**First, the business model upgrade has already begun.**
We are currently in an advanced stage of industry development driven by digital front-end technologies, and the market is expected to grow rapidly. For equipment suppliers, this represents a critical window of opportunity to evolve into security system developers. We believe that this transformation in business models has already started taking shape.
**1. The Safe City project in the era of front-end digitization offers new opportunities for top equipment suppliers.**
In our previous in-depth analysis, we discussed how the security industry is transitioning from back-end digitization to front-end digitization. The Safe City initiative is often the first to adopt new technologies in the sector. Today’s Safe City systems are largely based on digital front-end solutions. In our earlier report, we highlighted that in the front-end digitization era, the integration of networking and intelligence will become more prominent. We also analyzed the cost-benefit ratio of large-scale security projects from both third-party system developers and equipment suppliers, and it became clear that equipment suppliers have a distinct advantage. As a result, we believe that the opportunities for equipment suppliers with strong system development capabilities in the context of the Safe City project have significantly increased.
**2. Intelligent traffic construction is on the horizon, offering great potential for video security companies.**
With China's automotive consumption entering a period of rapid growth, energy efficiency has become a key issue in economic transformation. China ranks second in global oil consumption, and the transportation sector accounts for about 25% of total consumption. Each vehicle in the U.S. consumes 1.8 tons of fuel annually, compared to 1.5 tons in the EU and 1.1 tons in Japan, while China’s per-vehicle consumption is as high as 2.3 tons. Additionally, urban traffic congestion has worsened, with about 30% of gasoline being wasted in traffic jams. To address these challenges, intelligent transportation has emerged as a viable solution. Alongside environmental monitoring, goods traceability, and smart grids, it forms one of the four core areas of IoT development.
Intelligent transportation can significantly improve road efficiency, reduce traffic congestion by up to 60%, and boost short-distance transport efficiency by nearly 70%. It can also increase existing road capacity by two to three times. Within the system, vehicles make fewer stops, reducing travel time by 13% to 45% and improving vehicle use efficiency by over 50%. Moreover, intelligent traffic control can cut fuel consumption by 15% and lower emissions by increasing average speeds. Smooth traffic flow also reduces engine idling time, which leads to better air quality. According to calculations, cutting one minute of engine idling time nationwide could save 1,000 tons of fuel annually.
Additionally, intelligent transportation can help reduce traffic accidents. In China, over 500,000 people are disabled and more than 100,000 lose their lives each year due to traffic accidents. Intelligent technology can cut accident rates by 30% to 70% annually. With real-time license plate recognition, video security companies can collect vehicle data efficiently, making them key players in this emerging field.
**3. Business model upgrades are accelerating.**
As discussed in our prior reports, the path for business model upgrades in the security industry is becoming clearer. Equipment suppliers with enhanced system development capabilities are now securing more system-level projects, effectively transforming into security system developers. In specialized areas like intelligent transportation, where system complexity is high, a mature operating model is likely to emerge early, further pushing video surveillance companies to upgrade their business models.
**Second, we remain optimistic about the progress of Pingan City and intelligent transportation projects.**
**1. Hikvision's progress in the Safe City project in the central and western regions is promising.**
Due to limited government funding in central and western China, large Safe City projects are more likely to be funded through BT or BOT models. Hikvision, with 3.8 billion yuan in cash as of the third quarter of this year, is well-positioned to take on such projects. It also holds a formal financial leasing license, allowing it to leverage bank funds. This gives Hikvision a significant financial edge over its competitors. As the largest shareholder, China Electronics Technology Corporation, a state-owned enterprise under SASAC, ensures strong government relations and marketing support.
For example, the "3111 Project" launched by the Ministry in 2005 led to direct investments of 10 billion yuan in the first batch of cities, expanding to nearly 100 billion yuan after 2010. Projects like Shaanxi’s 500 million yuan investment over five years, Chongqing’s community monitoring plans, and Xining’s three-year surveillance platform all reflect strong government-driven demand. Given Hikvision’s unique position and government connections, we are confident in its performance in the Midwest Safe City projects.
**2. Intelligent traffic construction is expected to enter a substantive phase.**
Hikvision and Dahua have been preparing for intelligent transportation for the past two years, with Hikvision acquiring Shanghai Goldway, a company specializing in this area. These efforts suggest they are actively pursuing related projects. Intelligent transportation projects may evolve into ongoing operations, shifting revenue from one-time equipment sales to continuous operational income. Once breakthroughs occur, this could drive stronger revenue growth and elevate valuations.
**3. We expect future performance of related companies to exceed expectations, leading to higher valuations.**
The unpredictable nature of Safe City and intelligent transportation projects means that the performance of leading video security companies like Hikvision and Dahua may surpass expectations. Moreover, the business model upgrades resulting from these projects will enhance their valuation potential. We are optimistic about the long-term prospects of these companies.
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