Watching the watcher

Surveillance giant: Hikvision

Financial incentives have been a tricky topic for China’s state-owned enterprises (SOEs). In an earlier era when everyone was getting a similar salary regardless of performance, productivity was low and many SOEs were lossmaking. Going into the era of market reform in the 1980s – when some officials were getting too much in the way of personal rewards – newer pay arrangements were often attacked for betraying socialism.

The same old problem has just come back to haunt Hikvision, the world’s biggest supplier of video surveillance systems.

Investors didn’t seem too worried when the Hangzhou-based company was one of eight Chinese tech firms added to an American blacklist last month (indeed, some seem to think that brands like Hikvision are being singled out because they are seen as the biggest commercial challengers in tech know-how). However they did seem more shocked by the news last week that the China Securities Regulatory Commission (CSRC) was investigating two of Hikvision’s top executives for their violation of disclosure rules.

The suspects are Gong Hongjia and Hu Yangzhong, two former classmates at the Huazhong University of Science and Technology. Hu left the state-backed 52nd Research Institute of the China Electronics Technology Group (an organisation heavily linked to research in areas including nuclear weapons and quantum radar) and founded Hikvision in 2001. Gong, a native of Hubei who later secured permanent residency in Hong Kong, invested about Rmb2.5 million “to help a classmate”. As Hikvision grew into a leading manufacturer of surveillance equipment, Gong prospered too, earning a reputation as one of the country’s most successful angel investors. The camera maker’s market value was Rmb300 billion ($42.6 billion) this week. Gong, now the vice chairman, still owns a 13.4% stake worth Rmb40 billion (which is 16,000 times his initial investment 19 years ago). Meanwhile, Hu, the general manager, owns about 2% of Hikvision’s Shenzhen-listed shares.

So why are Gong and Hu getting close attention from the CSRC? The stock market watchdog said the duo is being investigated for alleged violations of disclosure rules. Without giving too much further detail Hikvision said in a circular that the investigation was targeting “individual board members” but not the company itself.

Hikvision has been one of the most popular A-shares for retail investors and foreign fund mangers. Announcement of the probe saw its share price dip more than 5% at one point, although news then filtered through that the situation wasn’t as bad as first feared.

Caixin Weekly and Caijing, two respected financial magazines, both reported that Gong and Hu were alleged to have handed out incentives to Hikvision staff from their own pockets, without properly disclosing it. Describing Hikvision as “the SOE which looks the most different from other SOEs” (China Electronics Technology Group is still Hikvision’s largest shareholder, see WiC375), Shanghai Securities News has also reported sympathetically on the case this week. The problem, it said, was that the incentives Hikvision could afford to give its senior executives and researchers couldn’t compare with the payouts from tech giants in the private sector such as Tencent and Alibaba. “How to increase the options and freedom for SOEs to provide more attractive incentives has been a pressing concern. Hopefully the debacle at Hikvision will shed light on the problem and speed up reform on the issue,” an insider told the newspaper.

Huawei, a company that claims to be privately held despite longstanding speculation that its ownership ultimately rests with the state, isn’t hampered in the same way as Hikvision. Last week it revealed it was handing out Rmb2 billion in cash rewards to staff working ‘round-the-clock’ to help it weather the impact of Washington’s blacklisting…

© ChinTell Ltd. All rights reserved.

Sponsored by HSBC.

The Week in China website and the weekly magazine publications are owned and maintained by ChinTell Limited, Hong Kong. Neither HSBC nor any member of the HSBC group of companies ("HSBC") endorses the contents and/or is involved in selecting, creating or editing the contents of the Week in China website or the Week in China magazine. The views expressed in these publications are solely the views of ChinTell Limited and do not necessarily reflect the views or investment ideas of HSBC. No responsibility will therefore be assumed by HSBC for the contents of these publications or for the errors or omissions therein.