvision’s orders of video surveillance applications for smart city and IoT-

related business.

Figure 7: Hikvision’s sales for smart city and IoT business

Figure 8: Rising sales contribution for smart city and IoT

business

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2014 2015E 2016E 2017E 2018ERevenue for IoT and Smart City business

2015-2018E CAGR at 70.1%

(CNYmn)

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19.1%

22.7%

25.2%

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2014 2015E 2016E 2017E 2018E

Sales Exposure to IoT & Smart City

Source: Deutsche Bank estimates


An exciting business for smart city

We are positive on the video surveillance applications for the smart city

business. We have seen Hikvision’s successful expansion into smart city for

smart office/building, smart banking/financing, smart education & campus,

smart police & traffic, smart energy, and smart court. The increasing demand

and applications for smart city and related service/solution sales should help

Hikvision’s business upside in the coming years. One example of the smart city

application for Hikvision’s smart office solution is the following:

Smart office system

Hikvision’s smart office solutions (Figure 9) enable administrators and

superintendents to monitor the office in real time. The access control system

can also record employees’ attendance and send records to business

managers and HR managers. Receptionists are able to remotely identify guests

with IP cameras at the gate and issue access cards with the card issuer. Police

reporting systems and alarms alert the police department, security companies,

and on-site superintendents of any intrusion or trespass.

21 September 2015


Hikvision Digital


Figure 9: Smart office applications

Source: Deutsche Bank, Company data

Facial recognition system

Hikvision is developing its own competitive solutions (hardware device,

software and platform) for facial recognition technology with its video

surveillance products (Figures 10 and 11), which can be used in the smart

police, smart office, and safe city fields. The real-time, quickly responsive, and

accurate facial recognition system can help enhance public security, anti-

terrorist activities, and also for crowd flow control. Given the higher barriers to

entry for facial recognition technology, we believe Hikvision has much better

margins and earnings for the system than other businesses.

Figure 10: Hikvision’s facial recognition system Figure 11: Hikvision’s facial recognition devices



Ezviz product family for Hikvision

While most of Hikvision’s end customers are government/state-owned

enterprise system integrators and commercial clients, management also has

an aggressive intention to launch its sub brand, called Ezviz, for the smart

home and IoT consumer segments (Figure 12). With the affordable and

friendly-UI (user interface) devices, including IP cameras, NVRs, police

reporting boxes, sensors, detectors, and emergency buttons, consumers can

easily enjoy real-time remote access to video images at home on their

smartphone, NB, and/or tablets. The system can also connect local police

21 September 2015


Hikvision Digital


and/or fire station upon detection of any intrusion. We see rising demand for

the applications because it can effectively satisfy the needs of consumers for

safe home, baby, and health-care products.

Figure 12: Hikvision’s Ezviz products for IoT market


Solid upgrade demand for the video surveillance market

We can break down Hikvision’s business by different segments, including

Front-end products: analog cameras and IP cameras;

Back-end products: mainly DVR (digital video recorder) and NVR

(networking video recorder);

Central Controlling Equipment: system integration, software, etc.;

Engineering construction; and

Others: total solutions and service.

Among the businesses above, the front-end and back-end products are the

most important segments, with revenue contributions for Hikvision at 53% and

20%, respectively, in 2014 (Figure 13).

We are seeing consistent upgrade demand in the video surveillance market for

both front-end and back-end products plus integrated solutions and software,

which we believe should easily boost Hikvision’s business growth in the

coming years. We forecast the sales contribution for frond-end and back-end

products to reach 58% and 18%, respectively, in 2018 (Figure 13).

21 September 2015


Hikvision Digital


Figure 13: Hikvision’s revenue by segments

53% 55% 55% 57% 58%

20% 17% 18% 18% 18%

27% 28% 27% 25% 24%

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2014 2015E 2016E 2017E 2018E

Front-end Products Back-end Products Others


Front-end products: from analog to IP cameras

We estimate the 2015-2018 revenue CAGR for Hikvision’s front-end products

to come in at 44% (Figure 14). Our assumptions include faster sales growth for

IP cameras (2015-2018 CAGR of 56%) than analog cameras (2015-2018 CAGR

of 30%). Hikvision is one of the major market share gainers, and its growth

rates for analog and IP cameras are above those of the entire market (overall

market 2015-2018E sales CAGR for analog cameras of 4% and IP cameras of

23%; refer to our sector report).

