Hikvision: Performance bottleneck, R&D downsizing, AI to save the situation?

Hikvision released its 2024 annual report and fourth-quarter financial report (ending March 2025) after the A-share market closed on the evening of April 18, 2025, Beijing time. The key points are as follows:

1. Overall performance: Continued sluggishness. $HIKVISION(002415.SZ) achieved revenue of 18.5 billion yuan in the first quarter of 2025, a year-on-year increase of 4%. In the context of a sluggish domestic main business, revenue growth mainly came from the drive of innovative businesses ; the net profit attributable to the parent company in the first quarter of 2025 was 2 billion yuan, a year-on-year increase of 6.4%. Although the company has begun to control expenses, the recovery in profits is still mainly affected by downstream demand, which remains sluggish.

2. Progress of various businesses: No improvement in domestic business. In the second half of 2024, all three major business groups in the domestic market experienced a decline. Among them, the domestic public service business group (PBG) saw a double-digit decline, making it the "worst" performer among all businesses; while the large and medium-sized enterprise group (EBG) and the small and medium-sized enterprise group (SMBG) also experienced varying degrees of decline. Innovative businesses still maintained double-digit growth, serving as the main growth point for the company;

3. Integration of software and hardware: Software is volatile, hardware is more stable. Since transforming from a hardware vendor that only sells surveillance equipment to a leading security company empowered by software, the company has maintained an integrated operation model of software and hardware.

Dolphin Research estimates that in the second half of 2024, the revenue share of the company's software business will fall back to around 20%. Compared to the decline in software business, although the growth rate of hardware business has slowed, it still maintains growth.

Overall view of Hikvision: Performance is sluggish, still no signs of improvement.

Hikvision's revenue showed slight growth in the first quarter, 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, compensating for the decline in the domestic main business, ultimately achieving single-digit growth.

Looking at the company's annual report data, although both innovative and overseas businesses have seen growth, the growth rates of both have also begun to decline. In addition, there are no signs of improvement in the company's sluggish domestic main business. Affected by government finances and other factors, the PBG business continues to decline, with data for the second half of the year already at a five-year low; both EBG and SMBG businesses have again declined, and demand from the enterprise side has not shown sustained improvement. Due to weak demand, the company has also actively reduced inventory levels in the supply chain.

The number of R&D personnel, which has been increasing year by year, saw a decline in 2024, indicating that the company has begun to control expenses. In the context of continued sluggish performance, controlling expenses can improve short-term performance, but this is not a sustainable way for the company's long-term healthy development The acceleration of business and revenue growth brings more "hope."

Under the current circumstances, the company also hopes to make changes through AI empowerment. Based on the "Guanlan" large model, the company has launched corresponding products and plans to combine its self-developed large model with an intelligent computing hardware platform, but this has not yet impacted the company's current operations.

Due to economic expectations and the influence of some downstream industries, the market has lowered its expectations for the company, 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 of operations and AI large model empowerment. If the company can see new changes in these two areas, it is expected to inject confidence back into the market. Otherwise, the company will continue to linger at the bottom.

Here is Dolphin Research's specific analysis of Hikvision's financial report:

1. Core Data: Continued Weakness

1.1 Revenue Situation

Hikvision achieved revenue of 18.5 billion yuan in the first quarter of 2025, an increase of 4% year-on-year. The revenue growth this quarter is mainly driven by the growth of innovative and overseas businesses, while domestic business remains sluggish.

1.2 Gross Margin Situation

Hikvision 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 rate of gross profit is lower than that of revenue, mainly due to the decline in gross margin.

Hikvision's gross margin this quarter is 44.9%, a year-on-year decrease of 0.9 percentage points. The year-on-year decline in the company's gross margin this quarter is mainly affected by the decline in domestic main business and the decrease in the proportion of software business.

1.3 Core Expense Situation

Hikvision's core expense situation mainly includes selling expenses, management expenses, and research and development expenses. Hikvision's total core expenses in the first quarter of 2025 amounted to 5.93 billion yuan, a year-on-year increase of 1.9%. The core expense ratio remains at 32%, a year-on-year decrease of 0.6 percentage points.

1) Selling Expenses: This quarter, the company's selling expenses were 2.601 billion yuan, a year-on-year increase of 5.6%. The selling expense ratio this quarter is 14%, a year-on-year increase of 0.2 percentage points. The changes in selling expenses are relatively close to the revenue situation 2) Management Expenses: The company's management expenses for this quarter were 652 million yuan, a year-on-year decrease of 4.1%. The company has begun to control personnel costs. The management expense ratio for this quarter was 3.5%, a year-on-year decrease of 0.3 percentage points;

3) R&D Expenses: The company's R&D expenses for this quarter were 2.67 billion yuan, basically flat year-on-year. The R&D expense ratio for this quarter was 14.4%, a year-on-year decrease of 0.6 percentage points. The company is also controlling R&D expenses, with no year-on-year growth seen in the past two quarters.

