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 in China and there are 4 Chinese companies in the global top-10 according to the A&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?

1. 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.

2. 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”

1. China Market in Previous Years
2. Governmental Project – “Snow Bright”
3. Expected Influence in Suburban Market

B. Global Market and Leading Position of Chinese Companies

1. Promising Market
2. Rapidly Growing Chinese Companies
3. International Exploration of Chinese Companies
4. Concern for U.S. Companies

C. Leading Chinese Companies

1. Value Chain of Surveillance Companies
2. Background of Leading Companies
3. Domestic vs. Overseas Revenues
4. Growth and Margin
5. Operating Cash Flow

D. Risks

1. U.S. Entity List
2. The Competitor HiSilicon of Huawei
3. Coronavirus

E. Valuation

F. Conclusion

G. Appendix