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December 6, 2021updated 13 Dec 2021 9:44am

SenseTime becomes latest victim of China tech crackdown with 62% IPO writedown

By Elles Houweling

SenseTime, China’s most valuable artificial intelligence (AI) company, has slashed its initial public offering (IPO) by 62% to US$768m a day before its planned debut on the Hong Kong Stock Exchange (HKEX). The revaluation comes amid ever-tightening regulations on Chinese tech companies, which have triggered a sell-off across mainland and Hong Kong stock exchanges.

The Hong Kong-based unicorn said it hoped to raise 5.99bn Hong Kong dollars (US$786m) by selling 1.5 billion shares ranging between 3.85 Hong Kong dollars and 3.99 Hong Kong dollars, Reuters reported, citing a term sheet seen by the publication.

Previously, SenseTime was aiming to raise up to US$2bn. However, following Beijing’s ongoing crackdown on the tech industry with a slew of new cybersecurity regulations introduced recently, many Chinese tech companies have halted their IPO plans or decided to slash their valuation.

Ride-hailing giant Didi Chuxing’s recent decision to delist from the New York Stock Exchange (NYSE) and pursue a Hong Kong float further knocked investors’ confidence. The move even prompted Chinese regulators to issue a statement in an attempt to calm the markets, saying that Chinese firms feeling compelled to cancel plans to go public resulted from a “complete misreading and misinterpretation” of the regulations’ aim.

Hong Kong’s Hang Seng index dropped nearly 2% over the past five days. The Hang Seng tech index – which contains China’s largest tech giants, including Alibaba and Tencent – fell by 4.4% last week. Shanghai’s STAR market – China’s equivalent to the Nasdaq – also dropped by 4.8%. Equally, the Shenzhen Component Index slumped 0.68%.

Eight cornerstone investors have signed up for the SenseTime IPO and subscribed US$45m, amounting to 58.6% of the deal, according to the term sheet. These include mixed-ownership reform fund Guosheng Overseas Hong Kong and Shanghai and SAIC Hong Kong. CICC, Haitong International and HSBC are the joint sponsors of the offering.

Aside from SenseTime, the music streaming unit of Chinese gaming powerhouse NetEase, Cloud Village, was also forced to trim its IPO price by 50% last week. Even so, shares fell 1% on the first day of trade. The company ended up raising US$421m in the end, a significant drop from its initial plan to raise US$1bn.

Listing plans by Chinese companies have been significantly affected by Beijing’s intensified scrutiny of the technology industry and data security practices, especially the transfer of data across borders, which has been deemed a matter of national security by the government.

Last month, the Cyberspace Administration of China (CAC) – the country’s main internet watchdog – proposed in its consultation of “Network Data Security Management Regulations” that internet companies that may influence national security must clear additional cybersecurity checks before seeking a listing in Hong Kong.

These new data regulations have been flagged by SenseTime as a “risk factor” in its draft prospectus.

“Failure to comply with the cybersecurity and data privacy requirements in a timely manner, or at all, may subject us to government enforcement actions and investigations, fines, penalties, suspension of our non-compliant operations, and revoking relevant business permits or business licenses,” it said.

“The place to be in tech for both Beijing and global asset manager support is upstream hardcore green tech,” GlobalData analyst and China specialist Michael Orme tells Verdict.

Despite the crackdown, companies focussing on sustainable technology, such as battery manufacturers BYD, CATL and Ganfeng Lithium, saw their share prices rise. For tech giants like Alibaba and Tencent, the future is less clear. “It’s a bloodbath,” Orme adds.

SenseTime was identified as the world’s most valuable AI unicorn by GlobalData’s analysis. The upcoming float values the AI startup at as much as $133bn Hong Kong dollars (US$17bn), based on the upper end of its IPO price range. Its biggest shareholders include SoftBank and Alibaba.

Founded by a group of professors at the Chinese University of Hong Kong in 2014, SenseTime’s capabilities range from facial recognition, image recognition and object recognition to text scenario recognition, medical image analysis, video analysis, autonomous driving and remote sensing.

In 2019, SenseTime became one of the first Chinese companies to be placed on the US Entity List, a trade blacklist that restricts it from gaining access to certain technologies originating from the US.

The White House under Donald Trump claimed that the company was “implicated in human rights violations and abuses in the implementation of China’s campaign of repression, mass arbitrary detention, and high-technology surveillance” against the Uyghur population, a mostly Muslim ethnic group in the Xinjiang region.

Soon after, the company released a statement, saying,” we are deeply disappointed with this decision by the US Department of Commerce. We will work closely with all relevant authorities to fully understand and resolve the situation.”

“We abide by all relevant laws and regulations of the jurisdictions in which we operate. We have been actively developing our AI code of ethics to ensure our technologies are used in a responsible way. In the meantime, we remain focused on protecting the interests of our customers, partners, investors and employees,” the statement added.

Yet another blacklist

The US government will place SenseTime on an investment blacklist, effective Friday, the same day the company aims to make its IPO on the Hong Kong Stock Exchange, the Financial Times has reported, citing people familiar with the matter.

Washington alleges that SenseTime uses its facial recognition technology to aid the Chinese government in human rights abuses against Uyghur Muslims in the Xinjiang region. The further US blacklisting of SenseTime will be part of a package of sanctions against various countries to mark Human Rights Day.

The decision by the US Treasury coincides with President Joe Biden’s recent Democracy Summit in which he addressed global human rights issues with over 100 nations.

SenseTime will be placed on a list of “Chinese military-industrial complex companies”, which bans Americans from investing in the business. This comes in addition to SenseTime’s previous entry on the so-called Entity List, which restricts it from gaining access to key American technology.

Its addition to the investment blacklist could prove problematic for US shareholders in the company. US private equity firm Silver Lake, which has a 3% stake in the company, said it would lock up some of the shares for six months after SenseTime’s IPO. Fidelity and Qualcomm own smaller stakes in the company.

HSBC is the only western investment bank involved in the IPO, the Financial Times reported, citing US banking executives.

Following the news that it might be added to the investment blacklist, SenseTime decided to postpone its IPO. The company added that it remained committed to completing the float and would submit a supplemental prospectus and updated listing timetable as soon as possible.

The company is reportedly also determined to move quickly to avoid the regulatory requirement to completely refile its IPO after January 1, one source told Reuters.

SenseTime also said it would refund all application fees in full, without interest, to all applicants who had subscribed to shares in the listing process.