SenseTime – Prudence calls.

Retreat and live to fight another day.

• SenseTime’s addition to the US investment blacklist has delayed the already-downsized IPO where I think the sensible move is to postpone the listing and come back when conditions are better.
• As far as the West goes, SenseTime is a controversial company as it is alleged that SenseTime’s best-in-class facial recognition software is being used to enable human rights abuses against the Muslim Uyghurs in the province of Xinjiang.
• This is not a new controversy as SenseTime has been on the entity list for over 2 years for exactly the same reason.
• Consequently, this move by the US is clearly designed to damage the ability of Chinese technology companies to access Western capital which will slow their development.
• This is all part of the long, drawn-out cold war that Radio Free Mobile and Alavan Independent see playing out over the next 10 to 20 years (see here).
• SenseTime is one of the key players in this race as our research identified AI, quantum computing & autonomous driving as three areas where the US has a real fight on its hands to be number 1.
• SenseTime is rated by RFM research as the global No. 5 in AI and probably has the best facial recognition in the world.
• Western companies have been plagued with systems that make mistakes and struggle with occluded faces but according to the US Treasury Department, SenseTime has highlighted its ability identify Uyghurs with beards, sunglasses, and masks in patent applications.
• Being on the investment blacklist means that US citizens may not buy shares in the security and any that hold it at the time of inclusion need to sell within a specified period of time.
• In practice, this also makes it very difficult for non-US, non-Chinese investors to invest as many brokers will simply cease trading in the security rather than check the nationality of the beneficiary behind each trade.
• This greatly increases the severity of the impact which is why this IPO is now likely to struggle when it finally lists.
• The company is now updating its prospectus and is hoping to proceed with the listing, but I don’t think that there is much point.
• Sentiment for Chinese technology is rock bottom at the moment and the shares of those that are not blocked are having a very hard time attracting any real interest.
• Hence, this added complication is likely to make matters much worse in terms of attracting new investors meaning that a better choice might be to retire and wait for better market conditions.
• The problem with that China will feel that its reputation as a technology and financial powerhouse will be tarnished if the US can effectively cancel its IPOs.
• However, I think China will have more egg on its face if it goes ahead and it turns out to be a complete disaster.
• I think that there is a chance that the IPO does go ahead but I would not be optimistic in terms of post-listing performance given the probable lack of demand.
• Hence, I would be very cautious of picking up this in the open market right after the listing especially as there are plenty of other bargains to be hard for those willing to run the regulatory gauntlet.
• Of these, Alibaba remains the best, which I still hold.