Figure 14: Revenue mix for Hikvision’s front-end

products

Figure 15: Revenue growth for Hikvision’s front-end

products

50% 52%56%

63%68%

49%47%

43%

36%

31%

1%

1%

1%

1%

1%

0

10,000

20,000

30,000

40,000

50,000

2014 2015E 2016E 2017E 2018EIP Camera Analog Camera Others

2015-2018E CAGR at 44.4%

(CNYmn)

81%

67%

59%53%

45%66%

51%

37%

20%15%

73%

58%48%

39%

34%

0%

20%

40%

60%

80%

100%

2014 2015E 2016E 2017E 2018E

IP Camera Analog Camera Front-end Products



Back-end products: from DVR to NVR

Our assumption for Hikvision’s 2015-2018 sales CAGR for back-end products

is 37% (Figure 16), and this includes our forecasts of 2015-2018 revenue

CAGRs for DVR at 20% and NVR at 50%. These numbers are also higher than

our assumptions for growth of the entire market, with 2015-2018E sales

CAGRs for DVR at -12% and NVR at 21% (refer to our sector report).

21 September 2015


Hikvision Digital


Figure 16: Revenue mix for Hikvision’s back-end

products

Figure 17: Revenue growth for Hikvision’s back-end

products

50% 53%58%

66%70%

49%46%

41%

33%

29%

1%1%

1%

1%

1%

0

3,000

6,000

9,000

12,000

15,000

2014 2015E 2016E 2017E 2018ENVR DVR Others

2015-2018E CAGR at 37.2%

(CNYmn)

9.1%

34.3%

68.2%

53.6%

45.0%

-5.1%

18.6%

35.7%

11.1% 15.0%1.1%

26.6%

52.7%

35.8%34.8%

-20%

0%

20%

40%

60%

80%

2014 2015E 2016E 2017E 2018E

NVR DVR Back-end Products



The robust and consistent upgrade demand and the company’s ongoing

market share gains from peers for back-end and front-end video surveillance

products should continue to help Hikvision’s gross and operating margins rise

and imply upside risks for EPS vs. consensus expectations.

The industry leader in China

Hikvision is the leader in the video surveillance market in China, with sales

market share at 28% in 2014 (Figure 20), according to our study. Its sales

exposure in China was 75% (Figure 19) in the same year. With more than

12,000 employees worldwide, including 5,300 R&D engineers (44% of total

manpower), the company has established competitive logistics, sales, and

manufacturing footprints in China, including its R&D clusters in Hangzhou and

Wuhan and manufacturing campuses in Hangzhou, Beijing, Shanghai, and

Chongqing (Figure 18).

We believe its R&D resources, strategic policy incentives offered by the

government, and close partnership with large enterprises can enhance

Hikvision’s time-to-market advantages for new product launch and help it gain

in high-margin project-based or custom-designed businesses.

We also expect its solid product portfolio, higher shipment scale, and good

relationships with system integrators, value-added retailers, state-own

enterprises, and corporate clients to support its business momentum, and we

look for market share to climb to 48% in 2018 (Figure 20).

21 September 2015


Hikvision Digital


Figure 18: Hikvision’s operation footprints in China


Figure 19: Hikvision’s solid home base in China (sales

contribution in 2014)

Figure 20: Hikvision’s market share in China

China75%

Overseas markets

25%

28.0%

35.0%42.1%

45.9%48.2%

0%

20%

40%

60%

2014 2015E 2016E 2017E 2018E

Hikvision Digital



Industrial cameras for smart factory business

On 18 June 2015, Hikvision launched its new industrial camera products

(Figures 21 and 22), with outstanding functions for 3D positioning, dimension

measure, 3D sense rebuilding, defect detection, bar code recognition, and

automatic categorization. These products are key elements for automation and

robot applications for smart factory business and artificial intelligence, which

can help improve manufacturing efficiency and accuracy and reduce costs.

This technology is also one of key-focused investment items for “Made in

China 2025”, pushed by the Chinese government.

21 September 2015


Hikvision Digital


Figure 21: Hikvision’s industrial 3D IP Camera Figure 22: Hikvision’s industrial camera



Exciting expansion into overseas markets

Hikvision has built global footprints for its own brand operations for the video

surveillance business in the Pan-Americas, Europe, and Pan-Asia-excluding-

China markets (Figure 23). According to our study, Hikvision is the No. 1 video

surveillance supplier, with global market share of the business’s sales at 12.3%

in 2014 (Figures 24 and 26). The company decided to grow the overseas

markets with its own brand strategy earlier than other China local peers. It

currently has active operations in 20 cities. We are confident that Hikvision can

leverage its higher shipment scale and slimmer manufacturing costs in China

to compete against the other video surveillance suppliers outside China, and

we estimate its global market share of the business’s sales to reach 39% in

2018 (Figure 25). The consolidation trend in the industry should also benefit

Hikvision’s overseas sales growth, although margins (higher operating

expenses) could be lower than those in China.

