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Vimicro: A Hidden Chinese Small-Cap Gem

Beijing,March 23, 2015/www.forbs.com/ Video technology supplier Vimicro (Nasdaq: VIMC) delivered a strong 4Q 2014 performance in revenue and, more importantly, earnings distributable to shareholders on Wednesday, March 18. 2014 annual revenue increased by 55.7% to $100.14 million, largely driven by the SVAC-compliant technology and solution, which we believe will become the industry standard. Non-GAAP earnings per share (EPS) distributable to shareholders were ~$0.22 in 2014 vs. a net loss of $0.23 per share in 2013.

We see Vimicro as a rare gem: A Chinese small-cap stock listed in the U.S. with a compelling product at the right time in its life cycle due to government endorsement and support. We expect Vimicro to continue to expand its sales footprint, especially in China¡¯s interior where domestic unrest could rise further, spurring the wider and faster adoption of public security infrastructure. Since the replacement cycle of the camera head is about 4-5 years, as more local police departments ¡ª currently VIMC¡¯s core users ¡ª start to adopt VIMC products, the recurring revenue as a percentage of total revenue will increase, adding to the visibility of company¡¯s revenue and income stream. Furthermore, security equipment market penetration is inevitable to increase, with the private sector following the public sector. Policy guidance implicitly favoring homegrown technology such as SVAC at the expense of foreign incumbents will give domestic companies an upper hand in the competition.

Rising concerns in China about safety and security risks are increasing public awareness on the importance of domestic video security standards, especially after the recent incident at Hikvison, a major Chinese supplier of video security products. Local public security departments are consequently urged to adopt a uniform public video security standard, and SVAC is the leading standard developed jointed by VIMC and the First Research Institute of the Ministry of Public Security of China.

China currently spends ~$10 billion on video security products every year. The Public Security System accounts for 40%, or ~$4 billion, which we see as the size of Vimicro¡¯s potential addressable market. Considering its revenue was $100 million in 2014, Vimicro is still in its first inning of growth into public and private sectors nationally with a first mover¡¯s advantage.

Going forward, we see sustainable revenue growth momentum in the next few years. In addition, due to the heavy upfront operating costs including research and development, market education, and marketing and sales, Vimicro¡¯s operating model has tremendous leverage.

We estimate revenue growth of 40-50% and earnings growth of more than 100% from $0.22 to ~$0.50 in 2015. For a pure play and fast growing technology company in the very early stage of market penetration, it deserve a price-to-earnings multiple of at least 25 -30x, which leads to our price target of $12 to $15, or 45% to 74% upside in the stock.(Author: Junheng Li)

Company Contact:

Mr. Hongqian Li

Phone: +86 (10) 5884 8898

E-mail: lihongqian@vimicro.com


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