US trade blacklist hurts Chinese AI giant Megvii’s sales growth

Traffic move down the third ring road in Beijing, China, on Monday 15 May, 2017. Photographer: Qilai Shen/Bloomberg

Megvii Technology Ltd.’s revenue growth dissipated in the second half of 2019 after it joined Huawei Technologies Co. on a U.S. trade blacklist, underscoring the extent to which White House sanctions are hurting China’s technology leaders.

The company backed by Alibaba Group Holding Ltd. grew revenue a mere 2.7% in 2019’s second half after more than tripling sales in the first six months of the year, according to unaudited numbers for investors seen by Bloomberg. On a full-year basis, Megvii fell short of its target for 2.9 billion yuan ($409 million) in sales by almost 28%, a person familiar with the matter said, asking not to be identified discussing internal targets.

Megvii and its biggest competitor, SenseTime Group Ltd., had been among China’s fastest-growing startups but are now under scrutiny after the Trump administration blacklisted them over alleged involvement in human rights violations against Muslim minorities in China. The surprise action in October encompassed several leading players in the field of artificial intelligence, a key area of contention between the world’s two largest economies.

Megvii suspended certain operations while it determined which parts of the business may violate the blacklist, which prohibited the export of American technology, and that delayed some orders or shipments in the second half, another person said. To re-energize the business, the AI giant is now developing new revenue streams, including temperature detection solutions deployed to help China curb Covid-19 this year.

U.S. sanctions helped tank Megvii’s attempt to go public, a $1 billion deal regarded as the unofficial coming-out party for China’s burgeoning AI sector. Megvii, backed also by Alipay-operator Ant Financial, Lenovo Group Ltd. and China Mobile Ltd., this year allowed its application for a Hong Kong IPO to lapse, throwing its future plans into question. Megvii representatives declined to comment.

(in millions of yuan) 1H 2019 2H 2019 Full-Year 2019
Revenue 949 1,151 2,100
YoY growth (%) 210.3% 2.7% 47.2%

China’s advances in AI have unnerved Washington because both countries are vying for leadership in a technology at the heart of everything from autonomous driving and robot waiters to facial recognition. Chinese names like Megvii and SenseTime are joined by established players including Huawei, Tencent Holdings Ltd. and Didi Chuxing in a race with the likes of Google and Microsoft Corp. to develop systems fundamental to future modern economies.

The company, last valued at about $4 billion according to people familiar with the matter, generates most of its revenue from products that combine software and sensors to help government agencies and other clients enhance public safety and optimize traffic management. Megvii disclosed in its August IPO documents that sales from that business, which it labeled “city IoT solutions,” jumped 270% to 694.8 million yuan in 2019’s first six months. It said in its prospectus that it served 112 cities in China, 38% of the country’s total, as of June.

It also sells face-scanning systems to companies from iPhone-maker Foxconn Technology Group to Lenovo and Ant Financial, the payments affiliate that supports Alibaba’s e-commerce business. The company generated 207.2 million yuan from the segment it dubs “personal IoT solutions,” or 22% of its revenue. Its third major business line, solutions for logistics that deploy AI-empowered robots and sensors, made up some 5% of revenue.

Megvii lost 3.4 billion yuan in 2018, partly due to changes in the value of preferred shares, according to its prospectus. 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, according to the IPO document.

Bloomberg

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In Singapore, we are looking to double our reporting team by this year-end to comprehensively cover the fast-moving world of funded startups and VC, PE & M&A deals. We want reporters who can tell our readers what is really happening in these sectors and why it matters to markets, companies and consumers. The ability to write precisely and urgently is crucial for these roles. Ideal candidates must have to ability to work in a collaborative, dynamic, and fast-changing environment. We want our new hires to be digitally savvy and ready to experiment with new forms of storytelling. Most importantly, we are looking for hard-hitting reporters who work well in a team. Collaboration and collegiality are a must.

Following vacancies can be applied for (only in Singapore).

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  • A reporter to track companies/startups that have raised private capital, and have the potential to become unicorns. SEA currently has over 40 companies with a valuation of over $100 million and under $1 billion.
  • A reporter who can get behind the scenes and reveal how funding rounds are put together, or why they’ve failed to materialise. She/he in this role will largely focus on long-format stories. 
  • A journalist to track special situations funds, distressed debt and private credit (from the PE angle) across Asia.