Megvii pushes ahead with IPO plans as biometrics market grapples with ban fallout

Chincotech-facial-recognition

The potential blockbuster initial public offering of biometric facial recognition unicorn Megvii is still being planned for early November, despite the company being added to the U.S. government’s Entity List, anonymous sources told the South China Morning Post.

Megvii was among 28 organizations added to the U.S. Entity List earlier this month, but says allegations that it has played a role in the human rights violations that ostensibly motivated the ban are “unsubstantiated.” CEO Yin Qi told employees in an internal memo that the company will “fight” inclusion on the list, according to the SCMP. The company lost access to chips from Nvidia and other key components as part of the ban.

Financial documents show Megvii lost 3.4 billion yuan (U.S.$480 million) in 2018, and 759 million yuan ($107 million) in 2017. The company also burned through 674 million yuan in the first six months of this year, and was left holding 1.4 billion yuan in cash and equivalents, plus 3.3 billion yuan in term deposits. The company may, therefore, require a cash infusion to continue its operations within the next year or so.

One entry among 40 pages of risk factor examinations in Megvii’s IPO filing documents notes the possibility of trade restrictions imposed by the U.S., noting it could have a material impact on the company’s results.

Since the announcement of its inclusion on the Entity List, Megvii has faced a re-evaluation by Goldman Sachs of its sponsorship of its IPO, and an investigation by the government of Taiwan into Megvii’s contracts there. SCMP reports that the U.S. government is also considering blocking government pension funds from investing in China.

Meanwhile, the blacklisting of Dahua and Hikvision is causing confusion among American partners, end users, and others in the supply chain, according to Frost & Sullivan.

The two companies rank second and third in sales to the global surveillance market, which is worth $20.48 billion, but are on pace to be the top two vendors of IP surveillance cameras, the research and consulting firm notes.

Both have continued to build a strong presence in the U.S. despite a 2018 ban on the use of their hardware by government agencies, and talks took place in other regions around similar measures when that ban was put in place, no other jurisdiction followed the U.S. Dahua and Hikvision maintained their market position, and had higher than average growth rates over the past year, so the broader impact remains to be seen.

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