Hidden Champions Fund Newsletters: February 2019 Updates

19th February 2019

Dear Valued Clients and Partners,

In my last issue, I mentioned that in order to practice long term investing, one should have a certain view of the future. In my opinion, the broader and more general the prediction is, the easier it is to get it “right”. However, picking a stock is as specific as it gets, and the idea of having some level of diversification in the portfolio selection and allocation is important, as we will not be able to tell the future with total certainty. In fact, the more specific we are about our predictions, the more likely we will turn out to be wrong. If any fortune teller is able to foretell your exact future with minute details and it turns out to be accurate, do introduce him to me! I do reckon he can become an expert stock picker and fund manager!

For this issue, however, I will attempt to provide you with a short but general prediction of the likely future development of cities and the trends that may happen. Disclaimer: I do not claim to be an accurate futurist or fortune teller; I could very well turn out to be wrong about my predictions.

Whether we like it or not, the major cities of the world are going to grow bigger (both in terms of population and land area) and smarter (with technology advancement). As for 2017, 54% of the world’s population (4 Billion people) live in cities. To cope with the population growth and improvement in standards, cities have to be “upgraded” in terms of infrastructure and connectivity. These areas will include Transport, Energy, Infrastructure and Communications. With the mass adoption of the smartphone and more “Internet of Things (IoT)” to come, more data and insights can be gleaned from the behavior and actions of the population living in the cities, which will enable the cities to be smarter and operate more efficiently and effectively in the future.

One trend from the beginning of Smart Cities is the “need” for the smart cities to “see” what is going on. How does a city “see”? While humans have eyes, cities will inevitably have more and more surveillance cameras and equipment. This seems like the “Big Brother” depicted in George Orwell’s “1984” is becoming a reality. For cars to turn driverless, the need for “eyes”, sensors and computing power in a vehicle will also increase. And with all these data and information, it will need to be transmitted to a “Brain” via “nerves”, implying that the computing & processing power and the data connectivity of a city will increase, whether one can see the physical infrastructure or not.

What are the industries that are likely to benefit?

In my opinion, companies involved in surveillance solutions will likely have a better chance to do well. Companies that are able to supply the “eyes” for the vehicles and IoTs will also stand a good chance. Due to the increase in data storage and connectivity requirements, companies involved in the storage and transmission of the data will be in the line too. The challenge comes in picking the potential winner out of the many companies that will gain leadership in their respective segments. In the technology sector, there are many dynamics at play and the leaders often change. The winners of today are not necessarily the winners of tomorrow.

One such company involved in surveillance solutions is Hikvision. Our Investment team, Richard and Joyce arranged for a company visit to their corporate headquarters to “touch the brick”. Joyce’s article on the visit will dwell into the wide and large-scale applications of Hikvision’s surveillance solutions, particularly in China. With the tensions created from the US-China Trade war, Hikvision may find it increasingly difficult to break into other markets, even though the company already has a significant overseas presence.

I hope you enjoy this issue of our Newsletter.

Warm regards,
Clive Tan | CEO
Hidden Champions Capital Management


After visiting Sunny Optical in Yuyao (do refer to our previous newsletter), Zhipeng and I boarded the train to Hangzhou to visit Hangzhou Hikvision (SZSE:002415), the world’s leading provider of innovative video surveillance products and solutions, providing security, visual management and big data services (According to iHS report, it ranked first in the iHS global mid-range and high-end video surveillance market  for 7 consecutive years [2011 to 2017]).

On the way to Hikvision’s headquarters, the talkative taxi driver constantly mentioned about the two pride and joy of Hangzhou: Alibaba and Hikvision, one of the world’s largest e-commerce retailer and surveillance system provider respectively. These two companies not only generates great economic benefit for Hangzhou, but more importantly, attract more local and foreign talents to Hangzhou.

As we made our way towards the HQ, there were no traffic police in sight, and the driver proudly said that there was little need for the traffic police to be around physically, since they are able to utilize the surveillance system that encompassed the entire road, and are even able to monitor the condition of the vehicles moving on the road.

With this visit, we would like to introduce Hikvision to you, focusing on three aspects: their Products and Technology, the Management and Risks they face.

