We project SenseTime's generative AI related revenues should exceed 50% mix in 2024 and believe SenseTime's full transition to GenAI will pay off in the long term. However, we also see significantly intensified domestic LLM competition this year with more domestic competitors achieving good rankings in common international benchmark systems where SenseTime lacks enough presence. ByteDance's token price war since May may also weigh on generative AI growth and margin prospect of SenseTime. Based on the operating losses, token price war and huge AI investments required, we believe SenseTime may need new fundraising by 2025. We maintain HOLD and the key stock catalyst will be the outperformance of SenseNova's model intelligence over domestic and overseas peers. We lower our TP from HK$1.75 to HK$1.45 based on 7.5x 2025E EV/Sales.
Key Factors for Rating
Business momentum resumed upon GenAI: Sensetime has restructured its business into three key categories including Generative AI, Traditional AI and Smart Auto, with respective rev. mix of 35%, 54% and 11% in 2023. We are positive on Company's strategy of phasing out Traditional AI involving Smart City projects and fully embracing Generative AI.
Domestic LLM competition intensifies: SenseTime targets itself as China's SOTA LLM with SenseNova but we also see impressive progress made by domestic LLMs including Qwen by Alibaba, Ernie by Baidu, KimiChat, ChatGLM, and Baichuan, who have made remarkable publicity on various international LLM benchmark leaderboards including LMSYS Chatbot Arena, MT-bench, MMLU, GLUE and SuperGLUE. So far, SenseTime showed up in benchmark leaderboard competition much less often besides SuperCLUE, a Chinese language based leaderboard. We think with SenseTime's early and huge investment in pre- trained transformers since 2017, showing up in such public leaderboards will be key for investors to reinstall confidence. From the monetisation perspective, competition also intensifies as Bytedance initiated token price war, slashing price to 99.3% lower than the industry average for business users since May, which should also add near-term pressure to SenseTime's GenAI revenue and margins.
Fundraising may be required by 2025: projecting losses over 2024-26 with a net cash balance of RMB4.4bn, SenseTime may need additional funding by 2025 given our concerns about 1) AIDC and AIaaS price war, and 2) a larger LLM training investment may be required to compete with SOTA models both domestically and internationally.
Key Risks for Rating
Potential breakthrough of SenseTime's LLM; operating loss narrows faster than our forecasts; competition with domestic LLMs.