The "AI Four Little Dragons" have a bumpy road to listing

Author | Caijing New Media Liu Fen Editor | Jiang Shizhou

On December 30, 2021, SenseTime (00020. HK) officially landed on the Hong Kong Stock Exchange, the issue price of HK$3.85 / share, the listing of three trading days of stock prices immediately doubled, the fourth trading day the highest rose to 9.7 Hong Kong dollars / share, and then fell sharply, as of the morning close on January 6, at 6.72 Hong Kong dollars / share, down 3.59%.

In the eyes of industry insiders, hard technology companies are scarce targets in the Hong Kong stock market, and SenseTime's identity as the "first AI stock" and the potential of the track it is located in are important factors in the rapid surge of its stock price. There are also voices saying that SenseTime's rise is due to short-term buying, and the rally is not sustainable.

From the submission of the Hong Kong stock listing application on August 27, 2021 to the hearing of the Hong Kong Stock Exchange on November 22, SenseTime, known as the first of the "FOUR LITTLE DRAGONS OF AI", has been attracting market attention. Compared with the listing process of the A-share Science and Technology Innovation Board, hong Kong stock IPOs are relatively fast. Megvii Technology, Yitu Technology and Yuncong Technology have successively proposed a listing plan for the Science and Technology Innovation Board, but the road to listing has been tortuous.

Re-watching the artificial intelligence track, it has long passed the early venture capital boom and entered the "squeeze bubble" stage. Commercialization and profitability have become the core indicators, and enterprises that cannot bring real commercial value will be eliminated. Even if the listing is successful, there may be a phenomenon of inversion of the valuation of the primary and secondary markets.

SenseTime has brought confidence to the AI track IPO, but what convinces the market is that it has a reason for long-term growth. For the AI Tigers, who have not yet made a profit, where the way out seems to be more worthy of attention.

SenseTime technology has finally become the "first stock" after ups and downs

SenseTime, Megvii, Yuncong, and Yitu are the four unicorns that have attracted the most attention in the field of Chinese intelligent computer vision (CV), and are known as the "FOUR LITTLE DRAGONS OF AI". From the perspective of the time of establishment, SenseTime was established in 2014, which is later than Megvii Technology and Yitu Technology, ranking third. If calculated according to valuation and financing amount, SenseTime is a well-deserved "brother".

Before the listing, SenseTime has conducted 12 rounds of financing, with a cumulative financing amount of more than US$5 billion, and the investors are Zhongsoft Bank, Primavera, Silver Lake, IDG, China State-owned Enterprise Structural Adjustment Fund and other star institutions. In 2018, the valuation of the company exceeded $6 billion, and although the pace of financing in 2019 and 2020 has slowed down, the value is still rising, and the valuation will reach $10 billion in 2020.

While the financing news has shaken the market again and again, the listing rumors of SenseTime technology are frequent. On August 27, 2021, SenseTime officially submitted an application for listing on the Hong Kong stock market, and the rumors finally sat down. By the hearing of the Hong Kong Stock Exchange on November 22, the IPO process was relatively smooth, but it was sanctioned by the United States on the eve of the listing.

On December 10, the U.S. Treasury Department added SenseTime to its list, banning U.S. investors from investing in SenseTime. On December 13, SenseTime announced that its global offering and time to market have been postponed. A number of industry insiders believe in interviews with the media that some investors of SenseTime may be "dissuaded", and even some companies may not cooperate with SenseTime for "compliance" considerations.

On December 20, after seven days of suspension of the listing plan, SenseTime resumed its global offering, with the same issuance scale and pricing range as before, but made many amendments and supplements to the original prospectus. After the amendment, the shares will no longer be offered to U.S. investors, and Guotai Junan International and BOCOM International will no longer act as joint bookrunners and joint lead managers.

After comparison, it can be seen that the cornerstone investors in the two prospectuses have changed greatly. The latest cornerstone investors total 9, the previously disclosed GF Fund, Pleiad Fund, WT, Focustar and Hel Ved did not appear among the Cornerstone investors, Xuhui Capital, Guotai Junan, Hong Kong Science and Technology Park, Xima Ophthalmology, Taizhou Cultural Tourism are all new investors. The size of the investment increased to $510 million from the previous $450 million.

It is worth noting that the heat of SenseTime, which restarted the offering, has "cooled" in the market. SenseTime issued a total of 1.5 billion shares at offer prices ranging from HK$3.85 to HK$3.99 per share, raising approximately HK$6 billion. After the end of senseTime's public offering, the 14 securities companies raised HK$1.337 billion, only about 43% of the previous offering. The final offering price is HK$3.85, which is at the bottom of the price range.

