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China's Hikvision downplays US risks amid ZTE woes

Top surveillance camera maker cites alternatives if banned from American parts

TAIPEI -- China's state-backed Hangzhou Hikvision Digital Technology, the world's biggest maker of surveillance cameras, acknowledged uncertainty Monday about its overseas outlook but expects only a limited impact as U.S. regulators consider wider crackdowns against Chinese suppliers due to security concerns.

"We do recognize that politics and trade tensions would definitely have negative impacts on our company's overseas business ... it's so unpredictable at this point," Huang Fanghong, senior vice president and secretary of the board, said in an earnings call with investors and reporters.

"We don't think we could work hard to change anything, especially when such uncertainties that loom on the horizon come more from the political side, the trade frictions between countries, but not from the business side," she said.

Huang's comments came amid market speculation that Hikvision could face a crackdown similar to that experienced by compatriots Huawei Technologies and ZTE in the U.S. and elsewhere. American regulators last week voted for a ban on the use of federal funds for purchases from either networking gear maker, alleging a risk to national security. ZTE also received a seven-year ban April 16 on access to American technology after it failed to follow a U.S. sanctions settlement to punish employees involved in doing business with Iran.

A U.S.-China Economic and Security Review Commission report on Thursday flagged more Chinese suppliers to the federal government including Lenovo Group and BOE Technology Group, the country's top display makers, citing security risks.

The report also highlighted government-led China Electronics Technology Group, citing it as a network of former military labs that operates both commercial and military technology businesses. The company owns a 41.5% stake in Hikvision.

Hikvision's American business was hit last year after regulators warned that some of its products could be vulnerable to hackers. The Chinese group was eliminated from a suppliers list of the General Services Administration, a division that oversees procurement for the U.S. government.

Hikvision is the world's largest provider of surveillance cameras, and the Chinese company's market capitalization surpasses that of major iPhone manufacturer Hon Hai Precision Industry.

Hikvision generated revenue of 41.9 billion yuan ($6.66 billion) in 2017, with 29% coming from overseas. The company did not provide a breakdown by region, but Bernstein Research estimates 7% of the video surveillance gear provider's sales originated in the U.S.

Shares of Hikvision plunged more than 7% during the week beginning April 16 amid concerns that the company could become the next ZTE. But Hikvision is one of the most valuable tech companies on China's domestic exchange, and its stock price has more than tripled since the start of 2016.

The company, little known outside the tech sector, controls 21.4% of the global video surveillance market, researcher IHS-Markit says. Its market capitalization of 360.6 billion yuan tops that of major iPhone assembler Hon Hai Precision Industry and neared the level of Sony as the market closed Monday.

A full ban on American-made components similar to that facing ZTE would have only a limited impact on Hikvision, Huang said.

"In the surveillance industry, the components we need are much less than those needed for smartphones or telecom equipment. We think we should be OK if we cannot buy anything from the U.S.," she said. "We do see more and more domestic lens providers and sensor makers that could supply quality components so that we do not need to buy from foreign suppliers."

Hikvision buys chips from U.S. producer Nvidia to facilitate artificial intelligence features for video surveillance camera systems, Huang said, but she sees alternatives in solutions provided by smaller local chip startups. Her company also announced plans late last year to develop its own AI chips but it will still rely on external suppliers until the chip is available.

The Chinese company, which was founded in 2001 and listed in 2010, is regarded as a major entity in advancing the country's AI industry, which Beijing hopes will reach $150 billion by 2030. Many analysts said Hikvision's rapid rise in recent years also fits with China's push to surveil and control its 1.4 billion citizens.

Hikvision generated net profit of 9.41 billion yuan in 2017, up more than 26%, on a 31% increase in revenue. Sales for January-March 2018 jumped nearly 33% on the year to 9.36 billion yuan, while net profit advanced more than 22% to 1.81 billion yuan.

Analysts also see just a mild impact on Hikvision if it is barred from using U.S. components. Jay Huang, an analyst at Bernstein Research, said his agency expects only up to 4% of the company's revenue could be influenced by such a ban.     

"The ZTE event may trigger Hikvision to accelerate its reprioritization and diversification of suppliers," the analyst said. Huawei chip arm Hisilicon Technologies and Chinese homegrown AI chip startups such as Cambricon Technologies and Horizon Robotics could all provide related solutions that Hikvision now buys from Intel's Movidius and Nvidia, he said.

Shares of Hikvision edged 1.96% higher Monday to close at 39.08 yuan ahead of the earnings call.

In related news, Taiwan's Win Semiconductors, a 3-D sensing and optical parts contract chipmaker, said Monday it saw a limited impact as a key U.S. customer, Lumentum, was banned from selling any parts to ZTE.

"For the near term, we do not see meaningful changes from our business after the ZTE ban -- while for the long run, we are still monitoring closely whether other related dynamics could cause any impact," said Steve Chen, senior vice president of Win Semi.

Lumentum is also a major supplier of crucial 3-D sensing components to enable the iPhone X's Face ID facial recognition system.

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