Warpath

Trump's Tech Quest

Hikvision's future might not always look so bright.
Photographer: Krunja Photograher/Getty Images

As fund managers globally prepare to embrace more of China's $9 trillion stock market, some may be disappointed to learn that a few firm favorites could draw the ire of Donald Trump.

Having dealt with steel and aluminum, the U.S. president is now seeking to impose tariffs on up to $60 billion of Chinese imports and will target the technology and telecommunications sectors, Reuters reported Tuesday.

Chinese hardware companies are precisely the ones foreigners love.

Take a look at the shareholdings of mainland firms that also trade on the stock-connect pipe between Hong Kong and Shenzhen. Foreigners own 11 percent of surveillance camera maker Hangzhou Hikvision Digital Technology Co. and almost 10 percent of Midea Group Co., the home appliance manufacturer that annoyed German politicians with its takeover of robotics firm Kuka AG in 2016.

Fly Me to the Moon

Shares of Hikvision and Midea have rallied big time as foreigners buy in

Source: Bloomberg

International buying of both companies has pushed their shares to record highs. Hikvision is up 115 percent over the past 12 months while Midea has risen 78 percent. Hikvision is trading at a price/earnings to growth ratio of 2 times while Midea is at 1.3 times. (A PEG ratio of 1 is deemed fair value.)

It's hard for investors not to like Hikvision. In just four years, the company has increased revenue fourfold while maintaining a profit margin of more than 20 percent. Analysts continue to see breakneck growth. Morgan Stanley estimates that over the coming three years, the Chinese government will add 400 million CCTV cameras to the nation's installed base of 180 million.

Eyes on the Prize

Hikvision's revenue increased fourfold in just four years

Source: Bloomberg

Note: 2018 data is analyst consensus estimates.

But it's not so straightforward. Although foreigners may be betting on Beijing's obsession with watching its own citizens, about 30 percent of Hikvision's 2016 revenue was derived from overseas. Hikvision is controlled 40 percent by state-owned China Electronics Technology HIK Group Co. If Trump was wary of Huawei Technologies Co. installing network equipment on U.S. soil, how's he going to feel about American companies using Chinese surveillance cameras?

Beijing is actively developing this homegrown champion. As a "key national software enterprise," Hikvision needs to pay only 10 percent tax versus the standard 25 percent. VAT refunds alone account for about 20 percent of the company's net profit. These kinds of tax breaks aren't unusual for U.S. high-tech firms either, but when was Trump one to care about nuance.

Game On

As a "key national software enterprise," China's Hikvision gets several tax advantages

Source: Bernstein Research

It's not hard to imagine Midea going on Trump's watch list one day, too.

After the Foshan, Guangdong province-based group's $5 billion Kuka acquisition, Germany expanded its takeover-blocking powers, allowing ministers to investigate deals involving a wide range of companies operating in "critical infrastructure." Midea got the green light from the U.S. government -- Kuka had an American subsidiary engaged in highly sensitive defense-related activity -- but only after the Chinese firm promised to keep the divisions independent. Like Hikvision, Midea also gets about half of its revenue from overseas.

Trump's decision to block Singapore-based Broadcom Ltd.'s acquisition of rival chipmaker Qualcomm Inc. should be a wake-up call. Even though Huawei had no direct role in the Qualcomm deal, its presence was felt everywhere.

The Committee on Foreign Investment in the U.S. was concerned Broadcom would cut back on R&D funding at Qualcomm, in turn strengthening Huawei, which is spending billions of dollars on the next generation of mobile technology, known as 5G. The fact Qualcomm probably couldn't keep pace with the Chinese firm's R&D spend even if it were a standalone company didn't seem to matter.

For international money managers, it's very much buyer beware. Those nice sales numbers could disappear after a 2 a.m. tweet, and with them, the heady valuations.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

    To contact the author of this story:
    Shuli Ren in Hong Kong at sren38@bloomberg.net

    To contact the editor responsible for this story:
    Katrina Nicholas at knicholas2@bloomberg.net

    Before it's here, it's on the Bloomberg Terminal.
    LEARN MORE