Hikvision Confuses 'Financial Market' With Chinese Government

What an oblivious statement:

"The loan’s size is an indication of how financial institutions view Hikvision’s sound financial record and credit rating, its innovation and sustainable growth. “The financial market clearly sees Hikvision as a successful company to get this approved,” [Hikvision's marketing person] said."

That financial institution here is the China Development Bank which is the Chinese government. So the Chinese government lent money to a Chinese government owned company - Hikvision.

So kudos to Hikvision for getting the $3.1 billion, but this is nothing to do with the general financial market and everything to do with Chinese industrial / economic policy.

And shame on these trade magazines to report on this and to not even mention that the CDB is owned by the Chinese government. Nice work Hikvision paying them off.

The weirdest behind the scene element is that we broke this story a full week before Hikvision reached out to the trade magazines. We asked Hikvision for comment before publishing but they declined. So IPVM broke the story, was read 10,000+ times already, and now Hikvision is scrambling to try to do damage control with a few trade mag articles.

And they want to equate the financing from the Chinese government with the 'financial market'. Just be honest, the Chinese government wants Hikvision to dominate the industry, as your chairman has already said, and is providing this money to fuel this goal.


...but this is nothing to do with the general financial market...

On the other hand, don't you think that financiers outside of China would have been willing to participate in this deal, if they were given the chance?

This happened after Hikvision had to abort their Hong Kong IPO which was supposed to be used for international expansion. That, in itself, shows the concerns for getting money from financiers outside of China.

So, no, I doubt they would participate in the deal, especially since the CDB was likely offering attractive terms typically of one government organization to another.

Remember, the CDB's mission is different than Western commercial banks. The latter just want to make money, the CDB's mission is to help develop China and can therefore accept greater risks and lower gain than outsiders.

Back in July, the Chinese government put a hold on IPO's in mainland China that was not lifted until recently. In Hong Kong, the turmoil caused the exchange to delay many bigger IPO's, not just Hik. See Demand for Hong Kong IPO's Dries Up.

As for whether they could have raised the money outside of China instead, I think that based on their balance sheet, yes.

Look at Avigilon, who recently expanded their line of credit to $240 million, on likely 2015 revenue of $400 million. By that admittedly crude measure, Hik would have raised ~2.4 billion on likely 2015 sales of $4 billion.

Is Avgilon a better credit risk than Hik?

Right, for Hong Kong IPOs, it's because investors are generally concerned about Chinese companies.

As for raising money, you are conflating too things. First you said:

"don't you think that financiers outside of China would have been willing to participate in this deal"

then you said:

"As for whether they could have raised the money outside of China instead, I think that based on their balance sheet, yes."

"This deal", given it is from a Chinese government bank to a Chinese government company, likely has much lower rates and less restrictive terms than a different deal from a regular non-government bank. Yes, it might be possible to raise money outside of China but I doubt at anywhere near as attractive as from the CDB.

"based on their balance sheet"

Hikvision's balance sheet is suspicious. Their net profit margin percentage is astronomical, higher than Google's. It could be that the numbers are inaccurate as many Chinese government statistics and financials are widely believed to be. However, even if we assume they are totally accurate, the profits are clearly driven by Chinese government contracts.

For the Chinese government to loan money to a Chinese government company making its profits on Chinese government projects is far less risky than for anyone else, ergo why I believe the terms would be far better from the CDB.

Yes, it might be possible to raise money outside of China but I doubt at anywhere near as attractive as from the CDB.

Strawman. I am not debating the terms of the deal, only whether the deal would get done. The terms may be much better than outside China, but then again they might not.

Hik maybe a pawn of the Chinese state, but pawns can be sacrificed as well, typically for some some greater good elsewhere on the board. China is not an endless reservoir of cash without return

In any event, the terms are NOT disclosed, so when Hikvision says

The financial market clearly sees Hikvision as a successful company to get this approved,”

they are not bragging about the terms, just about the fact that they got the money. Money which you concede might be available outside of China. Which wouldn't happen if they were some crap company not a successful company.

