The AI company's latest moves include a share placement to raise new funds and its investment in a media company

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Key Takeaways:

• Phancy Group reported its revenue rose over 35% in the first quarter, as its AI services gain traction
• The company's first-quarter gross margin stood at 35.1%, less than half that for American peer Palantir

The AI boom is minting a new generation of superstar stocks, presenting an equally exploding number of new choices for investors. One of the earliest players in the space, Phancy Group Co. Ltd. (6682.HK), an enterprise-level AI company formerly known as Fourth Paradigm, has been making numerous moves lately in hopes of attracting investor attention.

That includes an announcement of first-quarter operational data for the company in late May, which is an optional disclosure for Hong Kong-listed companies that are only required to report such information twice yearly. Before that, the company raised money through a new share placement to purchase GPUs, and also formed a strategic tie-up that included buying a stake in Huanxi Media Group Ltd. (1003.HK).

Phancy‘s business has begun to improve lately as its products gain traction, lifting the company to profitability on an adjusted basis last year. Its business continued to grow in the first quarter, as its revenue rose 35.4% year-on-year to 1.46 billion yuan ($215 million). By the end of March, its orders on hand for agentic AI had roughly doubled from just three months earlier, showing demand for its products is strengthening.

Big share placement

To support its need for cash to expand its capabilities in the fast-moving AI sector, Phancy sold 38.8 million shares for HK$40.36 apiece on April 22, raising HK$1.57 billion ($200 million). The company said 80% of that would be used to advance its AI computing power equipment based on heterogeneous GPUs, a step required to build infrastructure for its application programming interface (API) business. On April 30, it announced its purchase of GPU servers for 400 million yuan. That rapid action shows Phancy is moving quickly in the high-speed race to develop the latest AI and adjacent applications.

Just weeks after the GPU purchase, the company announced on May 19 that it was investing HK$200 million for a stake in Huanxi Media, whose business is filmed entertainment. By combining Phancy's AI capabilities with Huanxi's in film and TV, the two parties said they plan to establish joint ventures and work together in areas such as filmed and interactive cultural entertainment, game development, and intellectual property peripheral derivatives. That shows that Phancy is trying to move beyond its historical primary focus on the finance, energy, telecommunications, and manufacturing sectors into film and television.

The latest fundraising followed an attempt at the end of last year that was ultimately aborted. That saw the company announce a plan to convert 13.78 million of its domestic shares into H-shares that could be traded in Hong Kong. But the plan never went ahead and Phancy abruptly withdrew it in early May without explanation, not long after it announced its plan to raise funds through the new share issue.

Advantageous AI position

Phancy was established in September 2014 and primarily provides platform-centric AI solutions. Its Sage AI Platform is a core product that helps enterprises quickly construct tailor-made AI systems, and provides ready-to-use AI applications that boost efficiency for companies' systems used in functions like marketing, risk control, and operations. Phancy also offers optional supporting server infrastructure featuring "hardware + software" that assists with intelligent transformations for enterprise customers.

The high degrees of digitalization and interconnectedness in today's world have caused data volumes to explode, posing unprecedented challenges for data analysis. Systems like Sage Platform aim to tackle that issue by identifying hidden patterns within data.

Phancy's Sage Platform achieved a 15.9% market share for decision-making AI as early as 2022, ranking it first in the industry, at 9 percentage points higher than the second-place American firm SAS, according to a report by China Merchants Securities. The company was the leader of China's machine learning platform market for six consecutive years from 2018 to 2023. As the enterprise-level AI applications market continues to expand, Phancy is well placed to be a prime beneficiary if it can stay up with the latest trends in the fast-evolving market.

General large model developers such as DeepSeek and OpenAI rely on public information such as internet texts and codes for most of their training data. But industry-specific large models must be trained on less publicly available data from sectors like finance and healthcare, which is subject to stringent compliance requirements and is very specific. That gives companies like Phancy, which have access to large volumes of such data through their big customer bases and relatively long operating history, a distinct advantage over younger peers.

Phancy has cultivated such industry-specific large models for years now, giving it extensive experience in processing industry data and understanding the pain points of different types of enterprises. Among its various offerings, its enterprise-level AI operating system, called Sage AIOS 5.0, has already built a series of foundational industry large models for health management, hydropower, and acoustics.

Low gross margin

Despite its status as an AI industry veteran, it's worth noting that Phancy's gross margin is not particularly high, at just 35.1% in the first quarter. By comparison, American AI company Palantir (PLTR.US) was far higher with a gross margin of 86.9% during the same period, and has stayed above 80% over the past several quarters. That means Phancy may need to show some improvement of that metric to draw more investors to its stock and break out of its range-bound pattern since its 2024 listing. The stock has climbed as high as HK$70 at one point post-IPO, but has also fallen to the HK$30 range and lower.

Phancy currently trades at a lofty price-to-earnings (P/E) ratio of 128 times for its expected profit this year, valuing the company quite highly. That said, the global market for enterprise-level AI is on a fast growth track, set to rise from $1 billion in 2023 to $13 billion in 2030, China Merchants Securities estimates. If Phancy can defend its share in the space, and also boost its gross margin, its stock could break out of its current cycle of ups-and-downs and enter a steadier growth trajectory.

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Benzinga Disclaimer: This article is from an unpaid external contributor. It does not represent Benzinga’s reporting and has not been edited for content or accuracy.