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Chinese A.I. Startup Megvii Files for an IPO in Hong Kong Amid Protests

Chinese artificial intelligence startup Megvii Technology Ltd. is filing for an initial public offering on the Hong Kong Stock Exchange. The A.I. unicorn is expected to raise at least $500 million and possibly as much as $1 billion in its IPO, despite the economic uncertainty in Hong Kong as the city staggers through its twelfth consecutive week of anti-government protests and a recession looms.

The listing announcement comes days after one of its high-profile backers, the Chinese tech giant Alibaba Group Holding, decided to postpone its own $15 billion HKSE IPO because of Hong Kong's political unrest. Megvii's decision to list is one indication that Hong Kong is still an attractive destination in spite of the current market downturn and increasingly spooked investors in several sectors.

Ivan Li, head of research at Hong Kong-based CSL Securities, says that Megvii's relatively small size is an advantage under these market conditions—the amount of funds it has to raise is smaller, so it has a good chance of meeting its target compared to its "mega-sized peers."

"Hong Kong's investment community should welcome the proposed IPO of Megvii," Li says, adding that as the first Chinese A.I. company to go public, Megvii will enhance the diversity of Hong Kong's stock market.

Megvii was reportedly valued at over $4 billion after its last funding round in May, when it raised $750 million in funds, and the company tripled its year-on-year revenue in the first half of 2019 to earn $133 million.

Megvii was one of the earliest A.I. companies in China when it was founded eight years ago. The IPO will make it China's first publicly-listed A.I. firm, beating competitors like SenseTime and CloudWalk. IPO applications for the HKSE usually take three months to process, so the listing is expected to occur in the fourth quarter of the year.

The Beijing-based startup is known for its cloud-based facial recognition brand Face++, largely because of a Human Rights Watch report that said Face++ was used in an app for mass surveillance of ethnic Uighurs in Xinjiang. The allegation turned out to be false, and HRW issued a correction, but according to Megvii's prospectus, it caused "significant damages to our reputation which are difficult to completely mitigate."

Face++ software is in wide use in commercial services like smartphone unlocking and mobile payments. Through Face++, Megvii is the world's largest provider of third-party authentication software. Megvii also offers A.I.-driven logistics services and traffic monitoring. The company developed its own deep learning algorithm, Brain++, which it uses to train the algorithms that power its other software like Face++.

Apart from the risk associated with Hong Kong's unrest and resultant economic slump, Megvii is contending with political factors like the U.S.–China trade war, in which U.S. tariffs and blacklisting have already hurt Chinese tech companies.

Megvii was not one of the Chinese tech companies blacklisted by the U.S., but rumors circulated earlier this year, fueled by the HRW report, that the U.S. might ban it. Such controversy would likely make it difficult for Megvii, a homegrown Chinese company, to go public on a U.S.-based stock exchange.

Wary of that reputation, Megvii is setting up an A.I.-ethics committee and whistle-blowing procedures for employees, and customers must pledge in their contracts that they will not use Megvii technology for "any illegal or inappropriate purposes, including infringement of human rights."

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