Hikvision’s  headquarters are located at the Internet of Things Industrial Park in Hangzhou High-tech Zone, and comprises three office buildings. Upon arrival, their Investor Relations manager brought us to the exhibition hall to start the tour.

  1. Product and Technology

Hikvision offers more than just a variety of camera products, but is also a system solution provider due to its powerful software algorithms capabilities. Right upon entering the exhibition hall, their cutting-edge technology caught our attention.

Advanced Technology Wall (showcasing the de-fog function, optical image stabilization,  enhanced lighting and deep analysis etc)

During a foggy day Super de-fog technology

With Hikvision’s software, even a picture taken during a foggy day can be used as they are able to treat the picture with their “super defog” technology.  The pictures above are shown for comparison.

Normally, when a camera catches a speeding car, the image will be blur, but the software is able to enhance and  display a much clearer photo.

Even at night, Hikvision’s software is able to transform the video into a clearer picture to assist in monitoring.

China’s ongoing Xueliang project (雪亮工程) and smart city construction, all requiring the support of big data.

Thanks to the surveillance system, China has enjoyed stability and security in recent years.  Without the government’s Tianwang project(天网工程), construction of Xueliang project(雪亮工程)and intelligent traffic information project, having a good security environment may be a daunting task for a country with 1.3 billion in their population.

Hikvision’s products have a very wide range of applications coupled with strong technical support, and if you are observant, you should be able to see it at almost every corner of our lives:

Maintaining Security 维护治安

Industrial Manufacturing and Other Innovative Business工业制造等创新业务

The ubiquitous Hikvision – a long-distance runner who focuses on the track.

China currently has just over 2 million police officers, posing quite a challenge for such a large country with a population of 1.3 billion (For comparison, China has 153 police officers per 100,000 people; compared to 462 police officers per 100,000 people in Hong Kong, China; 284 police officers per 100,000 people in the United States; and 217 police officers per 100,000 people in Australia. 1). Therefore, rolling out an intelligent security monitoring system is the natural step to assist the law enforcement authorities.
Security cameras forms a crucial part of intelligent security monitoring, and are used to ensuring a safe city via the Skynet project. They play a part in monitoring social activities, environmental protection, monitoring hazardous chemicals transportation, food safety, important bridges, buildings, rail transit, water conservancy facilities, municipal administration, infrastructure security monitoring, early warning and emergency linkages .
With the advancement of projects such as China’s safe city and smart city, surveillance systems now requires high-definition, intelligent, networked, and digitized surveillance systems. Judging from the number of cameras installed in various provinces and cities in China as shown in Table 1 below, Hikvision can be seen everywhere in the first and second tier cities, but I believe that there will still be a lot of room for growth in most third- and fourth-tier cities in the future.

Figure 1: Qianzhan Industry Research Institution: No. of surveillance camera in china provinces2

The exhibition hall provided us an intuitive understanding of Hikvision’s products, technology and future prospects. To further understand the business, we interviewed the investor relations manager with questions that we were curious about when researching the company.

Throughout the interview, the Investor Relations Manager repeatedly emphasized that Hikvision was able to grow from 28 people to more than 20,000 security leaders since its inception, thanks to a group of focused, forward-looking and technical proficient management.

  1. Management

The founding team of Hikvision is a typical “Engineering Guys” combination. Mr.Chen Zongnian (Chairman), Mr.Gong Hongjia (Vice Chairman) and Mr.Hu Yangzhong (General Manager) graduated from the Computer Science Department of Huazhong University of Science and Technology.

After graduating from university in 1986, Chen Zongnian worked at the 52nd Research Institute of China Electronics Technology Group Corporation for more than 30 years. The 52nd Research Institute is a national first-class research institute comprising both combination of military and civilian personnel, specializing in the research of computer-external storage devices. The 9-11 terrorist attacks in the United States pushed for the rapid development of the digital surveillance market in 2001, and Chen Zongnian together with the 52nd Research Institute were ready to start new business with technology, products and talents. At the end of 2001, Hikvision was established with 28 employees.

The current vice chairman, Gong Hongjia, like Chen Zongnian, graduated from the Computer Science Department of Huazhong University of Science and Technology in 1986. However, after graduating, he chose to start a business himself. In 1994, Gong Hongjia founded Desheng Company in Dongguan, and made Desheng Radio the domestic industry leader (In fact, I realized that the Desheng Radio that every student had to have to pass English was a creation by Gong Hongjia!).

