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China’s Megvii Considers Delaying IPO on Blacklist Concerns

Manuel Baigorri, Carol Zhong and Lulu Yilun Chen
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China’s Megvii Considers Delaying IPO on Blacklist Concerns

(Bloomberg) -- China’s Megvii Technology Ltd. is considering whether to delay its initial public offering given uncertainty over whether it can secure its existing $4 billion valuation while on an American blacklist, according to people familiar with the matter.

The artificial intelligence startup is discussing with advisors whether to proceed with the planned Hong Kong share sale this month or hold off as they try to get off the U.S. “Entity List,” which cuts off access to key American technology, the people said, requesting not to be named because the matter is private. Investors are hesitant to buy shares and Megvii may have trouble securing even a $3.5 billion valuation, one of the people said.

Megvii and its biggest competitor, SenseTime Group Ltd., are among China’s fastest-growing technology startups, but their futures have been thrown into jeopardy after the Trump administration blacklisted them over alleged involvement in human rights violations against Muslim minorities in China. Both are trying to get off the blacklist and say they have done nothing wrong. Megvii, backed by Alibaba Group Holding Ltd. and Sinovation Ventures, was valued at about $4 billion in its last fundraising round, people familiar with the matter have said.

“The U.S. is feeling increasingly threatened by the rise of Chinese AI as this is the next frontier in tech leadership, and also has widespread military, security and political implications,” said Mark Tanner, founder and managing director of Shanghai-based consultancy China Skinny. “The disparities in ideologies between the U.S. and China is also going to play out in AI algorithms, so it is unlikely that Washington will be delivering policies that support, fund and purchase Chinese AI services.”

No final decision has been made and Megvii is still planning to hold a listing hearing this month in Hong Kong, the people said. It’s still early in the process and discussions around valuations remain fluid. A representative for Megvii declined to comment.

Read more: U.S. Blacklisting Undermines Megvii IPO, China’s AI Ambition (1)

Megvii filed its IPO documents in August and may need the cash. It lost 3.4 billion yuan ($480 million) in 2018, partly due to changes in the value of preferred shares. 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 twelve months, stood at 3.3 billion yuan as of June.

Both companies have been trying to reduce their reliance on American software and circuitry by developing their own chips. The blacklisting could further decouple the two Chinese companies from the U.S. in terms of tech and funding. Megvii has said it “strongly objects” to the U.S. blacklisting and that the company complies with all regulations in the markets in which it operates.

“We believe our inclusion on the list reflects a misunderstanding of our company and our technology, and we will be engaging with the U.S. government on this basis,” the company said when the blacklist was announced. Goldman Sachs Group Inc., JPMorgan Chase & Co. and Citigroup Inc. are the underwriters for Megvii’s IPO.

Read more: World’s Most Valuable AI Startup Scrambles to Survive Trump Ban

Megvii’s IPO was supposed to have been China’s artificial intelligence industry’s unofficial debut on the global stage. Uncertainty is mounting amid months-long anti-government protests in Hong Kong and increasing scrutiny from the U.S. government.

Chinese AI has raised hackles in Washington like no other segment of the country’s vast corporate machine, in part because of the welter of headlines daily proclaiming how it may surpass the U.S. Broadly defined as anything from autonomous driving and robot waiters to facial recognition systems, names like Megvii and SenseTime are joined by established players including Huawei, Tencent Holdings Ltd. and Didi Chuxing in an effort that’s intended to seal China’s place at the nexus of the modern global economy.

SenseTime said at the time of its blacklisting that “the decision by the U.S. government is unwarranted,” and it’s working to address any questions or concerns the U.S. might have regarding its technology or products.

(Updates with analyst’s comment from the fourth paragraph)

To contact the reporters on this story: Manuel Baigorri in Hong Kong at mbaigorri@bloomberg.net;Carol Zhong in Hong Kong at yzhong71@bloomberg.net;Lulu Yilun Chen in Hong Kong at ychen447@bloomberg.net

To contact the editors responsible for this story: Peter Elstrom at pelstrom@bloomberg.net, ;Fion Li at fli59@bloomberg.net, Edwin Chan

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