Wednesday was not a good day for shares of Hangzhou Hikvision Digital Technology. The same goes for the surveillance giant’s smaller Chinese rival Zhejiang Dahua Technology.
On Tuesday evening, reports suggested Hikvision may soon suffer the same fate as Huawei, as the Trump administration puts the squeeze on Beijing in an effort to extract trade concessions.
According to the New York Times, Hikvision could find itself barred from obtaining US components within “weeks”. Subsequent reports suggested Dahua is also under scrutiny along with “several unidentified others”, all of which may ultimately be blacklisted as Trump “widens the dragnet”, to quote Bloomberg.
Just as the US rolled out the “national security” excuse to justify the Huawei move, a ban on Hikvision and Dahua would come pre-packaged with a lot of high-minded rhetoric about Beijing’s systematic disregard for human rights and China’s repressive tactics in Xinjiang – even though Trump probably thinks “Uighurs” is a brand of trendy boots.
In other words, Washington will claim to be taking the initiative when it comes to ridiculing China’s efforts to create what amounts to a police state utilizing the type of surveillance technology that Hikvision develops. It’s just a coincidence, apparently, that this comes two weeks after the trade talks broke down.
Shares of Hikvision plunged by nearly the daily limit in China on Wednesday. Ultimately, Hikvision and Dahua fell nearly 6% each on the session.
As Bloomberg notes, Hikvision is an MSCI Asia Pac constituent “and is among Shenzhen stocks most owned by overseas investors.” Here’s a breakdown of the company’s revenue and profit mix:
An official from Hikvision told the 21st Century Business Herald that the company can use “other commercial measures” to bridge any gaps if US companies stop supplying chips.
That may be true, but as Goldman writes on Wednesday, the risks are real for the company, both in terms of revenues and the supply chain.
“[Hikvision says] the US contributes around 5% of total revenue [but] along with Europe and Australia, it could be up to 50% of its overseas revenues, or 10-15% of the total revenues”, the bank writes, adding that their sensitivity analysis “implies that every 50% increase / decrease of overseas revenues could result in a 14% increase / decrease to our Hikvision 2020E net income [forecast].”
In their original coverage initiation, Goldman wrote that “China is in an early stage of specification upgrade to AI-featured surveillance, and we expect the public security and transportation sectors to be the earliest customers, benefiting Hikvision.”
That was the good news.
However, Goldman went on to warn that “although specification upgrades to AI-featured surveillance are underway in China, we are cautious on whether this technology will be widely adopted globally, considering the privacy concerns, which could weigh on Hikvision’s future earnings growth.”
That’s a nice way of saying that Goldman isn’t entirely sure whether the world will be wholly enthusiastic about acquiring the technology Beijing is utilizing to build a police state – especially given unfavorable western media coverage of that buildout, long-standing concerns for the plight of the Uighurs and, now, the Trump administration’s insistence that other western nations “wake up” to the national security threat posed by Chinese tech.
“Chipset could be a major bottleneck if US companies were to stop supplying to Hikvision, including Nvidia, Intel / Movidius, and Ambarella”, Goldman said Wednesday morning, adding that “although Hikvision has a diversified supply chain with the top five suppliers contributing only 23% of its total procurement in 2018, that chipset is key to cameras’ performance, especially for AI-featured cameras, which is one of the main revenue drivers of the company.”
Trump is tightening the noose around Beijing. Cornered animals are notoriously dangerous. One assumes that applies to dragons.