With the Hong Kong Exchange reportedly greenlighting a revised prospectus for Megvii Technology, the Chinese facial recognition company currently blacklisted by the US, a pending IPO not only tests investor appetite at frothy valuations but whether institutional investors would participate for companies that are currently under an ethical spotlight.
Megvii’s plans to raise $500 million are now reportedly back on track after the Beijing-headquartered artificial intelligence company originally failed to win approval for its IPO in November, according to a Reuters news report.
The Hong Kong Stock Exchange’s Listing Committee – whose consent is essential for any IPO candidate – kicked back its application after concerns over the company’s “suitability” were raised, implying Megvii’s alleged human rights abuses in China’s Xinjiang Uighur Autonomous Region were a worry. Citi, Goldman Sachs, and J.P. Morgan are the main banks working on the deal.
The Hong Kong exchange is no stranger to hosting sanctioned companies. United Company Rusal, a Russian aluminium producer, was blacklisted in early 2018 but has since been absolved. Last year, the US sanctioned two COSCO subsidiaries for alleged involvement in ferrying crude out of Iran. But while the news generated selling pressure at the time, Rusal’s and COSCO’s share prices are both higher then when the story broke, suggesting investors are relatively agnostic and forgiving.
But as Chinese technology companies seek unicorn valuations, maybe investors will be less generous. Rusal and COSCO trade at high single digit multiples, placing them within the radar of quant funds chasing distressed asset prices.
Which is why Megvii’s listing has broader implications. A successful IPO in Hong Kong would indicate investors are still keen for technologies that are ubiquitous throughout China. Listings by ByteDance, the company behind TikTok, as well as Ant Financial, Alibaba’s payment platform, would cement this view.
Should the Megvii’s listing disappoint, it will be important to assess to what degree did valuations keep investors side lined or were more concerned about responsible investing.
And if you think ESG (environment, social and governance) investing is a passing fad, you are wrong. Investments in funds focused on socially responsible investing have surged to $17.67 billion, as of November last year, from $2.83 billion in 2015, according to Morningstar data. According to KPMG research, three in four of the largest companies across 49 countries claim they are employing ESG business models or sustainable methods, this compares to only 12% in 1993.
“(Facial, voice, and eye retina recognition) is the right technology. But if I am ESG compliant, how can I invest?” said a fund manager at a mid-tier asset management company who asked to remain anonymous.
Backed by the Alibaba Group, as well as Lenovo, China Mobile and CapitaLand, the fund manager added it would not be easy to take a “zero position” given who is behind Megvii as well as lacking alternatives in the Hong Kong market. However, sanctions would likely keep them from taking anything other than a small position.
According to Megvii’s estimates, only 1% of its $200 million revenue is generated out of Xinjiang Province where concerns lay. Even though ESG definitions vary across investment and asset classes, it would also seem counter intuitive to allow a company under US sanctions to draw a pass, as the fund manager pointed out.
But some names make the cut. iFlytek, a mainland listed Chinese AI company that was blacklisted along with Megvii, trades at a forward multiple above 90x and includes high profile institutional investors as key shareholders. Would a Hong Kong listing of Megvii replicate this success or would they lack buyers on the ground of ESG and responsible investing?
Like most IPOS, a successful listing comes down to the price at offering. While overall investors seem to like Megvii, it is hard to ignore a valuation for any stock that comes with serious ethical baggage.