Can SenseTime, which has lost 24 billion yuan in three years, win by relying on “hard technology”?

Earlier, due to the IPO plans of Yitu, Yuncong, and Megvii, which belong to the “AI Four Little Dragons”, all of them were not going well. Therefore, when SenseTime passed the Hong Kong Stock Exchange listing hearing, some people in the industry chanted “hard technology victory”.

However, SenseTime had an accident at this final critical moment and lost the opportunity to ring the bell in Hong Kong on December 17. Someone can’t help but ridicule, saying that it is only the last step away from the “long march” of becoming the “first stock of AI”.

On December 13, 2021, SenseTime announced on the Hong Kong Stock Exchange that the company will postpone the IPO plan originally scheduled for December 17, and all application funds will be refunded to the applicant without interest.

SenseTime’s IPO was only a short shot, and it was forced to suspend it because it entered the US government’s “non-SDN China economic complex list”, which is commonly known as the “blacklist.” This is already the “second entry” of SenseTime since 2019.

A related person released news that SenseTime was only suspending the current IPO plan this time, rather than stopping, and the company is still committed to completing the listing at the end of the year. The postponement of the IPO means that SenseTime cannot rely on the stock market for financing during this period. This is not good news for a company with high revenue but continuous losses.

In 2018, SenseTime completed a US$400 million investment from Ali, and has since become a veritable “AI unicorn” in the global industry. However, three years later, SenseTime has entered a vicious circle of slow growth in its core business and uncertain prospects for new development businesses.

The outside world’s perception of it has also changed from its “excellent technical background and promising prospects” to its “high revenue and unprofitable”. What is all this?

1. SenseTime Technology Co., Ltd. trapped in the “first share of AI”

In 2018, SenseTime’s CEO Xu Li once said: “SenseTime is the world’s leading artificial intelligence platform company. In the future, it will use technology as its core to empower more industries.”

In recent years, the domestic field of artificial intelligence is as ambitious as Xu Li at the time: in the context of the continuous affirmation and emphasis on AI technology by national policies, industry workers feel proud of the cause they are involved in. Continue to cultivate in the technical field and delve into the application direction of technology in reality.

China’s artificial intelligence development level has quickly reached the forefront of the world, and many artificial intelligence companies have been established. Among these companies, the four “hard technology” companies, namely Shangtang, Yitu, Yuncong, and Megvii, are the most eye-catching, synthesizing the “AI Four Dragons”.

However, this is not the case in the eyes of capital. The A-share market does not seem to recognize the “money-generating ability” of AI companies.

Megvii and Yuncong’s IPO journey was twists and turns, and finally switched to the Sci-tech Innovation Edition. There is no relevant news at present; after Yitu’s IPO was terminated in July this year, there was no other action. Among them, only Shangtang passed the hearing of the Hong Kong Stock Exchange and gained market recognition.

With such achievements, SenseTime naturally has his confidence.

The company was established in 2014, and its valuation reached US$6 billion four years later. The current valuation is US$12 billion. Compared with the other three companies, the most outstanding performance of SenseTime is nothing more than revenue and gross profit margin.

According to the “Shangtang Technology Prospectus” (hereinafter referred to as the “Prospectus”), from 2018 to 2020, the total annual revenue of Sensetime Technology reached 1.853 billion yuan, 3.027 billion yuan and 3.446 billion yuan; in 2021, Shangtang Technology The total revenue of Tang Technology in the first half of the year was 1.652 billion yuan.

According to relevant data, the total revenue of Shangtang Technology in 2019 exceeded the sum of Yuncong, Megvii, and Yitu in the same year. In 2020, the revenue of Megvii Technology, which is also the “AI Four Little Dragons”, is 1.391 billion yuan, and Yuncong Technology is only 755 million yuan. The total revenue of Yitu Technology from 2017 to June 2020 for the three and a half years is only 1.47 billion yuan, which is still not as good as the single-year data of SenseTime in 2018.

Excluding the steadily rising total revenue, SenseTime has also achieved results in terms of gross profit margin.

According to the “Prospectus”, SenseTime’s gross profit margins in 2018 and 2019 were 56.5% and 56, 8% respectively. In 2020, it increased to 70.6%, and in the same year, Yuncong Technology’s gross profit margin was only 43.2%. In the first half of this year, SenseTime’s gross profit margin achieved another increase, reaching 73.0%.

Regardless of total revenue or gross profit margin, SenseTime has achieved a trend of rising year by year on the basis of disdaining the group. It is indeed the veritable “pillar” of the “AI Four Little Dragons”.

Only from the perspective of “Internet things”, SenseTime can be called the “first AI stock”. Except for the excellent performance of the annual revenue data, it may not be without the results of the other three companies.

Comparing SenseTime’s revenue data from 2018 to 2020, it can be found that although the company’s revenue has been increasing year by year, its revenue growth has slowed down from 63.4% to 13.8%.

Therefore, although the data is true, it is not objective enough.

As for why SenseTime has a slowdown in revenue growth? The 2020 epidemic is bound to be an important reason. In addition, considering the company’s current “huge loss” and “difficult profitability”, “Internet things” believe that there should be certain problems with SenseTime’s business.

2. There is a business structure but no business layout

SenseTime’s business mainly focuses on four aspects: intelligent enterprise services, intelligent city management, intelligent personal life, and intelligent automobile travel.

