2021 results missed our expectations

Arcvideo Technology (Arcvideo) announced that revenue rose 14.3% YoY in 2021 to Rmb418mn; attributable net profit fell 40.3% YoY to Rmb61mn; and recurring net profit declined 36.3% YoY to Rmb51mn. In 4Q21, revenue rose 7.0% YoY to Rmb226mn; attributable net profit dropped 41.6% YoY to Rmb48mn; and recurring net profit slid 37.6% YoY to Rmb47mn. The firm’s 2021 results missed our expectations, with revenue and attributable net profit Rmb33.56mn and Rmb5.33mn lower than the preannounced results, as revenue recognition of some orders was deferred during COVID-19 resurgence in 1Q22.

Trends to watch

Broadcasting & TV business pressured; watch progress of order from AI Arabiya2. In 2021, Arcvideo revenue from the media business edged downward 0.64% YoY to Rmb295mn mainly due to slower-than-expected delivery of orders; thus postponing some revenue recognition to 2022. In 2022, we suggest watching progress of a US$17.93mn order from AI Arabiya. We expect the order to be delivered in 2022 and to drive significant growth in the firm’s broadcasting & TV business. We believe the order from AI Arabiya will be a benchmark for more overseas orders and future growth potential on the back of the firm’s technological expertise.

Arcvideo won bid for 8K broadcast control platform; outdoor UHD screen project from MIIT underway. On March 29, Arcvideo won a bid for the Beijing 8K outdoor ultra-high-definition (UHD) large screen project valued at Rmb8.57mn. The Ministry of Industry and Information Technology (MIIT) said that it would complete installation of 28 public outdoor 4K and 8K UHD large screens across 20 cities in China by June 2023. We expect the firm to continue securing additional orders from the MIIT project by leveraging its first-mover advantage in the UHD industry.

Sales of edge computing products growing, driving up GM of public security business. In 2021, revenue from the public security business rose 79.5% YoY to Rmb123mn, mainly on wide application of edge computing products in financial, energy, transportation, and social scenarios. Gross margin (GM) of the firm’s public security business rose 15.33ppt YoY to 53.9% thanks to higher level of standardization of its edge computing products. We believe that sales of such computing products will continue growing, driving revenue from the public security business to grow at a CAGR of 50% over 2022-2023.

Financials and valuation

We cut our 2022 and 2023 revenue forecasts 15.5% and 10.2% to Rmb547mn and Rmb709mn, and cut our 2022 and 2023 net profit forecasts 32.3% and 25.4% to Rmb98mn and Rmb143mn, given that we expect the COVID-19 resurgence in 1H22 to weigh on Arcvideo order delivery. That said, we expect the firm’s ability to secure more orders, and the firm’s expenses likely continue to rise. We maintain OUTPERFORM and switch our valuation to 30x 2023e P/E and cut our TP 26.4% to Rmb53. Our target offers 31.5% upside. The stock is trading at 32.9x 2022e and 22.6x 2023e P/E.

Risks

COVID-19 resurgence weighing on new orders; uncertainties in overseas business.