SenseTime Group has fended off claims made in a short-seller report, accusing the Chinese artificial intelligence (AI) company of questionable business and accounting practices, in the latest stock hit for the once-promising market leader.
The report released Tuesday by short-seller firm Grizzly Research cited court cases, official documents and insiders accusing the company of engaging in efforts to inflate its revenues through means such as “round-tripping,” in which it financed companies to, in turn, purchase goods from SenseTime.
The AI firm’s stock tumbled as much as 9.7 per cent before closing about 5 per cent lower in Hong Kong on Tuesday, hitting its lowest level since October and provoking a response, in which SenseTime said the report was “without merit” and contained “misleading conclusions and interpretations”.
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“The company’s board of directors is reviewing the allegations and considering the appropriate course of action to take to safeguard the interests of all shareholders,” the filing to the Hong Kong stock exchange read, adding that the company would make additional disclosures in due course.
The firm’s share price closed down 0.73 per cent on Wednesday.
The company first gained prominence in 2015 when it developed a facial recognition algorithm that was 99.55 per cent accurate. The breakthrough saw it become China’s leading provider of AI-powered facial recognition technology, used primarily in the public sector, including by the Chinese police.
Its business surged in 2020 as local governments in China implemented facial recognition technology as part of their efforts to enforce Beijing’s zero-Covid policy. By 2021, SenseTime claimed to be Asia’s largest AI software firm.
However, Grizzly’s short seller report adds to a list of difficulties the company, once considered one of China’s promising “four little dragons” of AI, has faced in recent years.
The move followed SenseTime’s addition to a US trade blacklist in 2019, which restricted its access to certain technologies originating from the US, based on related accusations in Xinjiang. SenseTime denied both allegations from the US.
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According to local media outlet Caixin, SenseTime conducted a large-scale downsizing in 2022, cutting over 1,000 people, representing 17 per cent of its workforce. In August the following year, Caixin reported that downsizing had continued across various departments, after the company reported a more than 30 per cent year on year decline in gross profits for the first six months of the year.
However, according to Charlie Chai, vice head of research at independent investment research provider 86 Research, the outlook for the company remains in question due to poor macroeconomic conditions and increased competition in China’s AI market.
“The company’s revenue has been very reliant on public finance and fiscal spending,” said Chai, adding, “over the past few years, municipal and provincial governments have been strapped for cash, and SenseTime seems to have been a major victim”.
Meanwhile, while SenseTime has an edge in computer vision and facial recognition technologies, it found itself competing with local tech giants in its other AI businesses, with the rivals more suited to pursuing the cash-burning ventures.
“Historically in China, early movers in new technologies do not necessarily sustain an edge once the new field gains the attention of large conglomerates, like Huawei, Alibaba, Tencent and Baidu,” Chai said, adding that this has already happened to the other three AI dragons – Cloudwalk Technology, Megvii and Yitu.
Alibaba owns the South China Morning Post.
Nevertheless, according to a research note from 86 Research seen by the Post on Tuesday, the company will not be changing its hold rating on SenseTime in the wake of the Grizzly report.
86 Research’s note added that references to accounting frauds were “peripheral at best” and would not affect its current rating of the company.
While Grizzly’s report had outlined many of the challenges for the business, such as increased competition, chip-supply uncertainties, and increasing receivables, these have been previously highlighted and offer no new incremental information, it said.