Finally, I admit the statement does rub me the wrong way, but in any case it seems like harmless puffery ("Look, we're the best!") of which all companies are guilty of, and you (normally) tolerant of.

What statement were you hoping for?

"With our IPO plans hopelessly in ruins, we looked to further our subservience to the Totalitarian Chinese state, in keeping with our shared plans for World Domination by 2030, as well as make our stated goal of an annual run rate of 500 billion USD by the end of 2025."

"Money which you concede might be available outside of China. Which wouldn't happen if they were some crap company."

Please do not insinuate statements to me. I never said Hikvision was 'some crap company'.

The issue here is that Hikvision said that "the financial market clearly sees Hikvision as a successful company to get this approved."

My critique remains - a China government bank is not the financial market or anything close to a financial market as the rest of the world considers financial markets. So the financing says nothing about whether the financial market views them as successful or not.

However, we can all safely agree the Chinese government, based on this funding, believes they are successful.

"What statement were you hoping for?"

Say nothing about the financial markets. It simply is unnecessary and begs this type of debate and attention about their status as a government owned company and the Chinese government infusing more money into them.

Please do not insinuate statements to me. I didn't not say Hikvision was some crap company.

Ok, I'm sorry. I changed it in my post above to echo Hik's statement. In any event I only said it because I honestly thought that you were taking them to task for acting like the global financial markets found them creditworthy when they were not.

But I understand now, you're not really upset that

"Hikvision Confuses 'Financial Market' With Chinese Government"

as much as

"Hikvision Confuses 'Banker' With Owner".

By this I mean you are not offended by their puffery, only their puppetry.

Is that fair?

"By this I mean you are not offended by their puffery, only their puppetry."

That's quite a way of phrasing it!

I think it's hypocritical for Hikvision to pretend to be a private company operating within the financial market, when they are much more a government owned and funded operation.

I respect that Hikvision has made the very most out of its government driven operation but they should own what it is.

I will respectfully disagree with the last part you said.

Remember, the CDB's mission is different than Western commercial banks. The latter just want to make money, the CDB's mission is to help develop China and can therefore accept greater risks and lower gain than outsiders.

The china banks( china central government) goal is to stay in power. the only way they can stay in power is to maintain "X%" of growth every year which they have admitted and every one else knows. If the Chinese government can help squeeze some of that though Hikivison, then 3 billion dollars/Yuan is nothing. as long as they can have enough fake sales data to make their fake growth number look more believable.

If it cost $100 to make a camera and sell it to break even, and of that $3billion and they put that towards lowering the price of each camera to $75 by just spending $25 dollars per camera out of the slush fund to sell more then they will do it just to keep idle hands busy and the numbers looking good.

the Chinese central banks( Chinese government) job is the same as the other central banks ( each respective government) job in around the world to what they can to make the numbers look as good as they can to keep the game going as longer than everyone else.

They dont care about what happens to the surveillance industry, they care about what happens to China first. Not to mention most of the surveillance cameras/parts are made there now, so their "R&D" is reverse engineering what ever Equipment a company signs a contract for china to manufacture which saves them money in the long run I guess to. Software would be weak spot as that tends to be loaded by the contract owner, so they could easily just buy something that is good enough with some of that three billion dollars and round themselves out.

Believe or not, it's sort of same old same old, just different industry this time around.

The history might just repeat itself.

How many people believe that HIK selling cameras below production cost?

I don't think they are selling it below production cost. Even when they sell $50 analog HD cameras, surely their product cost is lower than that (even after factoring in the cut to ADI, etc.). The bigger question is whether they are selling it below total cost, including sales, marketing, support, etc. In the West, that seems to be very likely the case.

I was told more then 100000 cameras leaving factory every day

Sounds possible: 100,000 X $55 X 365 = ~2 billion USD

There is no way that is possible. At least not EVERY day. Unless they are just churning them out and stacking them up in a warehouse where they will sit for years.

I do not think they are shipping 36 million cameras a year (mainly because the ASP you need to assume is too low) but it seems certain they are shipping 10 million plus.