Figure 23: Hikvision’s global footprint


21 September 2015


Hikvision Digital


Figure 24: Hikvision’s global market share Figure 25: Rising sales exposure to overseas markets

12.3%

16.4%

21.1%

25.2%

29.3%

0%

10%

20%

30%

40%

2014 2015E 2016E 2017E 2018EHikvision Digital

25%27%

30%

34%

39%

15.0%

25.0%

35.0%

45.0%

2014 2015E 2016E 2017E 2018ERevenue Exposure to overseas markets



Figure 26: Top 20 global video surveillance suppliers

2014 YoY Growth (%) Market share (%) OPM (%)

Ranking Company Country 2014 2013 2014 2014 2014

1 Hikvision Digital Technology China 2,693 1,679 60% 12.3% 25.6%

2 Dahua Technology China 1,146 845 36% 5.2% 13.6%

3 Axis Communications Sweden 802 694 16% 3.7% 13.1%

4 Flir Systems U.S. 354 727 -51% 1.6% 16.9%

5 Infinova U.S. 159 154 3% 0.7% -3.8%

6 Tamron Japan 125 121 3% 0.6% 8.3%

7 Vivotek Taiwan 119 130 -9% 0.5% 10.1%

8 IDIS Korea 115 115 0% 0.5% 5.2%

9 Verint Systems U.S. 110 120 -8% 0.5% 7.0%

10 Synectics U.K. 97 76 28% 0.4% -3.8%

11 Dynacolor Taiwan 87 75 16% 0.4% 18.2%

12 GeoVision Taiwan 72 74 -3% 0.3% 25.1%

13 Hitron Systems Korea 67 95 -30% 0.3% -7.6%

14 ITX Security Korea 66 81 -18% 0.3% 18.4%

15 Indigovision U.K. 64 55 16% 0.3% 6.6%

16 Dali Technology China 58 42 39% 0.3% 9.8%

17 CNB Technology Korea 47 65 -27% 0.2% -23.7%

18 Vicon U.S. 35 40 -12% 0.2% -18.0%

19 Hi Sharp Electronics Taiwan 25 30 -17% 0.1% -2.3%

20 Hunt Electronic Taiwan 24 30 -21% 0.1% 11.1%

Others (*) 15,637 13,953 12% 71.4%

Total 21,900 19,200 14.1% 100.0%

Total Revenue (US$ mn)

Source: Deutsche Bank, Asmag, Bloomberg Finance LP Note: * including multiple-solution vendors in the security industry

Our 2016E net income and EPS are higher than consensus

We forecast Hikvision to achieve 2015-2018 CAGRs for total revenue and EPS

of 41% and 39% (Figures 29 and 33). We also assume stable gross margin

(Figure 31, GM: 43.3-44.1%) and rising operating margins (Figure 32, OPM: 25-

26.7%) trends for 2015-2018, mainly due to Hikvision’s (a) increasing shipment

scale, (b) improving procurement power and cost structures, (c) growing

software and integrated solutions, and (d) successful expansion to new, high-

margin smart city application devices.

On our assumptions, its EPS will increase from CNY1.15 in 2014 to CNY4.24 in

2018 (Figure 33), with ROE (Figure 34) improving from 36% to 43.6% over the

same period. Our 2015 and 2016 EPS estimates are 3% and 7% higher than

the Street’s expectation (Figure 27). We expect its robust earnings momentum

and rising net cash position to support its share price performance.

21 September 2015


Hikvision Digital


Figure 27: Our 2015 and 2016 P&L assumptions vs. consensus forecasts

2015E 2016E

(CNY$ mn) DBe Conse nsus Diff YoY DBe Conse nsus Diff YoY

Sales 26,265 25,125 5% 52% 38,569 35,990 7% 47%

Gross profit 11,370 11,005 3% 49% 16,761 15,440 9% 47%

Operating expenses 4,800 4,616 4% 48% 6,682 6,392 5% 39%

Operating profit 6,571 6,389 3% 49% 10,079 9,048 11% 53%

Net income 6,681 6,509 3% 43% 9,867 9,119 8% 48%

EPS (CNY) 1.64 1.60 3% 43% 2.43 2.26 7% 48%

Outstanding shares (mn) 4,069 4,069

Financial ratio

Gross margin 43.3% 43.8% -0.5% -1.1% 43.5% 42.9% 0.6% 0.2%

Opex ratio 18.3% 18.4% -0.1% -0.6% 17.3% 17.8% -0.4% -0.9%

Operating margin 25.0% 25.4% -0.4% -0.5% 26.1% 25.1% 1.0% 1.1%

Net margins 25.4% 25.9% -0.5% -1.6% 25.6% 25.3% 0.2% 0.1% Source: Deutsche Bank estimates, Bloomberg Finance LP

