Baidu plans Hong Kong IPO, spin-off of AI unit Kunlunxin as China races to build its own chips

Baidu, the prominent Chinese technology firm, has revealed its intention to spin off its artificial intelligence chip division, Kunlunxin, and pursue a public listing in Hong Kong. This strategic move is taking place as domestic chip manufacturers in China seek funding amidst the country's push for semiconductor independence. In a statement released on Friday, Baidu disclosed that it has confidentially submitted a listing application to the Hong Kong Stock Exchange. However, the specifics regarding the offering, such as its size and structure, are still under consideration. It is important to note that this plan is contingent upon obtaining regulatory approvals, including from China's securities regulatory body, and Baidu has acknowledged that the spin-off may not necessarily move forward. Currently, Baidu holds approximately 59% ownership of Kunlunxin. As a significant player in China's expanding AI sector, Baidu not only procures specialized AI chips for its data centers and cloud computing services but is also involved in their design through Kunlunxin. The company stated that this spin-off is intended to showcase Kunlunxin’s potential as an independent entity, attract targeted investors, and diversify financing avenues. Importantly, Kunlunxin will continue to operate as a subsidiary of Baidu. This development comes at a time of escalating tech tensions between the U.S. and China, with both nations implementing various restrictions on Chinese AI firms' access to cutting-edge chips from companies like Nvidia. In response, the Chinese government is increasingly advocating for domestic chip acquisitions and channeling substantial public funds into the sector’s development. Recently, several Chinese chip firms, including Moore Threads and Biren Technology, have announced their own plans to go public. Established in 2012, Kunlunxin plays a crucial role in Baidu's vision of becoming a comprehensive AI enterprise, encompassing hardware, servers, data centers, as well as AI models and applications. Although Baidu has historically relied heavily on Nvidia's chips for AI processing, it has begun integrating more of its self-developed chips into its data centers to support its Ernie AI models. Kunlunxin has also transitioned into a more autonomous operation, increasing its sales to third-party clients beyond Baidu. Reports from Reuters indicate that Kunlunxin's revenue is expected to surpass 3.5 billion yuan (approximately $500 million) for the previous year, with projections for external sales to constitute over half of its revenue by 2025. Additionally, Kunlunxin achieved significant success last year, securing orders valued at over 1 billion yuan from China Mobile, one of the largest mobile carriers in the country, which also participated in a recent funding round that raised over 2 billion yuan, valuing Kunlunxin at around 21 billion yuan. In its announcement, Baidu emphasized that the upcoming spin-off is designed to align management incentives with performance outcomes and enhance Kunlunxin's visibility in the market. Analysts from JPMorgan have forecasted a substantial growth trajectory for Kunlunxin, predicting that its chip sales could soar sixfold to reach 8 billion yuan by 2026.