PE-backed Chinese AI player Megvii files for HK IPO

The company has received four rounds of private funding from the likes of Abu Dhabi Investment Authority (ADIA), China State-owned Venture Capital Fund, The Russia-China Investment Fund, Alibaba Group's Ant Financial, Taiwan's Foxconn Technology, BHR Partners, Qiming Venture Partners, and Sinovation Ventures. The most recent round – which closed in May – was at a valuation of $4 billion.

Megvii's core competency – as outlined by Yin Qi, the company's co-founder, in a letter that accompanies the prospectus – is deep learning, whereby machines intelligence is self-generated rather than rules-based. The company claims to be one of the few AI specialists globally to have developed a proprietary deep learning framework called Brain++. It wants to build an engine capable of generating new algorithms almost automatically.

Megvii shares top billing with SenseTime – which hit a valuation of $4.5 billion with a $620 million round in May 2018 – among China's AI start-ups. All these companies are heavily involved in the government-supported and ethically sensitive facial recognition segment.                

Founded in 2011, Megvii launched Face ++, a cloud-based computer vision open platform, in 2012. This was followed in 2015 by Face ID, a facial recognition authentication solution for mobile phones. It was the company's first revenue-generating product. Megvii now claims to be China's largest provider of cloud-based identity authentication solutions enabled by facial recognition, specializing in personal devices, smart cites, and supply chains.

The number of Face ID customers rose from 128 in 2017 to 1,044 last year. In 2018, Megvii software featured on over 70% of Android-based smart phones with facial recognition technology manufactured in China, according to market research group CIC. The company is also strong in mobile authentication for financial services and ride-hailing, with a 61% market share last year.

Despite this dominance, the portion of revenue generated by mobile phone solutions fell from 73% in 2016 to 18.9% last year due to rapid growth in other segments – chiefly smart cities, which contributed 74% of revenue.

Megvii launched its first smart camera product for security applications, including use by the police, in 2015. It is now the third-largest player in internet of things-enabled community management, with 339 customers across 112 cities. AI cameras accounted for 9.5% of security camera shipments in China last year, but the share is expected to be 17.1% this year. Megvii provides software and hardware, typically working with system integrators to develop proposals when bidding for projects.

Supply chain solutions make up the smallest and youngest part of the company's business. Starting in 2017, Megvii offered machine vision technology that enables robots to pick up, move and sort goods automatically. In January this year, it launched a smart logistics platform – known as Hetu – which is reportedly used by in Tmall's warehouses to manage over 500 robots.

Although Megvii's revenue increased from RMB313.2 million ($43.8 million) in 2017 to RMB1.43 billion last year, the company continues to post substantial losses. These rose from RMB758.8 million to RMB3.35 billion during the period. For the six months ended June 2019, revenue and net losses came to RMB948.9 million and RMB5.2 billion, respectively. While rising R&D expenses are a contributing factor, the biggest hit came from changes in the value of preferred shares as the company's valuation rose.

Sinovation led Megvii's Series A in 2013 and re-upped the following year, joining Qiming in a Series B worth $22 million. The company scaled up significantly for its Series C, raising $460 million. The round was led by China State-owned Venture Capital Fund and featured Ant Financial, Foxconn, SK Group, Sunshine Insurance Group, and BHR. ADIA, Bank of China Group Investment, ICBC Asset Management, and Macquarie Group came into the $750 million Series D in May.

Ant Financial is the largest external shareholder with 15.08%, while Alibaba's Taobao unit has 14.33%. China State-owned Venture Capital Fund owns 11.33%. No other third-party investor holds more than 5%. The company's other backers include GGV Capital, Kuwait Investment Authority, and China Harvest.

The size and pricing of the offering have yet to be set. Megvii will list under the weighted voting rights structure that allows founders to retain voting control even if their equity ownership is diluted below 50%.

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• Topics
• Greater China
• Technology
• Exits
• China
• Ant Financial
• Bank of China
• Abu Dhabi Investment Authority (ADIA)
• ICBC
• Macquarie Group