China is nurturing local hi-tech companies to fulfil its ambitions of becoming the global leader in fields such as artificial intelligence by 2030 and trying to offset any damage to promising start-ups from the US-China trade war.

The Shanghai Stock Exchange launched the Star Market in mid-2019, bringing together Chinese tech companies and domestic investors. The Nasdaq-styled board allows unprofitable companies in areas such as AI, cloud computing, biotech and green energy to list in China for the first time.

The Star Market, established under the orders of Chinese President Xi Jinping, also represents a bold move by Shanghai to lure tech companies away from other financial hubs such as Hong Kong and New York.

Citic Securities is advising Cayman Islands-domiciled Megvii on the Star listing, which will take the form of a Chinese Depositary Receipt (CDR). The first step in the months-long process is to make sure that senior management and major shareholders are up to scratch on the corporate governance responsibilities of leading a listed company, according to the company’s filing.

An IPO would give Megvii’s shareholders, including Alibaba Group Holding – the owner of the Post – a chance to exit or partially sell their shares. Other shareholders of Megvii include Alibaba’s affiliate Ant Group, the personal computer maker Lenovo, Foxconn, the world’s largest contract electronics manufacturer, and the Abu Dhabi Investment Authority (Adia).

Megvii applied for a US$500 million IPO on the main board of Hong Kong’s stock market in August 2019. Later that year, the company hit pause on business activity to communicate with clients and suppliers about the US government’s decision to include it on a blacklist for alleged human rights violations against Muslim minorities in China’s Xinjiang region.The firm was one among eight companies included on the so-called entity list. Since then Washington has added more companies as US-China relations have deteriorated.

Megvii objected to its inclusion on the list and said it had generated only around 1 per cent of its revenue from projects in Xinjiang in 2018 and no revenue from the area in the six months ended June 30.

Megvii was keen to list in Hong Kong, not only to raise capital but also to diversify its shareholder base and boost its brand outside its home market. The Beijing-headquartered firm started expanding across the rest of Asia and the Middle East in 2018.

Megvii posted operating losses of just over 115 million yuan (US$16.2 million) in the first six months of 2019, according to its Hong Kong IPO filing documents.

Megvii’s peers include SenseTime and Hikvision in China, as well as Cognex in the US and Japan’s Keyence.

The company was caught up in the global debate about potential privacy and data abuses by users of facial recognition. As of 2019, the start-up generated roughly a third of its revenues from projects where government departments are the end users. Surveillance and security is by far the largest application of facial recognition tech in China.

Founded in 2011, Megvii set up an AI ethics committee last year to guard against the weaponisation of its tech.

The company was last valued at more than US$4 billion after raising US$750 million in May 2019.

Additional reporting by Enoch Yiu 

This article appeared in the South China Morning Post print edition as: Megvii goes ahead with plan to list on Shanghai bourse

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