海康威视(002415)

RMB10bn investment for the next four years

Hikvision’s board of directors has decided to invest RMB10bn capex to build 4R&D centers and 2 industrial bases in five cities in the next four years. Wemaintain BUY rating on Hikvision.

Building new R&D centers and production bases

The four R&D centers will cost RMB6.5bn and be deployed in the cities ofXi’an, Wuhan, Chengdu and Hangzhou. The construction period for eachproject will take ~ 40 months and be completed during 2H21-1H22. Combinedwith Hangzhou R&D center, its R&D network will cover the mid-westernprovinces in China and utilize the local science and education talents to furtherstrengthen its R&D team. The two production bases will cost RMB4bn and bedeployed in Chongqing and Wuhan. The completion of production bases willhelp Hikvision leverage local labor resources and increase capacity.

Focus on the R&D talents and increasing capacity

We expect these R&D centers to strengthen its core competence in videosurveillance and develop the innovation businesses (such as industryautomation and automotive applications) with new applications. The newproduction bases will increase capacity and vertical integration capability asthe company grows in size. We expect upside to our current capex forecastbut should be manageable given Hikvision’s 2017E profits of RMB9.5bn andnet cash position of RMB9.2bn at the end of 2Q17.

Valuation and risks

We believe the investment plan is in sync’s management’s strategy in securingits leadership in the video surveillance sector while diversifying into newgrowth segments. Our TP of RMB34.5 is based on 25x 2018E EPS, which issupported by 34%/36% ROE and 28%/33% earnings growth in 2017/2018,respectively. Risks: market share loss and weak demand