Figure 28: Hikvision quarterly P&L highlights

Unit: CNY mn 1Q15 2 Q15 3 Q15 E 4 Q15 E 2 0 15 E 1Q16 E 2 Q16 E 3 Q16 E 4 Q16 E 2 0 16 E

Sales 4,288 5,508 7,048 9,421 26,265 6,077 7,917 10,116 14,459 38,569

Gross profit 1,897 2,309 3,114 4,050 11,370 2,591 3,302 4,537 6,331 16,761

Operating profit 1,024 1,246 1,768 2,533 6,571 1,515 1,932 2,787 3,844 10,079

Non- operating items 209 139 200 485 1,033 99 145 273 582 1,099

Pre- tax income 1,233 1,385 1,968 3,018 7,604 1,614 2,077 3,060 4,426 11,178

Net profit 1,045 1,161 1,701 2,775 6,681 1,401 1,806 2,628 4,032 9,867

EPS (CNY) 0.26 0.29 0.42 0.68 1.64 0.34 0.44 0.65 0.99 2.43

No. of shares (m) 4,069 4,069 4,069 4,069 4,069 4,069 4,069 4,069 4,069 4,069

Ma rgin a na lysis (%)

Gross margin 44.2% 41.9% 44.2% 43.0% 43.3% 42.6% 41.7% 44.8% 43.8% 43.5%

Operating margin 23.9% 22.6% 25.1% 26.9% 25.0% 24.9% 24.4% 27.5% 26.6% 26.1%

Pre- tax margin 28.7% 25.1% 27.9% 32.0% 29.0% 26.6% 26.2% 30.2% 30.6% 29.0%

Net margin 24.4% 21.1% 24.1% 29.5% 25.4% 23.1% 22.8% 26.0% 27.9% 25.6%

Tax rate 15% 15% 14% 8% 12% 13% 13% 14% 9% 12%

YoY growth (%)

Sales 65% 61% 51% 44% 52% 42% 44% 44% 53% 47%

Gross profit 56% 40% 47% 52% 49% 37% 43% 46% 56% 47%

Operating profit 54% 48% 46% 50% 49% 48% 55% 58% 52% 53%

Pre- tax income 58% 49% 42% 43% 46% 31% 50% 55% 47% 47%

Net profit 52% 39% 43% 42% 43% 34% 56% 55% 45% 48%

QoQ growth (%)

Sales - 35% 28% 28% 34% - 35% 30% 28% 43%

Gross profit - 29% 22% 35% 30% - 36% 27% 37% 40%

Operating profit - 39% 22% 42% 43% - 40% 28% 44% 38%

Pre- tax income - 42% 12% 42% 53% - 47% 29% 47% 45%

Net profit - 47% 11% 46% 63% - 49% 29% 46% 53%

Sa le s bre a kdown (%)

Front- end (Analog & IP Cameras) 55% 55% 53% 56% 55% 52% 54% 54% 58% 55%

Back- end (DVR & NVR) 19% 19% 17% 14% 17% 20% 20% 17% 16% 18%

Central Controlling Equipments 9% 9% 17% 14% 13% 9% 8% 18% 14% 13%

Engineering Construction 3% 4% 6% 6% 5% 3% 3% 5% 6% 5%

Others 14% 14% 7% 10% 11% 15% 15% 6% 7% 9%

Total 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% Source: Deutsche Bank estimates, Company data

21 September 2015


Hikvision Digital


Figure 29: The revenue trend for Hikvision Figure 30: Revenue growth for Hikvision

17,233

26,265

38,569

51,839

68,132

0

20,000

40,000

60,000

80,000

2014 2015E 2016E 2017E 2018E

Sales

(CNYmn) 2015-2018E CAGR at 41%

60.4%52.4%

46.8%

34.4% 31.4%

0%

20%

40%

60%

80%

100%

2014 2015E 2016E 2017E 2018ESales Growth



Figure 31: Gross margin trend for Hikvision Figure 32: Operating margin trend for Hikvision

44.4%43.3% 43.5% 43.5% 44.1%

30%

35%

40%

45%

50%

2014 2015E 2016E 2017E 2018EGross Margin

25.6%25.0%

26.1% 26.2%26.7%

20%

25%

30%

2014 2015E 2016E 2017E 2018EOperating Margin



Figure 33: EPS trend for Hikvision Figure 34: ROE trend for Hikvision

1.15

1.64

2.43

3.22

4.24

0.00

1.00

2.00

3.00

4.00

5.00

2014 2015E 2016E 2017E 2018EEPS

(CNYmn) 2015-2018E CAGR at 38.7%

36%

39.6%

44.9% 44.5% 43.6%

20%

30%

40%

50%

2014 2015E 2016E 2017E 2018E

ROE



21 September 2015


Hikvision Digital


Revenue assumptions

We offer our detailed revenue assumptions in Figure 35, in line with our

investment thesis. We expect IP cameras in the front-end product segment,

NVR in the back-end segment, and software & integrated solutions to act as

the key revenue and earnings growth drivers for Hikvision.

