Hikvision: Layoffs and Cost Control, When Will the Domestic Dilemma Be Resolved?

$HIKVISION(002415.SZ) released its 2025 semi-annual report and second-quarter financial report (as of June 2025) after the A-share market closed on the evening of August 1, 2025, Beijing time. Key points are as follows:

1. Core Data: Hikvision's revenue for this quarter was 23.3 billion, down 0.5% year-on-year. There is no sign of recovery on the revenue side; although overseas business continues to grow, domestic business still faces significant pressure. The company's gross margin for this quarter was 45.4%, up 0.9 percentage points year-on-year, mainly due to the recovery in gross margin of security monitoring products.

2. Operating Expenses: The company's R&D expenses and management expenses both declined this quarter. In 2024, the number of R&D personnel decreased for the first time, and under the current business pressure, the company will continue to cut staff and reduce expenses. Judging from the "relatively rigid" performance in recent quarters, the company, as a state-owned enterprise, is relatively slow in reducing related expenses.

3. Specific Business Performance from Semi-Annual Data

a) Domestic Main Business: Still Sluggish. Among them: ① Domestic Public Service Department (PBG) down 2.1% year-on-year, although there is support from special government bonds, the company's business related to the government is still declining; ② Domestic Enterprise Department (EBG) down 0.4% year-on-year, halting the decline seen in the second half of last year; ③ Domestic SME Department (SMBG) down 29.7% year-on-year, the economic environment has a greater impact on SMEs and individual businesses, and the company's related business has seen a significant decline;

b) Overseas Main Business: Maintains Growth. Compared to the sluggish domestic business, the company's overseas main business grew by 6.9% year-on-year, mainly due to the company's expansion in emerging markets;

c) Innovative Business: Still the Fastest Growing Segment. This quarter, both domestic and overseas innovative businesses achieved double-digit growth, mainly driven by the growth of robotics, automotive electronics, and smart home businesses.

4. Software and Hardware Business: According to estimates, Dolphin Research expects Hikvision's software added value in the first half of the year to be approximately 7.98 billion, down 4.6% year-on-year; while hardware revenue for the first half was 33.84 billion, up 3% year-on-year, mainly benefiting from the demand from overseas.

Dolphin Research's Overall View: Flat Performance, Continued Pressure Domestically

Hikvision's revenue growth turned negative again this quarter, mainly dragged down by the decline in domestic main business, with government, enterprise, and SME-related businesses all experiencing varying degrees of decline. The company's gross margin improved, mainly driven by the recovery in the gross margin of security monitoring equipment, while the gross margin of innovative business continued to decline.

The current domestic revenue share remains above 60%, which is a significant impact on the company's performance. If the domestic business is broken down for analysis: government-related is mainly affected by fiscal budget expenditures, enterprise-related is affected by changes in the real estate and other industries, and SME-related is affected by macroeconomic and market competition.

From the performance of Hikvision's various businesses in the first half of the year, it can be seen: ① Although there is support from special government bonds, the demand in the monitoring and security field is not strong; ② The real estate industry has a significant impact on the enterprise department, and it is still under pressure from the economic environment; ③ SMEs are the most impacted in the current market.

Although Hikvision is still actively expanding into emerging markets, the company's overseas revenue continues to show growth, but the profit margin in emerging markets (compared to developed countries) is relatively limited, and the company's performance is still mainly affected by the relatively sluggish domestic base.

Considering Hikvision's current market value (268.8 billion), it roughly corresponds to an estimated 2025 net profit valuation of about 20 times PE (assuming revenue growth +5%, gross margin 44%, tax rate 10.5%). Referring to the company's historical valuation range (16-28 times PE), the current valuation is in the lower-middle position, indicating a lack of market confidence in the recovery of the company's domestic main business.

As the leader in the track, Hikvision's current valuation is more of a recognition of the company as a "hardware equipment manufacturer," mainly reflecting the valuation of the hardware side. When business is sluggish, the company's valuation tends to be at the lower end of the range; when business recovers, the valuation tends to be at the higher end of the range.

From this financial report, it is clear that Hikvision is under pressure from domestic business, and the company's annual performance will be difficult to improve. If the company's software value cannot be realized or AI empowerment is not achieved, the company's valuation will be difficult to break through the valuation range, and the operating side will continue to be impacted by the external environment.

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

I. Core Data: Weak Business, Continued Staff Reduction and Cost Control

1.1 Revenue Situation

Hikvision achieved revenue of 23.3 billion in the second quarter of 2025, down 0.5% year-on-year. After turning positive year-on-year in the previous quarter, the company's revenue side declined again this quarter, mainly dragged down by the sluggish domestic main business.

1.2 Gross Margin Situation

Hikvision achieved a gross profit of 10.6 billion in the second quarter of 2025, up 1.5% year-on-year. The gross margin for this quarter was 45.4%, up 0.9 percentage points year-on-year. The recovery in the company's gross margin this quarter was mainly due to the improvement in the gross margin of security monitoring products, while the gross margin of innovative business declined this quarter.

