SenseTime’s post-IPO rally surprises market

Shares of Chinese artificial intelligence group SenseTime Group continued to climb on Tuesday, powering ahead with a rally that has seen the stock rise 120% since investors’ cool welcome to the company’s initial public offering.

SenseTime’s strong gains, out of sync this week with the wider market for Chinese tech stocks or Hong Kong shares, have puzzled observers. A trader at a U.S. investment bank in Hong Kong said she had “no idea” why SenseTime has kept rising.

SenseTime took a rocky two-year path to market, twice getting sidetracked by punitive U.S. sanctions over its alleged role in facilitating human rights abuses against ethnic Uyghurs in China’s northwest Xinjiang region.

It ultimately priced its IPO last week at HK$3.85 a share, the bottom of the range at which the stock had been marketed. Retail investors placed orders for 5.2 times the number of shares allotted to them, while orders from institutional investors came to 1.5 times the shares on offer, both indicators of tepid demand for a Hong Kong IPO.

Cornerstone investors, mostly Chinese state funds, came through, however, with orders for $511.6 million of the $711.72 million worth of stock on offer.

Amid these signs of market ambivalence, three analysts who publish on the SmartKarma investment platform labeled SenseTime shares as “unattractive” or “expensive” ahead of the start of trading last Thursday.

“Though we consider SenseTime to be one of the leading players in the AI space in China… we have concerns over the company’s financials and lack of a path to profits,” wrote Shifara Samsudeen of LightStream Research.

“Moreover, the company’s revenue momentum seems to be slowing down and increasing regulatory pressure could impact earnings growth going forward,” she added. “We would recommend exiting if the shares rise by about 3%-5% as we don’t expect large upsides.”

Toh Zhenzhou, a senior analyst at Aequitas Research, was even more skeptical, writing that he saw “a 33% potential downside” from the IPO price level.

SenseTime recorded a loss of 3.71 billion yuan ($583 million) on revenue of 1.65 billion yuan in the first half of 2021 © Reuters

 

Essence International, a Chinese securities company, said ahead of the listing that “a reasonable market capitalization” for the company would be between 162 billion Hong Kong dollars ($20.77 billion) and HK$194 billion, based on its financial track record.

On its debut last Thursday, SenseTime gained as much as 23.1% before ending the first day up 7.3%. It then surged 33.2% on Friday and a further 40.9% on Monday, and was up as much as 25.2% to HK$9.70 in early trading on Tuesday.

The company ended the morning session up 9.4% at HK$8.48, giving it a market capitalization of HK$282.2 billion.

So far, major investment banks have yet to publish research or recommendations on the stock.

“Because it’s just newly listed, we have not covered the stock yet,” Pierre Lau, China equity strategist for Citigroup, said at a media briefing on Tuesday. “I can’t comment because there’s no official view.”

“But I think the background information that you can see is that they did the IPO not at the high end of the IPO price, so maybe there’s some opportunity there in terms of valuation,” Lau added.

SenseTime recorded a loss of 3.71 billion yuan ($583 million) on revenue of 1.65 billion yuan in the first half of 2021. The sanctions imposed by the U.S. Treasury Department last month bar American investors from trading in securities of the company, though SenseTime said in its updated IPO prospectus that its lawyers had advised that the Treasury move technically affected only a group subsidiary.

SenseTime’s investors include Japan’s SoftBank Group, Alibaba Group Holding, artificial intelligence developer iFlytek, U.S. venture group IDG Capital and mutual fund group Fidelity International.

Brian Tycangco, an analyst with Stansberry Research in Manila, said, “It makes sense to consider that SenseTime is rising on expectations it will be included in the major Hang Seng indexes.” He added that investors might also be betting on its future inclusion in the Stock Connect program that allows mainland investors to buy designated Hong Kong stocks.

SenseTime’s share sale capped a disappointing year for Hong Kong IPOs. Listings on the exchange’s main board slid 33% in 2021 from a year before while overall proceeds declined 17% to HK$331.66 billion, according to data compiled by accounting firm PwC.

As a result, the city tumbled in annual global IPO rankings, but PwC projected on Monday that Hong Kong would return to the top three this year, with IPO sales reaching HK$350 billion to HK$400 billion. PwC sees biotechnology companies and hopefuls taking advantage of Hong Kong’s new special purpose acquisition company, or SPAC, listing rules driving the gains.

None of SenseTime’s closet competitors are listed yet, but domestic competitor Megvii has applied for an IPO on the Shanghai Stock Exchange after failing to list in New York and Hong Kong. Alibaba-backed Megvii has also been sanctioned by Washington over alleged involvement in Xinjiang abuses.

Author: CISSY ZHOU, NIKKEI Asia

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