Subscribe

Briefing Sep 17, 2020 05:55 pm EqualOcean

AI Firm iFLYTEK Closes China Mobile-Led Funding Round

News EO
News · 2
report
News EO
Oct 6, 2020 12:01 am ·

Despite the Pandemic, Chinese AI Firm iFLYTEK Expands Its Scope

In August 2020, we published an article dissecting the business of iFLYTEK (002230:SZ), ‘China’s first AI stock,’ where the company’s current drawbacks – the self-cannibalizing consumer hardware business and irrelevant input method software – were pointed out. We also made several projections business segment-wise, mapping the possible shifts in the company’s revenue structure, such as the foray into education and attempts to make a difference in the healthcare equipment area.  Since then, the company’s stock has continued its dive, hitting the levels it was trading at in the end of 2019, following the major retreat of the mainland’s A-shares. As of September 25, it is still almost 7% higher than our then-estimated CNY 32.35. Below are two of the most significant changes iFLYTEK has made in 2020 to optimize its scope, adjusting it to the dynamic global economic landscape. 1. Big data system Zhixue (智学网), which is designed to digitalize educational institutions by bringing the interaction between teachers and students online, is now covering over 16,000 schools nationwide. iFLYTEK is betting big on learning hardware, integrating augmented reality techniques into the classroom experience. However, the industry competition is intensifying: the gross profit margin of iFLYTEK's education products and services dropped by 7.31% year-on-year in the first half of 2020. 2. The so-called 'smart cities' and the 'to-government' (2G) segments have been looking somewhat bleak so far in 2020: the company's revenue within these domains was down by over 40% year-on-year in the six months through June. To facilitate a rebound, in the second quarter, the firm signed a number of contracts with representatives of various links of China's multilayer public sector chain.

Briefing
Briefing · 1
Briefing
Briefing · 1
Analysis EO
Analysis · 2
report
Analysis EO
Aug 31, 2020 05:54 pm ·

Why Is China's Biggest AI Stock iFLYTEK Overvalued?

