GFAI - Guardforce AI: Significant Expansion Into AI And Robotics Services

2023-06-06 08:17:14 ET

Summary

• Guardforce AI, a Singapore-based security solutions provider, is expanding into AI and robotics services, which could potentially turn its operating losses into profits in the coming years.
• The company's AI and robotics segment revenue grew by 245% in 2022, and it has made significant progress in developing its Guardforce AI Intelligent Cloud Platform and AIoT Robot Advertising model.
• Despite the potential for growth, GFAI faces risks such as the need for additional financing, competition from robot manufacturers, and economic and political uncertainties in its operating regions.

With more than 40 years of experience as a security service provider, Guardforce AI ( GFAI ) is a globally integrated security solutions provider headquartered in Singapore, that in the past few years made enormous efforts to expand into AI and robotics solutions services. Guardforce is quickly establishing its presence in the Asia Pacific region and expects to get in a position to provide its services globally. GFAI’s businesses are categorized into four main units: secure logistics business (GFAI is the market leader in the cash logistics business in Thailand), robotics solution business (established in 2020 as a part of the company’s revenue diversification efforts), information security business (in March 2021, GFAI acquired a majority stake in Handshake Networking, a provider of professional information security consultancy services in the Asia Pacific region), and general security solutions business (in June 2022, the company acquired 100% equity interest in Beijing Wanjia, a certified National High Technology company in China).

Investment thesis

The company’s significant expansion into AI solutions and robotics services combined with its well-established secured logistics business can change the game for Guardforce, changing its operating losses into considerable operating profits in the following years. In 2021, the share of robotics AI solutions, information security, and general security solutions revenues in GFAI's total revenues was 2.4% ($0.87 million). In 2022, this share increased to 10.4% ($3.6 million).

On 15 February 2023, Guardforce announced it has acquired Kewei's robot business assets in China, strengthening its Robotics-as-a-Service ((RaaS)) capabilities and intellectual property, and expanding its geographic footprint for AI and robotics capacity. On 23 February 2032, the company signed an Artificial Intelligence of Things ((AIoT)) robot advertising contract with a local government office in Macau to promote shows, exhibitions, and forums on approximately 165 robots for a total period of 20 weeks. Also, on 22 March 2022, Guardforce acquired 100% of the equity interests in Shenzhen GFAI and Guangzhou GFAI in the Greater Bay Area of China. On 2022 June 2022, the company announced it has opened new offices in Tokyo, Japan, and San Francisco, California, expanding its RaaS business lines in these two markets. Moreover, on 24 June 2022, GFAI announced the acquisition of 100% equity interests in Beijing Wanjia, an integrated security provider with 25 years of experience, from Shenzhen Yeantec. On 30 June 2022, Guardforce announced a collaboration with FLAIR (Hong Kong Industrial Artificial Intelligence and Robotics Centre Limited) to meet the growing needs of its clients. It is important to know that in the past few years, GFAI's RaaS platform expanded from one market to ten markets, including Hong Kong, Macau, Thailand, Singapore, Malaysia, China, Dubai, Australia, Japan, and the U.S.

As a result of the company's acquisitions and expansions in 2022, its total assets increased from $42 million in 2021 to $61 million in 2022 and based on acquisitions and expansions in 2023, GFAI's total assets in 2023 are expected to be higher than in 2022. All of these acquisitions, agreements, and expansions mean that Guardforce's robotics AI solutions, information security, and general security solutions revenues in 2023 can be significantly higher than in 2022, increasing the share of these segments in the company's revenue mix. Based on the company's new assets, I expect the contribution of AI solutions and robotics services to Guardforce revenue in 2023 and 2024 to be considerably different compared with 2022. One might argue that acquiring new assets to expand AI solutions and robotics services is one thing, and finding customers to sell these solutions and services is another thing. In a separated part of this article, I will explain why at this time, finding customers may not be a serious problem for GFAI.

