Chinese Models

Eye in the sky

How a Hangzhou surveillance firm saw its value soar to $55 billion


Gong: Hikvision co-founder

There are 58 subsidiaries under the state giant China Electronic Technology Group Corp (CETC). Most of them are named unimaginatively by number but many have made important contributions to China’s defence industry. The 27th Research Institute has played a crucial role in the country’s development of a nuclear capability, while the 14th Research Institute is the birthplace of Chinese radar. Last month it said it had developed a quantum radar that detects stealth aircraft within “hundreds of kilometres”.

The 52nd Research Institute is less decorated militarily but it boasts one of CETC’s commercial jewels: Hikvision Digital Technology, the worldwide leader in surveillance systems and the most valuable company on Shenzhen’s stock exchange.

How big is Hikvision?

Hikvision’s market capitalisation surged to a peak of Rmb370 billion ($54.7 billion) in May. Since then the Hangzhou-based company has seen its market value retreat to Rmb266 billion on profit-taking but it is still bigger than the likes of property major China Vanke and delivery giant SF Express.

That has valued Hikvision at nearly 40 times its 2016 net profits of Rmb7.2 billion. However, local brokerages believe the valuation is warranted because the company has reported annual earnings growth of over 40% since going public on Shenzhen’s small and medium enterprise board in 2010.

The 21CN Business Herald says Hikvision became the world’s biggest surveillance system maker in 2011. This top spot is cemented by a more than 50% share of China’s CCTV equipment market. It employs nearly 20,000 people, with 9,300 staff in research and development alone – focused on related fields like facial recognition, Big Data and robotics.

Hikvision reported revenues of Rmb32 billion last year, or almost one fifth of the total for its parent firm, CETC.

Who owns Hikvision?

Hikvision was founded in 2001 and influenced from the outset by the now modish concept of ‘mixed ownership’ (where state ownership and private capital combine – a structure being championed by reformers in the central government).

Hikvision started with registered capital of Rmb5 million out of which Rmb2.45 million was contributed by Gong Hongjia, a man dubbed by Chinese media as “the best angel investor” (see WiC180).

That reputation is largely a result of Gong’s investment in Hikvision. His stake has been diluted to about 16% as of December last year but it was still worth Rmb43 billion as of this week – or over 16,000 times his initial stake (and that excludes dividend payouts – 21CN reckons Gong has earned “billions of yuan” over the years by selling down his stake).

Few have provided a satisfying answer as to why CETC, a state giant with a proud military background, would pick Gong, a Hong Kong permanent resident, as its co-investor in the first place. Nevertheless CETC still controls an effective stake of 39% of Hikvision, making it the biggest single shareholder in the company. The company’s founders and executives own about 8.5% of Hikvision’s shares and it has also become a favourite holding for institutional investors.

Why is Hikvision so successful?

Hangzhou has been prolific in producing commercial heavyweights. The likes of Alibaba, Geely and Wahaha are all based in the city but when Hikvision was founded up to 80% of China’s surveillance cameras were provided by foreign firms such as Sony, Sharp and Samsung.

All the same, it sensed an opportunity loomed: most CCTV systems needed upgrading from video tapes to the digital age and rapid urbanisation was driving new demand. Also providing tailwinds was a government campaign to step up nationwide surveillance after the September 11 attacks in the US.

At the time there were thousands of domestic firms vying for contracts and local governments generally wanted to grant their business to local providers in the hope that they would use the contracts as springboards to sell into rival cities and provinces. Hikvision had a tremendous advantage, however. Xi Jinping – China’s leader – was then serving as Party boss of Zhejiang and his provincial government’s support between 2002 and 2007 was instrumental in the company’s early success, according to the Zhejiang Daily.

Furthermore Hikvision had the backing of its influential parent CETC, whose military background was a natural fit for the security programmes espoused by the central government.

Hikvision has focused on offering high-end systems at mid-range prices. Equally importantly, Zhejiang Daily says, is that the firm has invested heavily in R&D, delivering a product that outclasses its foreign rivals but generally costs less.

A case in point was 10 years ago when Hikvision noticed that the desktop hard drives its clients were using in conjunction with their surveillance systems were inadequate. So it approached California-based Seagate to create a specialised product, improving the performance of its surveillance applications and laying the foundations for a collaboration that has kept it ahead of its competitors.

How big can Hikvision get?

Government data suggests that China’s surveillance system market was Rmb540 billion last year. But the pie is set to grow bigger – by 2020, the central government plans to implement a “social credit” system in which vast amounts of data will be captured so as to assign each citizen a personal rating based on social and financial behaviour (see WiC352).

Such an ambitious project requires a contribution from “Big Brother” data collectors such as Hikvision, whose facial recognition technology is already scooping up information on people’s lives (a track record of jaywalking or double parking, for instance).

Another of the growth areas could be the installation of facial recognition cameras in ATMs – the government has already pushed for this kind of technology in Macau (and potentially Hong Kong) to fight money laundering and capital flight. A similar roll out for cash machines across mainland China would be a potentially huge boost for sales.

Hikvision is also advancing overseas. According to market research specialist IHS, its global market share was 21.4% last year, compared with 4.5% in 2010. An obvious challenge is how to manage its reputation in the wake of recent international concerns about the company’s background.

The UK’s Daily Mail has been typical in this regard, describing the Chinese firm as “central to the government’s Orwellian programme” to spy on its 1.4 billion citizens and even suggesting that Hikvision’s internet-linked surveillance systems installed abroad could be accessed from China to track dissidents and human rights campaigners in cities like London (where the Chinese firm has 20% of Britain’s CCTV equipment market).

There were similar fears at the US embassy in Afghanistan, where the Americans dropped Hikvision’s internet-enabled cameras last year on security concerns stoked by media reports.

The Voice of America has reported that Hikvision devices are “engineered for effortless hacking”, for instance, and that its machines could collect information and send it back to the Chinese government.

Hikvision, like telecoms network provider Huawei, has tried to deflect the speculation about its ultimate loyalties, but the rumours are inevitable due to its closeness to China’s military industrial complex.

“We have always committed to raising product safety and protecting client privacy. We operate in an open and market-oriented manner,” it told the Global Times after the US embassy’s decision.

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