According to Frost & Sullivan's report, SenseTime is Asia's largest ARTIFICIAL intelligence software company in terms of 2020 revenue and the largest computer vision software provider in China, with an 11% market share. From 2018 to 2020 and the first half of 2021, SenseTime's three-and-a-half years of cumulative revenue was nearly 10 billion yuan, and the adjusted three-and-a-half-year loss totaled 2.86 billion yuan.

Listing is not the end, and companies in the spotlight face more questions and challenges. Cambrian, which is in the field of AI, has created the myth of the capital market, once a market value of 100 billion, and now it has shrunk by more than 70 billion yuan, and it is difficult to continue the scenery under long-term losses. Although the business is different, whether SenseTime, which is also profitable, can support the market value of 100 billion Hong Kong dollars and break the curse of loss remains to be seen later.

Megvii, Yuncong, and Yitu have a long road to listing

The "FOUR LITTLE DRAGONS OF AI" ARE wonderful, but they also have many things in common. Established at a similar time, they all have deep technical genes, starting in the field of computer vision, first developing technology and then looking for scenes for landing applications, becoming the object of capital pursuit in the venture capital boom.

You catch up with me in financing, and after the boom subsides, you are not willing to show weakness in IPOs.

As early as 2017, Megvii Founder Yin Qi expressed his thoughts: "Going public is going to happen, and we hope we will be the first." In August 2019, Megvii Technology, which has been preparing for a long time, formally submitted a prospectus to the Hong Kong stock market, but it was soon "sniped" by the United States. In October of the same year, the U.S. Department of Commerce placed Megvii on its Entity List, restricting a company's ability to purchase or otherwise acquire certain goods, software, and technology. At that time, also included in the list were Beijing SenseTime, Yitu Technology and so on.

In the view of market participants, the market atmosphere at that time was not bad, if Megvii Technology can reduce the valuation to reflect the risk, or it may break into the "AI first stock". There are also unoptimistic voices that because of being included in the "entity list", the listing committee is worried about whether it is appropriate to seek an IPO at this time, and asked Megvii Technology to provide more information. On November 22 of the same year, Megvii Technology responded to the report that it had not passed the listing hearing of the Hong Kong Stock Exchange, but only 3 months later, the listing process of Megvii Hong Kong stocks was shown as "invalid", and finally the issuance and listing was not completed within the validity period of the listing application materials.

"We hope that the stock price will be strong and stable after the listing, and we need to choose a more suitable window to list." At a media briefing in July 2020, Inchi once again expressed his thoughts on going public. Two months later, Megvii Technology signed a listing counseling agreement with CITIC Securities and moved to the Science and Technology Innovation Board.

On the eve of the IPO, another drama scene was staged. In February 2021, a driver at Beijing Megvii was sentenced to four years in prison for extortion and extortion for a huge amount of 3 million yuan from CEO Yin Qi under the threat of selling "trade secrets". On March 12 of the same year, Megvii Technology officially submitted an IPO application for the Science and Technology Innovation Board, with a plan to raise 6.018 billion yuan.

In fact, in addition to the sharp adjustment of performance, the relationship between Megvii Technology and Ant Group and the compliance of cooperation methods have attracted multiple rounds of inquiries from the Shanghai Stock Exchange, making the regulatory review particularly cautious. Since the registration was submitted on September 30, 2021, there have been no results. In the latest inquiry by the CSRC on Megvii Technology, it bluntly said that the cooperation agreement between the two involved "specific use of relevant data", requiring item-by-item clarification of the compliance of the use of data. For Megvii Technology, which is already one step behind SenseTime, it may still be difficult to complete the IPO dream in the short term.

It is worth mentioning that when Megvii Technology launched the science and technology innovation board city counseling in September 2020, Yuncong Technology and Yitu Technology also carried out synchronous operations in August and September of the same year. In November 2020, the Shanghai Stock Exchange accepted THE APPLICATION FOR LISTING ON THE SCIENCE AND TECHNOLOGY INNOVATION BOARD of YITU Technology and reviewed it in accordance with the regulations. Yuncong Technology's application for listing on the Science and Technology Innovation Board was also accepted in early December of the same year.

The turning point came in March and June 2021. On March 11, Edu Technology voluntarily requested the suspension of the IPO review, because issuers and sponsors needed to implement the requirements of rules and regulatory verification for a long time. On March 31, due to the expiration of financial information, The listing application of Cloud From Technology was also suspended.

On June 11, 2021, the Shanghai Stock Exchange resumed the review of the issuance and listing of Yitu Technology in accordance with the regulations. However, on the same day, the financial information in the listing application documents of Yitu Technology has expired and needs to be submitted additionally, and the SSE has once again suspended its issuance and listing review on this ground. On June 30, the SSE terminated the review of the issuance and listing of Yitu Technology due to the issuer's withdrawal of the listing application or the sponsor's withdrawal of the sponsorship.