► The company's business composition is complicated while its focus area – Artificial Intelligence (AI) – is arcane to most digital laypeople. The complexity leads to diversified and controversial valuations of the company, some of which could result in overvaluation. ► Its business can be classified into two types: AI-related and non-AI-related. The AI-related part also divides into valuation methods as the business models and growth potential differ. ► Within the AI-related area, different valuation methods are applied based on the service type – P/S multiplier for software-hardware combined services while P/E multiplier for the open-source platform. ► The company's to-consumer products with speech recognition require a transformation to be less self-contradictory. ► The company's to-judiciary business, as one of the promising revenue segments, enjoys a massive potential market of CNY 180 billion. ► Per EqualOcean's analysis, the fundamentals of iFLYTEK can support a reasonable valuation at CNY 71.18 billion and CNY 32.35 per share. At the moment, the stock price is overheated due to its current business landscape. Policies, capital operation and other factors that affect the market cap are not considered in this analysis.  Segmentation rationale Speaking of Chinese-listed companies that excel in AI-related businesses, iFLYTEK (002230:SZ) is well placed to be the next heavyweight, after the tech giants Alibaba (BABA:NYSE, 09988:HK), Tencent (00700:HK) and Baidu (BIDU:NASDAQ). Generously supported by the Chinese government, iFLYTEK has adequate funding for AI-related R&D, which is one of the nationally-defined focus subfields in the science and technology realm. However, taking from 60%-70% of its total revenue, the company's government-based business is not thoroughly related with artificial intelligence, or specifically the company's core technology – speech recognition and processing. For instance, the 'smart city' segment is mainly about the information engineering services related to the digitalization of the local services, such as the online driving license system and other self-service systems. The education segment has started to release products related with speech recognition and online AI courses, but the major percentage (nearly 90%) was generated from auxiliary teaching tools and education website 'Zhixue.' Thus, not all of iFLYTEK’s business has such high growth potential as AI-related ones. A valuation method that does not distinguish business sectors and considers them all as AI technology-driven is quite likely to result in an overvaluation. Below, we divide iFLYTEK's business into three parts: non-AI-related, AI-related hardware and software, and AI-related platform services. Non-AI-related business – P/E The non-AI-related business segment includes the smart city, education, operator big data and telecom value-added operation businesses. Since these sectors have long been in place, and since the cooperation agreements with government, state-owned schools and operators are stable, we consider this part of the business to be at the mature stage; the profitability matters more than the growth potential. Thus, here we use an average P/E multiplier for mature IT service enterprises of 20 for the valuation of the sector. The projected net profit generated from this non-AI-related segment in 2020, based on its interim growth rates, is around CNY 300 million. The corresponding market cap is CNY 6 billion. AI-related hardware and consumer business – P/E The AI-related segment which is suitable for P/E multiplier consists of smart hardware, software application, judiciary business, automotive area, smart customer services, and smart healthcare. Though this segment is related to AI technologies  – such as the speech recognition embedded on court recorders and consumer products such as  ‘instant interpreter’ pens – this part in essence resembles the business model of traditional IT equipment providers. The benchmark companies are Hikvision (002415:SZ) and Dahua Technology (002236:SZ). Thus, the P/S multiplier in valuation is not applicable and the P/E ratio will be used for this segment. Smart hardware and software application The hardware part of iFLYTEK's to-consumer business lies in this segment with products like interpretation machines, home robotics and pen voice recorders. During the '618' shopping festival, the company's sales volume was up by 40% year-over-year with over twenty categories of AI-empowered consumer electronics products championed in each segment. However, iFLYTEK's translation software products are to some extent at odds with its hardware products as their functions overlap. With the iFLYTEK-developed translation app installed in the smartphone, the handset itself could provide the same function as the translation machines, resulting in a self-competition situation. Even though the translation machine has certain upgrades such as a higher degree of noise tolerance and stability, the market potential is squeezed by its own software products. Besides the self-competition problem, the most widespread to-C product of the company – Xunfei Input Method, with monthly active users (MAU) in 2019 over 140 million – is also not well-positioned, since the users tend to use the input method directly rather than open the app. Thus, the profitability of iFLYTEK's prevalent products is questionable. Thus, we project the revenue growth rate for the smart hardware and the software application will slow down to around 40%. Judiciary Featured by the company's partially state-owned background and the technology advantage, iFLYTEK's judicial business boasts a track record of high quality. As the courts, public security bureau and procuratorate all require reliable recording and documentation equipment for eliminating human error, iFLYTEK's judiciary segment is about providing trial services with both software and hardware. According to the company's 2019 annual report, the iFLYTEK-empowered AI speech recording products had covered 1,300 courts in China. With the total number of Chinese courts at around 3,500 according to the Chinese Supreme People's court, the company enjoys over 270% of sales growth in terms of court service products in the following years. If we take the demand from public security bureau, procuratorate and local police stations into account, the market potential of iFLYTEK's judiciary business will climb up to over CNY 18 billion in the following three years. Smart medical care Boosted by the COVID-19 crisis, iFLYTEK's medical care-related business grew by 665% year-over-year, with its AI doctor assistant and intelligent filter of patients with fever, cough, and dyspnea during the outbreak. During the first half of 2020, the AI assistant experimented in 66 districts and counties. Assuming the AI-empowered medical assistant enters most regions around China in the following years, the rocketing growth of the medical care will be likely to keep its pace. The projected 2020 net profit is at CNY 565 million. With a P/E multiplier at 50 extracted from the Hikvision and Dahua technology, this segment presents a market cap of CNY 28.25 billion. AI-related platform service – P/S iFLYTEK's AI open platform is designated as China's national key laboratory, shouldering the national cognitive intelligence research and development as well as the open-source solutions of related technologies. As this segment is solely related with the company's AI technology and most of the AI solutions on platform do not have concrete commercialization models, the valuation of this segment is aimed at measuring the company's technical strength and future potential. In addition, the upfront investment and expenditures are rather high. Thus, here we apply the P/S multiplier to evaluate the platform segment. As the P/S multipliers of Chinese outstanding AI companies in the AI software track – SenseTime, Megvii, CloudWalk and Yitu technology, surpassed 20, here we employ the P/S ratio of 20 to iFLYTEK's AI platform segment. The corresponding market value is around CNY 36.93 billion. To sum up, based on the relative valuation of iFLYTEK's business segments, the rational market value is CNY 71.18 billion and the corresponding target price per share is CNY 32.35 – 16% lower than the closing price of CNY 37.52 as of August 28, 2020. iFLYTEK's complexity in business contributes to its overheated market valuation, since institutions and investors might resort to the P/S or other similar valuation methods for its overall business, taking the latter as entirely AI-related.

