SenseTime Group’s Hong Kong IPO of up to HK$5.99bn (US$768m) was in limbo on Friday after the Chinese artificial intelligence company was put on a blacklist that bars Americans from investing in it.
A Financial Times report on Thursday that the US Treasury was going to place the company on the blacklist led to a day of tension and speculation during Hong Kong trading hours on Friday as all involved waited for an announcement from the US Treasury.
That announcement came just before midnight Hong Kong time with the Treasury saying that SenseTime was one of five individuals and 10 entities sanctioned for "their connection to human rights abuse and repression".
“On International Human Rights Day, Treasury is using its tools to expose and hold accountable perpetrators of serious human rights abuse,” deputy secretary of the Treasury, Wally Adeyemo, said in a statement.
The statement said that "SenseTime was sanctioned because of the role its technology plays in enabling human rights abuses against the Uyghurs and other Muslim minorities in Xinjiang".
SenseTime, it added, "has developed facial recognition programs that can determine a target’s ethnicity, with a particular focus on identifying ethnic Uyghurs. When applying for patent applications [SenseTime] has highlighted its ability to identify Uyghurs wearing beards, sunglasses, and masks".
Speaking during trading hours in Hong Kong, people with knowledge of the situation said SenseTime was awaiting the official announcement from the US before deciding what its next step would be.
“The company was still meeting investors as of Friday morning [Hong Kong time] and they haven’t pulled the plug yet,” said a person with knowledge of the matter. “At the same time it was communicating with the Stock Exchange of Hong Kong on how to handle the IPO once the blacklist is formally announced.”
The deal's books were covered, with support mainly coming from Chinese investors, in addition to some participation from investors in Europe and South-East Asia. The deal was marketed under the 144A format, but US investors did not show much interest as the company was already on a separate US list that restricts companies from using American suppliers.
By midnight Hong Kong time on Friday, shortly after the US Treasury statement, the picture was hardly any clearer. "There will be a million calls over the weekend," said a person involved with the deal. "We’ve got a load of stuff we need to think about."
Some investors in the book before Friday chose to withdraw their orders. Eight cornerstone investors have committed US$450m to the deal, representing around 59% of the float.
It is uncertain what the blacklisting would mean for US investors that are already shareholders. Silver Lake is by far the largest with a 3% stake, while Fidelity and Qualcomm have stakes below 0.5%.
One of the things the bankers involved will have to think about is their role on any attempt to push on with – or reshape – the IPO.
It is certainly possible that some or all of the IPO's sponsors and bookrunners will feel unable to continue with the deal, if their lawyers deem that they are captured by the regulatory action.
“If any of the sponsors drop the deal, the delay could take months,” said another person familiar with the situation. The shares were originally scheduled to start trading on December 17.
Sponsors CICC, Haitong International and HSBC all have operations in the US. The three sponsors are also joint global coordinators and joint bookrunners with CMB International, China Merchants Securities and DBS. There are 11 other joint bookrunners – all Chinese banks.
But even with that background and with demand dropping out of the book on Friday those close to the company said it was still keen to push ahead with the deal although it is considering a smaller transaction.
Even in that case, additional disclosures will now be required, leading to some delay at a minimum. If a smaller deal is pursued then that could mean having to run the retail offer afresh, which would delay pricing for several weeks.
Increasing tension
SenseTime’s blacklist inclusion comes after Chinese ride-hailing giant Didi Global announced it would delist from the New York Stock Exchange five months after its ill-fated IPO there and pursue a listing in Hong Kong.
Some US investors were burnt by investing in Didi after China's cyberspace regulator launched a data security probe into the company just two days after the listing and removed its app from app stores in China.
Didi shares have since plunged. They closed at US$6.66 on Thursday, down 52% from the IPO price.
US regulators are also taking a stricter approach on China-to-US listings. The Securities and Exchange Commission announced earlier this month Chinese companies that list on US stock exchanges must disclose whether they are owned or controlled by a government entity and provide evidence of their auditing inspections.
The regulator also agreed to allow the Public Company Accounting Oversight Board to determine which US-listed foreign companies should be delisted for failing to comply with US audit requirements.
Chinese authorities are reluctant to let overseas regulators inspect local accounting firms because of national security concerns.
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