Figure 35: Revenue breakdown by products

Re ve nue (CNYm) 2 0 14 2 0 15 E 2 0 16 E 2 0 17 E 2 0 18 E

Front- end Products 9,068 14,364 21,300 29,507 39,408

Back- end Products 3,510 4,443 6,787 9,214 12,424

Central Controlling Equipments 1,639 3,345 4,977 6,429 8,496

Engineering Constructions 807 1,335 1,868 2,616 3,610

Others 2,210 2,778 3,637 4,073 4,195

Tota l Re ve nue 17 ,2 3 3 2 6 ,2 6 5 3 8 ,5 6 9 5 1,8 3 9 6 8 ,13 2

YoY growth (%) 2 0 14 2 0 15 E 2 0 16 E 2 0 17 E 2 0 18 E

Front- end Products 73% 58% 48% 39% 34%

Back- end Products 1% 27% 53% 36% 35%

Central Controlling Equipments - 104% 49% 29% 32%

Engineering Constructions 148% 65% 40% 40% 38%

Others 29% 26% 31% 12% 3%

Tota l Re ve nue 6 0 % 5 2 % 4 7 % 3 4 % 3 1%

Re ve nue (%) 2 0 14 2 0 15 E 2 0 16 E 2 0 17 E 2 0 18 E

Front- end Products 53% 55% 55% 57% 58%

Back- end Products 20% 17% 18% 18% 18%

Central Controlling Equipments 10% 13% 13% 12% 12%

Engineering Constructions 5% 5% 5% 5% 5%

Others 13% 11% 9% 8% 6%

Tota l Re ve nue 10 0 % 10 0 % 10 0 % 10 0 % 10 0 % Source: Deutsche Bank estimates

Balance sheet and dividend policy

We expect Hikvision to increase its capex from CNY611m in 2014 to CNY862m

in 2018 (Figure 36) for capacity expansion on new applications of smart city,

IoT products, and related software and solution business.

For its cash conversion cycle (Figure 37), we see its days receivable increasing

from 97 days in 2012 to 128 days in 2015 due mainly to rising orders for

overseas system integration vendors and project-based clients (state-owned

and multinational enterprises) in China. However, its tight control of inventory

and longer days payable has helped hold its healthy cash conversion cycle at

75-80 days.

We expect Hikvision to maintain the dividend payout ratio at 35%, which is

higher than Dahua’s dividend payout ratio at 10.2%, implying a dividend yield

of 1.8-4.6% for 2015-2018E based on the current share price. Under the

assumptions of capex expansion and dividend payout in 2015-2018, the trends

of free cash flow (Figure 38) and net cash position (Figure 39) of Hikvision

should still be healthy and increasing. We forecast free cash flow and net cash

position increasing from CNY3.1bn and CNY6.6bn in 2014 to CNY12.4bn and

CNY22.6bn in 2018, respectively.

21 September 2015


Hikvision Digital


Figure 36: Hikvision’s capex Figure 37: Hikvision’s cash conversion cycle

611 672

726 784

862

-

200

400

600

800

1,000

2014 2015E 2016E 2017E 2018E

Capex

(CNYmn)

97

128

101

85

107

138

91

7570

80

90

100

110

120

130

140

2012 2013 2014 2015E

Days of Receivable Days of Inventory

Days of Payable Cash conversion cycle



Figure 38: Hikvision’s free cash flow Figure 39: Hikvision’s net cash position

3,101 4,148

6,217

9,143

12,436

-

4,000

8,000

12,000

16,000

2014 2015E 2016E 2017E 2018E

Free Cash Flow

(CNYmn)

6,593 8,501

11,402

16,090

22,645

-

5,000

10,000

15,000

20,000

25,000

2014 2015E 2016E 2017E 2018ENet Cash Position

(CNYmn)



21 September 2015


Hikvision Digital


Figure 40: Our assumptions for Hikvision’s balance sheet and cash flow

Ba la nc e she e t (Unit: CNYmn) 2 0 13 2 0 14 2 0 15 E 2 0 16 E 2 0 17 E 2 0 18 E

