With a staggering 800 million yuan bet on its shoulders, Shengtong Technology, an enterprise-level interactive AI supplier, is making a splash in the Hong Kong stock market IPO.

In the midst of the surging AI wave, another AI company is attempting to enter the capital market.

On January 12th, Shanghai Shengtong Information Technology Co., Ltd. (referred to as "Shengtong Technology") submitted an application to the Hong Kong Stock Exchange, with CICC as the exclusive sponsor.

Before its IPO on the Hong Kong stock market, Shengtong Technology was listed on the N board of the Shanghai Equity Custody and Trading Center, which is one of the regional equity markets, from 2015 to 2022. It later transferred to the Sci-Tech Innovation Board of the same market.

Shengtong Technology is a domestic provider of enterprise-level information technology solutions, mainly serving government and enterprise clients.

According to iResearch, the market size of China's AI solution market in 2022 was 232.9 billion yuan, with interactive AI solutions accounting for 24.9% of the market share, with a market capacity of 58 billion yuan, approximately half of the largest sub-market, computer vision AI solutions.

Based on the 2022 revenue, Shengtong Technology ranks second in the Chinese enterprise-level full-stack interactive AI solution market, with a market share of 2.7%. Although it is second only to IFLYTEK (002230.SZ), which has a market share of 14.4%, the difference between the two is 11.7 percentage points.

From 2020 to 2022, Shengtong Technology achieved revenues of 347 million yuan, 460 million yuan, and 515 million yuan, with net profits of 34.89 million yuan, 36.38 million yuan, and a net loss of 90.88 million yuan, respectively.

In the first three quarters of 2023, Shengtong Technology's revenue increased by 50.78% YoY to 488 million yuan, but compared to the net loss of 2.24 million yuan in the first three quarters of 2022, the net loss significantly expanded to 61.43 million yuan.

The main reason for the loss is that Shengtong Technology has a wager agreement with institutional shareholders, which results in a portion of its equity being reflected as "redeemable capital contributions" liabilities, increasing from 39.9 million yuan in the first three quarters of 2022 to 142 million yuan in the same period of 2023.

As of the first three quarters of 2023, the total amount of redeemable capital contributions of Shengtong Technology has reached 848 million yuan. Shengtong Technology believes that within 12 months from September 30, 2023, investors will not request redemption.

In the first three quarters of 2023, Shengtong Technology recorded an operating profit of 85.69 million yuan, with an operating profit margin of approximately 17.55%, and a gross profit margin increased by 1.92 percentage points YoY to 41.08%.

In the prospectus, Shengtong Technology expects the gross profit margin to continue to rise in 2023, due to the inclusion of more profitable software systems in its solutions and an improvement in the standardization level of its solutions.

In 2022, the revenue proportion of Shengtong Technology's pure software solutions increased from 18.7% in the previous year to 33.1%, while software and hardware solutions reached 66.9%. As of the first three quarters of 2023, the revenue proportion of Shengtong Technology's pure software solutions has increased to 37.8%. The interactive AI technology solutions of Shengtong Technology are mainly applied to four sectors: urban management, automotive, telecommunications, and finance. In the first three quarters of 2023, urban management and administration contributed CNY 237 million, accounting for 49.5% of Shengtong Technology's revenue. The revenue contribution from the telecommunications and automotive industries was 22% and 18% respectively, while the finance industry accounted for 9%, a decrease of 3.7 percentage points compared to the previous year.

In the urban management business, there is a risk of over-reliance on revenue from a single project.

According to the prospectus, from 2020 to 2022, the Chengdu Smart Town project accounted for 38.1%, 26.4%, and 24.9% of Shengtong Technology's revenue respectively, representing more than half of the revenue from urban management and administration in each period.

The fact that nearly half of the revenue comes from urban management means that Shengtong Technology's downstream customers are mainly government and enterprise clients, who generally have longer payment cycles.

As of the first three quarters of 2023, Shengtong Technology's trade receivables and other receivables increased by 21.9% YoY to CNY 414 million.

This is also a common characteristic of AI companies doing B2B business. As of the first three quarters of 2023, iFLYTEK had a turnover days of accounts receivable of 233 days, while Geling DeepPupil (688207.SH) had 235 days.

In the risk disclosure section of the prospectus, Shengtong Technology also stated that due to the reliance on sales to the public sector, it requires a significant amount of time, money, and upfront costs, with no guarantee of sales volume in return.

Currently, Tang Jinghua, the Chairman of Shengtong Technology, holds a total stake of 27.66%. Yingke Capital, through its fund under Yingke Innovation Asset Management Company, holds a total stake of 11.75%, making it the largest institutional investor.

In this fundraising initiative for the Hong Kong Stock Exchange, Shengtong Technology plans to use the funds raised to strengthen the research and development of key technologies, seek domestic and international investment and M&A opportunities, and for general corporate purposes.