Key Takeaways:

• SenseTime spent up to 2 billion yuan on R&D in the first half of this year, equal to 144% of its total revenue
• Falling revenue from its two core businesses and delayed customer payments led the company to boost its impairment provisions by more than 50%

By Ken Lo

SenseTime Group Inc. (0020.HK) may be first among China’s four “AI Tigers.” But its healthy appetite for R&D spending looks set to keep it trapped in a sea of red ink for some time to come.

Of China’s top AI companies, SenseTime stands above its three biggest rivals, CloudWalk Technology (688327.SH), Megvii Technology and Yitu Technology, in computer vision artificial intelligence (AI). The company provides its technology to government and enterprise customers for applications like smart cities, surveillance and autonomous driving.

SenseTime said the flood of red ink owed mainly to its mounting R&D investment, combined with financial and contract asset impairments and foreign exchange losses.

Weak demand

SenseTime’s R&D spending has rocketed over the last four and a half year, ascending from 849 million yuan in 2018 to 3.61 billion yuan last year. It’s on track to stay on that trajectory this year after reaching 2.04 billion yuan in the first half of 2021 alone, positioning it to break through the 4-billion-yuan barrier for the whole year.

China’s continuing Covid control disruptions in the first half of this year dragged the company further down the deficit rabbit hole, with revenue down 14.3% year-on-year to 1.42 billion yuan. In the end, R&D spending made up 144% of the company’s revenue for the period, much higher than the average for large AI companies.

Among its four business segments, revenue for SenseTime’s smart business unit fell 12.2% year-on-year in the first half of 2022. Revenue for its smart city unit plunged 44.8%, creating the biggest drag on overall revenue. Its smaller smart life and smart auto businesses both performed much better, growing 97.6% and 71.1%, respectively. But that pair combined contributed less than 30% of the company’s total revenue.

Rising impairment provisions

Despite the cash-bleeding and higher impairment provisions, the company’s successful IPO last year meant it was still sitting on 19.51 billion yuan in cash, deposits, structured deposits, and bonds at the end of June.

But even if a cash crunch isn’t looming anytime soon, another major issue remains in the form of western sanctions. As the two examples we mentioned earlier illustrate, SenseTime has become a “focus company” for Washington due to its business supplying the central and local governments with its powerful surveillance technology.

Reflecting continued pressure from Washington, SenseTime suffered another blow last week when the U.S. also banned Nvidia (NASDAQ:NVDA) and AMD (NASDAQ:AMD) from selling their most cutting-edge AI chips to all Chinese customers.

SenseTime’s interim results did not discuss the latest impact of the U.S. sanctions on its business. But revenues from its overseas business reached 19% of the total, representing a 7.6 percentage point increase from the level for all of last year. But the change probably reflects declining revenue in China, rather than indicating the company’s overseas business is somehow free from influence by U.S. sanctions.

SenseTime’s shares have moved steadily downward this year after reaching a January high of HK$9.70, dropping as low as HK $2.04 on June 29, or nearly half of their issue price. Last Friday the stock closed at HK$2.26, giving it a market value of HK$76 billion.

SenseTime trades at a relatively low price-to-sales (P/S) ratio of just 4.2 times, less than half the 10.79 times for CloudWalk Technology. That could reflect concerns about SenseTime’s being singled out for sanctions by Washington, as well as investor concerns about its heavy R&D spending.