Asse ts

Cash and cash equivalents 4,593 7,200 9,156 12,111 16,856 23,473

Accounts receivables 3,663 6,157 9,211 13,526 18,179 23,893

Inventory 1,429 2,292 3,469 5,079 6,819 8,862

Other current assets 2,706 3,459 3,494 3,528 3,564 3,599

Curre nt Asse ts 12 ,3 9 0 19 ,10 8 2 5 ,3 2 9 3 4 ,2 4 3 4 5 ,4 18 5 9 ,8 2 7

Fixed assets 1,030 1,529 2,037 2,527 2,995 3,456

Long- term investments 128 325 459 547 648 753

Intangible assets 171 214 214 214 214 214

Other non- current assets 352 114 116 118 121 123

Non- c urre nt Asse ts 1,6 8 2 2 ,18 3 2 ,8 2 7 3 ,4 0 7 3 ,9 7 9 4 ,5 4 7

Tota l Asse ts 14 ,0 7 2 2 1,2 9 1 2 8 ,15 6 3 7 ,6 5 0 4 9 ,3 9 7 6 4 ,3 7 4

Lia bilitie s

Accounts payables 1,609 3,592 5,631 8,245 11,071 14,387

Short- term debt 184 362 399 438 482 530

Other current liabilities 1,122 2,158 2,797 3,490 3,525 3,560

Current Liabilities 2,915 6,112 8,827 12,173 15,078 18,478

Long- term debt - 245 257 270 283 298

Other non- current liabilities 44 54 106 127 165 215

Non- current Liabilities 44 299 363 397 449 512

Tota l lia bilitie s 2 ,9 5 9 6 ,4 11 9 ,19 0 12 ,5 7 0 15 ,5 2 7 18 ,9 9 0

Sha re holde rs' Equity

Share capital 4,017 4,069 4,069 4,069 4,069 4,069

Minority interests 26 37 52 60 69 82

Others 7,069 10,773 14,845 20,950 29,731 41,233

Tota l Sha re holde rs' Equity 11,113 14 ,8 7 9 18 ,9 6 6 2 5 ,0 8 0 3 3 ,8 7 0 4 5 ,3 8 4

Tota l Lia bilitie s a nd Sha re holde rs' Equity 11,113 14 ,8 7 9 18 ,9 6 6 2 5 ,0 8 0 3 3 ,8 7 0 4 5 ,3 8 4

Ca sh flow (Unit: CNYmn) 2 0 13 2 0 14 2 0 15 E 2 0 16 E 2 0 17 E 2 0 18 E

Net income 3,077 4,681 6,697 9,876 13,112 17,266

Depreciation 66 97 164 236 315 401

Amortization 5 13 19 28 38 50

Working capital change -1,625 -1,374 -2,191 -3,311 -3,568 -4,440

Others 340 290 181 213 111 110

Operat ing Cashf low 1,863 3,706 4,870 7,042 10,008 13,388

Capex -391 -611 -672 -726 -784 -862

Others -1,979 -430 70 61 75 95

Invest ing Cashf low -2,370 -1,041 -602 -665 -709 -768

Issuance (retirement) of new shares 2 489 0 0 0 0

Increase (decrease) in debt 181 426 48 53 57 62

Dividend paid -602 -1,030 -2,338 -3,454 -4,586 -6,039

Others 0 -6 -1 -2 -2 -3

Financing Cashf low -419 -120 -2,291 -3,403 -4,531 -5,979

FX Adjustment -15 60 -20 -21 -23 -24

Change in cash and cash equ ivalen ts -941 2,606 1,957 2,954 4,745 6,617 Source: Deutsche Bank estimates, Company data

21 September 2015


Hikvision Digital


Company profile

Company background

Established in November 2001 in Hangzhou, China, Hikvision is one of the

leading video surveillance products and solution suppliers in the world, with

No. 1 market share in revenue worldwide and in China. Its sales contributions

in 2014 from front-end products (analog and IP cameras), back-end products

(digital and networking video recorders), central controlling equipment (system

integration and software), engineering construction, and other products are

53%, 20%, 10%, 5%, and 12%, respectively.

Hikvision was listed on the Shenzhen Stock Exchange (ticker: 002415 SZ) with

share capital of CNY500m in May 2010. CETHik Group (China Electronic

Technology Hik Group) is its largest shareholder, with ownership of 39.91%

(August 2015).