By the end of 2024, the number of R&D personnel in the company was 28,300, a decrease of more than 200 compared to 2023, marking the first decline in recent years. Although the annual average salary of R&D personnel has risen to 419,600 yuan, this also includes some compensation costs.

In the context of continued sluggish operations, the company has begun to control expenditure in management and R&D departments.

1.4 Net Profit Attributable to Shareholders

Hikvision achieved a net profit attributable to shareholders of 2.04 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 was only 12%, still at a historical low.

The company's operations were mainly affected by weak domestic demand, with signs of decline in the PBG, EBG, and SMBG departments, directly leading to sluggish revenue and a decline in gross profit margin, ultimately impacting profit performance.

2. Progress of Various Businesses: No Improvement in Domestic Business

Since 2021, Hikvision has stopped disclosing specific details about "front-end products," "back-end products," and "central control products," instead categorizing them under the company's "main business products and other products." In the financial report, the progress of various innovative businesses has been emphasized, and the company's development focus is shifting towards innovative businesses.

1) Main business products and other products remain the largest source of income for the company, contributing 76% of revenue in the second half of 2024. Affected by the sluggishness of the domestic main business, the overall proportion of the main business is showing a downward trend, but it remains the largest share;

2) The proportion of innovative businesses continues to increase, maintaining a share of 24% in the second half of 2024, 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 Products and Services

Hikvision's main products and services achieved revenue of 39.13 billion yuan in the second half of 2024, a year-on-year decline of 5.5%. Affected by the sluggish domestic main business, it has fallen into decline again.

In the domestic main product business, all three major business groups showed varying degrees of decline in the second half of 2024. ① Domestic Public Service Business Group (PBG) declined by 14.4% year-on-year, the largest decline among all businesses, greatly affected by government finance and other factors; ② Domestic Enterprise Business Group (EBG) declined by 6.3% year-on-year; ③ Domestic Small and Medium-sized Enterprise Business Group (SMBG) declined by 10.8% year-on-year, mainly due to weak downstream demand and tight funding, the company actively reduced inventory levels in the supply chain.

In the overseas main product business, revenue reached 14.55 billion yuan in the second half of 2024, a year-on-year increase of 3.4%. Although the growth rate of the overseas main business also showed a significant decline, it still performed better than the domestic decline.

2.2 Innovative Business

Hikvision'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 innovative business accounts for only 1/4, it is currently the company's main growth point. In the second half of 2024, both the automotive business and thermal imaging business grew by over 30%.

The company's innovative business has seen good growth both domestically and internationally, broken down as follows:

① In the domestic innovative business, Hikvision 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 scale, the innovative business is currently mainly concentrated in domestic operations.

② In the overseas innovative business, Hikvision achieved revenue of 3.17 billion yuan in the second half of 2024, a year-on-year increase of 11.8%.

3. Software-Hardware Integration: Software Volatility, Hardware Stability

Hikvision relies on hardware carriers such as cameras for shipments and follows up with customers for subsequent software services, thereby achieving the company's "software-hardware integration" business framework. From the financial report released this time, how do Hikvision's software and hardware perform respectively?

3.1 Software Side

Although Hikvision discloses product categories separately in its annual report, it does not disclose the company's software revenue separately. Since the company's software products can enjoy the value-added tax refund policy, it can be seen from the company's annual report that there are projects for excess tax refunds, and the software revenue can be calculated from the value-added tax refund amount "Software product revenue = VAT refund amount / refund ratio"

(Note: "Refund ratio = VAT calculation and payment ratio - actual VAT payment ratio")

Dolphin Research estimates that in the second half of 2024, Hikvision's software business revenue will be 10.38 billion yuan, a year-on-year decline of 7.6%. The added value of Hikvision's software continues to decline to around 20% of the company's total revenue.

3.2 Hardware Segment

After estimating the software added value, we can derive Hikvision's hardware revenue from the company's annual total revenue. In the second half of 2024, Hikvision's hardware business revenue will be 40.9 billion yuan, a year-on-year increase of 0.9%.

Comparing the growth rates of Hikvision's software and hardware revenues reveals that both segments experienced a slowdown in the second half of the year. In contrast, the hardware segment has generally maintained a growth trend, while the software segment has shown a noticeable decline. Overall, the hardware business (such as monitoring equipment) is more resilient to risks, whereas the software business is more significantly affected by economic conditions.