Big Brother startups offer white knuckle returns

By Alec Macfarlane

(The author is a Breakingviews columnist.)

HONG KONG, Jan 24 ( Breakingviews) - Big Brother startups offer white knuckle returns. China's facial-recognition technology specialists SenseTime and Megvii are in fundraising mode. Video surveillance in China is tipped to be a $20 billion industry by 2022, according to Bernstein research, up from $8 billion in 2017. Sticky questions could result in volatile valuations, but Beijing's resolve to watch its people closely will drive growth.

The big growth area for both companies, according to investors, is state surveillance. China had roughly 175 million cameras watching over its citizens in 2016, more than triple the number in the United States, IHS Markit estimated in 2017, the last time it updated its figures. Those numbers will only increase as Beijing rolls out a huge national surveillance system to monitor its 1.4 billion people.

However, it's not all about authoritative regimes. SenseTime and Megvii's technology is used for everything from unlocking phones to detecting whether drivers are paying attention to roads. SenseTime serves 18 industries. Its smart city projects, which include surveillance work for Beijing, account for less than 30 percent of its revenue. Sales totaled $100 million in 2017, according to CLSA research citing SenseTime.

But the more ominous aspects of the sector will grab attention, making these companies poorly suited for a quiet public life or expansion overseas, particularly in the West, where greater value tends to be put on privacy. Shares in Chinese surveillance camera makers Hangzhou Hikvision and Zhejiang Dahua both plummeted last year following national security concerns over the use of their equipment abroad.

As long as SenseTime and Megvii remain primarily focused on clients in China, or similarly strict regimes, the valuations of these Orwellian outfits are likely to boom, rather than bust.

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- Chinese facial-recognition startup Megvii has begun preparations for an initial public offering in Hong Kong this year, Refinitiv publication IFR reported on Jan. 15, citing people close to the deal.

- Goldman Sachs and JPMorgan have started working on the IPO, which could raise up to $1 billion, the report said. Megvii's clients include Alibaba, Ant Financial, Taiwan'sFoxconn and Lenovo Group, according to the company's website.

- Meanwhile, Beijing and Hong Kong-based SenseTime, an artificial-intelligence startup also focused on facial recognition, is beginning preparations to raise about $2 billion in a new round of financing, Bloomberg reported on Jan. 10, citing people with knowledge of the matter.

- SenseTime raised $620 million in May 2018 at a valuation of more than $4.5 billion.

Bloomberg - World's Largest AI Startup Readies $2 Billion Fundraising (graphic).

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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