Analysis EO
Analysis · 2
report
Analysis EO
Aug 23, 2020 08:23 am ·

AI Is Transforming China's Healthcare Industry

► AI healthcare is an inevitable trend across the globe, especially in the emerging market. ► Chinese AI healthcare companies are getting more mature, forming the industry landscape. Artificial intelligence, as a fundamental technology, can help power almost any industry. As one of the tier-one countries with the most AI hubs, China is experiencing a national digitalization across many sectors and across multiples disciplines. At the mid-stage of its digital reshaping, the healthcare industry is lit with a limelight that no market watcher can miss. Generally, smart technology helps the healthcare industry grow faster on innovation, and helps it grow smarter in various healthcare services. So far, AI healthcare in China includes ten areas, including drug development, auxiliary diagnostics, auxiliary treatment, health management, rehabilitation, online consultations, health wearables, hospital management, precision medicines and biotechnology research. An inevitable trend: Global and domestic Undoubtedly, the concept of healthcare and AI is exciting to investors. The capital resources can never be too much for players in this area. On a global scale, the healthcare AI funding was up 14% on a QoQ-based CAGR. In China, the funding activities have calmed down to a healthy status since the peak time in 2018, with a total investment amount of CNY 7.9 billion, occurring in 66 deals. Compared to the continuously dynamic global investment environment, China's capital market for healthcare AI seems to have cooled down since last year. The average investment amount per deal is CNY 61.4 million, CNY 181.2 million and CNY 147 million from 2017 to 2019. The first two quarters in 2020 saw 26 transactions completed at a total of CNY 1.8 billion, with an average deal amount of CNY 69 million. There are 129 Chinese AI healthcare companies in 2020, excluding those in targeted genetic research. Among them, 55 firms are in medical imaging, representing 42.6% of the total AI healthcare players. Most of the AI medical applications are based in triple-A hospitals, but they show an accelerated expansion trend. Exploiting various healthcare demand Undoubtedly, AI technology can be leveraged in far more healthcare areas. Medical imaging is just a starter. But how far can AI go down the healthcare path? To have a rough idea about the potential, we can have a general look at the fundamental technology. The AI in China can be dissected into six perspectives: computer vision, machine learning, natural language processing, data mining, speech conversion and speech interaction. As the underpinning technology, each angle of AI technology mentioned can vitalize niche healthcare segments on a technical level. Medical imaging and new drug discovery are two heated applications integrated with high-end AI. Besides, from a broader perspective, AI technology helps redistribute medical resources in an innovative way. On the one hand, it makes traditional medical facilities run smarter, faster and more effectively. The smart hospitals project has already been promoted in large-scale Chinese cities, following up on the great demand for electronic records, cloud records, data sharing, and online consultation. On the other hand, cloud technology connects doctors from end to end, making the medical expertise and knowledge more equal across regions. It is a well-known fact that China has a very unbalanced distribution of medical resources – almost 80% of medical resources are aggregated in 20% of hospitals. In contrast, grassroots clinics and hospitals in remote and lower-tier cities significantly lack high-quality supplies. Medical imaging for real-time surgeries makes it so that patients from everywhere consult prestigious expert doctors. Last but not least, one noteworthy fact is the fusion of multi-technologies in a stand-alone medical scenario. It implies that the medical demand for AI technology has been better understood and recognized. These medical demands are not a monolithic request but multi-faceted and technical-solution-demanding questions. The landscape of five primary healthcare segments Many AI healthcare companies have been trying out the market. The segment of medical imaging by far has grown to a heated red sea while other industries are experiencing the infant or booming stage. The AI technology has been used in these ten medical areas: drug development, auxiliary diagnostics, auxiliary treatment, health management, rehabilitation, online consultations, health wearables, hospital management, precision medicines and biotechnology research. However, from an industry perspective, we pick out some example companies in five primary healthcare segments. The AI healthcare is not a new concept anymore. As more companies in this field are eyeing the consumer market, the industry is starting to enter a mature phase. Meanwhile, some online healthcare companies – JD Health, Ping An Good Doctor and Ali Health – have been injecting AI technology into their consumer-oriented services.

Briefing
Briefing · 1
Briefing
Briefing · 1
Briefing
Jul 17, 2020 09:59 pm · qianlong.com

iFLYTEK Ranks First in China's AI Speech Market

Briefing
Briefing · 1
Briefing
Jul 16, 2020 06:53 pm · China Economic Herald

IIoT is Regarded as an Essential Part of Digital Transformation

Briefing
Briefing · 1
Briefing
Briefing · 1
Briefing
Updated 24 hours ago · ITjuzi

Retail AI Startup ImageDT Completes USD 10 Mn Series B

Briefing
Briefing · 1
Briefing
Briefing · 1
Briefing
Briefing · 1
Briefing
Briefing · 1
Briefing
Briefing · 1
Briefing
Briefing · 1
Briefing
Briefing · 1
Briefing
Briefing · 1
Briefing
Briefing · 1
Read more