1.3 Core Expense Situation

Hikvision's core expenses mainly include sales expenses, management expenses, and R&D expenses. Hikvision's total core expenses for the second quarter of 2025 were 6.84 billion, down 1% year-on-year. The core expense rate was 29.4%.

Specifically: ① Sales Expenses: Sales expenses for this quarter were 3.1 billion, basically flat year-on-year; ② Management Expenses: Management expenses for this quarter were 730 million, down 6.4% year-on-year; ③ R&D Expenses: R&D expenses for this quarter were 3 billion, down 1% year-on-year.

Due to the pressure on the company's operating side, the company has begun measures to reduce staff and expenses. The reduction in R&D personnel in 2024 is the first decrease in recent years. As the current domestic main business is still declining, the company will continue to cut expenses.

II. Progress of Various Businesses: Domestic Market Still Under Pressure

Since 2021, Hikvision no longer specifically discloses "front-end products," "back-end products," and "central control products" and directly includes these in the company's "main products and other products" project. In the financial report, the progress of various innovative businesses is prominently disclosed, and the company's development focus is also shifting towards innovative businesses.

1) Main Products and Other Products Business is still the company's largest source of income: contributing 70% of revenue in the first half of the year. Due to the sluggish domestic main business, the proportion of main business in the overall revenue is showing a downward trend, but it still accounts for 70%;

2) The proportion of innovative business continues to increase: the share of innovative business in the first half of the year increased to 28%, up 3 percentage points year-on-year. In the first half of the year, with the company's main business relatively sluggish, innovative business was the main growth point, mainly contributed by robotics, automotive electronics, and smart home business.

2.1 Main Products and Services

Hikvision's main products and services business achieved revenue of 30.05 billion in the first half of 2025, down 2.7% year-on-year, mainly dragged down by domestic business.

In the domestic main products business, the three major business groups showed varying degrees of decline in the first half of 2025. ① Domestic Public Service Business Group (PBG) down 2.1% year-on-year. Under the influence of special government bonds, the company's government-related business narrowed its decline but is still declining; ② Large Enterprise Domestic Enterprise Business Group (EBG) down 0.4% year-on-year, the enterprise department is still relatively better performing in domestic business but is affected by the economic environment; ③ Domestic SME Business Group (SMBG) down 29.7% year-on-year, the decline expanded again. SMEs and individual businesses are most impacted by the external environment, and under weak downstream demand and tight funding, the company has also actively reduced inventory levels in the supply chain.

In the overseas main products business, revenue of 12.23 billion was achieved in the first half of 2025, up 6.9% year-on-year, mainly driven by the demand for security monitoring products in emerging markets.

2.2 Innovative Business

Hikvision's innovative business achieved revenue of 11.766 billion in the first half of 2025, up 13.9% year-on-year, mainly driven by robotics, automotive electronics, and smart furniture business.

Although the proportion of innovative business is only 1/4, it is currently the company's main growth point. However, it should not be ignored that the growth rate of the company's innovative business has significantly slowed down.

The company's innovative business achieved good growth both domestically and overseas this time, specifically:

① In domestic innovative business, Hikvision achieved revenue of 8.57 billion in the first half of 2025, up 13% year-on-year. From the revenue scale, innovative business is currently mainly concentrated in domestic business, which is also the source of the slowdown in growth.

② In overseas innovative business, Hikvision achieved revenue of 3.19 billion in the first half of 2025, up 16.6% year-on-year, the overseas part still maintains a good growth performance.

III. Software and Hardware Integration: More Prominent Hardware Attributes

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

3.1 Software Side

Although Hikvision discloses product categories in the annual report, it does not separately disclose the company's software revenue situation. Since the company's software products can enjoy VAT refund policies, the annual report shows a VAT super tax burden refund item, and software revenue can be calculated through the VAT refund amount.

"Software Product Revenue = VAT Refund Amount / Refund Ratio"

(Note: "Refund Ratio = VAT Calculation Ratio - VAT Actual Payment Ratio")

Dolphin Research estimates Hikvision's software side business revenue for the first half of 2025 to be 7.98 billion, down 4.6% year-on-year. Hikvision's software added value continues to decline to around 19% of the company's total revenue.

3.2 Hardware Side

After calculating the software added value, Hikvision's hardware side revenue can be obtained through the company's annual total revenue. Hikvision's hardware side business revenue for the first half of 2025 was 33.8 billion, up 3% year-on-year.

The company's expansion in emerging markets has driven the growth of hardware side revenue and continued to increase the proportion of hardware business.

Relatively speaking, the hardware side has basically maintained a growth trend, while the software side is still declining. Overall, hardware business (such as monitoring equipment) has better risk resistance, while software business is more affected by the economic environment.