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SoftBank-backed CloudMinds' US IPO chances dwindle

The U.S. IPO of Chinese robotics and artificial intelligence company CloudMinds Technologies Co. Ltd. looks increasingly unlikely as investor appetite for loss-making startups weakens, experts told S&P Global Market Intelligence.

CloudMinds said in July 2019 it was planning to raise up to US$500 million via an initial public offering of its American depositary shares on the NYSE. At the time, analysts said investors would be nervous about another SoftBank Group Corp.-backed pre-profit IPO following the devaluation and failed listing of WeWork Cos. Inc. SoftBank is CloudMinds' largest shareholder with 34.6%.

The AI company has since failed to ease these nerves, experts said. Zhen Zhou Toh, an Asia-Pacific IPO and placements analyst at Aequitas Research said the company's "poor" financials and lack of profitability "make it much harder for equity capital market bankers to tell a convincing story to investors."

CloudMinds reported a net loss of US$97.48 million in the six months to June 2019 compared to a net loss of US$64.79 million in the year-ago period, the company's Sept. 12, 2019, filing showed. The company has reduced its workforce in China and Japan to save on costs, according to a Reuters report. CloudMinds declined to comment.

"As with WeWork, before an IPO, a startup has to show its governance structure, financial discipline and business acumen. It seems CloudMinds had none of these. I doubt anybody has the appetite to back them at this point," said Hatem Dhiab, managing partner at Gerber Kawasaki.

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CloudMinds' revenue visibility is low as it depends on the placement and delivery timing of orders, Arun George, IPO, M&A and TMT analyst at Global Equity Research said in a research note on investment research platform Smartkarma. The company's 2019 revenue for the six months ended June 30, rose to US$148.4 million from US$33.3 million in the year-ago period, according to company filings. A closer look shows revenue for segments such as smart devices and cloud AI solutions has been volatile, George said.

On a broader level, U.S. investor appetite for Chinese companies is weak due to the poor returns of recent listings and a growing wariness of their "growth at all costs" business models, George said in an interview.

The average return on Chinese IPOs was a loss of 20% last year, George said, pointing to the U.S. listings of sports events owner Wanda Sports Group Co. Ltd., Tencent Holdings Ltd.-backed online brokerage Futu Holdings Ltd., plastic surgery app So-Young International Inc. and social commerce company Yunji Inc. as prime examples.

According to Renaissance Capital's U.S. IPO Market report, 23 China-based companies listed in the U.S. in 2019 raising a combined US$3.4 billion. The research showed Chinese issuers averaged a 4% first-day return and a -18% total return in 2019.

"As things stand, CloudMinds is increasingly looking like joining WeWork by pulling its IPO," George said.

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Despite CloudMinds' difficulties, SoftBank is unlikely to look to exit the investment, experts said. This is just as well, as finding a buyer for its stake could prove tricky, they said.

Toh said that technology-focused investors are likely to look at "better Chinese AI companies" such as facial technology software provider Beijing Kuangshi Technology Co. Ltd., or Megvii. It is scheduled to IPO in Hong Kong this year.

SoftBank will look at the performance of its Vision Fund — within which CloudMinds sits — as a whole and accepts "a few may go wrong," Dan Baker, analyst at Morningstar said.

The near-US$100 billion investment portfolio saw its fair value drop in the quarter to end-September 2019 and its valuation excluding exited investments was US$77.6 billion for the same period, compared to US$82.2 billion in June 2019, according to data compiled by S&P Global Market Intelligence. The quarter also saw SoftBank's Vision Fund and Delta Fund record a loss for the first time since their inception in 2017, of US$8.76 billion.

Experts said the main long-term impact on SoftBank of exposure to CloudMinds will be that its portfolio company valuations will continue to be heavily scrutinized.

"It is more likely that SoftBank partners with other investors to inject capital into CloudMinds," George said, adding that this may be necessary in order to prevent SoftBank from facing another WeWork debacle.