Urgent! How to evaluate the valuation of SenseTime, which plunged by 45%?

[Blue Tech Observation] On June 30th, there was a commotion in the Hong Kong stock market, with the "AI unicorn" SenseTime Technology (SenseTime-W 00020.HK) with a market cap of 200 billion yuan plummeting in a straight line during intraday trading, dropping more than 45%. By the closing of that day, the market cap had shrunk to 104.9 billion in a single day, with a closing price of 3.130 Hong Kong dollars, a total volume of 1.903 billion shares for the day, a turnover of nearly 6.2 billion, and a turnover ratio of 5.68%.

SenseTime Technology, known as the "number one AI stock" tech giant, was included in the Hang Seng Tech Index and the Hang Seng Composite Index in February this year, representing the Hong Kong Stock Exchange's full recognition of SenseTime Technology's strong fundamentals (long-term maintenance of a large market cap) and active trading (good liquidity), serving as an endorsement. SenseTime Technology has also maintained a nice stock price trend, but the major reversal it is currently experiencing seems to reflect the capital market's disapproval of its previous trillion-dollar valuation.

The stock price of the stocks that have been unlocked has dropped.

According to industry analysts, the sharp drop in SenseTime Technology's stock price this time may be related to the huge amount of shares being unlocked. Before the listing of SenseTime Technology, pre-IPO investors and cornerstone investors held 23.3 billion shares, accounting for nearly 70% of the company's total new share capital prior to the IPO, and 3.1% of the actual total share capital of SenseTime Technology, with a large market cap and shareholding volume.

Before the targeted issuance, cornerstone investors of SenseTime Technology included Softbank, Chunhua Capital, Yinhoo Capital, IDG, Guodian Fund, Shanghai International Group, Sailling, and Dinghui, among other well-known enterprises.

Perhaps to stabilize confidence in the capital markets, on the day of the share unlocking plunge, SenseTime Technology issued an announcement expressing confidence in the long-term value prospects of the group.

The announcement stated: 'Xu Li, Wang Xiaogang, Xu Bing, and several other management members of the group voluntarily pledged that they would not sell the B shares involved in the restricted shares unit adopted by the company on November 1, 2016, before December 29, 2022, and the B shares involved in the shares under the employee incentive plan (revised) adopted by the company on November 1, 2016.'

But the market is still in a state of panic, ushering in an unprecedented market bearishness towards SenseTime Technology since its listing.

There were already underlying risks of sustained losses before the plunge.

According to industry analysts, there may be three reasons for the sharp drop in SenseTime Technology's stock price: first, the impact of the huge unlocking, as this round of unlocking involves a large amount of funds and implies that all shares held by the original shareholders or cornerstone investors at the initial listing of SenseTime Technology will no longer be subject to selling restrictions. This is an earlier commitment voluntarily made by original shareholders and cornerstone investors to limit the sale and purchase of shares in order to maintain share prices and demonstrate the confidence of the original shareholders and cornerstone investors in the company.

Now that the expiration date means that the original shareholders and cornerstone investors can freely buy and sell shares of SenseTime on the stock market, and even sell all without holding any more, which can be understood simply as a significant 'bearish' behavior to some extent.

In fact, before its IPO, SenseTime had been continuously losing money, and its profit prospects were still uncertain. According to SenseTime's prospectus, in 2018, 2019, and 2020, it had net losses of 3.433 billion yuan, 4.968 billion yuan, and 12.158 billion yuan respectively. The first financial report after going public in 2021 showed a loss of 17.17 billion yuan, a 41.3% year-on-year increase, with an even larger adjusted net loss of 1.418 billion yuan, a 61.5% increased loss. Looking at the data, it is not difficult to find that whether before or after adjustment, SenseTime's loss in 2021 hit a new high.

There may be irrationality in the valuation of SenseTime.

According to professional analysis, if the PS ratio is used for estimation, SenseTime's current total market cap should correspond to a PS ratio of 18.9 times, and the market cap corresponding to the PS ratio of 35.5 before SenseTime's unlocking should be 35.5 times in 2021. Such a high PS ratio in the US stock market, which has always favored technology concept stocks, is also rare.

Currently, there are only 5 US companies with a total market cap exceeding $10 billion and a PS ratio exceeding 35.5 times, namely LUCID GROUP, RIVIAN AUTOMOTIVE, BILL.COM, ARGENX, and SNOWFLAKE. Among these five companies, except for LUCID GROUP being a startup company, their annual total revenue growth trend and PS ratio level are superior to SenseTime, showing more growth potential and sustainable profitability.

Has the bubble of SenseTime completely dissipated?

It can be speculated that SenseTime cannot be considered to have sustainable profitability. Therefore, coupled with the high valuation bubble phenomenon, it has resulted in insufficient market confidence and the inability to withstand the bearish signal of the huge unlocking release. Original shareholders, cornerstone investors, and retail investors have been selling off, leading to a sharp drop in stock prices.

There have been multiple doubts about the long-term sustainability of SenseTime: the long-term unprofitable financial status, the unclear prospects of AI commercialization, the huge executive compensation, and other issues...

But the question remains as to whether the current valuation bubble of SenseTime Technology has completely dissipated, and the rationality of its valuation still needs to be questioned, requiring scrutiny from the market and time.

(Image: Lv Ge)

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