0020.HK

The Chinese AI specialist recently launched its own ChatGPT-equivalent, just as two major shareholders sold down some of their stakes

Key Takeaways:

  • SenseTime released its SenseChat chatbot around the same time two of its major backers, SoftBank and Alibaba, sold down their stakes
  • The company disappointed investors with a surge in its adjusted loss and a 19% drop in revenue last year

 

By Fai Pui

Microsoft-invested (MSFT. US) OpenAI’s launch of ChatGPT has breathed major new life into artificial intelligence (AI) chatbots across the world, prompting Chinese tech giants like Baidu (BIDU. US; 9888.HK) and Alibaba (BABA. US; 9988.HK) to jump on the bandwagon with their own offerings. That turned up the pressure to follow suit on SenseTime Group Inc. (0020.HK), which bills itself as a pure AI company.

SenseTime didn’t disappoint, officially introducing its SenseNova AI architecture on April 10. At the same time, it released SenseChat, its own version of ChatGPT, which chairman and CEO Xu Li said can not only create reports and stories, but can also assist with code writing, medical consultation and other applications.

SenseNova also includes the SenseMirage platform that can instantly turn words into pictures. The company is also serving up SenseAvatar, an AI digital avatar platform that can generate digital avatars using only a five-minute live-action video. It has also developed a platform that can generate large-scale 3D scenes and granular objects.

Having learned from Baidu, whose unveiling of its Ernie Bot last month failed to impress after using only a taped demonstration, Xu made sure the public could see SenseChat performing in real time. He used it to write promotional copy for the launch party where it was being demonstrated. He also showed how to train SenseMirage by uploading 20 photos of Hong Kong women in the 1980s and then having it churn out pictures of women dressed in that distinctive ’80s style.

Sagging stock

Despite the real-time show, the market was unimpressed by SenseTime’s efforts. Its share price initially rose by 10% to HK$3.70 at one point the next day, only to reverse course and fall nearly 6%, before closing down by 0.9% at HK$3.30. The downward trend continued after that, with the stock closing at HK$2.48 on Monday this week.

The setback could owe partly to sell-downs of SenseTime’s shares by its two of its major shareholders, Japan’s SoftBank Group (9984.T) and Alibaba, which seized the market euphoria to cash out some of their stock. SoftBank sold 50 million shares one trading day before SenseTime’s announcement, reducing its holdings from 14.14% to 13.95%.

Alibaba did the same thing the day after the launch, selling 40 million shares on April 11 to reduce its holdings from 8.04% to 7.88%. That same day, SenseTalent Management Ltd., which is owned by SenseTime employees, also sold 5.08 million SenseTime shares to reduce its holdings from 14% to 13.98%.

Following the recent sell-downs, SenseTime’s price-to-sales (P/S) ratio is down to about 21 times, a figure that still look high but is much lower than the 55 times for Cloudwalk Technology (688327.SH), which also ranks among China’s top AI companies. Such a big difference may reflect concerns about SenseTime’s prospects.

UOB Kay Hian analyst Curtis Yeung said SenseTime conducted 12 rounds of fundraising before its listing in December 2021. But given the low returns for major shareholders like SoftBank and Alibaba since the listing, and the fact that the company is still losing money due to heavy spending on R&D and sales, it should come as little surprise that those big backers would want to cash out some of their holdings.

“I suspect that some investors will continue to trim their positions. SoftBank, in particular, might need to free up some funds for operational purposes after making losses for four consecutive quarters,” Yeung said.

SenseTime’s latest financial results for 2022 were also a disappointment, including a net loss of 6.09 billion yuan ($885 million), which was 64.5% narrower than the loss in 2021.  But its non-IFRS adjusted loss rose 234% to 4.74 billion yuan, equal to more than half of the company’s cumulative adjusted loss of 8.3 billion yuan over the past five years.

The market was expecting a loss, but a 19% revenue decline came as a bigger surprise to many investors. Revenues for its two core businesses, smart business and smart cities, fell by 25.2% and 48.9%, respectively, even as its smaller smart life segment grew by 130%, and its smart auto segment grew by 59%.

Cash outflows

SenseTime blamed the Covid pandemic for the surprise revenue hit, as some of its customers delayed AI spending, on-site deployment of products and construction of smart cities during China’s strict disease control measures during the year. As SenseTime’s clients faced their own difficulties, some also delayed making payments.

One- and two-year-old trade receivables surged 1.3 times by the end of last year from year-earlier levels to 3.25 billion yuan, and trade receivables over three years old soared by 524% to 630 million yuan from 101 million yuan over that period. At the same time, its trade receivable turnover days also increased from 319 days in 2021 to 494 days at the end of last year.

Even as its outstanding bills have grown, SenseTime has continued to spend heavily on new product development. The company brought in 3.8 billion yuan in revenue last year, but its R&D spending alone rose by 11.1% to an even bigger 4.01 billion yuan, bringing its R&D spending total over the past five years to 12.85 billion yuan.

Analyst Yeung believes that unlike other large tech companies with stable cash flow, SenseTime’s income from its existing business is insufficient to meet its funding needs. Accordingly, it may need to limit its future R&D expenditure as the losses pile up.

SenseTime’s net operating cash outflow last year was 3.09 billion yuan, up 24% from 2021. Its net cash outflow from investments also widened more than fivefold to 9.3 billion yuan. As that happened, its cash and cash equivalents plunged by 51.8% to only 7.96 billion yuan by the end of last year. At its current rate of spending, the company’s cash reserves may only be enough for two years or less.

SenseTime’s main business has yet to enter a sustainable track and the newly launched SenseNova still needs time to grow. But that hasn’t stopped the company from making new bets in the field of autonomous driving. Its SenseAuto intelligent vehicle platform made its debut at the 2023 Shanghai International Automobile Industry Exhibition last week, displaying its full-stack intelligent driving solutions with the release of six new intelligent auto products. Nearly 30 vehicle models equipped with SenseAuto’s products were showcased at the exhibition.

“Image and visual processing are SenseTime’s strong suits,” said Yeung. “The company’s advantages in detecting objects and mapping road conditions, combined with AI-assisted training, will help it make breakthroughs in the field of autonomous driving.”

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