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Analysts: Hikvision's China business, AI strategy to survive potential US ban

Hangzhou Hikvision Digital Technology Co. Ltd.'s robust business in China and domestic-focused artificial intelligence strategy will prevent the company from derailing if it is blacklisted in the U.S., analysts say.

Washington is reportedly looking to make it mandatory for U.S. companies to seek permission from the government before selling goods to the Chinese video surveillance technology company.

Such a move would be the first U.S. action against a company involved in the surveillance and mass detention of Uyghurs and other Muslim ethnic minorities in the Xinjiang region of China.

Shares of Hikvision, which makes traffic cameras, thermal cameras and unmanned aerial vehicles and employs more than 34,000 global staff, fell 10% following the news reports.

Analysts are more sanguine about Hikvision's future should it face U.S. trade restrictions.

Purchase restrictions will pose operational risks to the company as it imports equipment such as chips from the U.S. for use in its products. But analysts say the company can rely on its Chinese business and local suppliers.

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According to Ying Wang, a senior analyst at Moody's, 72% of Hikvision's total 2018 revenue was from China, while exports to the U.S. accounted for roughly 5% of revenue.

Rex Wu, equity analyst at Jefferies noted that most of the company's AI solutions are sold to the government, public and enterprise sectors in China and therefore its plans to expand its AI-related business will remain intact.

"We think a potential U.S. ban would accelerate the adoption of AI application-specific integrated circuits for edge computing, pushing costs down even lower," he said, adding that the company can opt for local AI chip makers including HiSilicon(Shanghai) Technologies Co. Ltd. and Beijing Horizon Robotics Technology Co. Ltd.

Similarly, Ke Yan, Asia Pacific IPO and placement research analyst at Aequitas Research, said in an interview that Hikvision could switch from using U.S.-based chip maker NVIDIA Corp.'s equipment for its AI processing units to China's Cambricon Technologies Corp. Ltd.

"Overall, as surveillance involves a less complex supply chain than mobile phones, we believe the impact to Hikvision will be less severe for Hikvision than Huawei," Yan said.

Earlier in May, the U.S. blacklisted Chinese telecommunication equipment provider Huawei Technologies Co. Ltd., citing perceived threats to U.S. national security or foreign policy interest. Shortly after, the U.S. Commerce Department issued a temporary license that will allow American companies to continue doing business with Huawei for three months.

While Hikvision will have to look for alternative suppliers, Wang added that the company's "strong financial and liquidity profiles" will provide "buffers to cushion against the potential near-term impact" of the restrictions.

According to the company's latest earnings report, Hikvision's operating income rose by 6.17% year over year to 9.94 billion yuan in the first quarter ended March 31. Net profit declined by roughly 15% in the same period, however.

Hikvision has been on the U.S.' radar for some time.

In March, a letter from top U.S. advisers to Secretary of State Mike Pompeo condemned U.S. companies that "may be contributing to Beijing's persecution of Uyghurs through their support or commercial ties with Hikvision and Zhejiang Dahua Technology Co. Ltd." The letter said the two Chinese companies had "profited from the surge of security spending in Xinjiang," a district in Western China where human rights groups say the detention camps are. The company's facial recognition cameras are used to track the population.