0020.HK
Investors have been cashing out of SenseTime while other AI stocks around the world are surging.

Investors have been cashing out of the Chinese AI specialist while other AI stocks around the world are surging

Key Takeaways:

  • SenseTime’s battered share price enjoyed a brief bounce after Alibaba completed a stake selloff, removing some of the uncertainty surrounding the stock
  • Investors will pay close attention to SenseTime’s performance in the first half of the year, looking for any progress in tackling the problems of rising trade receivables, falling revenue and surging costs

 

By Fai Pui

Chinese tech company SenseTime Group Inc. (0020.HK) was quick to join the chatbot frenzy with a suite of AI tools, but its share price has been rapidly going in the opposite direction to other big names in artificial intelligence.

AI has been an investment magnet since OpenAI, backed by Microsoft (MSFT.US), launched its ChatGPT last year, heralding a new age of transformative technology. The enthusiasm has since lifted AI-related stocks in major markets around the world, with Microsoft, Nvidia (NVDA.US) and Apple Inc. (AAPL.US) scaling fresh heights.

But it is a different story in Hong Kong, where some investors are cashing out of AI. Primary investors in China’s SenseTime, which brands itself as a pure AI company, have sold down their stakes over several months, slashing 20% off the stock value since the start of the year, to the dismay of other investors.

On July 20, the share dived 5.6% in a single day. It dropped another 3% the next day, when a mass of sell orders in the first five minutes of trade sent the price to a new low for the year of HK$1.61. But the share suddenly and unexpectedly rebounded that morning, surging 14.2% in half an hour from HK$1.61 to HK$1.84.

Just as investors were puzzling over the price moves, the company made an after-hours announcement. The market learned that Taobao Holding Ltd., a wholly owned subsidiary of Alibaba Group (BABA.US; 9988.HK), had sold all its remaining class B shares in SenseTime, bringing the tech giant’s five-year investment in the AI company to a close.

News that Alibaba had definitively completed its SenseTime retreat triggered a relief rally, easing some of the uncertainty that had been weighing on the AI firm’s stock, according to Kenny Wen, KGI Asia’s head of investment strategy.

“SenseTime was under pressure due to Alibaba’s continual selloff. With the full exit, one source of strain was lifted, and this helped explain why the stock reversed its decline last Friday,” he said.

Alibaba was one of the core investors in SenseTime when the firm launched a Series C financing round in 2018, raising $600 million. The investors, which included Singapore’s Temasek sovereign wealth fund, piled in at $0.153 (HK$1.19) per share. In April this year, the AI excitement from ChatGPT boosted the SenseTime price from HK$2.4 to HK$3.7.

Alibaba has made handsome profits by cashing out from the peak. On April 11, it announced a sale of 40 million shares at HK$3.452, pocketing HK$138 million ($17.7 million) in proceeds. The SenseTime share price began to wilt under the pressure. Alibaba sold another 70 million shares on June 5 for HK$154 million, and 10 days later it offloaded another 50 million at HK$2.267 to net HK$113 million.

By July 6, Alibaba had sold 557 million shares at an average price of HK$1.82, thereby coming away with HK$1.014 billion. Factoring in the remaining holdings sold last week, it has extracted more than HK$1.9 billion from its investment.

Independent analyst Ivan Chow linked the decision to pull out of SenseTime with Alibaba’s plans to split into multiple units and its eagerness to avoid any suggestion of monopolistic practices that could threaten its future prospects.

As China’s biggest provider of visual software, SenseTime has rolled out a host of AI products including mobile AI services, autonomous driving solutions, and platforms for cities and enterprises. Its business is built around four pillars: smart city, smart life, smart vehicles and smart business. In April, the company debuted its proprietary AI architecture “SenseNova” together with a ChatGPT-like product called “SenseChat”, which can write text and computer code and is even able to provide medical consultations. Keen to capitalize on the AI frenzy, it also introduced “SenseMirage”, which generates images from words, and “SenseAvatar”, an AI-based film platform.

Still bleeding

But the broad suite of AI products has not bolstered the share price, as investors fret about SenseTime’s declining revenue, rising trade receivables and sustained losses, according to KGI Asia’s Wen.

“Despite their bullish sentiment about tech stocks, they would rather choose the big names such as Alibaba and Tencent (0700.HK) instead,” he said.

SenseTime was still stuck in the red last year with a net loss of 6.09 billion yuan ($850 million). The net loss was nearly 65% smaller than in 2021, but the company’s non-IFRS adjusted loss surged by a whopping 234% to 4.74 billion yuan. Even more concerning was a 19% drop in revenue, driven by steep falls in income from two of its key businesses. Revenue in the smart business category fell by a quarter and the smart city income stream logged a nearly 49% drop, offsetting rising revenue in the other two segments, smart life and smart vehicles.

SenseTime blamed the effects of the pandemic, which had increased its trade receivables, or outstanding payments by customers. Receivables with a timeframe of one to two years jumped 1.3 times to 3.245 billion yuan and three-year receivables ballooned by 524% from 101 million yuan in 2021 to 630 million yuan.

Wen believes it will be crucial for the company to post an upbeat performance for the first half of the year, after pandemic controls were lifted. Investors will be on the lookout for any improvement in the figures for trade receivables, as well as any management progress in cutting costs to staunch the flow of red ink, he said.

On July 13, China issued interim policies on the generative AI industry that will go into effect on August 15. The text struck a more positive note than an earlier outline, with the stated aim of promoting healthy and effective growth in the sector. Without any hint of the harsh tech regulation of recent years, the blueprint offers clues to the direction of travel for China’s AI industry.

But analyst Chow thinks international investors will still be cautious about SenseTime, amid tensions between China and the U.S. over potentially sensitive technology.

“Despite attractive valuations, foreign funds or investors might steer clear of the stock due to the company being sanctioned by the U.S. and not being included in the MSCI index,” he said, adding that appetite for the stock would be further dampened by a U.S. Treasury requirement for U.S. investment funds to provide information about their Chinese holdings. Unless the relationship between the two countries improves, SenseTime stock would continue to struggle, he said.

Another company, Cloudwalk Technology (688327.SH), also ranks among China’s big four AI stocks, and is more highly valued by investors than SenseTime, judging from comparative price-to-sales (P/S) ratios. Cloudwalk is listed on the Shanghai Stock Exchange with a P/S ratio of 47.51 times, way more than SenseTime’s multiple of 13.4.

Moreover, SenseTime has been facing selling pressure from other big-name investors aside from Alibaba. Japan’s Softbank (9984.T), which has been reporting losses for five straight quarters, also sold 50 million SenseTime shares in April.

Now that Alibaba’s divestment is complete, the stock price moves may hinge on whether Softbank decides to free up cash by selling more of its shares.

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