Unlike Yitu Technology, in June 2021, Yuncong Technology completed the financial information update, and the Shanghai Stock Exchange resumed its issuance and listing review. Subsequently, focusing on the equity structure, continuous losses, major products, sales models, core technologies, related party transactions and subsidies, Yun accepted inquiries from technology. Five months have passed since the registration was submitted on August 4.

The blue ocean turns into a red sea

The listing of AI companies needs a "commercial advancement" from technology to industry, and the supervision values not only profitability, but also the ability of enterprises to continue to operate. Looking at the prospectus, the poor financial situation is the main factor that the listing of the "AI Four Tigers" has been blocked and questioned.

In the first half of 2018-2021, SenseTime lost 24.272 billion yuan in three and a half years, with an adjusted loss of 2.862 billion yuan; Megvii Technology lost 14.624 billion yuan in three and a half years, with an adjusted loss of 4.29 billion yuan; and Yuncong Technology lost 2.899 billion yuan in three and a half years. In the first half of 2017-2020, the total revenue of YITU Technology in three and a half years was less than 1.5 billion yuan, but the cumulative loss exceeded 7.2 billion yuan.

Technology application and hardware development are the moats of AI companies, and it is not difficult to see heavy investment in technology and talents behind the losses, but long-term hematopoietic deficiencies inevitably try to reduce expenditures. Wage cuts, layoffs, the sale of "drag bottles" business... In May 2021, the "AI Four Little Dragons" were even on the pulse heat list.

The four unicorns all have a similar state of "high financing, high research and development, and high loss", and also face the common bottleneck of technology and product commercialization that is not as expected.

Since the rise of the third wave of artificial intelligence, computer vision has been the fastest track for commercialization. As early as 2014, when Alipay was looking for a "brush face payment" technology provider, Megvii Technology immediately decided to take the first landing scene. Yitu Technology, Yuncong Technology, SenseTime Technology have also started from "brushing face", Cloud from technology to help Haitong Securities do remote account opening identity authentication system, Yitu Technology with "Dragonfly Eye System" to help public security departments strengthen security, SenseTime uses face recognition to help China Mobile complete the real-name system of 300 million mobile phones.

It is worth noting that the threshold for image recognition algorithms is not high. The recognition rate of the "AI Four Little Dragons" has not yet reached 100%, and the advantages over other companies are not too big, Ali, Baidu, Tencent, etc. have developed their own face recognition technology. After the giants with data and channel advantages came down, the blue ocean gradually disappeared, and the once large orders did not continue. For example, Ant Financial revealed in 2020 that the company's face brushing system has long ceased to cooperate with Megvii Technology and was independently developed by Ant Financial.

In recent years, with the blessing and drive of deep learning algorithms, computer vision technology and software and hardware products have been widely used in pan-security, finance, Internet, medical, industrial, government affairs and other fields. After the track of image recognition was taken away by giants, the "AI Four Little Dragons" began to do software and hardware integration solutions, but they also faced competition from AI hardware companies such as Hikvision and Dahua.

At present, SenseTime has a comprehensive layout in the vertical field, and its business is composed of smart business, smart city, smart life and smart car, and the main growth points are smart business and smart city. Yitu Technology's business is mainly divided into two categories: intelligent public services and intelligent business, providing customers with artificial intelligence hardware, software and software and hardware combinations and SaaS services and other solutions; Cloudcong Technology focuses more on smart governance and smart finance. Megvii's business focuses on three major scenarios: consumption, city and supply chain, radiating C-end, G-end and B-end.

According to industry analysts, AI landing is mainly based on the model of to B/G, more like the role of customized outsourcing, there is also a lack of massive data problems due to the inability to directly contact the user group, and the artificial intelligence image recognition scene is increasingly resisted by policies and public opinion. In terms of operating capabilities and capital turnover, AI startups are also facing serious financial pressure.

SenseTime admitted in its prospectus that future revenue growth will depend on developing new technologies, enhancing customer experience, establishing effective commercialization strategies, competing effectively and successfully, and developing new products and services. In the face of competition, we will continue to attract more AI research talents, expand research fields, continue to increase investment in SenseCore's artificial intelligence infrastructure and models, expand application scenarios, vertical industries, business layouts, and invest in sustainable technologies.

It is worth mentioning that after SenseTime, the U.S. Treasury Department has also included Megvii Technology, Yitu Technology, and Yuncong Technology in the list of non-SDN Chinese military complexes, restricting U.S. investors from investing in the above companies. In order to successfully go public and win the trust of investors, the "AI Tigers" need to find a sustainable profit path that can stand the test.