20220826-招银国际-商汤-W-00020.HK-A_slower_AI_adoption_pace_amid_macro_uncertainties_10页_1mb

SenseTime (20 HK) Company Update Summary

Core Content Overview

This report provides an update on SenseTime's financial performance and outlook, highlighting the impact of macroeconomic uncertainties and the pandemic on its business segments. Despite these challenges, the company is showing signs of resilience with the emergence of AIDC as a new revenue stream. The report maintains a "BUY" rating with a revised target price of HK$3.07, reflecting a more conservative outlook.

Key Financial Performance

• FY1H22 Revenue: RMB1.42bn (-14% YoY), missing estimates by 26% and consensus by 31%
• Gross Margin: 66.0% (-7 ppts YoY), below estimates by 6 ppts and consensus by 3 ppts
• Operating Loss: RMB2.27bn, below estimates
• Net Loss: RMB3.158bn, missing estimates
• Adjustments: Adjusted for share-based compensation, operating expenses rose 39% YoY to RMB2.9bn

Segment Performance

• Smart Business: Revenue down 12% YoY to RMB568mn; customer count down 19% YoY to 512; average revenue per customer up 9% YoY to RMB1.1mn
• Smart City: Revenue down 45% YoY to RMB434mn; number of cities increased 30% YoY to 155; average revenue per city down 58% YoY to RMB2.8mn
• Smart Life: Revenue up 98% YoY to RMB292mn; customer count up 18% YoY; average revenue per customer up 67% YoY to RMB1.60mn
• Smart Auto: Revenue up 16% YoY to RMB184mn; customer count up 54% YoY to 20; average revenue per customer up 11% YoY to RMB6.0mn

Revenue and Margin Trends

• Revenue Mix: Smart Business (40%), Smart City (44%), Smart Life (11%), Smart Auto (4%)
• Gross Margin: Declined to 66.0% from 73.0% in FY1H21
• Operating Margin: -160.5% (vs. -139.4% in FY1H21)
• Adj. EBITDA Margin: -196.5% (vs. -33.7% in FY1H21)
• Net Margin: -223.1% (vs. -224.2% in FY1H21)

Capital Expenditure and Operating Model

• AIDC Launch: AIDC in Shanghai is generating recurring revenue, but requires significant capital investment
• Gross Margin Impact: Selling computing power affects gross margin due to depreciation expenses
• Capital Expenditure: Increased in FY1H22, impacting SenseTime's asset-light model
• Operating Expenses: Adjusted for share-based compensation, operating expenses increased 39% YoY

Earnings Revisions

• Revenue Revisions: Revised FY22-24E revenue down by 10-12% due to macro uncertainties
• Earnings Misses: Multiple financial metrics missed estimates, including gross profit and net profit
• EPS Revisions: EPS revised down significantly, reflecting the overall earnings weakness

Valuation and Investment Outlook

• Target Price: HK$3.07 (down from HK$4.50)
• Valuation Methodology: EV/sales is used as AI deployment is in an early stage
• Target Multiple: Based on a 30% premium to China AI peers
• Market Comparison: SenseTime's EV/sales is at 11.7x (FY22E), with peers showing a range of 6.1x to 21.7x

Share Performance

• Market Cap: HK$78,742mn
• Avg. 3 Months Turnover: HK$348.82mn
• 52-Week High/Low: HK$9.70 / HK$2.04
• Total Issued Shares: 25,979mn
• Shareholding Structure:
  • Softbank: 18.4%
  • ESOP: 14.9%
  • Alibaba: 9.4%

Share Performance Trends

• 1-Month: -7.8% absolute, -1.4% relative
• 3-Month: -52.5% absolute, -50.5% relative
• 6-Month: -65.6% absolute, -59.2% relative

Financial Summary

• Income Statement:
  • Revenue: RMB5,053mn (FY22E), RMB6,942mn (FY23E), RMB9,184mn (FY24E)
  • Cost of Sales: RMB1,784mn (FY22E), RMB2,545mn (FY23E), RMB3,368mn (FY24E)
  • Gross Profit: RMB3,269mn (FY22E), RMB4,397mn (FY23E), RMB5,815mn (FY24E)
  • Net Profit: RMB-4,662mn (FY22E), RMB-5,344mn (FY23E), RMB-5,104mn (FY24E)
• Cash Flow:
  • Net cash from operating activities: RMB-7,644mn (FY22E)
  • Capital Expenditure: RMB7,735mn (FY22E)
  • Net cash from investing activities: RMB-7,548mn (FY22E)

Strategic Outlook

• Smart City Recovery: Expected to sequentially recover in FY2H22E
• AIDC: A new and recurring revenue stream
• Leadership in AI: Recognized for its AI software-centric business model and leadership in the AI field
• Free Float: Considered in the valuation model

Peer Comparison

• China AI Peers:
  • Ainnovation: EV/sales 6.1x
  • Cambricon: EV/sales 21.7x
  • Arcsoft: EV/sales 13.8x
  • Hikvision: EV/sales 2.8x
  • Dahua: EV/sales 1.3x
• Global AI Peers:
  • Palantir: EV/sales 7.6x
  • UiPath: EV/sales 8.6x
  • C3.ai: EV/sales 4.7x
  • Nvidia: EV/sales 15.9x
  • Ambarella: EV/sales 9.0x

Conclusion

SenseTime faces challenges due to macroeconomic uncertainties and the pandemic, particularly in Smart City and Smart Business segments. However, AIDC is emerging as a positive factor, providing recurring revenue. The company's financial performance has missed estimates, but its leadership in AI and potential for recovery in Smart City projects support the "BUY" rating. The target price reflects a more cautious outlook, considering the current economic environment.