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Megvii IPO valuation complicated by lack of direct peers, US blacklisting

Megvii's upcoming Hong Kong IPO could be complicated by a lack of comparable public companies, trade restrictions with the U.S., and the fact that it has yet to make a profit, analysts said.

The Chinese artificial intelligence company postponed its IPO in 2019 after its application drew questions from the Hong Kong Stock Exchange's listing committee. With those questions reportedly resolved, Megvii's updated prospectus may need regulatory approval before its debut can go ahead. Megvii, which is also known as Beijing Kuangshi Technology Co. Ltd., declined to comment when asked about the status of its IPO.

Megvii is known for its facial recognition platform Face++ and offers AI software for personal, smart city and supply chain internet of things devices. With no other public company selling comparable products, it will likely price its shares against those of video surveillance specialists Hangzhou Hikvision Digital Technology Co. Ltd. and Zhejiang Dahua Technology Co. Ltd., analysts said.

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At the 2019 quarter ending September, Hikvision was trading at an 18.2x total enterprise value/revenue multiple while Dahua was trading at 8.8x, according to S&P Global Market Intelligence analytics.

Its consumer IoT offering means iFLYTEK Co. Ltd., a voice recognition and language software company, may also be used as a peer in valuation calculations, Zhen Zhou Toh, a partner and analyst specializing in APAC IPOs and placements at Aequitas Research, said. iFLYTEK was trading at a 28.8x TEV/revenue multiple at September-end 2019.

The updated filing should provide new information about the company's financial performance, which should help investors assess Megvii's valuation more easily, Toh said. However, he added that one area of uncertainty is the company's inclusion on the U.S. entity list in October 2019, which restricts its ability to trade with the country and its suppliers.

"Even if it [the U.S. blacklisting] does not slow down Megvii's growth fundamentally, it will have put doubt in investors' minds as to how easily Megvii can be impacted by macro regulatory factors," Toh said.

Arun George, IPO, M&A and TMT analyst at Global Equity Research, said he believes the blacklisting will negatively impact the valuation "due to higher uncertainty around the future revenue and profits" of the company, citing research platform Smartkarma.

"While Megvii has little exposure to the U.S. in terms of revenue, it relies on U.S. companies for some components and technology," George said. Megvii's suppliers also use items imported from the U.S., and it is unclear if these items can be replaced with those of the same quality and price in China or from other countries, he added.

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However, any valuation jitters from the entity list may be short-lived. The share price of Hikvision, which is Megvii's closest peer and is also on the entity list, is now above pre-entity list levels.

The profit and loss

Megvii's August 2019 stock exchange filing shows a net loss of 5.2 billion Chinese yuan and revenue of 949 million yuan for the first six months of 2019.

Megvii, founded in 2011, was valued at US$4 billion after it closed its latest funding round raising US$750 million in May 2019. Investors include Bank of China Group Investment Ltd., Macquarie Group Ltd., ICBC Asset Management Global Co. Ltd. and Alibaba Group Holdings.

Megvii's IPO co-sponsors are Goldman Sachs, Citi and JP Morgan.

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