According to GFAI’s revenue mix in 2022, its secured logistics business accounts for 86% of the company’s total revenue, compared with 97% in 2021. GFAI’s robotics solution business, general security business, and information security business are not still bringing a significant amount of money to the company; however, they are expanding at a fast pace and can increase their share in GFAI’s revenue mix in the following years as the company’s key management members changed in the past few years. Lie (Olivia) Wang, who has 15 years of experience in capital markets and security industry experience, has been the CEO of Guardforce AI since 2019, and the Chairwoman of the Board of Guardforce AI since August 2022. Also, Lin Jia, who has extensive experience in the robotics industry, has been the President of GFAI since August 2022.

While Seeking Alpha’s quant rating suggests that GFAI is a sell, Wall Street analysts' rating suggests that the stock is a strong buy. Considering the risks related to GFAI’s businesses, and according to the company’s recent developments and the strong demand outlook for AI solutions and robotics services, I conclude that it could be a good time to consider the stock as a buy.

Financials

In 2022, GFAI reported revenue of $34 million, compared with $35 million in 2021 and $38 million in 2020. “Due to the impact of COVID-19 and the shutdown of certain customers' facilities in the secured logistics business segment during the year, we experienced a slight decrease in revenue of less than 2.0%,” the CEO commented. The company’s gross profit decreased from $6.3 million in 2020 to $4.1 million and $4.0 million in 2021 and 2022, respectively.

The company’s revenue decreased in the past two years slightly (due to the negative effect of the pandemic). However, as a result of significantly higher expenses, its operating loss soared. In 2022, as a result of impairment loss on fixed assets of $4.4 million (compared with zero in 2020 and 2021), and selling, distribution, and administrative expenses of $15.3 million (compared with zero in 2020 and $7.6 million in 2021), GFAI’s operating loss increased from $2.0 million in 2020 to $3.7 million in 2021 and jumped to $16.9 million in 2022.

However, the most important thing in GFAI’s financial results is not that the company’s net loss in 2022 was significantly higher than in 2021. The most important thing in GFAI’s financial results is that the company’s robotics AI solutions revenue increased from $0.37 million in 2021 to $1.27 million in 2022, and its general security solutions revenue increased from zero in 2021 to $1.79 million in 2022 (see Figure 1). In 2023, these revenues can be significantly higher than in 2021, paving the path toward making profits in the upcoming years. it could be a good time to consider the stock as a buy.

Figure 1 – GFAI’s revenues

Expansion into AI and robotics

In 2022, GFAI made significant efforts to improve its integrated AI and robotics business. It is important to know that GFAI’s revenues in 2022 were deeply connected to its traditional secured logistics business segment. However, as the company’s AI and robotic segment revenues, which are still a relatively small percentage of its total revenue, are growing at a fast pace, I expect GFAI’s AI and robotics business revenues to account for a large part of the company’s total revenues in a few years. It is important to know that GFAI’s robotic AI segment revenue grew by 245% in 2022.

The service robotics market is expected to grow at a CAGR of 16.6% from 2022 to 2029, reaching $57 billion. It is important to know that from 2022 to 2028, the service robotics market in the Asia Pacific is expected to grow at a CAGR of 23.7%, which is significantly higher than the global estimated growth of the service robotics market. Also, the artificial intelligence market is expected to grow at a CAGR of 38% from 2022 to 2030, reaching $1591 billion, with the highest growth in the Asia Pacific region. As the robotics and AI market is expected to grow significantly in the following years, GFAI has expanded its RaaS solutions, such as AIoT robot advertising.

Also, the company has invested a significant amount of money to benefit from the strong demand for AI services in the tourism industry. “We have made significant progress in developing the Guardforce AI Intelligent Cloud Platform ((GFAI ICP)) and successfully set up three main hubs for the GFAI ICP in Mainland China, the United States, and Hong Kong, each with the ability to manage well over 10,000 robots,” the CEO explained. Furthermore, in 2022, the company launched its AIoT Robot Advertising ((RA)) model and its mobile application on the Apple App Store in Asia, allowing advertisers to publish advertisements on the company’s robots.

