Hangzhou Hikvision Digital Technology (002415.SZ): Performance Stalled, Research and Development Cutback, Can AI come to the rescue?

Hangzhou Hikvision Digital Technology (002415.SZ) released its 2024 annual report and fourth-quarter financial report after the A-share market closed on the evening of April 18, 2025 Beijing time, with the following key points: 1. Overall performance: Continuously weak. Hangzhou Hikvision Digital Technology achieved a revenue of 18.5 billion yuan in the first quarter of 2025, a year-on-year increase of 4%. Despite the domestic core business remaining weak, revenue growth mainly came from the drive of innovative businesses. Net profit attributable to shareholders in the first quarter of 2025 was 2 billion yuan, a year-on-year increase of 6.4%. Although the company has started cost control measures, the rebound in profit is still mainly affected by downstream demand and remains weak. 2. Progress of various businesses: No improvement in domestic business. In the second half of 2024, all three major domestic business segments experienced declines. Among them, the PBG domestic public service business segment saw a double-digit decline, performing the "poorest" among all businesses; the EBG large and medium-sized enterprise group and SMBG small and medium-sized enterprise group also experienced varying degrees of decline. Innovative businesses maintained double-digit growth as the company's main growth point. 3. Software-hardware integration: Software fluctuates greatly, hardware more stable. Since transforming from a hardware manufacturer that only sells surveillance products to a security leader with software empowerment, the company has maintained an integrated software-hardware business model. Dolphin Jun calculated that the company's software business accounted for around 20% of revenue in the second half of 2024. While the growth rate of hardware business has slowed down, it still maintains growth compared to the decline in software business. Overall view of Hangzhou Hikvision Digital Technology: Performance remains weak, showing no signs of improvement. In the first quarter, Hangzhou Hikvision Digital Technology saw a slight increase in revenue, while the gross profit margin continued to decline year-on-year. The growth in this quarter was mainly driven by the growth of innovative businesses, offsetting the decline in the domestic core business, ultimately achieving a single-digit growth performance. Based on the company's annual report data, although both innovative and overseas businesses have grown, their growth rates have begun to decline. Additionally, the company's weak domestic core business has not shown signs of improvement. Influenced by factors such as government finances, the PBG business continued to decline, reaching a new low in the second half of the year; EBG and SMBG business segments both experienced declines again, with no sustained improvement in demand from enterprises. Due to weak demand, the company has actively reduced inventory levels in the supply chain. The number of R&D personnel, which had been growing annually, saw a decrease in 2024, indicating that the company has begun to control expenses. In the continued weak performance, cost control measures can improve short-term performance, but it is not the way for long-term healthy development of the company. Accelerated growth in business and revenue can provide a more optimistic outlook. In the current situation, the company also hopes to make changes through AI empowerment. Based on the "Guanlan" model, the company has launched corresponding products and plans to combine self-developed large models with intelligent computing hardware platforms, but this has not yet had an impact on the company's current operations. Due to economic expectations and the impact of some downstream industries, market expectations for the company have decreased, and the company's stock price has continued to fluctuate within a range. For the company, the main focus of the current market is on the improvement in operations and the empowerment of AI large models. If the company can make new changes in these areas, it may inject confidence back into the market. Otherwise, the company will continue to linger at the bottom. Here is a detailed analysis: 1. Core data: Continuously weak 1.1 Revenue situation Hangzhou Hikvision Digital Technology achieved a revenue of 18.5 billion yuan in the first quarter of 2025, a year-on-year increase of 4%. The growth in revenue this quarter was mainly driven by the growth of innovative and overseas businesses, while the domestic business remained weak. 1.2 Gross profit margin situation Hangzhou Hikvision Digital Technology achieved a gross profit of 8.3 billion yuan in the first quarter of 2025, a year-on-year increase of 2.1%. The growth in gross profit was lower than the revenue side, mainly due to the decline in gross profit margin. The gross margin of Hangzhou Hikvision Digital Technology this quarter was 44.9%, a year-on-year decrease of 0.9 percentage points. The decline in gross margin this quarter was mainly due to the decline in the domestic core business and the decrease in the proportion of software business. 1.3 Core expense situation The core expenses of Hangzhou Hikvision Digital Technology mainly include sales expenses, management expenses, and research and development expenses. The total of these three core expenses in the first quarter of 2025 was 5.93 billion yuan, a year-on-year increase of 1.9%. The three core expense ratio maintained at 32%, a year-on-year decrease of 0.6 percentage points. 1) Sales expenses: The company's sales expenses were 2.601 billion yuan this quarter, a year-on-year increase of 5.6%. The sales expense ratio this quarter was 14%, an increase of 0.2 percentage points compared to the same period last year. The change in sales expenses is relatively close to the situation on the revenue side. 2) Management expenses: The company's management expenses were 652 million yuan this quarter, a year-on-year decrease of 4.1%. The company has begun to control personnel costs. The management expense ratio this quarter was 3.5%, a decrease of 0.3 percentage points. 