On the afternoon of October 11, it was reported that an employee of Hikvision (002415.SZ) recently revealed that the company was currently undergoing large-scale organizational adjustments, with 32 R&D regions being reduced to 12. "Only a few core regions will be retained, and the rest will be optimized, affecting more than 1,000 people."

Regarding this adjustment, Hikvision responded, "The company does not have large-scale layoffs. It is an adjustment of business strategy to optimize R&D capabilities in headquarters and key sales cities, so some regional positions have been adjusted accordingly."

As of the close on October 11, Hikvision's share price was 29.63 yuan per share, with a decline of 5.55%. Compared to the 68 yuan per share in July 2021, the price has halved, and the latest total market value is 273.58 billion yuan.

Years of pressure on performance

As soon as the news of Hikvision's 'large-scale layoffs' broke, it immediately trended on social media, sparking heated discussions among netizens.

"It's so difficult now, even industry leaders are laying off staff. Governments and state-owned enterprises have no money and no cases, and surveillance cameras are everywhere. If they are still functional, there's no need to replace them," said many netizens, speculating that to cope with this challenge, Hikvision might have to take measures such as layoffs to optimize costs and structure.

Hikvision started with surveillance cameras and rode the high-speed train of urban infrastructure construction, achieving the miracle of 36% annualized revenue growth and 31% annualized profit growth from 2010 to 2019, earning it the reputation of a security giant.

Currently, Hikvision is gradually transforming from a security product manufacturer into a practitioner of digitizing scenarios, using various new technologies to solve diverse difficulties and needs for customers of all sizes across multiple industries.

Although the business seems complex, in a nutshell, it aims to reduce costs, improve quality, and increase efficiency for customers. However, in recent years, this business has become increasingly challenging.

Firstly, the overall market demand is weak, and competition within the industry is intensifying. Secondly, governments and enterprises are also experiencing consumption downgrades, "preferring cost-effective products rather than innovative, high-performance ones as in the past. To some extent, low-margin businesses are now more attractive."

In the first half of 2024, the company's performance still failed to rebound, with a net profit attributable to shareholders of 5.064 billion yuan, a year-on-year decrease of 5.13%.

Among them, the second quarter revenue reached 23.4 billion yuan, an increase of 9.5% year-on-year, but this growth rate was lower than market expectations. Net profit attributable to shareholders in the quarter was 3.1 billion yuan, a year-on-year decrease of 10.7%, also lower than market expectations.

At the business level, while the performance of the Enterprise Business Group (EBG) and Small and Medium Business Group (SMBG) increased, the growth was not significant. However, the company's Public Service Group (PBG) in China experienced a near-double-digit decline, significantly impacting overall performance.

R&D as the 'hardest hit' area

Recently, a Hikvision employee revealed that the company was currently undergoing large-scale organizational adjustments, with the R&D department being the hardest hit. "Regions like Hunan are no longer operational, but headquarters regions like Hangzhou have not yet started the process."

This is not unfounded. Currently, Hikvision's product matrix is continually expanding, covering over 300 segmented scenarios across ten industries and more than 70 sub-industries, including urban management, metallurgy, construction, agriculture, and healthcare. In recent years, the company's employee count has continued to grow, leading to rising expenses and a long-term lag in profit growth compared to revenue growth.

While striving to 'reduce costs, improve quality, and increase efficiency' for customers, Hikvision must also address these same challenges for itself as a matter of urgency.

From a staffing perspective, R&D technicians are the 'hardest hit' area.

In recent years, Hikvision has continued to increase its investment in R&D. In 2023, the company's R&D investment amounted to 11.4 billion yuan, an increase of 16.08% over 2022. R&D investment accounted for 12.75% of operating revenue in 2023, an increase of 0.95 percentage points from 2022.

As of the end of 2023, the company had 28,479 R&D personnel, accounting for 48.65% of the total workforce, an increase of nearly 8,000 from 20,597 in 2020.

Within R&D expenses, salaries amounted to 9.1 billion yuan, and their proportion of operating revenue has been increasing year by year.

In fact, as of the end of 2023, Hikvision employed 58,544 people, an increase of 260 over the same period last year. Among them, the overall trend for sales and production personnel at Hikvision is downward.

It is imperative to make adjustments to R&D technicians.

What does the future hold?

There is a polarized view in the market regarding Hikvision's development prospects.

Some argue that Hikvision's current management is second to none in the industry, and the industry itself relies heavily on management capabilities, making management Hikvision's greatest moat.

"Hikvision's management capabilities are already very strong. It's quite a management miracle that they can manage both business and finance so well despite such fragmented operations."

Others believe that Hikvision is just an average company that does not focus on top-tier R&D but rather relies on existing resources and undertakes basic projects. In the past, when the economy was good, it relied on government contracts; now that the economy is struggling, its lack of innovative strength is becoming apparent.

"I've gradually distanced myself from Hikvision since the beginning of this year and will liquidate my holdings soon, mainly considering its long-term growth potential is worse than I anticipated."

From an institutional shareholder perspective, Hikvision was once considered a core asset by many fund managers but has since disappeared from the top ten holdings of star fund products such as E Fund.

As of the first half of this year, a total of 309 funds held Hikvision shares, with a total holding of 359 million shares, accounting for 3.94% of outstanding A shares. Compared to the end of the first quarter, 68 funds increased their holdings by 9.2414 million shares, while 115 funds reduced their holdings by 24.3534 million shares.

Is Hikvision no longer attractive?

In terms of its main business, domestic security business growth has reached its ceiling, and overseas and innovative businesses are poised to become the two pillars of future performance growth.

To date, Hikvision has incubated eight innovative businesses, including Ezviz Networks, Hikrobot, and Hikmicro, covering areas such as smart homes, mobile robots and machine vision, infrared thermal imaging, automotive electronics, intelligent storage, intelligent fire protection, intelligent security checks, and intelligent healthcare.

In the first half of 2024, Hikvision's innovative business generated overall revenue of 10.328 billion yuan, a year-on-year increase of 26.13%, accounting for 25.06% of the company's total revenue and becoming a core growth engine.

Hikvision's overseas business has also evolved from initial foreign trade to establishing regional centers for localized sales and, finally, establishing sales and service channels worldwide, adopting a "one country, one policy" strategy for localized marketing.

As of 2023, the company had established 80 branches in international and Hong Kong, Macao, and Taiwan regions, providing localized services to more than 150 countries and regions.

In the first half of this year, Hikvision's overseas business achieved a year-on-year increase of 3% in gross margin and a high growth rate of 17.51% in operating revenue. Among them, the proportion of developed and developing countries has reached a 3:7 split, with vast market potential remaining in Latin America, Southeast Asia, South Asia, Central Asia, the Middle East, and Africa.