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US ban to impact Megvii IPO, force Hikvision to swap suppliers

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US ban to impact Megvii IPO, force Hikvision to swap suppliers

The U.S. government's ban on eight Chinese companies from doing business with the country will dampen Megvii Technology Ltd.'s IPO, but have little impact on surveillance companies like Hangzhou Hikvision Digital Technology Co. Ltd., according to analysts.

The Department of Commerce made 28 additions to its entity list Oct. 7. Surveillance camera maker Hikvision, facial recognition software developer Megvii, security video network-provider Zhejiang Dahua Technology Co. Ltd., image recognition system developer SenseTime Group Ltd., digital forensics and information security products provider Xiamen Meiya Pico Information Co. Ltd., image algorithm provider Yitu Technology, AI software and products provider iFlytek Co. Ltd., and security system developer Yixin Science and Technology Co. Ltd. are "enabling activities contrary to the foreign policy interests of the U.S.," the department claimed. The companies are "implicated" in human rights violations taking place under China's high-technology surveillance of Uighurs, Kazakhs and other Muslim minority groups.

The Xinjiang Uighur Autonomous Region People's Government Public Security Bureau, 18 of its municipal and county bureaus, and one other organization are engaging in such activities, the department said.

The ban will likely impact Megvii and SenseTime's Hong Kong IPO plans, as investors increasingly take into account environmental, social and governance metrics, Ke Yan, Asia Pacific IPO and placement research analyst at Aequitas Research said.

"U.S.-based funds with concerns may potentially stay away from the IPO, which may even lead to the company pulling the plug on its IPO," Yan said. Political unrest in Hong Kong and a weak equity market could also force Megvii to delay its listing, said Chris Marshall, associate vice president for Data, Analytics and AI at IDC.

The companies could IPO on the Shanghai Stock Exchange's technology innovation, or STAR Market, board instead, Yan said.

However, the ban will have little influence on device makers like Hikvision, due to its ability to replace U.S. suppliers with Chinese ones, Rex Wu, a telecom, media, and technology equity analyst at Jefferies LLC said, in a distribution note.

The raw material inventory turnover of Hikvision increased to 64 days and its key chip inventory could last up to six months, which protects the company from immediate impact, Wu said.

SenseTime, Hikvision and Megvii revenues "are not especially tied to any particular national market," Marshall said. They will be impacted less by the loss of potential U.S. customers and more because of their dependence on U.S.-based Nvidia Corp. for graphics processing units, or GPUs, he said.

In the long term, companies like Hikvision may turn to domestic chip suppliers as alternatives to U.S. partners. The surveillance camera maker relies heavily on Intel Corp. for central processing unit, or CPU, technologies, according to Jefferies data. However, China's Huawei can replace Intel to supply CPU, while the AI solution developer DeePhi Technology Co. Ltd., Horizon Robotics and Huawei's HiSilicon(Shanghai) Technologies Co. Ltd. can replace the GPU with AI chips, Wu said.

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The U.S. ban will accelerate the adoption of AI application-specific integrated circuits, which are essentially AI-focused chips, for edge computing, pushing costs down, Wu added. AI chips have been cheaper than the GPUs, he added.

Nvidia's GPU is the best for deep learning training, Wu added. If Hikvision needs a substitute for machine learning training, it can use China's National Super Computing Centers as SenseTime does, he said.

The U.S. business contributed less than 5% of Hikvision's total revenue, according to Jefferies' estimates. The camera maker reported about 71.0% operating income from the domestic market, while the overseas market accounted for around 29.0% of its total operating income, according to the company's 2019 interim report.

Similarly, Meiya Pico said Oct. 8 in a filing to the Shenzhen Stock Exchange that the entity list has little influence on its performance and operation. "Less than 1% of the company's revenues are from the overseas markets," the company said. It claimed that the company's products are mostly self-developed and suppliers are majorly domestic.

IFlytek said in a filing to the Shenzhen bourse that its core technologies are all developed internally and will not be affected by its addition to the list. Hikvision stopped trading due to the ban, while Dahua shuts its stock trading Oct. 8 due to the entity list, according to its filing to the Shenzhen exchange.

SenseTime and Megvii criticized the entity list and said they will reach out to the U.S. government for communications.

Yitu and Yixin did not respond to requests for comment.

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