Facial recognition company CloudWalk Technology, one of China's leading artificial intelligence firms, has kicked off a high-profile Rmb3.75bn (US$553m) Shanghai Star IPO, as issuers on the Nasdaq-style market face intense pressure to price their deals right after a spate of disappointing debuts.
With 80% of the companies listed on the Star market since the beginning of the year trading underwater, regulators have stepped up their scrutiny of IPO pricing in recent weeks. The Shanghai Stock Exchange held a meeting with brokerages last month to discuss how to stabilise new Star listings and is also planning to use IPO trading performance as a new metric to evaluate the work of bookrunners.
Meanwhile, the Securities Association of China last week suspended one of Western Securities' institutional accounts from quoting or subscribing to new IPOs for one month after it quoted a price 30 times the eventual issue price during pricing consultation for the planned Star IPO of image sensor chip design company SmartSens Technology Shanghai.
Extended roadshow
Against that backdrop, CloudWalk held a full seven days of private roadshows before conducting formal price consultation on May 13. It will announce the issue price on May 16, and have a public online roadshow for a half day on May 17.
“It is not common to have as many as seven small-scale roadshows before pricing consultation day," an investment banker away from the deal said. "Normally, it's a three-day private roadshow, or sometimes four or five-day roadshows. A longer roadshow allows CloudWalk to fully communicate with potential long-term investors on its equity story and valuation.”
The seven-day roadshow is akin to the pre-marketing period for a Hong Kong IPO and a departure from the usual practice in China to issue research reports from sponsors and hold a single day of price consultation.
“I assume that there is too much pressure on the deal,” a Beijing-based banker said. “The secondary market is really dismal. It will become more common to have more than three-day roadshows in the future in such a poor market.”
“As an unprofitable company, the probability of trading below water is really high,” the first banker said.
CloudWalk, founded in 2015, lost a cumulative Rmb2.08bn from 2019 to 2021 while it spent Rmb1.57bn on R&D. Its revenue rose 42.5% in 2021 to Rmb1.07bn.
Based on the expected proceeds, the IPO will value the company at Rmb24.7bn, or 22.9 times last year's sales.
CloudWalk plans to offer 112m A-shares, or 10% of the enlarged capital. There is a 15% greenshoe. Strategic investors will take up 30% of the offering and the rest will be split 80:20 between institutional and retail investors.
One private equity investor said the valuation of AI companies has been dragged down because of the past year's bear market, but that it remains in bubble territory.
“We did not buy CloudWalk in the pre-IPO round of Q4 2019, when it was valued at Rmb16bn–Rmb17bn, which was really expensive as the P/S almost reached 35 times,” the investor said.
China Securities, the sponsor of the deal, quotes an average 2021 price-to-sales of 15.82 for five listed peers – Shenzhen-listed Hangzhou Hikvision Digital Technology (4.58), Iflytek (4.46), Star-listed ArcSoft Corp (15.96), Cambricon Technologies (27.79), and HK-listed Sensetime Group (26.30).
The brokerage estimated that the company could earn a profit of at least Rmb176m in 2025.
CloudWalk Technology is one of the “Four Leading AI Computer Vision Start-ups” in China, alongside Hong Kong-listed SenseTime, Yitu and Megvii Technology. According to IDC data, the quartet had a market share of more than 40% in the computer vision sector in 2020.
CloudWalk's facial recognition technology is widely used in the financial, public security and aviation sectors. Its customers include the Civil Aviation Administration of China, the Ministry of Public Security, Bank of China, Agricultural Bank of China, Xiaomi and Volkswagen.
It was blacklisted by the US in May 2020 for allegedly participating in major human rights abuses in China’s northwestern Uyghur Autonomous Region.
Chequered history
Because of the politically sensitive nature of some uses of their technology, heavy losses and inflated pre-IPO valuations, Chinese AI companies have had a chequered stock market history.
Sequoia-backed Beijing Deep Glint Technology was the first AI company listed on the Star market on March 17. Its shares, sold at Rmb39.49, or 30 times 2020 sales, have lost over 34% since and closed at Rmb25.91 on Thursday.
In December, Sensetime Group raised HK$5.78bn (US$740m) from a Hong Kong IPO at HK$3.85 per share or a 2022 forecast enterprise value-to-sales of 11.6. The shares have risen 17.6% to HK$4.53 on Thursday.
Chipmaker Yitu withdrew a plan in June 2021 to offer Rmb7.51bn of Chinese depository receipts on the Star market, without giving a reason.
Megvii Technology passed a hearing at the SSE in September 2021 for a Rmb6.02bn Star IPO but the deal has been halted as it needs to update its financial data.
CloudWalk has weighted voting rights that give its two founders, Zhou Xi and Yao Zhiqiang, combined voting rights of 64.6% via a 23.32% stake held through Changzhou CloudWalk Technology. Its Class A shares have six times the voting rights of its Class B shares.
Proceeds from the IPO will be used for three artificial intelligence projects and working capital.