Asian Tech Press (Nov 28) -- Chinese AI firm SenseTime Group (0020.HK) plunged on Tuesday after a short-seller report accused it of artificially inflating its revenue.
U.S. short seller Grizzly Research LLC said in a report that SenseTime is "artificially (un)intelligently inflating revenue through highly questionable revenue round-tripping schemes."
Grizzly Research said two court cases describe SenseTime providing funds to customers, either directly or through intermediaries, which in turn were used to purchase goods from SenseTime that may never have been delivered.
The short-seller report also quoted Louis Jiang Zhu, the chief executive of financial media firm CapitalWatch, as having said something to accuse SenseTime of revenue fraud.
Last August, Zhu questioned SenseTime's sales performance on social media platform Wechat, according to Chinese tech outlet 36Kr.
Zhu seemed to have some understanding of SenseTime's revenue round-tripping program and described it. He believed that SenseTime found an intermediary third-party company to "invest" 200 million yuan in four or five companies in the form of equity, and then these four or five firms acted as SenseTime's agents and transferred 200 million yuan in sales to SenseTime.
According to Zhu, SenseTime invested in the third-party companies in exchange for an equivalent amount of revenue, without actually delivering the products.
Grizzly Research believed "that SenseTime's cash burn will continue unabated despite attempts to stem losses via headcount reductions, while large (and growing) accounts receivables indicate, at best, an inability to collect payment and, at worst, fake revenue."
The short-seller report also mentioned that smart money is scrambling to exit the AI company.
Since November 2022, Chinese e-commerce giant Alibaba has been selling its holdings in SenseTime.
In July this year, SenseTime made an announcement that Taobao Holding Limited, an Alibaba subsidiary, had sold all its Class B shares in the company in an orderly manner.
That means after a 5-year-long investment, Alibaba has completely liquidated its position out of SenseTime.
In addition to Alibaba, major shareholder SoftBank has also sold SenseTime shares since December 2022.
As of July 31 this year, after six reductions, SoftBank still holds about 3.37 billion SenseTime shares, cutting its stake to 12.99%.
Moreover, SenseTime announced in mid-July that the company's co-founder and executive director, Xiao'ou Tang, allocated all Class B shares he held to limited partners, which were acting as independent third parties and pre-IPO investors in the company.
With the allocation, Tang no longer holds any Class B shares in SenseTime.
In a filing to the Hong Kong Stock Exchange on Tuesday midday, SenseTime responded to the short-seller report by saying, "The report is without merit and contains unfounded allegations and misleading conclusions and interpretations."
SenseTime said, "It also shows a lack of understanding of the company's business model and financial reporting structure, and a lack of thorough reading of the company's public filings."
"The author of the report did not contact the group to verify the relevant information or gain any understanding of the group's financial statements," it said.
The AI firm added, "The company's board of directors is reviewing the allegations and considering the appropriate course of action to take to safeguard the interests of all shareholders."
Following the short-seller report, SenseTime's Hong Kong-listed shares had tumbled 9.7%, its biggest single-day drop since April this year.
As of press time, the company was down more than 4%.
