In the fast lane, initiating with Buy

Deutsche Bank Markets Research Rating Buy Asia China Technology Hardware & Equipment Company Hikvision Date 15 November 2016 Initiation of Coverage In the fast lane, initiating with Buy Reuters Bloomberg Exchange Ticker 002415.SZ 002415 CH SHZ 002415 Forecasts And Ratios Year End Dec 31 2014A 2015A 2016E 2017E 2018E Sales (CNYm) 17,233 25,271 32,725 41,341 51,512 EBIT (CNYm) 4,293 5,374 6,945 9,013 11,332 DB EPS FD(CNY) 0.78 0.98 1.27 1.63 2.05 DB EPS growth (%) 52.7 25.6 30.3 28.0 25.8 ROE (%) 35.9 34.4 36.0 38.0 39.1 PER (x) 16.1 22.5 19.0 14.9 11.8 Source: Deutsche Bank estimates, company data Initiating coverage with Buy and target price of CNY40.8 ________________________________________________________________________________________________________________ Deutsche Bank AG/Hong Kong Deutsche Bank does and seeks to do business with companies covered in its research reports. Thus, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. DISCLOSURES AND ANALYST CERTIFICATIONS ARE LOCATED IN APPENDIX 1. MCI (P) 057/04/2016. Price at 14 Nov 2016 (CNY) 24.20 Price target - 12mth (CNY) 40.80 52-week range (CNY) 26.50 - 15.79 Shenzhen Index 2,212 James Chiu Research Analyst (+886) 2 2192 2848 james.chiu@db.com Price/price relative 81216202428323611/145/1511/155/16HikvisionShenzhen Index (Rebased) Performance (%) 1m 3m 12m Absolute -3.8 -5.4 4.5 Shenzhen Index 3.3 7.1 -4.2 Source: Deutsche Bank Key indicators (FY1) ROE (%) 36.0 Net debt/equity (%) -32.6 Book value/share (CNY) 3.86 Price/book (x) 6.27 Net interest cover (x) – Operating profit margin (%) 21.2 Source: Deutsche Bank We initiate coverage on Hikvision (002415 CH), the global leader in the video surveillance industry, with a Buy rating and a target price of CNY40.8, based on 25x 2017E PE. We expect widening IoT applications and Hikvision’s expanding product portfolio to sustain its long-term growth. As a result of new products, its market share is rising towards 28% and margins are stabilizing with scale and a rising proportion of solution business revenues. The shares are on 15x currently and should re-rate to better reflect 27% earnings growth. Riding on the IoT/Smart city boom We expect the video surveillance industry to benefit from the surging growth of IoT as network cameras capture images/data. These cameras are also essential in various smart city implementations in keeping citizens safe and improving their quality of life. Market research firm, Frost & Sullivan, estimates smart city spending will reach US$1.5tr in 2020. We believe more than half of Hikvision’s total solutions business is related to the IoT/smart city and we expect the solution business to benefit from the IoT/Smart city boom. A market share gainer Hikvision's global market share has expanded rapidly from 7.9% in 2012 to 18.1% in 2015. We expect the share gain trend to continue and reach 27.5% in 2018 on the back of its lower cost structure, one-stop-shop strategy with complete product line-ups, early entry into aerial surveillance and close proximity to the fast-growing Chinese market, at a 17% CAGR in 2015-19E. Margin pressure to subside Hikvision's margin has declined since 2010 due to its lower pricing strategy to expand market share with rapid shipment growth. While we expect the price pressure to persist as Hikvision gains further share, we also expect margin erosion to be partially offset by rising economies of scale with a lower opex ratio and a rise in the more lucrative total solutions business. We expect OPM to stay at 21-22% over the next few years. Valuation and risks We base our target price of CNY40.8 on 25x 2017E P/E, in line with its historical average of 24x. We believe the valuation is justified by strong earnings growth, net cash position and an average ROE of 38% during 2016-18. The key risks are a market share loss and weaker-than-expected demand. Distributed on: 15/11/2016 10:48:35 GMT 15 November 2016 Hardware & Equipment Hikvision Page 2 Deutsche Bank AG/Hong Kong Model updated:14 November 2016 Running the numbers Asia China Hardware & Equipment Hikvision Reuters: 002415.SZ Bloomberg: 002415 CH Buy Price (14 Nov 16) CNY 24.20 Target Price CNY 40.80 52 Week range CNY 15.79 - 26.50 Market Cap (m) CNYm 145,438 USDm 21,278 Company Profile Hangzhou Hikvision Digital Technology Co., Ltd develops, manufactures and sells video surveillance products. The Company manufactures video and audio compression card, network hard disk video recorders, video servers, cameras, network storage, and other digital products. Price Performance 812162024283