The current general manager Mr.Hu Yangzhong graduated from Master degree of the Computer Science Department of Huazhong University of Science and Technology in 1989 and entered the 52nd Research Institute in a technical position as well.

Since its inception, Hikvision has always been focused on the security field, but has had the foresight to start strategizing about entering the AI field as early as in 2013. They have become the leader in the security industry, providing smart city solutions, and is constantly innovating. In recent years, they expanded to the field of smart homes and industrial manufacturing.

With CEOs with technical backgrounds leading them, they understand the great importance of R&D and innovation, and Figure 2 below shows the distribution of manpower in Hikvision over the years. Half of the company’s manpower comes from the R&D and Engineering department.

Figure 2: Hikvision Manpower Distribution (Source: from annual report)

Today, Hikvision, as a leading state-owned security company, still maintains a rare high-speed growth. Despite being state-owned, Hikvision can be regarded as the most market-oriented, with incentive systems ahead of many other state-owned enterprises. Hikvision Internet Video (Ezviz series), Automotive Electronics, Hikvision Robotics and other innovative businesses are a result of such systems, where the company and employees created a subsidiary with a 60:40 shareholding ratio, enabling a large number of core employees and technical backbone to innovate and become business partners, sharing ownership and being responsible for the revenue and risks. Hikvision has a long-term talent development and incentive system to help the company continue to develop and innovate, as seen from the growth to more than 26,000 employees worldwide.

Of course, every business has their risks. As an investor, we need to understand the risks that business operations will face.

  1. Risks

The recent Sino-US trade war has affected the overseas expansion of many Chinese companies. Hikvision, the leader of security, has also been boycotted by the United States and other pro-US alliance countries. Hikvision’s overseas revenues account for 30%. If the trade war continues to ferment, it will inevitably affect the company’s overseas business expansion. However, the IR manager addressed this issue from two perspectives.

From Hikvision’s business perspective: the US side of the business is definitely affected, but currently Hikvision’s business in the US is 6% of overall sales. Moreover, Hikvision’s existing customers in the United States are mostly retailers or commercial users, not the US government. In the face of resistance from the US allies, such as sales in Japan, Australia, and the United Kingdom, the markets in these developed countries are saturated, thus the impact on the sales of Hikvision is limited; in fact, Hikvision’s overseas expansion focuses more on emerging markets such as Southeast Asia, India, African countries, Russia and other regions, including some countries involved in the Belt and Road initiative. These overseas markets present lucrative opportunities.

Supply Chain perspective: The US is considering a ban of US components exported to China, components such as computer processing chips (CPU) and graphic chips (GPU) which are integral parts of Hikvision’s surveillance systems.

Hikvision, however, is of the opinion that the chips present in their current technology are chips that are general chips with a wide range of application, and is currently not subject to special control by the US Department of Commerce, nor does it need to be specially filed or licensed by the Ministry of Commerce. Such chips in contention are the GPU and FPGA, which are general-purpose devices. GPU are components found in game graphics card used in all computer systems nowadays, and any attempts to regulate such products will face tremendous pressure from manufacturers of these products.

Furthermore, should such a ban occur, Hikvision believes that these can be easily substituted with products available both home and abroad, even though they may suffer temporarily from the cost and quality perspective. In addition, Hikvision has decided to focus on co-operating and developing such products with China domestic chip suppliers in the future. They are also of the opinion that they will be able to get the chips from other sources. Therefore, this issue will not be a major obstacle in their business.


From this company visit, I was able to understand deeper about Hikvision’s products and technologies. Hikvision has the ability to be a global security industry leader, who is not only able to provide cheap and good products, but more importantly, they understand what the customer requires, coupled with continuous innovation to produce their own hardware and software to win the market. Of course, driving this massive ship will require a group of dedicated and far-sighted management teams, which are in the hands of the more than capable Mr.Chen Zongnian and Mr.Hu Yangzhong, the two technical experts plus operational master Mr.Gong Hongjia. They were able to grow Hikvision from a market value of US$$6.3bil in 2010 to US$44bil in 2019 (almost 6 times bigger). We were also able to clear some queries, mainly about the impact of the Sino-US trade war on Hikvision. The business from the United States will be more or less dragged down, but the impact is limited. After all, it only accounts for 6% of the total turnover. Moreover, Hikvision are more focused on expanding in emerging markets. Recently, on February 15, 2019, Hikvision just released a quick snapshot of 2018 results: The total revenue and net profit increased by 19% and 20% respectively compared with the previous period. Although the growth rate has slowed down compared with the previous two years, the security industry is demanding in nature, and we expect the performance to continue to grow steadily.