3) Research and development expenses: The company's research and development expenses were 2.67 billion yuan this quarter, almost unchanged from the same period last year. The research and development expense ratio this quarter was 14.4%, a decrease of 0.6 percentage points compared to the same period last year. The company has also controlled research and development expenses in the last two quarters, and there has been no year-on-year growth. By the end of 2024, the number of R&D personnel in the company was 28,300, more than 200 fewer than in 2023.The number of personnel has decreased for the first time in recent years. Although the average annual salary for research and development personnel has increased to 419,600 yuan, this also includes a portion of compensation costs.In a continuing downturn in operations, the company has begun to control expenses in the management and research and development departments. 1.4 Net profit attributable to owners of the parent company Hangzhou Hikvision Digital Technology achieved a net profit attributable to owners of the parent company of 20.4 billion yuan in the first quarter of 2025, a year-on-year increase of 6.4%. The company's net profit margin for this quarter is only 12%, still at a historical low. The company's operations are mainly affected by the softening of domestic demand, with the PBG, EBG, and SMBG departments all showing signs of decline, directly leading to the sluggish revenue end and the decline in gross profit margin, ultimately affecting the performance of the profit end. 2. Progress of various businesses: no improvement in domestic business Starting from 2021, Hangzhou Hikvision Digital Technology no longer specifically discloses "front-end products", "back-end products", and "central control products" and directly includes them in the company's "main business products and other products" project. In its financial reports, the company focuses on disclosing the progress of various innovative businesses, with the company's development focus shifting towards innovative businesses. 1) Main business products and other products remain the company's largest source of revenue, contributing 76% of revenue in the second half of 2024. Due to the downturn in the domestic main business, the proportion of the main business in the overall business is declining, but still the largest proportion; 2) The proportion of innovative businesses continues to increase, with the share of innovative businesses in the second half of 2024 maintained at 24%, a year-on-year increase of 4 percentage points. Among them, the automotive business and thermal imaging business are the main sources of growth. 2.1 Main business products and services Hangzhou Hikvision Digital Technology's main business products and services business achieved revenue of 39.13 billion yuan in the second half of 2024, a year-on-year decline of 5.5%. Due to the impact of the domestic main business downturn, it once again fell. In the domestic main business in the second half of 2024, the three major business groups all experienced different degrees of decline. 1) The domestic public services business group (PBG) declined by 14.4% year-on-year, the largest decline among all businesses, largely affected by factors such as government finances; 2) The domestic enterprise business group (EBG) of large enterprises declined by 6.3% year-on-year; 3) The domestic small and medium-sized enterprise business group (SMBG) declined by 10.8% year-on-year, mainly due to weak downstream demand and tight liquidity, the company proactively reduced inventory levels in the supply chain. In the company's main business products business overseas, revenue was 14.55 billion yuan in the second half of 2024, a year-on-year increase of 3.4%. Although the overseas main business growth rate also showed a significant decline, it still outperformed the domestic decline. 2.2 Innovative business Hangzhou Hikvision Digital Technology's innovative business achieved revenue of 12.156 billion yuan in the second half of 2024, a year-on-year increase of 17.3%. Although the proportion of innovative businesses is only one-fourth, it is currently the company's main growth point. In the second half of 2024, the automotive business and thermal imaging business both saw growth rates of over 30%. The company's innovative business saw good growth both domestically and overseas, with the following breakdown: 1) In the domestic innovative business, Hangzhou Hikvision Digital Technology achieved revenue of 8.99 billion yuan in the second half of 2024, a year-on-year increase of 19.3%. In terms of revenue, innovative businesses are mainly concentrated in the domestic market. 2) In the overseas innovative business, Hangzhou Hikvision Digital Technology achieved revenue of 3.17 billion yuan in the second half of 2024, a year-on-year increase of 11.8%. Three, software-hardware integration: software fluctuation, hardware more stable Hangzhou Hikvision Digital Technology relies on hardware carriers such as cameras for shipments and follows up with customers with software services to achieve a "software-hardware integrated" business framework. From the financial report published this time, how did Hangzhou Hikvision Digital Technology perform in terms of software and hardware? 3.1 Software Although Hangzhou Hikvision Digital Technology did not separately disclose the income situation of the company's software in the annual report, it can be seen from the annual report that there is a VAT refund project, which can be used to calculate the software income through the VAT refund. "Software product income = VAT refund amount / refund ratio" (Hint: "Refund ratio = VAT calculation and payment ratio - actual VAT payment ratio") By estimating, Hangzhou Hikvision Digital Technology's software business income in the second half of 2024 was 10.38 billion yuan, a year-on-year decline of 7.6%. The proportion of software value-added in Hangzhou Hikvision Digital Technology's total revenue continued to decline to around 20%. 3.2 Hardware After calculating the software value-added, the hardware revenue of Hangzhou Hikvision Digital Technology can be obtained from the total annual revenue. In the second half of 2024, Hangzhou Hikvision Digital Technology's hardware business revenue was 40.9 billion yuan, a year-on-year increase of 0.9%. Comparing the revenue growth rates of Hangzhou Hikvision Digital Technology's software and hardware, it can be seen that both hardware and software business growth rates declined in the second half of the year. In comparison, the hardware business is essentiallyThe overall trend has been one of continuous growth, but there has been a noticeable decline in the software sector. Generally speaking, the hardware business (such as monitoring equipment and other products) is more resilient to risks, while the software business is more affected by economic factors.This article is reprinted from the "Dolphin Investment Research" public account, edited by GMTEight: Jiang Yuanhua.