China’s SenseTime has overcome headwinds to go public. Its next challenge is to find a path to profit.
The Chinese artificial intelligence company said Wednesday that it raised around $700 million from its initial public offering, at the low end of the price range. The company was forced to delay its IPO earlier this month after the U.S. government added SenseTime to an investment blacklist, alleging that the company’s facial-recognition technology was used in the oppression of mainly Muslim ethnic minorities in China’s Xinjiang region. SenseTime said its lawyers advised that the sanctions applied only to an unlisted subsidiary, but it anyway excluded U.S. investors from its IPO after its restart this week. Support from cornerstone investors, including state-backed ones, have helped carry it through the storm.
Before the blacklisting, SenseTime’s IPO had been scaled back from its earlier aim of raising up to $2 billion, with market sentiment weighed down by plunging Chinese technology stocks. Hong Kong’s Hang Seng Tech Index, which counts Alibaba and Tencent among its members, has lost around a third this year. Some of Hong Kong’s recent listings are also underwater. One of the company’s subsidiaries was added to a U.S. export blacklist in 2019, also for its involvement with Xinjiang.
SenseTime is the first of what are known as China’s four AI dragons to go public. Megvii and Cloudwalk, two of the other dragons, have filed to list on Shanghai’s STAR board. Backed by investors like SoftBank, SenseTime says it is the largest AI software company in Asia. It has an 11% market share in computer-vision software in China, according to Frost & Sullivan in its IPO filings.
While AI is certainly a technology that could ride policy tailwinds, Beijing’s increasing scrutiny of data and algorithms could pose uncertainties to its business.
Another problem is that its customer base seems to have become more concentrated this year. Its five biggest customers made up nearly 60% of its revenue in the first six months this year, with the largest customer alone accounting for 23%.
About 48% of its revenue in the first half this year came from providing services like facial recognition or computer vision to municipal governments and their departments. An additional 40% came from serving enterprises. Autonomous driving is a promising segment but accounted for only 4.3% of its revenue.
SenseTime has been losing money, and the question is whether it can demonstrate a path to profitability. The company has to spend more than 100% of its revenue on research and development, and building data centers, which is how most of the IPO proceeds will be spent. With increasing competition in the sector, it may have to keep burning cash to keep up.
SenseTime has developed strong AI technology. Next, it needs to figure out how to make money from it—and find a way to do so in the face of more hostility from the U.S.
Write to Jacky Wong at jacky.wong@wsj.com
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