Photo/Shetuwang

Aug. 26 (NBD) -- China's artificial intelligence company Megvii Technology Limited (Megvii) has filed for a Hong Kong listing, with its prospectus released on HKEx's official disclosure platform HKExnews on Sunday (August 25), a move heralding that the first Chinese AI company will go public.

Despite its satisfying revenue in recent three years, sizeable investment in R&D and reliance on government spending bring uncertainties to the company's future financial results. 

Alibaba-backed Chinese AI company to go public 

Though the specific timeline for the initial public offering (IPO) and the pricing of Megvii's shares weren't articulated in the prospectus, reports emerged saying that the Chinese AI start-up aims to raise up to 1 billion U.S. dollars through the float.

In 2011, with the mission to "power humanity with AI", Megvii was initiated by three Tsinghua University graduates Yin Qui, Yang Mu, and Tang Wenbin and now has grown into an AI company receiving global attention. 

In May this year, the company raised 750 million U.S. dollars in a Series D funding round led by Bank of China Group Investment Ltd, and other investors include Macquarie Group, ICBC Asset Management (Global) Co and a wholly-owned subsidiary of the Abu Dhabi Investment Authority. From 2015 to 2017, the company finished three financing rounds and raised an aggregate of more than 500 million U.S. dollars, according to data service platform Tianyancha. 

Megvii is also backed by Alibaba and its affiliate Ant Financial which trialed its "smile to pay" service in a KFC in Hangzhou two years ago employing the facial recognition technology from Megvii. According to the prospectus, National Business Daily (NBD) noticed that Alibaba indirectly holds 14.33 percent of Megvii shares through Taobao China while Ant Financial indirectly has 15.1 percent of Megvii shares via its wholly-owned subsidiary. 

Besides these two companies, AI Mind and Machine Intelligence are major shareholders of the company, with their stakes  standing at 5.57 percent and 6.19 percent, respectively.

Gain momentum from IoT but risks lies ahead

NBD noticed that Megvii delivered strong financial performance in the past few years, reporting a 358.8 percent compound annual growth rate (CAGR) for its revenues from 2016 to 2018. 

Its revenues increased from 67.8 million yuan (9.6 million U.S. dollars) in 2016 to 313.2 million yuan in 2017 and further ballooned to 1.4 billion yuan in 2018. In the first six months for 2019, its revenues rocketed to 949 million yuan, representing a rise of 210.3 percent from the year-ago period.

"Over the past eight years, we studied and rolled out numerous practical AI applications, including but not limited to facial recognition. We grew certain that the primary opportunity to apply AI technology is in IoT (Internet of Things)," said co-founder and CEO Yinqi in the letter to investors. 

However, the company witnessed an escalating loss in the same track period, with the loss amounting to 342.8 million yuan, 758.8 million yuan and 3.4 billion yuan in 2016, 2017 and 2018 respectively and further hiking to 5.2 billion yuan for the first half year of 2019. Megvii attributed the loss to changes in fair value of its Preferred Shares and the continuous investment in research and development.

NBD noticed that there saw a surge in the company's research and development expenses, and about 43 percent of its total revenue was invested in the R&D sector in the previous year, thus negatively impacting its profitability and operating cash flow in the short-term.

In addition to uncertainties associated with considerable R&D investment, Megvii's dependance on government spending on smart city projects could cast clouds over the company's future financial conditions. 

"Our growth, especially with respect to our City IoT solutions, depends in part on government spending and favorable government policies. However, government spending on smart city projects are subject to changes that are beyond our control, such as the future growth of urban population or changes in government’s fiscal policy," said the company in its prospectus. "There can be no assurance that the government spending on City IoT solutions will continue to grow or remain at the current level."

Email: lansuying@nbd.com.cn