SenseTime IPO: Testing Market Demand in Hong Kong

SenseTime IPO and the Shifting Landscape of Chinese Tech Listings

In the United States, anticipation is building for the initial public offerings (IPOs) of both Nubank and HashiCorp, expected to occur very soon. However, these are not the only technology companies attracting attention currently.

SenseTime, a prominent artificial intelligence firm based in China, is also preparing for its IPO this week. This listing offers a fresh perspective on the valuation of emerging Chinese technology businesses, particularly given recent changes in the country’s regulatory environment.

Navigating Regulatory Changes and Listing Choices

Considering the circumstances surrounding Didi’s planned delisting from U.S. stock exchanges, and the potential for Alibaba to follow suit, it’s understandable that SenseTime has chosen to list in Hong Kong rather than on the Nasdaq or NYSE.

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IPO Details and Valuation

Despite listing closer to its home market, SenseTime’s initial public offering isn’t experiencing optimal conditions. Reports from the South China Morning Post indicate that the company intends to secure up to HK$5.99 billion (approximately US$768 million) through the sale of 1.5 billion shares, priced between HK$3.85 and HK$3.99 each.

While raising $768 million is a significant achievement, it falls considerably short of the $2 billion that SenseTime had initially hoped to raise.

The offering is scheduled to commence tomorrow, and further details regarding the listing are anticipated in the coming days.

Analyzing SenseTime’s Potential and Financial Performance

SenseTime’s IPO could result in a valuation of up to $17 billion, contingent upon the final share price. Is this valuation justifiable?

What insights can be gained by comparing the company’s comparatively modest IPO to its actual operating performance? A closer examination of the financial data is necessary to determine the company’s true worth.

Let’s delve into the numbers to uncover a more comprehensive understanding of SenseTime’s prospects.

Rapid Expansion Coupled with Significant Costs

SenseTime develops artificial intelligence (AI) solutions. As detailed in their IPO prospectus, the company has established a “unique, comprehensive AI infrastructure” designed for the large-scale production of a diverse range of AI models, characterized by both advanced functionality and high precision. While such statements can often be viewed as promotional, the breadth of capabilities suggested is particularly noteworthy.

This extensive infrastructure allows SenseTime to assert “leading market positions” across various AI applications, including “smart” city initiatives, advanced manufacturing processes, mobile applications, and healthcare solutions. Consequently, the company adopts a broad perspective when targeting markets for its software offerings.

SenseTime’s revenue generation strategy is straightforward. The company primarily earns income through the sale of software licenses, alongside “AI software-integrated hardware and associated services.” This includes licensing software for installation on customer devices or servers, as well as offering combined hardware-software solutions—both those produced by SenseTime and by third parties. Additionally, SenseTime provides an “AI-as-a-Service” option, delivering customized model development to clients.

These revenue streams are consolidated into a single line item on the company’s income statement, which is presented below:

The timeline in the image progresses from left to right, with the most recent data appearing in the final two columns. All figures are expressed in millions of yuan, also known as renminbi (RMB). As a reference point, 1 million RMB equates to approximately $156,819 based on current Google currency conversion rates. Therefore, dividing the reported numbers by roughly six will yield their U.S. dollar equivalents.

To simplify the analysis, we have converted SenseTime’s H1 2021 results, compared to H1 2020:

• SenseTime H1 2021 revenue: $259,011,907.35
• SenseTime H1 2021 revenue growth: 92%
• SenseTime H1 2021 gross margin: 73.0%, an increase from 72.1% in H1 2020
• SenseTime H1 2021 operating loss: $337,195,501.81, remaining largely unchanged year over year
• SenseTime H1 2021 net loss: $582,190,028.98, representing a 30% improvement.

The financial data presents both positive and negative aspects. Achieving over 90% growth with revenue exceeding nine figures is highly commendable. Furthermore, a slight increase in gross margin is a favorable sign.

However, it’s evident that SenseTime’s expenditures significantly outpace its growing gross profits, resulting in substantial operating losses—exceeding 100% of its revenues. The company’s net losses include “fair value losses of preferred shares,” which are complex and require deeper analysis. Focusing on the core operating results provides a clearer picture.

These operating results are notably negative. This situation will make the SenseTime IPO a significant test case. A successful trading debut could pave the way for other high-loss technology companies seeking listings in Hong Kong. Conversely, the company’s need to reduce its initial IPO fundraising target suggests that demand for SenseTime equity may not be exceptionally strong.

The context surrounding SenseTime’s IPO is crucial. The Chinese government has recently implemented stricter regulations on several major technology companies and sectors. Consequently, the extent to which technology firms can accumulate substantial profits remains uncertain, particularly in sensitive areas like AI, where additional complexities exist.

Therefore, observing the company’s trading performance will be essential. While the Nubank and Hashicorp IPOs will garner more attention in the U.S., the SenseTime debut will be equally insightful and revealing.