The key difference is China's camera pattern usage. In a US city, 10,000 cameras is a very high number. In China, it's at least 10x that (100,000 not a big deal), with the biggest cities at or close to 1 million cameras.

Also, and related, the whole China infrastructure boom since 2008, is certainly driving a huge amount of camera deployment as each new city, subway, road, airport, malls, get video surveillance cameras.

10 Mil makes sense. Separate topic for sure, but how the heck do they even keep track of that many cameras? I know they need to find jobs for all the people so they don't revolt, but I doubt they have a bunch of monitoring centers staffed by thousands. Well, maybe they do! Any ideas on this John?

"I doubt they have a bunch of monitoring centers staffed by thousands. Well, maybe they do!"

Yes, they do. For example Beijing has 4300+ people watching cameras. Average annual wage in China is less than $10,000 so it is easier to justify people watching relative to the cost of technology / systems. That said, Chinese incomes have been dramatically rising so it is becoming less cheap to do so.

I do not think they are shipping 36 million cameras a year (mainly because the ASP you need to assume is too low)

100,000 X $55 X 365 = ~2 billion USD

So, do you think $55 too low an ASP?

Yes, mainly under the assumption that they are not charging enterprise Chinese customers so low a price. Even consumer Chinese cameras direct off their website go for $40 - $100.

But most of their cameras are not sold direct either.

ADI, for instance is selling 2MP Hik domes for $69 and 1MP ones for $59.

Hikvision HD Analog routinely sells for less than $55 per camera, even at retail.

8 ch kits for $299.

And they are still selling tons of SD analog even cheaper than that.

What supports your assumption that they are not charging enterprise Chinese customers this low a price?

I am assuming the product mix inside China is skewed towards higher priced cameras (i.e., more cameras like darkfighter, lightfinder, Smog beater, PTZ, thermal, etc.).

Smog beater, eh?

You may have a future in Sino marketing...

I don't know why this is even news. China Development Bank is the default bank to facilitate exports to most of the semi-government owned enterprises for years. Hikvision has been doing business with them for more than a decade. For example, many foreign dealer/distributor reselling Hikvision products expect them to provide terms or straight financing. Due to the strong capital/currency controls instituted by the Chinese government, even if Hikvision has a strong balance sheet of its own, it is not allowed to extend credit without first going through a government controlled bank. In this case, the China Development Bank. All foreign currency lending, remittance and settlements are done through some shape or form through this process. In this case, the bank act as a central banker to the exporters.

Needless to say China is not the only control that has a mixture of government and private entity cooperation as a form of government policy to favor certain key industries. In US, Boeing has been for years assisted by the US Government's Export Import Bank. http://fortune.com/2015/08/25/boeing-export-import-bank/

As an aside, China Development Bank does its job carrying out government policy of assisting domestic companies, but it doesn't do this at the expense of profitability or discipline. In the last decade, it has been the single most successful and most profitable of all Chinese banks. Its success has allowed it to surpass the clout of even the World Bank.

So is Hikvision using this money to sell products at below cost to squeeze out competition? Sure, they might be. But this playbook is done routinely at various businesses around the world. Amazon did it, Flipcart is doing it right now in India, and many others will try its hand at it too. As long as you have the firepower and staying power, it is absolutely valid tactic.

"I don't know why this is even news."

Again, as we discussed here, this is not common knowledge in the English speaking world. If you disagree with our general coverage that's fine but you are wasting your time trying to argue that we should not cover such things simply because this is known to a Chinese language audience.

"So is Hikvision using this money to sell products at below cost to squeeze out competition? Sure, they might be.... it is absolutely valid tactic."

One, doing so is of questionable legality. Two, such a strategy is high risk. Three, industry people (most who do not speak Chinese) want to better understand what is going on.

What steps should Hikvision take to achieve and keep customer loyalty? What can they do to fill the PELCO niche? Axis has a very high price point in many market segments. How can Hikvision manage to gather up their customers? I am surprised that Axis and Schnider still have their market shares.

NOTICE: This comment has been moved to its own discussion: What Steps Should Hikvision Take To Achieve And Keep Customer Loyalty?