Growth Stalls for China's Biggest Surveillance Vendor

While reports consistently emphasize bullish growth for the Chinese surveillance market, perhaps the biggest Chinese vendor of them all, CSST has reported declining revenue for Q2 2011.

CSST is a fascinating company. After the past few years of dramatic growth and sweeping acquisitions, now growth has stalled and the company is going private.

Let's start with a review of Q2 2011 financial results (based on CSST's 10Q and Management's Call transcript):

• Revenue declined 7.1% to $156.34 million USD for the quarter (yearly annual pace of ~$600 million USD).
• Installation revenue was about 75% of total revenue while manufacturing revenue was ~20%.
• R&D expenditures continue to be nearly non-existent at less than $1 Million USD per quarter. By contrast, Axis spent ~$18 Million USD for the same time frame.
• Advertising expenditures nearly tripled from less than $1 Million USD per quarter to almost $3 Million USD this quarter.
• No good explanation was provided for falling revenue after years of strong growth. The explanation given was: "As we succeeded in securing more larger scale installation projects which generally require longer installation time, we completed less installation projects in this quarter."
• A major strategic shift occurred as almost all revenue is now from the Chinese government: "Approximately 88% of revenues came from the government sector as compared to approximately 55% in the same quarter of 2010."

While we are not Chinese market experts, CSST exhibits a number of major red flags: declining revenue in a supposedly growing market, almost zero R&D expenditure and near complete dependence on a single customer. This is a company who could easily collapse like a house of cards if any shocks occur to the Chinese economy or government. The company would almost certainly be at a massive disadvantage in competing against global video surveillance vendors.