This Chinese video equipment company’s stock is on the move, and has been gaining support, recently receiving positive attention from our contributor, as well as Forbes and The Street.
Vimicro International (VIMC)
from Cabot China & Emerging Markets Report
Lots of companies can manage to grow along with a popular product line, but it takes different skills and more resources to stay on top when a major market just disappears.
Vimicro appears to have what it takes. At one time, the company owned a majority market share in image processors for webcams, for which its semiconductor designs were highly regarded. But the rise of video capabilities in mobile devices took a huge bite out of the webcam market, and Vimicro’s stock, both literal and figurative, hit the skids in 2012.
The company’s rehabilitation came courtesy of a Safe Cities initiative launched by the security conscious Chinese government, which decided that public places—airports, shopping centers, traffic intersections, banks, schools, railways and others—in every city in China would have to be under constant video surveillance. The cities themselves are required to foot the bill for the surveillance equipment, and Vimicro quickly transformed itself into a leading technology and solution provider.
The company designs, develops and markets the products that are needed for such a sweeping program of surveillance. Its full line of video recorders, video servers, hi-def cameras and storage and networking equipment offers turnkey installation for cities. (Vimicro still has a robust lineup of camera processors for webcams, PCs and industrial cameras, but that’s now a much smaller revenue source.
Vimicro has a technological advantage over many of its surveillance system competitors, because the company co-developed the Surveillance Video and Audio Coding (SVAC) standards that were adopted as the technological standard for the nation. (The company’s development partner for SVAC was the central government’s First Research Institute of the Ministry of Public Security.) The endorsement of Vimicro’s standard by the central government gives it a leg up on the competition. And since cameras and other equipment are on a four- to five-year replacement schedule, every installation is a source of future revenue.
The most important thing is that it’s early in the game for Vimicro, with Chinese authorities urging local public security departments to transition their equipment to the SVAC standard.
Revenue trends for Vimicro can vary quickly, as income depends on winning installation contracts that are controlled by bidding processes. The company was highly successful in 2014, increasing revenue by 56%. But the quarter-by-quarter growth was much lumpier, varying from a low of 14% in Q3 to 117% in Q2.
Earnings soared to 22 cents a share in 2014, up from a 24 cents-per-share loss in 2013. Estimates for 2015 are for a 150% jump in earnings (to 55 cents), with 2016 estimates reaching 118% growth to $1.20 per share.
The chart for VIMC shows a strong uptrend since the dark days of 2012 when the stock was trading below 1. There is lots of volatility here, including a drop from 12 to 5.4 last year when we had VIMC on the watch list. The stock built a nice base starting in the middle of January, trading for three months in a tight, slightly rising pattern that used 9 for resistance during January and February, then for support in March and the first half of April.
VIMC began a very quick rally on April 16 that has now blasted it from 9 to over 13. That’s big volatility, and you need to be ready for a stock that’s moving 7% a day. It’s likely that VIMC will have a significant down day after such a run, and we think it’s a good buy on any pullback at all. We will buy a half position tomorrow, hoping to be able to add to it after we have a profit cushion to work with. BUY A HALF.
Paul Goodwin, Cabot China & Emerging Markets Report, www.cabot.net, 978-745-5532, April 23, 2015