In previous post, I have analyzed Hikvision from business perspective, for details, please refer to http://www.xueqiuxia.com/blog/hikvision-business-analysis-great-iot-solution-provider-based-on-video-surveillance-to-leading-promising-ai-era/
In this post, I will analyze Hikvision from financial analysis. As I have discussed before, my analysis always focus on four parts: Financial health; Business growth; Profitability; Management efficiency.
Now, let’s dive into the four parts one by one:
- Financial Health.
In this part, the most import is to check if this company has enough money to pay its loan, to check how many days this company can stand if it don’t have revenue from tomorrow.
The ratio of Total Liability divide Total Asset:
As we can see that, with the fast development, the total liability and total asset ratio is increased from 18% to 40%. It’s reasonable for the ratio growth since Hikivision need more liability to expand its business, and the ratio is OK.
Next part is to check that if this company has the risk of debt in the near future.
|Short Time Borrowing||3,229.13||87,660.00||36,231.80||18,080.00||–|
|Long Time Borrowing||172,221.00||67,575.40||24,476.00||–||–|
|Cash and Bank Balance||1,363,500.00||1,010,650.00||719,966.00||459,261.00||553,476.00|
As we can see from the table, Hikvision has excellent ability to generate cash by using little debt, which proves that Hikivision has the wonderful business model.
I also use the operation cashflow / profit ratio to measure the health of one company. The great company will generate same cash from profit, even more than profit, also it keep making this ratio larger each year.
|Cashflow Profit Ratio||83.74%||54.68%||79.19%||60.56%||67.13%|
As we can see, this indicator is not good, I think two issues have caused this problem: 1. Hikvison need to invest a lot each year to keep the product competitive; 2. Hikvison has poor control over the channel since it increase its market share very fast in last years. The good thing is that the ratio is changing better, we can see clearly from the above results.
2. Financial Growth
Financial growth is the key indicator to invest in a business or not. The great business will increase revenue and profit fast and steadily in a long time period. Let’s examine Hikvision financial growth one by one:
The revenue is growing more than 4 times in the last 5 years, and the average annual growth rate is 45%. As the business becomes more mature, the growth rate is decreasing each year, however, in 2016, the revenue growth is still keep 26.32%, which is better than most business.
|Net Profit Growth||26.14%||25.67%||52.12%||43.76%||44.38%|
The profit is growing more than 3 times in the last 5 years, and the average annual growth rate is around 36%. As the same with revenue, the profit growth rate is also decreasing. By the comparison between revenue and profit, we can see that Hikivison is sacrificing profit to win more market share.
The shareholder equity growth is like profit, the value increased 3 times during the past 5 years. This means two things: 1. the real value of this enterprise has grow 3 times; 2. Hikvison has turn almost all the profit into the company real value, and not waste the profit.
Earning Power Growth.
The Earning Power is to measure the real earning capability of business, Warren Buffet use this one to caculate the real value of business. In my mind, Earning Power = Net Profit + Amortization – Earning Power.
|Fix Asset Investment||91,137.60||133,008.00||61,082.60||39,090.80||47,903.80|
As we can see from the following chart, the earning power has grew 4 times during the past 5 years.
Operation Cashflow is a key indicator, since it will reflect the company real capability to create values.
From this table, we can see that the operation cashflow is increased by around 4 times during the past 5 year.
Above all, it clearly shows that these indicators has similar and steady growth rate, although the earning power and operation cashflow is less than profit, they keep in the same pace.
Profitability is very important for value investment. I like the company has excellent profitability, especially compared to other companies in the same industry. In the mean time, this company should has the capability to keep the profit rate steady, even grow in the long time. Since the profitability will prove this company has real and wide moat or not. And the steady profit rate will make us to caculate the real values of the business easily.
|Gross Profit Ratio||41.58%||40.10%||44.42%||47.62%||49.20%|
|Operating Profit Ratio||21.39%||21.74%||25.40%||27.42%||27.58%|
|Net Profit Ratio||23.24%||23.28%||27.16%||28.63%||29.67%|
As we can see from the above chart, the gross profit ratio is keeping from 40%-50% during the past 5 years, and the operating profit ratio stays from 20%-30% in the same period. The profit ratio is lower each year, the part reason is that the highly competitive in the technology industry. Since Hikvison becomes top 1 in the security survellience industry, it will hold the more and more right to keep the ratio turning better.
ROE is another important indicator for value investment. The good business will have wonderful ROE, and it should be stable, and growing.
As we can see, Hikvison keeps stable ROE in recent years, and the ROE in 2016 is better than 2012. Very few companies can make ROE above 30%. That means Hikvison has unique profitability.
4. Management Efficiency.
Every company is run by people. In the company, the management team plays a large role for the business growth. As Warren Buffet said, we looking for first class business, which will run well even under third class people. However, I would prefer to choose the first class business with first class management team. By checking the management team, we should not only focus on the resume of each member, we need to review that how the management behave in the last years? Has they proved they are qualified for leading this company? Is this management team is stable in the past years and will be still stable in the future?
Let’s review several indicators regards to the management efficiency one by one:
Main Operating Expense Ratio.
|Main Operating Expense||587,196.60||423,737.40||309,674.06||193,656.81||143,068.08|
|Main Operating Expense Ratio||18.39%||16.77%||17.97%||18.02%||19.83%|
As we can see, the main operating expense ratio keeps at around 18% in the past, the management team already done a good work since Hikvison development very fast in the past.
Channel Control Capability.
|Receipts in Advance||46,969.10||39,551.10||50,306.70||28,906.50||26,840.40|
|Total Payable+ Receipts||835,482.60||647,499.30||409,537.70||189,775.50||134,342.40|
|Total (Payable+ Receipts) / Total (Receivable+Prepay)||0.58||0.572869221||0.658145028||0.504907641||0.672448668|
In this graph, we can clearly see that the total payable and receipts / total receiveable and prepay ratio stays at 58% in 2016. The reasonable level is 100%, the ratio of great business will keep at more than 100%, so it means this company has a good control in the suppy chain of this industry. This ratio is not good for Hikvison, and the management team will try their best to improve this indicator.
Stock turnover is also very important in manufacture industry, the good business will improve the turnover always.
Let’s see the stock turnover of Hikvison in the last 5 years.
As we can see the turnover becomes better in recent years, that means the management team done a good work in the stock part.
|Cash Dividend Growth||29.61%||74.98%||–|
Hikvison start deliver cash dividend from 2014, as we can see the cash dividend grows fast since then, and will keep growing by business development.