Overseas Chinese Equities, Aequitas Research

Ming Lu

Overseas Chinese Equities

IPOs and Placements coverage across Asia Pacific

Aequitas Research

We cover all listing across the Asia Pacific along with follow-up placements. As of Dec 2020, our team had covered 539 IPOs with a hit rate of 73.5% and 685 placements with a hit rate of 66.8%.

We combine fundamental bottom-up views with our proprietary quantitative framework to provide a holistic coverage across new listings and placements. Our coverage includes pre-IPO notes before the deal is launched, follow-up analysis once the deal is live and post-listing trading analysis as well.

Equity Bottom-Up

Zhejiang Dahua Technology A / Equity Bottom-Up

<h2><strong>Introduction</strong></h2>
<p style="text-align: justify;">The video surveillance market is speeding up in China and globally. The world’s top two surveillance companies are both headquartered in China and there are 4 Chinese companies in the global top-10 according to the A&amp;S ranking. </p>
<p style="text-align: justify;">The “snow bright” project shows that the Chinese government aims to cover suburban areas with surveillance systems. The outbreak of the coronavirus confirms the necessity of the “snow bright” project. However, there are concerns on the industry particularly when the U.S. Entity List aims to block the supply of semiconductor chips to surveillance equipment providers in China. </p>
<p style="text-align: justify;">Today investors outside mainland China can buy China-listed surveillance companies via the Northbound Shenzhen and Shanghai Connect. In this note, we deep dive into the video surveillance industry in China and try to find out investment opportunities in this industry. </p>
<h2>
<strong>What is original in this report?</strong> </h2>
<ol>
<li>A Chinese governmental committee wanted to cover suburban areas with video surveillance via the “snow bright” project. In fact, local governments did not start the project until the State Council gave the second order in 2019.  We believe most local governments will focus on fighting the coronavirus and have no spare capacity for “snow bright” in the first half of 2020. However, we expect the governments will pay more attention to video surveillance after the epidemic event, because, millions of Wuhan residents left the viral epicenter sealed by the municipal government by untracked vehicles. This huge security loophole proves the importance of surveillance systems in suburban areas.</li>
</ol>
<ol start="2">
<li>We believe the market undervalued Dahua merely based on its slow revenue growth. However, we notice that, among the top-three Chinese video surveillance companies, Dahua is the only one that improved its operating cash flows and margins. We believe earnings per share will grow 22% in 2020 and 25% in 2021 due to the accelerating revenues and the stable margin.</li>
</ol>
<h2><strong>Contents</strong></h2>
<p>A. Domestic Market – Demand from “Snow Bright Project”</p>
<ol>
<li>China Market in Previous Years</li>
<li>Governmental Project – “Snow Bright”</li>
<li>Expected Influence in Suburban Market</li>
</ol>
<p>B. Global Market and Leading Position of Chinese Companies</p>
<ol>
<li>Promising Market</li>
<li>Rapidly Growing Chinese Companies</li>
<li>International Exploration of Chinese Companies</li>
<li>Concern for U.S. Companies</li>
</ol>
<p>C. Leading Chinese Companies</p>
<ol>
<li>Value Chain of Surveillance Companies</li>
<li>Background of Leading Companies</li>
<li>Domestic vs. Overseas Revenues</li>
<li>Growth and Margin</li>
<li>Operating Cash Flow</li>
</ol>
<p>D. Risks</p>
<ol>
<li>U.S. Entity List</li>
<li>The Competitor HiSilicon of Huawei</li>
<li>Coronavirus</li>
</ol>
<p>E. Valuation</p>
<p>F. Conclusion</p>
<p>G. Appendix</p>

Introduction
The video surveillance market is speeding up in China and globally. The world’s top two surveillance companies are both headquartered in China and there are 4 Chinese companies in the global top-10 according to the A&amp;S ranking. 
The “snow bright” project shows that the Chinese government aims to cover suburban areas with surveillance systems. The outbreak of the coronavirus confirms the necessity of the “snow bright” project. However, there are concerns on the industry particularly when the U.S. Entity List aims to block the supply of semiconductor chips to surveillance equipment providers in China. 
Today investors outside mainland China can buy China-listed surveillance companies via the Northbound Shenzhen and Shanghai Connect. In this note, we deep dive into the video surveillance industry in China and try to find out investment opportunities in this industry. 

What is original in this report? 

A Chinese governmental committee wanted to cover suburban areas with video surveillance via the “snow bright” project. In fact, local governments did not start the project until the State Council gave the second order in 2019.  We believe most local governments will focus on fighting the coronavirus and have no spare capacity for “snow bright” in the first half of 2020. However, we expect the governments will pay more attention to video surveillance after the epidemic event, because, millions of Wuhan residents left the viral epicenter sealed by the municipal government by untracked vehicles. This huge security loophole proves the importance of surveillance systems in suburban areas.


We believe the market undervalued Dahua merely based on its slow revenue growth. However, we notice that, among the top-three Chinese video surveillance companies, Dahua is the only one that improved its operating cash flows and margins. We believe earnings per share will grow 22% in 2020 and 25% in 2021 due to the accelerating revenues and the stable margin.

Contents
A. Domestic Market – Demand from “Snow Bright Project”

China Market in Previous Years
Governmental Project – “Snow Bright”
Expected Influence in Suburban Market

B. Global Market and Leading Position of Chinese Companies

Promising Market
Rapidly Growing Chinese Companies
International Exploration of Chinese Companies
Concern for U.S. Companies

C. Leading Chinese Companies

Value Chain of Surveillance Companies
Background of Leading Companies
Domestic vs. Overseas Revenues
Growth and Margin
Operating Cash Flow

D. Risks

U.S. Entity List
The Competitor HiSilicon of Huawei
Coronavirus

E. Valuation
F. Conclusion
G. Appendix

United States

FLIR Systems, Inc. designs, manufactures, and markets thermal imaging and broadcast camera systems for a variety of applications in the commercial and government markets.  The Company makes products for condition monitoring, research and development, airborne observation and broadcast, search and rescue, and surveillance and reconnaissance.

Flir Systems (FLIR US)

Chinese Video Surveillance Industry

Introduction The video surveillance market is speeding up in China and globally. The world’s top two surveillance companies are both headquartered...

Ming Lu