With a loss of more than 1.1 billion yuan in 43 months, Li Kaifu's chairman of the board of directors of the innovative Qizhi applied for listing in Hong Kong for the second time

Reporter | Lu Zhigao

Four days after SenseTime was officially listed, another artificial intelligence company, Innovation Qizhi, also restarted its way to Hong Kong.

On January 3, Qingdao Innovation Qizhi Technology Group Co., Ltd. (hereinafter referred to as "Innovative Qizhi") once again applied to the Hong Kong Stock Exchange for listing. Previously, the company's prospectus filed in June 2021 expired in December of the same year.

Innovative Qizhi mainly provides enterprises with full-stack AI products and solutions, with Three independently developed proprietary AI platforms of Orion, ManuVision and MatrixVision, serving end users and system integrators in manufacturing, finance, retail and other industries.

Specifically, the Orion platform is used to train three algorithm models, including computer vision algorithm models for defect detection, object localization, character or code recognition, and dimensional measurement, edge video analytics algorithm models for understanding video, and machine learning algorithm models for structured data for intelligent prediction and intelligent decision-making. These algorithm models can be transferred between three AI platforms, with the image processing algorithm model being used for the ManuVision platform and the video processing algorithm model being used for the MatrixVision platform.

According to the company, in practical use, its products and solutions can help customers optimize their business or production processes. For example, for large gas stations with a daily flow of more than 2,000 vehicles, the license plate recognition accuracy of the whole station car matching and tracking technology is 99.9%; the defect detection rate of the AI screw quality detector is 99%, the measurement accuracy is 0.02 mm, the effective production speed is 250-300 pieces per minute, and the detection efficiency is about 8 times higher than that of manual inspection.

In the course of several years of development, while the revenue of Innovation Qizhi has grown rapidly, the loss is also expanding. According to the prospectus, during the reporting period from February 2018 to September 2021, the company's revenue was 0.37 billion yuan, 229 million yuan, 462 million yuan and 553 million yuan, while the net loss was 0.71 billion yuan, 248 million yuan, 361 million yuan and 438 million yuan, respectively.

In response, the company explained that the main reason for the increase in net loss was the increase in general and administrative expenses and research and development expenses. Among them, general and administrative expenses were $0.5 billion, $127 million, $195 million and $311 million, accounting for 133.6%, 55.4%, 42.2% and 56.3% of the revenue in the same period, respectively, while R&D expenditure was $0.29 billion, $113 million, $182 million and $177 million, accounting for 77.1%, 49.4%, 39.3% and 31.9% of the revenue in the same period, respectively. At the same time, the company expects that as the future business grows, the expenses of these two parts will continue to increase. This also means that its future losses are at risk of further expansion.

Innovation Qizhi also realized this risk and decided to optimize the expenditure of these two parts. For general administrative expenses, measures such as raising the threshold for recruited administrative personnel, streamlining the organizational structure, and improving information systems will be adopted; for R&D expenditures, measures such as formulating annual R&D project plans and outsourcing non-critical R&D to third-party service providers will be adopted.

In response to the pressure of continued losses, the company raised about 2.5 billion yuan through financing, including Becoming Capital, Innovation Factory, CICC Jiazi, China Renaissance Capital, SoftBank Vision Fund, etc. According to the prospectus, as of September last year, its cash and cash equivalents were 1.655 billion yuan, and the partners Of Innovation Factory, Innovation Factory Incubation and Innovation Factory Partners Wang Hua and Tao Ning held about 30.01% of the company's shares, making it the single largest shareholder group. As the founder of Innovation Factory, Kai-Fu Lee is also the chairman of the company.

In addition to the risk of continuous losses, the fluctuations in the gross profit margin of Innovation Qizhi are also worth paying attention to. During the reporting period from February 2018 to September 2021, its gross profit margin was 62.9%, 31.3%, 29.1% and 30.9%, respectively. The company explained that the products sold in 2018 were mainly software-based solutions, and from 2019 onwards, the products sold were mainly software and hardware integration solutions, coupled with competitive pricing in order to expand customers in the manufacturing and financial services industries, resulting in a decline in gross margins.

It is also understandable to expand the customer's operation in this way. After all, compared with SenseTime, Megvii, Yitu Technology and Yuncong Technology, Innovation Qizhi, which was founded in February 2018, is still just an industry recruit. The actual effect is also very obvious, as of September last year, it has a total of 130 customers. From 2018 to 2020, the number of manufacturing customers increased from 16 to 93, and the number of customers in the financial services industry increased from 2 to 18.

Due to weak bargaining power, the company's receivables and notes as a whole showed an upward trend. During the reporting period, the corresponding amounts were $0.16 billion, $121 million, $190 million and $296 million, with 76 days, 115 days, 135 days and 137 days respectively. In order to reduce risk, in addition to establishing customer credit policies, implementing enhanced credit term review and approval procedures, the company has also strengthened the performance review of accounts receivable management for relevant sales personnel.

Innovation Qizhi predicts that the company's overall gross profit margin will steadily increase in the short term. The reason for this is that as the business grows, its bargaining power for suppliers increases, while it will enjoy a better pricing bargaining position for its expected expanding small and medium-sized customer base, and on the other hand, it will implement a long-term strategy of diversifying its product portfolio and incorporate more software solutions with relatively high gross margins.

According to Frost & Sullivan, the size of China's artificial intelligence market will be about 185.8 billion yuan in 2020, accounting for 12.2% of the global artificial intelligence market, and it is expected to reach 1,045.7 billion yuan in 2025, accounting for 20.9% of the global artificial intelligence market. Among them, the scale of China's enterprise AI market has reached about 139.4 billion yuan in 2020, and it is expected to reach about 836.6 billion yuan in 2025, with a compound annual growth rate of 43.1%.

Although the market is huge, there are already many powerful artificial intelligence companies entering the game, and typical players include SenseTime, Megvii, Yitu Technology and Yuncong Technology. Among them, SenseTime has been listed on the Hong Kong Stock Exchange, and Megvii Technology and Cloudcong Technology have been reviewed and are in the stage of listing registration. According to the prospectus, SenseTime, Megvii and Yuncong Technology will have revenues of 3.446 billion yuan, 1.39 billion yuan and 755 million yuan respectively in 2020.

In addition to the continuous huge losses, the complex international situation also brings great challenges to the development of artificial intelligence companies. The "AI Tigers" have all been on the "blacklist" of the United States, and innovative Qizhi has transactions with companies in the "blacklist" of the United States. Although Innovation Qizhi said that it will continue to deal with suppliers on the "blacklist" without violating the restrictions of applicable export management regulations, this will undoubtedly lay hidden dangers for its future development.

In addition, with the continuous improvement of the importance of data, the introduction of a series of laws and regulations has also put higher requirements on the security and compliance of data by artificial intelligence companies. Innovation Qizhi said that the company's data sources include data simulated by the self-developed data labeling platform, on-site receipt collection directly authorized by customers or the company, and data from public datasets that will be used to train AI algorithm models for its proprietary platform. As of July 2021, it has stopped collecting data containing personal information and does not have the personal information of more than one million users.

Faced with an increasingly complex environment, the company has chosen to respond by improving its R&D capabilities and increasing talent in the field of artificial intelligence. As of September last year, it has applied for 634 AI-related patents and successfully registered 125 AI-related patents, including 79 invention patents. The key is whether these technologies can be smoothly transformed into results and successfully commercialized. As for the final effect, it remains to be further tested.