Another important market for GFAI’s robotic solutions is the hospitality industry. The company has launched the Small AI Hotel solution in Hong Kong, which helps customers to make booking online, check-in, and check-out using GFAI’s robots.

Customers

Due to more than 40 years of experience as a security service provider (the company’s security services are secured logistics, general security solutions, and information security), GFAI has a strong recurring revenue base. Its cash management solutions in Thailand support banks, government & financial institutions, hospitals, retailers, and business service providers. In China, the company’s general security solutions include security alarm systems installations, maintenance, and smart shop management system for retail clients. Also, the company is active in the payment card industry vulnerability assessment, web, mobile, and API application penetration test, and network and wireless infrastructure test. Thus, the company has been able to build a worthy customer base during the past decades. A well-established customer base means that GFAI has the opportunity to sell its AL & RaaS services and solutions to the same customers that have been using its security services for a long time. With the expansion of AI and robotics, many businesses in any industry will start using AI solutions and robotic services, and many of them have already started that. Thus, GFAI’s customers in the security services segment, have the potential to become its customers in the AI & RaaS segment too.

This is not an opportunity that every company in the AI and robotics industry can have easy access to. Many companies that provide robotic services and AI solutions are in the first stages of their founding, meaning that do not have a reliable customer base, and must put a lot of effort to find reliable customers. Thus, GFAI’s competitiveness in making long-term contracts with the customers that it has been working with within the past decades can be considered a positive thing. In 2022, GFAI completed three acquisitions in China, which means access to new customers. In February 2023, the company acquired key assets from a robot technology company in China (Kewei Robot Technology), meaning that GFAI now has access to new patents and can find new customers and provide more services to its current customers.

Moreover, you should know that GFAI is not putting all of its efforts into robotic services and AI solutions. The company’s security services business is still active and is expected to remain active for now. In 2022, GFAI diversified its secured logistic business by targeting the retail sector, including food and beverage businesses, which are also potential targets for the robotics business. Furthermore, the company secured a 5-year contract with the Bank of Thailand. In 2023, GFAI secured a 3-year contract with a retail chain store in Thailand and a 5-year contract with a tollway company for its secured logistics and cash handling services. Thus, as long as the company’s AI & RaaS business is not generating a considerable amount of cash, its security services business will continue to feed the operation expenses of the company and can be seen as a reliable resource for paying a part of the debts.

Figure 2 – GFAI’s client base

Risks

Guardforce has the chance to benefit from the strong AI and robotics expanding markets while maintaining its secured logistics business. However, risks and uncertainties related to its business and industry cannot be ignored. GFAI needs additional financing to fund its operations. However, for now, its negative operating profits may make it difficult for the company to obtain financing on favorable terms. It is important to consider that GFAI has started to expand into new industries which are highly competitive. Thus, if the company can’t turn its operating losses into profits, it might lose the limited trust of its investors. The robotics industries in Thailand, China, and the United States are not mature yet. GFIA’s robotics business model is a robotics-as-a-service model based on the robots manufactured by other companies. If robot manufacturers around the world change their business model to offer robotics as a service solution, GFAI may not be able to compete with them.

Also, there are some risks related to the company’s businesses in Thailand and China. In Thailand, a severe economic downtrend could have a significant negative impact on GFAI’s financial results. Moreover, the company’s cash flow generation in Thailand is vulnerable to foreign currency exchange risk exposure. In China, a considerable change in political or social conditions or government policies could have a material adverse effect on GFAI’s business.

End note

GFAI is in the first stages of its AI and robotics businesses and has to do a lot to turn into a profitable company. However, as the company has built its new businesses upon the legacy of its well-established secured logistics business, and has access to various customers, it has the potential to make progress without being forced to take serious financial risks. In 2022, the company’s AI solutions and robotics services revenues were significantly higher than in 2021 and can increase further in 2023. I expect the company’s 2023 financial results to be better than in 2022. The stock is a buy.

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