Blacklisted by US, when will Megvii get its IPO in Hong Kong?

18 Apr, 2020 02:53
source: Singularity Financial

Singularity Financial Hong Kong April 17, 2020 – by David Lee

Megvii Technology Ltd – which was blacklisted by the U.S. administration in last October – was asked to provide more information in November when the company faced the Hong Kong Stock Exchange listing committee to seek the go-ahead for the transaction.

The company grew revenue a mere 2.7% in 2019’s second half after more than tripling sales in the first six months of the year, according to unaudited numbers for investors seen by Bloomberg.

(IN MILLIONS OF YUAN) 1H 2019 2H 2019 FULL-YEAR 2019
Revenue 949 1,151 2,100
YoY growth (%) 210.3% 2.7% 47.2%

 

Can U.S. sanctions tank Megvii’s attempt to go public?

Megvii received approval from the Hong Kong exchange. That was to move forward with the IPO in January. Megvii planned to give an updated prospectus after the Chinese Lunar New Year. By then, the company would have its financial data for the year ended December 31, 2019. However, the coronavirus was still affecting the Chinese economy. Many businesses were closed for the pandemic.

As a result, Megvii’s IPO application expired in February. That’s six months after filing the listing application. Although, Megvii can apply for a three-month extension. But if that deadline passes or Megvii doesn’t apply for extension, it must start the IPO process over again.

There is no confirmed timetable for the Megvii IPO. But if the company plans to complete the IPO process before the extended three months, investors should look for Megvii stock around the end of May, according to Amber Deter from InvestmentU.

“The committee has to approve the company again after an updated prospectus is filed. But it looks like it will be a smooth process for the Megvii IPO.” Amber stated.

Seven-year-old Megvii is said to be angling to raise as much as $1 billion in its initial public offering, becoming the first of China’s fast-rising AI stars to debut and beating Sensetime Group Ltd. to the punch.

Citigroup , Goldman Sachs and JPMorgan are working on the updated listing.

Megvii hasn’t made a profit

The company grew revenue a mere 2.7% in 2019’s second half after more than tripling sales in the first six months of the year, according to unaudited numbers for investors seen by Bloomberg. On a full-year basis, Megvii fell short of its target for 2.9 billion yuan ($409 million) in sales by almost 28%, a person familiar with the matter said, asking not to be identified discussing internal targets.

Megvii tripled revenue to 949 million yuan ($133 million) in the first half of 2019. It generated more than 73% of those sales from AI services for major clients like government agencies, hospitals and real estate developers, the company said in a filing to the Hong Kong Stock Exchange.

Megvii generates the bulk of its revenue from products that combine software and sensors to help government agencies and other clients enhance public safety and optimize traffic management. Sales from that business, which it labeled “city IoT solutions,” jumped 270% to 694.8 million yuan in 2019’s first six months.

Megvii said it served 112 cities in China, 38% of the country’s total, as of June. It posted 5.2 billion yuan in losses for the first half, while adjusted profit reached 32.7 million yuan.

A big factor that could affect Megvii’s future and IPO

China’s advances in AI have unnerved Washington because both countries are vying for leadership in a technology at the heart of everything from autonomous driving and robot waiters to facial recognition. Chinese names like Megvii and SenseTime are joined by established players including Huawei, Tencent Holdings Ltd. and Didi Chuxing in a race with the likes of Google and Microsoft Corp. to develop systems fundamental to future modern economies.

In October 2019, Trump’s team placed Megvii on the blacklist. A total of eight Chinese companies were blacklisted. It’s believed Megvii was involved in human rights violations. The company might have helped repress Muslim minorities.

Megvii objected to being blacklisted. It means the company isn’t allowed to do business with American companies without permission. This brings a few issues for the Megvii IPO.

Megvii suspended certain operations while it determined which parts of the business may violate the blacklist, which prohibited the export of American technology, and that delayed some orders or shipments in the second half, another person said. To re-energize the business, the AI giant is now developing new revenue streams, including temperature detection solutions deployed to help China curb Covid-19 this year.

Also Megvii’s suppliers import items from the U.S. There is uncertainty whether the company can replace those items with ones of the same quality and price.

Megvii warned of possible economic and trade restrictions similar to curbs imposed on Huawei Technologies Co. Should that happen, it would prevent the company from procuring technology, and impair its ability to develop solutions. The company stressed that it’s made sure it’s compliant with relevant restrictions, while making contingency plans to minimize the negative impact of potential curbs.

Zhen Zhou Toh, an analyst specializing in Asia-Pacific IPOs, said:

“Even if it [the U.S. blacklisting] does not slow down Megvii’s growth fundamentally, it will have put doubt in investors’ minds as to how easily Megvii can be impacted by macro regulatory factors.”

And Arun George, an IPO analyst at Global Equity Research, believes this will negatively impact the company’s valuation “due to higher uncertainty around the future revenue and profits,” quoting SmartKarma research. He added:

“While Megvii has little exposure to the U.S. in terms of revenue, it relies on U.S. companies for some components and technology.”

Strategic investors include Ant Financial, Lenovo and many more

The company, last valued at about $4 billion according to people familiar with the matter, Megvii raised $750 million in private funding that took place in May 2019, making Megvii a technology unicorn. Megvii’s investors include by Alipay-operator Ant Financial, ICBC Asset Management, Lenovo Group Ltd., Macquarie Group and Alibaba Group Holdings.

Megvii counts Alibaba and its financial affiliate Ant Financial and Lenovo Group Ltd. as strategic investors. Alibaba indirectly held 14.3% of its shares, while Ant Financial indirectly held 15.1%.

Megvii also sells face-scanning systems to companies from iPhone-maker Foxconn Technology Group to Lenovo Group Ltd. and Ant Financial. The company generated 207.2 million yuan from the segment it dubs “personal IoT solutions,” or 21.8% of its revenue. Its third major business line, solutions for logistics that deploy AI-empowered robots and sensors, made up some 5% of revenue.