Hikvision Earnings: Stock Fairly Valued After AI-Inspired Rally, China Recovery Priced In

We retain our fair value estimate on Hikvision 002415 at CNY 49, corresponding to 25 times 2023 P/E after minor changes to our model. The stock is now fairly valued, in our view, after the company’s rally in the last few months, which could’ve been inspired by artificial intelligence excitement brought on by ChatGPT. While we continue to believe Hikvision will benefit from commercial digital transformation globally, this and China’s recovery have been priced in, leaving limited upside to the stock. The stock may overshoot in the near term if the spinoff of its robotics operations is approved by Chinese authorities.

We think the excitement around large language models and generative AI is misplaced on Hikvision, based on what management has discussed about the company’s application of AI on its products and how AI shapes its platforms. We see Hikvision’s value proposition has not changed, which is to help customers surveil, analyze and optimize their operations. We believe the company finds it more practical to use AI and algorithms to improve sensing and identification features, which in turn helps devices to find their way in executing tasks (like moving goods around a warehouse).

Even without large language models and generative AI, we still reckon Hikvision is bolstering its moat step by step. Hikvision has expanded its presence in audio and sensor products. Both audio and sensor products are used in industrial surveillance, such as monitoring gas leakages, and electrical, pressure, and temperature changes, to ensure safety and efficiency. Algorithms (including AI algorithms) are applied in these new products to help caution users as to potential hazards. We also note Hikimaging has better segmented its products into different diagnosis, surgery and ward monitoring offerings. As a result, we forecast a revenue CAGR of 15.6% over the next five years.