Figure 41: Company milestones

Year Events

2001 Established by Hong-Jia Gong and Chun-Mei Chen.

2002 Launched DS-4000M card and DS-8000 DVR.2003 Launched DS-4000H card.

2003 The era of H.264 began.

2004 Was awarded "Most Famous Brand in China Security Industry" and "Annual Top 10 Brand in China Security Industry"

2005 Was ranked no.5 in CCTV (Closed-Circuit TV) in "Top 10 Brands in Security Industry"

2005 Was awarded famous trademark of Hangzhou.

2006 Was ranked no.20 among "Forbes China Top 100 Potential Enterprises"

2007 Was awarded famous trademark of Zhejiang.

2008 Was ranked no.13 among global "Security 50" (no. 5 in Asia) by Asmag.

2008 Provided security control services to 2008 Olympic Games in Beijing.

2009 Launched video platform products.

2009 Launched DS-8100HS-S series DVR.

2010 Claimed no.1/no.5 share in DVR/CCTV market according to IHS.

2010 Listed in Shenzhen Stock Exchange in May 2010 with share capital of CNY500m.

2010 Ranked top 10 among global "Security 50" by Asmag.

2010 Won CNY5bn safe city project for Chongqing

2011 Unveiled 81/91HF-ST DVR and 6400 decoder.

2012 Launched 86/96N-ST NVR

2013 Launched ezviz and Smart IP Camera series.

2013 Unveiled solutions for safe city.

2014 Was ranked no.1/no.3 in video surveillance product group and all product group among "Security 50" by Asmag

2014 Cooperated with Baidu to launch ezviz smart video surveillance services.

2014 Provided video surveillance services and equipments to 2014 FIFA in Brazil.

2014 Was ranked no.1 in CCTV and video surveillance market according to IHS video surveillance research.

2015 Has been ranked no.1 in CCTV and video surveillance market according to IHS video surveillance research 4 years in a row. Source: Deutsche Bank, Company data

Management profile

Mr. Zong-Nian Chen (Chairman of the Board)

Mr. Chen is now Head of CETC 52 Research Institute (China Electronics

Technology Corporation 52 Research Institute) and Chairman of Hikvision

Digital. He has been working at CETC 52 Research Institute for ~30 years. He

was previously Deputy Head of CETC 52 Research Institute, Vice President at

Shenzhen Gold Corolla Electronic Co., Ltd., and Director and President at Hik

Group.

Mr. Hong-Jia Gong (Vice Chairman of the Board)

Mr. Gong is the Founder and Vice Chairman at Hikvision Digital.

He is also the Founder of Dongguan Tecsun Co., Ltd., and Watchdata. He

holds 18.28% of shares of Hikvision Digital, making him the second-largest

shareholder of the company.

21 September 2015


Hikvision Digital


Mr. Yang-Zhong Hu (Director, CEO [Chief Executive Officer])

Mr. Hu has worked as the CEO at Hikvision Digital since the company was

founded at the end of 2001. From 1989 to 2001, he was the Deputy Chief

Engineer at CETC 52 Research Insitute. He has been working for CETC 52

Research Institute for over 25 years.

Mr. Wei-Qi Wu (Director, Vice President)

Mr. Wu has been the Vice President at Hikvision Digital since 2002. He

previously worked as Engineer at CETC 52 Research Institute from 1986 to

2001.

Mr. Yi-Bo Zheng (Vice President, CFO [Chief Financial Officer])

Mr. Zheng is now the Vice President and CFO at Hikvision Digital. He joined

Hikvision Digital in 2004.

Shareholding structure

Figure 42: Shareholding structure

Na me S t a k e s ( %)

CETHik Group (China Elect ronics Technology Hik Group) 39.91%

Hong-Jia Gong 18.28%

Xinjiang Weixun Invest ment Management 7.09%

Xinjiang Pukang Invest ment Part ners 2.10%

CETC 52 Research Inst it ut e (China Elect ronics Technology Corporat ion 52 Research Inst it ut e) 1.97%

Zhejiang Dongf ang Group Co 1.69%

Morgan St anley & Co. Int ernat ional Plc. 0.66%

New China Lif e Insurance 0.65%

Wei-Ping Shen 0.54%

BNP Paribas Invest ment Part ners 0.44% Source: Deutsche Bank, Company data

Figure 43: Hikvision’s key parent companies


Hik

visio

n D

igita

l

Hard

ware

& E

qu

ipm

en

t

21

Sep

tem

ber 2

01

5

Pag

e 2

4

Deu

tsch

e B

an

k A

G/H

on

g K

on

g

Figure 44: Hikvision’s key direct holding subsidiaries

HangzhouHikvisionSystem

Technology Co.,Ltd

(Hangzhou)

Hangzhou Hikvision

Technology Co., Ltd

(Hangzhou)

Chongqing Hikvision

Technology Co., Ltd

(Chongqing)

ChongqingHik Technology

Co., Ltd

(Chongqing)

Beijing Hikvision Security

TechnologyCo., Ltd

(Beijing)

ShanghaiGoldway ITS

Co., Ltd

(Shanghai)

Henan HuaanSecurity Corp

(Henan)

Henan HuaanSecurity

Services Co., Ltd

(Henan)

Hikvision Australia PTY

Ltd.

