Hikvision has released its official 2016 financial results, and as preliminary reports indicated, 2016 was a year of solid growth. Highlights include revenue of $4.6 billion, a 26-percent increase in net profits, and plans to establish an R&D Centre in Montreal and a Research Institute in Silicon Valley, California.
Calling these highlights “concrete results and commitments that our integrator partners can depend on,” Jeffrey He, president of Hikvision USA Inc., and Hikvision Canada Inc., sat down with HikWire staff this week to discuss the 2016 results and to answer questions.
Q: Hikvision has released its official 2016 financial results, how did the North American region do?
JH: The results are not broken out region-by-region, however I can tell you that North America yet again experienced solid growth in 2016. This is a continuing trend for the past several years.
Q: What are the most significant results and why?
JH: The results show tremendous topline growth, but it’s important to note the bottom-line growth as well. Overall revenue increased 26.32 percent year-over-year, from $3.6 billion (RMB ¥25.2 billion) in 2015 to $4.6 billion (RMB ¥31.9 billion) in 2016. Our gross profit margin was 41.58 percent, that’s a 1.42 percent increase over the 2015 gross profit margin of 40.16 percent. And our net profits were up 26.46 percent at $1.0 billion (RMB ¥7.4 billion) in 2016, compared to $841 million (RMB ¥5.8 billion) in 2015.
Q: Are sales broken down between domestic (China) sales and overseas?
JH: Yes, in 2016, approximately $3.2 billion (RMB ¥22.5 billion) in revenue was from domestic sales (70.68% of the total revenue) and $1.3 billion (RMB ¥ 9.4 billion) was from sales in overseas regions (29.32% of the total revenue).
Q: How does Hikvision’s 2016 performance compare to previous years?
JH: The CAGR from 2010 (time of IPO) to 2016 is 44 percent.
Q: What were the important factors contributing to Hikvision’s impressive growth statistics?
JH: One of Hikvision’s core competencies is R&D. Our growth is a direct result of our leading R&D technology innovation capability, our secure products, growth in overseas markets including North America, and our continuous efforts to optimize operating quality and efficiency. Hikvision typically reinvests about 7 to 8 percent of overall revenue into R&D. In 2016, Hikvision invested $348 million (RMB ¥2.4 billion), or 7.62 percent of overall revenue, in R&D. The 2016 R&D investment was 41.26 percent higher than the 2015 investment of $249 million (RMB ¥1.72 billion).
Q: How many people work in R&D at Hikvision?
JH: The total headcount in 2016 was 20,013. Of those, 9,366 Hikvision employees, a full 46 percent of total employees, are dedicated to R&D. The number of R&D employees was up 30.43 percent from the previous year, when we had 7,181 people working in R&D.
Q: How does the North American region contribute to R&D?
JH: All of the overseas regions work closely with our five R&D centers in China, but we are also opening an R&D Centre in Montreal this year, and we plan to launch a Research Institute in the Silicon Valley in the near future. These are the first R&D operations to be opened outside of China, and they represent an important milestone for Hikvision USA Inc., and Hikvision Canada Inc. Over the past couple of years, we’ve made substantial investments in our regional organizations, and the R&D Centre and the Research Institute are a testament to Hikvision’s continued commitment to the market. The R&D Centre and Research Institute will help us get the most innovative technology talent in the industry, be more localized in our market and to serve our customers even better.
Q: What was the status of Hikvision’s long-term loans and short-term loans at the end of 2016?
JH: For a company the size of Hikvision, we are well positioned financially in terms of current loans. Relatively speaking, the loans are minimal. Hikvision’s short-term borrowings amounted to $4.6 million (RMB ¥32 million) and the total long-term borrowings were $246 million (RMB ¥1.7 billion) at the end of 2016.
Q: What about liquid cash assets?
JH: We’re confident of our ability to manage risk, in part because of our solid liquid cash assets, which include $1.97 billion (RMB ¥13.6 billion) in cash, also our operating cash flow was continuing to improve greatly in 2016.
Q: Your Annual Report lists “government subsidies” of $216 million (RMB ¥1.49 billion). You have said that Hikvision does not receive government subsidies. Can you explain?
JH: Some have misrepresented our credit facilities (with Export-Import Bank of China for example) as government subsidies, which could not be further from the truth. I have clarified this issue many times. It is true that there is a section in the Annual Report (page 172) under non-operating income that translates into English as “government subsidies.” This section has nothing to do with our credit facilities. Even a cursory examination of the section reveals that the amounts listed in this section, are, in fact: standard VAT tax rebates; local government incentives provided to businesses (including foreign-owned businesses) that promote employment and economic development; standard tax rebates for items such as water conservation and other environmental initiatives; and, amortization of deferred revenue to encourage companies to make high tech investments.
Q: Why did Hikvision issue a bond traded on the Irish Stock Exchange for €400 million? How does this fit into Hikvision’s financing model?
JH: Bank credit facilities and bond issuances are common methods for publicly traded companies to finance growth. In February 2016, Hikvision diversified its financing channels by issuing $450 million (EUR €400 million) in European bonds. Hikvision was granted international credit rating of A-, A-, and A3 by Fitch, S&P and Moody’s respectively, which opened up foreign currency financing channel for the company. Essentially, this makes it easier for us to raise foreign currency for potential future projects, if needed. In August 2016, Hikvision closed a five-year credit facility for $2.9 billion (RMB ¥20 billion) with the Export-Import Bank of China. Hikvision also maintains lines of credit with international financial institutions such as Citibank, HSBC and Deutsche Bank, among others.
Q: What is the highlight of the 2016 results?
JH: In my opinion, a 26-percent increase in net margin speaks for itself. It reinforces Hikvision executive management’s stated business strategy of focusing on having a balanced growth between revenue and net profit. As a publicly traded company, our shareholders look to us to expand value and increase global market share. Our strong performance in 2016 is the result of steady and substantial investment in R&D combined with the management’s commitment to “Glocalization”—the idea of “being global and thinking local.” In North America, our partners see the Glocalization strategy at work as we prepare to open the R&D Centre in Montreal. Armed with an extraordinary pipeline of products and services and with our dedicated team of professionals in place across the US and Canada, I am confident that we will achieve great results in 2017.
Note: The exchange rate applied in this document is based on the RMB/USD rate on April 26, 2017.