Warm regards,
Joyce Pang Qin | Investment Analyst
Hidden Champions Capital Management


1. List of countries and dependencies by number of police officers
2. 前瞻产业研究院整理:中国各省市安防摄像头数量
Qianzhan Industry Research Institution: No. of surveillance camera in china provinces https://www.qianzhan.com/analyst/detail/220/181122-bae0c3b6.html
3.  Hikvision Manpower Distribution (Source: from annual report)

继参观位于浙江余姚的舜宇光学(可参见隐形冠军基金上一期的基金通讯)之后,志鹏和我踏上前去杭州的火车,有幸实地参访海康威视的总部,一家以视频为核心的物联网解决方案提供商 , 面向全球提供综合安防 、 智慧业务与大数据服务, 并连续7年(2011-2017)蝉联iHS全球视频监控市场占有率第一位,主宰中高端视频安防市场。



1. 产品及技术


大雾天下的视频截图 透雾后的视频截图






无处不在的海康威视 – 聚焦赛道的长跑者




2. 管理层





两位技术人才 + 一位经营高手,后有国资力量的支持,打造出了如今的海康威视。自创立以来,始终专注在安防领域,并且早在2013年便开始布局AI领域。发展至今已然成为安防业老大,提供智能城市解决方案,并不断创新,近年来更是涉入智能家居领域,以及工业制造领域。技术出身的老总,相当重视研发及创新,下表二显示历年来海康威视的人力分布状态,公司一半的人力都是来自研发技术部门。


海康威视互联网视频(萤石)、汽车电子、海康机器人及其他创新业务上,公司和员工以6:4的股权比例共创子公司,使一大批核心员工和技术骨干成为与公司创新业务共担风险、共享收益的“事业合伙人”。 从初创成立时的28人,到拥有全球员工超过2.6万人的企业(截至2017年年底),海康威视自有一套构建长效的人才培养与激励体系,助力公司持续发展,不断创新。


  1. 风险

最近的中美贸易战影响了很多中国企业的海外扩张,作为安防龙头老大的海康威视也受到了美国及其他亲美联盟国的抵制,海康威视海外营收占比达30% , 贸易战若继续发酵不可避免的会影响到公司的海外业务拓展 。对于我们的疑问,投资者关系经理从两个角度给予解释。




通过此次的企业参访,让我更直观地了解海康威视的产品及技术,海康威视能做到全球安防老大,不仅仅是提供价廉物美的产品,更重要的是他们对于客户需求的把握度,以及持续创新,凭靠自身过硬的软硬体技术争取到市场。当然驾驭这艘安防界航空母舰需要一群专注且具远视的管理团队,陈宗年和胡杨忠这两位技术专才加上运营高手龚虹嘉使得海康威视过关斩将,业务不断扩大,市值也从2010年的US$6.3bil变为2019年的US$44bil。通过这次的参访,也让我对一直萦绕在心头的疑惑(主要来自中美贸易战对海康威视带来的影响)有了比较清晰的答案,来自美国的业务或多或少会受到拖累,但是影响有限,毕竟只占整体营业额的6%;况且海康威视更注重新兴市场的扩张。   2019年2月15日,海康刚好发布2018年度业绩快报,总收入和净利润分别比上期增长19%和20%,虽说增速比起前两年有所放缓,但是安防业具有刚需的性质,业绩有望持续稳定成长。

Warm regards,
Joyce Pang Qin | Investment Analyst
Hidden Champions Capital Management

1. List of countries and dependencies by number of police officers
2. 前瞻产业研究院整理:中国各省市安防摄像头数量
Qianzhan Industry Research Institution: No. of surveillance camera in china provinces https://www.qianzhan.com/analyst/detail/220/181122-bae0c3b6.html
3.  Hikvision Manpower Distribution (Source: from annual report)