Among them, smart enterprises and smart cities are its core business, and smart cars are the company’s new online business.

From the perspective of “Internet things”, the slowdown in SenseTime’s revenue growth is related to the performance of the above three businesses:

In the past period of time, the revenue growth of the two core businesses of smart enterprises and smart cities has slowed down, and the poor performance of the newly launched smart car business has jointly contributed to the final result.

Intelligent enterprise management and smart city construction have been the outlets of the past few years, bringing high revenue to SenseTime. However, with the passage of time, the continuous development of the industry, the revenue that can be brought will inevitably tend to flatten out.

Taking smart companies as an example, SenseTime’s customers are mainly companies that are undergoing digital transformation, and their income mainly comes from the access fees of the enterprise’s Ark open platform and the subscription fees for the Ark series of software and hardware.

However, digital transformation is a brand-new field for enterprises. It requires business management to reach a certain stage. Enterprises with transformation conditions will wait and see the results of transformation in the process of transformation, so as to determine the next direction.

However, other companies still have certain problems themselves (for example, some manufacturing companies need to achieve “carbon reduction goals”), and they have no time to consider the issue of transformation. Under such circumstances, SenseTime naturally fell into infinite waiting.

The field of smart cars is still under development, and the entire industry is still undergoing technological innovation. The development of this business means long-term R&D investment. Coupled with the large number of industry participants and high competitive pressure, it is not cost-effective in comparison.

From the perspective of “Internet things”, what is behind the pain of revenue generated by the alternation of new and old businesses is the structural problem on the business side of the enterprise.

For a long time, SenseTime has been committed to operating the B-side business: smart companies and smart cities are deployed around other companies and governments at all levels. Smart cars are also connected to car manufacturers; its performance in the C-side market is lackluster and can be used. Only the AR scenes of Meitu Xiuxiu and the filters of Xiaohongshu are the only cases presented.

And already listed on the A-share market, iFLYTEK, one of the “AI Big Three”, was able to achieve 13 billion yuan in revenue during the epidemic, and the key to its parent’s net profit of 1.364 billion yuan is its smart education business for public life.

According to Frost & Sullivan’s report, computer vision software is the largest segment of China’s artificial intelligence software market, with a compound annual growth rate of over 40% in the next four years. For the C-end market with substantial growth and huge demand, SenseTime Technology does not seem to show enough interest, but this is very likely to become a key help for its turnaround.

3. Does high R&D investment have to carry long-term losses?

According to the “Prospectus”, SenseTime’s reserves of 19.5 billion yuan in cash and cash equivalents, coupled with such a high revenue, do not seem to be short of money. Is this really the case?

Let’s take a look at SenseTime’s R&D investment.

Beginning in 2018, SenseTime has continued to make efforts in the fields of R&D and innovation, and the amount of investment has increased year by year.

According to the “Prospectus”, from 2018 to 2020, SenseTime’s R&D expenditures were 849 million yuan, 1.916 billion yuan, and 2.454 billion yuan, respectively, and the corresponding R&D expense ratios (that is, the ratio of R&D expenditure to total revenue in the same period) were respectively They are 45.8%, 63.3% and 71.1%.

In the first half of 2021, SenseTime’s R&D investment reached a higher level, reaching 1.772 billion yuan. At this time, SenseTime’s total revenue was only 1.652 billion yuan. It can be seen that the company’s R&D expense rate has risen rapidly year by year, and it has reached a critical moment.

SenseTime also stated in the “Prospectus” that 60% of the maximum 6 billion funds raised in the IPO will be used for research and development, and 25% for the development of new businesses. This is enough to show that SenseTime’s high investment in research and development will continue for a long period of time.

As the leading domestic “hard technology”, SenseTime has a net loss of more than 24 billion yuan in three and a half years.

Although there is a situation of depreciation of preferred stocks caused by the excessive valuation of the company before listing, the continued high investment in research and development is also a reason that deserves attention. Whether SenseTime’s continued high investment in R&D is worthwhile has been a matter of constant debate in the industry.

Some people may think that, for companies like SenseTime at the technical level, technological leadership is conducive to cultivating the company’s core competitiveness. Therefore, the high investment in R&D means that the company pays more attention to sustainable development.

But we must also look at the technical characteristics of the AI ​​industry. For an AI technology, it needs to go through many stages from initial research and development to final commercialization, and the research funding for each stage is very considerable. Therefore, the capital demand brought by the deep cultivation of technology is long-term, and the return is slow.

From the perspective of “Internet things”, the sustainable development of enterprises is understandable, but such a high capital investment will inevitably have a certain impact on profitability. This is also the need for AI companies that want to go public, including SenseTime. The problem.

The artificial intelligence industry is still the most watched industry in the next decade, and companies like SenseTime who are willing to continue to cultivate in the technical field represent the hope and value of this industry.

Although the status quo of high revenue and high valuation but difficult to make profit has cast a shadow on Shangtang Technology’s battle in the stock market, the career he has cultivated is still worthy of encouragement and expectation.

Reference materials:

1 “China Business News”: SenseTime’s delayed IPO: a loss of more than 24 billion in three and a half years, the prospectus mentions “Meta Universe” 47 times

2 “BT Finance”: SenseTime’s crisis of trust

The Links:   LTM190M2-L31 G070VTN010

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