Why Vimicro's Latest Contract Win Announcement Is An Exaggeration

On September 30^th, Vimicro (VIMC) announced that its joint venture, Zhongtianxin, has won a contract to provide SVAC-compliant video surveillance cameras and system to the Traffic Police Detachment of Taiyuan for RMB76 million, or USD12.4 million approximately.

There are a couple exaggerated and even misleading statements in this PR. First, as shown in the 20-F, note that VIMC only owns 51% of the JV Zhongtianxin, and 49% is owned by Shanxi Guoxin, which is a  Shanxi province government-owned investment company. Therefore, half of the revenues, $6.2M,  go to VIMC. With a gross margin of 35%, it comes out to a gross profit of only $2.2M. This is non-recurring revenues, doesn’t move the needle for a $300M market cap company.

The PR also states:

“As the only proven provider of SVAC technology and solutions in the marketplace, Vimicro will continue to leverage its first-mover advantages to capitalize on the megatrend of SVAC national standard adoption by the government, to further establish itself as a leading player in China's video surveillance market.”

There are a couple things wrong with this statement. First, VIMC isn’t even close to being a leading player in China’s video surveillance market. The following are the top video surveillance vendors that sell solely in China:

The exchange rate is 6 RMB per US dollar, so you can see how tiny VIMC is compared to these dominant players. The top two players in China, Hikvision and Dahua, have a market cap of $USD $12.5B and $5.33B. VIMC’s market cap doesn’t come close.

All of the above firms have H.264 video coding, which is the real Chinese (and worldwide) standard, not SVAC. VIMC needs its government connections to sell its cameras, instead of companies deciding to buy their cameras on their own. No private companies are buying VIMC’s products.

In fact, last month Hikvision won a contract in Guangdong province, where supposedly the SVAC standard reigns. It sold video storage to Shaoguan Iron And Steel Group, a huge government-owned steel company.

Hikvision also partnered with Alibaba (BABA) on 9/30. Together they will build China’s largest security camera cloud for family, personal, and city use. How can VIMC compete with that?

Expect problems up ahead with VIMC’s growth, as the Chairman’s government connections only go so far when its product is inferior.

To read the full report on VIMC, go to Seeking Alpha to author Adam Gefvert’s Instablog.

Disclaimer:

White Diamond Research and its clients may have a short position in VIMC, and stand to gain from the stock’s decline.