US blacklist hurt China AI giant's sales ahead of IPO attempt

[HONG KONG]  Megvii Technology's revenue growth dissipated in the second half of 2019 after it joined Huawei Technologies on a US trade blacklist, underscoring the extent to which White House sanctions are hurting China's technology leaders.

The company backed by Alibaba Group Holding grew revenue a mere 2.7 per cent 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 (S$586.7 million) in sales by almost 28 per cent, a person familiar with the matter said, asking not to be identified discussing internal targets.

Megvii and its biggest competitor, SenseTime Group, had been among China's fastest-growing startups but are now under scrutiny after the Trump administration blacklisted them over alleged involvement in human rights violations against Muslim minorities in China. The surprise action in October encompassed several leading players in the field of artificial intelligence, a key area of contention between the world's two largest economies.

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-energise the business, the artificial intelligence (AI) giant is now developing new revenue streams, including temperature detection solutions deployed to help China curb Covid-19 this year.

US sanctions helped tank Megvii's attempt to go public, a US$1 billion deal regarded as the unofficial coming-out party for China's burgeoning AI sector. Megvii, backed also by Alipay-operator Ant Financial, Lenovo Group and China Mobile, this year allowed its application for a Hong Kong IPO (initial public offering) to lapse, throwing its future plans into question. Megvii representatives declined to comment.

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 and Didi Chuxing in a race with the likes of Google and Microsoft to develop systems fundamental to future modern economies.

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The company, last valued at about US$4 billion according to people familiar with the matter, generates most of its revenue from products that combine software and sensors to help government agencies and other clients enhance public safety and optimise traffic management. Megvii disclosed in its August IPO documents that sales from that business, which it labeled "city IoT solutions", jumped 270 per cent to 694.8 million yuan in 2019's first six months. It said in its prospectus that it served 112 cities in China, 38 per cent of the country's total, as at June.

It also sells face-scanning systems to companies from iPhone-maker Foxconn Technology Group to Lenovo and Ant Financial, the payments affiliate that supports Alibaba's e-commerce business. The company generated 207.2 million yuan from the segment it dubs "personal IoT solutions," or 22 per cent of its revenue. Its third major business line, solutions for logistics that deploy AI-empowered robots and sensors, made up some 5 per cent of revenue.

Megvii lost 3.4 billion yuan in 2018, partly due to changes in the value of preferred shares, according to its prospectus. It listed 1.4 billion yuan in cash, equivalents and bank balances at the end of June, while it used nearly half of that for operations in the first six months of the year. Its term deposits, which refers to short-term bank deposits with maturities of three to 12 months, stood at 3.3 billion yuan as at June, according to the IPO document.

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