Alibaba-Backed AI Startup Sales Triple Enroute to IPO

(Bloomberg) -- Megvii Technology Ltd. for the first time revealed the stunning growth fueled by a nation’s obsession with security.

The Alibaba Group Holding Ltd.-backed startup tripled revenue to 949 million yuan ($133 million) in the first half. It generated more than 73% of those sales from AI services for major clients like government agencies, hospitals and real estate developers, the company said in a filing to the Hong Kong Stock Exchange.

Seven-year-old Megvii is said to be angling to raise as much as $1 billion in its initial public offering, becoming the first of China’s fast-rising AI stars to debut and beating Sensetime Group Ltd. to the punch. Its share sale however will run up against a host of uncertainties from violent pro-democracy protests that’ve gripped Hong Kong to the Trump administration’s increasingly aggressive campaign to contain China’s tech champions.

Megvii is moving forward even as other companies pump the brakes on their Hong Kong listing ambitions, wary of the turmoil. Its fundraising will further Beijing’s effort to lead the sector by 2030. That’s in turn prompting the Trump administration to sound the alarm about investment into Chinese technology.

Megvii generates the bulk of its revenue from products that combine software and sensors to help government agencies and other clients enhance public safety and optimize traffic management. Sales from that business, which it labeled “city IoT solutions,” jumped 270% to 694.8 million yuan in 2019’s first six months. Megvii said it served 112 cities in China, 38% of the country’s total, as of June. It posted 5.2 billion yuan in losses for the first half, while adjusted profit reached 32.7 million yuan.

‘IPOs‘ have been pretty disappointing in the past few months, but since AI is a hot category at the moment it could gain more traction,” said Mark Tanner, founder of Shanghai-based research and marketing company China Skinny.

Read more: China AI Startup Files for Hong Kong IPO Despite Protests

The filing kicked off the formal process for an IPO, though it could be months before Megvii’s actual debut. The offering faces particular challenges. Washington has upped its rhetoric about inspection of investment into Chinese technology, which may erode the interest of U.S. money managers in the country’s AI startups.

In a list of risk factors, Megvii warned of possible economic and trade restrictions similar to curbs imposed on Huawei Technologies Co. Should that happen, it would prevent the company from procuring technology, and impair its ability to develop solutions. The company stressed that it’s made sure it’s compliant with relevant restrictions, while making contingency plans to minimize the negative impact of potential curbs.

Read more: Trump Aides Say He Has Power to Force Companies From China (2)

Megvii also warned that sanctions on sales of American technology to Huawei may roil industries from consumer electronics to telecommunications. “Prolonged restrictions against Huawei could cause a turmoil to all such industries, which may in turn materially and adversely affect our business,” it said.

Megvii also sells face-scanning systems to companies from iPhone-maker Foxconn Technology Group to Lenovo Group Ltd. 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 21.8% 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 counts Alibaba and its financial affiliate Ant Financial and Lenovo Group Ltd. as strategic investors. Alibaba indirectly held 14.3% of its shares, while Ant Financial indirectly held 15.1%.

Read the IPO filing here.

(Corrects story from August to remove reference to China Mobile as an investor in final paragraph.)

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