(Australia)

HikvisionFZE

(Dubai)

HikvisionUSA, Inc.

(USA)

Prama Hikvision Indian Private

Limited

(India)

Hikvision Europe BV

(Netherland)

Hikvision Singapore Pte.

Ltd

(Singapore)

Hikvision South Africa (Pty) Ltd.

(South Africa)

Hikvision International Co., Limited

(Hong Kong)

Hikvision do Brasil

Comercio deEquipamentosde Seguranca

Ltda.(Brazil)

HDT International

Ltd.

(Hong Kong)

Hikvision Italy (S.R.L.)

(Italy)

Hikvision FRANCE SAS

(France)

Hikvision Spain,S.L.

(Spain)

ZAO Hikvision

(Russia)

Hikvision UK Limited

(U.K)

Hangzhou Hikvision Digital Technology Co., Ltd

100% 100% 100% 100% 100% 100% 51% 90% 100% 100% 100% 87.4% 100%

100% 95%95%100%100%100%100%58%100%100%

Direct Holding

Indirect Holding


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Hikvision Digital


Appendix 1

Important Disclosures

Additional information available upon request

Disclosure checklist

Company Ticker Recent price* Disclosure

Hikvision Digital 002415.SZ 31.90 (CNY) 18 Sep 15 NA *Prices are current as of the end of the previous trading session unless otherwise indicated and are sourced from local exchanges via Reuters, Bloomberg and other vendors . Other information is sourced from Deutsche Bank, subject companies, and other sources. For disclosures pertaining to recommendations or estimates made on securities other than the primary subject of this research, please see the most recently published company report or visit our global disclosure look-up page on our website at http://gm.db.com/ger/disclosure/DisclosureDirectory.eqsr. For disclosures pertaining to recommendations or estimates made on securities other than the primary subject of this research, please see the most recently published company report or visit our global disclosure look-up page on our website at http://gm.db.com/ger/disclosure/Disclosure.eqsr?ricCode=002415.SZ

Analyst Certification

The views expressed in this report accurately reflect the personal views of the undersigned lead analyst(s) about the subject issuer and the securities of the issuer. In addition, the undersigned lead analyst(s) has not and will not receive any compensation for providing a specific recommendation or view in this report. Andrew-C Chang

Historical recommendations and target price: Hikvision Digital (002415.SZ) (as of 9/18/2015)

0.00

10.00

20.00

30.00

40.00

50.00

60.00

Sep 13 Dec 13 Mar 14 Jun 14 Sep 14 Dec 14 Mar 15 Jun 15

Secu

rity

Pri

ce

Date

Previous Recommendations

Strong Buy Buy Market Perform Underperform Not Rated Suspended Rating

Current Recommendations

Buy Hold Sell Not Rated Suspended Rating

*New Recommendation Structure as of September 9,2002

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Hikvision Digital


Equity rating key Equity rating dispersion and banking relationships

Buy: Based on a current 12- month view of total share-holder return (TSR = percentage change in share price from current price to projected target price plus pro-jected dividend yield ) , we recommend that investors buy the stock. Sell: Based on a current 12-month view of total share-holder return, we recommend that investors sell the stock Hold: We take a neutral view on the stock 12-months out and, based on this time horizon, do not recommend either a Buy or Sell. Notes:

1. Newly issued research recommendations and target prices always supersede previously published research. 2. Ratings definitions prior to 27 January, 2007 were:

Buy: Expected total return (including dividends) of 10% or more over a 12-month period Hold: Expected total return (including dividends) between -10% and 10% over a 12-month period Sell: Expected total return (including dividends) of -10% or worse over a 12-month period

52 %

37 %

11 %22 %17 % 15 %

0

50

100

150

200

250

300

350

400

450

Buy Hold Sell

Asia-Pacific Universe

Companies Covered Cos. w/ Banking Relationship

Regulatory Disclosures

1.Important Additional Conflict Disclosures

Aside from within this report, important conflict disclosures can also be found at https://gm.db.com/equities under the

"Disclosures Lookup" and "Legal" tabs. Investors are strongly encouraged to review this information before investing.

2.Short-Term Trade Ideas

Deutsche Bank equity research analysts sometimes have shorter-term trade ideas (known as SOLAR ideas) that are

consistent or inconsistent with Deutsche Bank's existing longer term ratings. These trade ideas can be found at the

SOLAR link at http://gm.db.com.

21 September 2015


Hikvision Digital


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21 September 2015


Hikvision Digital


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21 September 2015


Hikvision Digital


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