Preannounced 2021 earnings down 35.2% YoY

Arcvideo Technology (Arcvideo) preannounced its 2021 earnings: Revenue grew 23.4% YoY to Rmb452mn; net profit attributable to shareholders fell 35.2% YoY to Rmb66.68mn; and recurring net profit decreased 29.5% YoY to Rmb56.09mn. In 4Q21, revenue rose 22.8% YoY to Rmb260mn and attributable net profit slid 35.2% YoY to Rmb53.45mn. The company’s revenue missed our expectations due to slower-than-expected delivery of big orders, while its profit was lower than our expectations owing to the ramp-up of its R&D and increasing sales expenses caused by distribution channels expansion.

Trends to watch

Deferred recognition of revenue from traditional broadcasting and TV business, and increased spending on R&D and distribution channel expansion weighed on earnings. In 2021, the company’s revenue and profit missed our expectations due to slower-than-expected delivery of orders for its broadcasting & TV business. In addition, increasing expenses, caused by the company’s ramp-up in R&D and market and distribution channels expansion, led to a YoY decline in net profit. The company’s public security business reported strong growth. Arcvideo’s investment in 5G edge computing and AI intelligence analysis paid off as edge computing projects started to deliver and traditional security business grew rapidly. We estimate revenue from public security business likely doubled in 2021. Arcvideo’s broadcasting & TV business maintained steady growth. The company optimized its revenue structure and made breakthroughs in its business on high-quality platforms such as China Central Television (CCTV) despite shrinking demand in the traditional media industry. In 2022, in addition to participating in formulating China’s first ultra-high definition (UHD) technology standards, the firm supported CCTV with its construction of 8K UHD TV project to broadcast the Beijing 2022 Winter in 8K UHD. We expect order confirmation and final delivery of these projects to generate incremental earnings in 2022.

Efforts in vertical expansion to bear fruit in 2022. In recent years, the company has continued to ramp up its video technology for further industry expansion. In 2021, it also stepped up its investment in immersive technologies such as immersive in-car entertainment and multi-screen synchronization. The firm is also spending more on marketing and distribution channel expansion for its 5G edge computing products, such as telecom operators and banks. We expect these efforts to bear fruit in 2022.

Looking into 2022, We believe sluggish traditional broadcasting and TV business will continue to weigh on the company’s earnings due to limited budget from their downstream clients. However, we expect large overseas orders (valued at Rmb114mn) signed with AI Arabiya in early 2022 (which should for the most part be delivered this year), combined with revenue recognition from the Winter Olympic project in 1H22, to drive up earnings growth in 2022.

Valuation and recommendation

Considering slowing delivery of big orders and increased R&D and sales investment, we lower our 2021 and 2022 revenue forecasts by 9% and 20% to Rmb452mn and Rmb647mn and introduce our 2023 revenue forecast at Rmb0.79bn. We cut our 2021 and 2022 net profit forecasts by 43% and 26% to Rmb67mn and Rmb146mn, and introduce our 2023 net profit forecast at Rmb192mn. Given lower sector valuation median, we cut our TP by 35% to Rmb72, implying 40x 2022e P/E, offering 34% upside. The stock is trading at 30x 2022e and 23x 2023e P/E. We maintain OUTPERFORM.

Risks

Disappointing progress of edge computing projects; uncertain overseas business.