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Short seller sounds alarm on SenseTime revenues, citing smart city decline and fraud

Short seller sounds alarm on SenseTime revenues, citing smart city decline and fraud
 

SenseTime is defending itself from accusation of fabricating revenue, or at least a lack of risk management, by short seller Grizzly Research LLC, ABC News reports.

A report from Grizzly refers to a pair of court cases that allegations of “revenue round-tripping” have emerged from. The practice allegedly involves investments in other companies by SenseTime in return for purchases agreements in which money comes back to SenseTime “without real delivery of product.”

The firm also says it found “several” related parties that are controlled by senior SenseTime officials that have not been disclosed. Grizzly says “SenseTime appears to be hiding these entities off the balance sheet, reminiscent of the Philidor-Valeant relationship.”

Further, the government contracts SenseTime holds are “unprofitable (and seemingly unpaid),” Grizzly says.

SenseTime responded that the report is “without merit,” according to ABC News, and says that its allegations are unfounded. Grizzly “shows a lack of understanding of the company’s business model and financial reporting structure, and a lack of thorough reading of the company’s public filings,” the company says.

The stock price for SenseTime fell by 9.7 percent in Tuesday trading before recovering roughly half of the difference, and closing down 4.9 percent.

SenseTime has dealt with the imposition of sanctions by the U.S. government, which contributed to a delay of a year and a half for the company’s IPO, and prominent investor Alibaba divested enough shares in July to fall below a threshold requiring disclosure if it sells off more. Grizzly claims that Alibaba has since sold its remaining 3.15 percent share.

In the meantime, the kinds of massive deployments of surveillance cameras and facial recognition software that the company built its reputation on appear to have slowed down.

The company was valuated at $5.9 billion in October, way down from its $16.5 billion IPO, in part due to a 58 percent decline in revenue from smart city surveillance contracts.

Trouble in domestic surveillance market

Perhaps the most damning part of the report is the suggestion that SenseTime’s revenues from biometric smart city projects, including those already completed, are at risk.

Grizzly refers to an OHCHR report from 2019 that estimates 40 percent of SenseTime’s revenue was coming form government contracts. The firm also analyzes company reports to show that its smart city business, which holds many of these contracts, declined by almost half from 2021 to 2022. SenseTime stated in 2021 that almost half of its revenues from the first half of that year came from smart city contracts.

Reports of crippling debt among China’s local governments have been circulating since at least 2021, the same year Bloomberg referred to China’s AI giants as “cash starved.”

Grizzly points out the fear that these combined circumstances hold for SenseTime: “the sharp loss of principal revenue sources from urban and regional governments due to the real estate bubble suggests these receivables may never be collected.”

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