January 24, 2019 / 2:46 AM / a year ago

Breakingviews - Big Brother startups offer white knuckle returns

SenseTime Co-Founder Xu Chiheng talks about the surveillance technology of his company as it is running on screens at the SenseTime office in Beijing, China, October 11, 2017. Picture taken October 11, 2017. REUTERS/Thomas Peter

HONG KONG (Reuters 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.

Founded in 2014, Alibaba and Silver Lake Partners-backed SenseTime has become a $5 billion artificial intelligence powerhouse. It’s customers and partners include local Chinese governments, Japanese automaker Honda and U.S. chipmaker Qualcomm. The company is trying to raise about $2 billion in new financing, Bloomberg reported earlier this month. Meanwhile, rival Megvii, which makes similar software, wants to raise up to $1 billion from a Hong Kong initial public offering, Refinitiv publication IFR reported last week.

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.  

Breakingviews

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