Meitu, Alibaba find beauty in new e-commerce partnership

The maker of beauty apps will sell $250 million worth of convertible bonds that could make the e-commerce giant its third-biggest shareholder

Key Takeaways:

• Meitu and Alibaba have formed a major new partnership that will see the latter leverage the former’s skills in video and photo apps
• The deal could give Alibaba nearly 7% of Meitu’s shares, and is one of Alibaba’s biggest investments since it was fined $2.5 billion for anti-competitive behavior in 2021

By Doug Young

Beauty app operator Meitu Inc. (1357.HK) is a company of many faces. After starting off as a popular but not very profitable app used by people to pretty up selfies, the company later found better business in providing similar software to professional outlets like cosmetic stores and photo studios that were more willing to pay for such products.

But the company always had an important asset in its huge base of more than 250 million users, mostly average consumers. More recently, it’s been using the power of AI and social media to finally monetize that user base, which has once again become its main growth driver. Now, it’s aiming to take its newfound success in the consumer market to the next level through a major new partnership announced last week with e-commerce giant Alibaba (BABA.US; 9988.HK).

Under the deal, Alibaba will purchase $250 million worth of three-year convertible notes from Meitu with a conversion price of HK$6 per share. A full conversion in three years would give Alibaba 6.85% of Meitu’s enlarged share capital, making it the company’s third largest shareholder behind only Meitu co-founders Cai Wensheng and Wu Zeyuan.

From Alibaba’s perspective, the tie-up is noteworthy because it’s one of the company’s largest investments in recent years and appears to show it is increasingly aware of the importance of social media and photo and video applications to the future of its core e-commerce business.

Alibaba was once quite acquisitive, buying billions of dollars worth of assets in areas from entertainment to media, takeout dining and brick-and-mortar retailing at the height of its buying binge in the 2010s. But that buying spree largely came to a halt in 2021 after the company was fined a record 18 billion yuan ($2.5 billion) for anti-competitive behavior as it grew too powerful and abused its market dominance.

This new partnership also looks notable for its international overtones, since both Alibaba and Meitu are trying to leverage their strengths by expanding overseas as growth in their home China market slows. More on that shortly.

Investors were quite excited by the announcement, at least initially, bidding up Meitu’s shares by 19% the day after it came out last week. At their close of HK$7.02 that day, the stock was already 17% above the HK$6 exercise price for Alibaba’s convertible bonds.

The shares have given back much of those gains since then, but are still up 6% from pre-announcement levels and have more than doubled since the start of the year. The analyst community is also quite bullish on Meitu, with three of the nine polled by Yahoo Finance rating the company a “strong buy,” and the other six giving it a “buy.” Still, we should also note that the company’s Monday close of HK$6.26 is well below the HK$8.50 that it sold shares for at the time of its 2016 IPO.

“The board believes that this strategic collaboration will serve as the foundation of a long-term partnership between the company and the subscriber,” Meitu said. “It will also allow the company to seize the opportunities brought by AI, driving the company’s long-term growth.”

E-commerce tools

Meitu’s growing business that incorporates e-commerce tools appears to be at the center of this deal. Whereas its earlier apps mostly allowed people to beautify photos of themselves, Meitu’s latest apps are far more sophisticated, drawing on AI and faster computing power to let people do things like virtually sample makeup and try on clothes. Equally important, they allow people to make in-app purchases of products after trying them out.

That business falls under the “photo, video and design products” segment in Meitu’s financial reports, and is the fastest growing of its three main revenue sources. Revenue from that category jumped 57% year-on-year last year to 2.09 billion yuan, growing to 63% of the company’s 3.34 billion yuan for the year. By comparison, its business of selling software as a service (SaaS) to companies like makeup stores and photo shops, known as “beauty industry solutions” in its reports, fell 32% year-on-year to 385 million yuan, accounting for 12% of its total. The rest of its revenue came from advertising.

The takeoff of the “photo, video and design products” business is directly tied to the company’s huge base of 266 million monthly active users (MAUs) at the end of last year. Meitu is increasingly able to convert those to paying users with its more sophisticated products. Its number of paying subscribers rose 38.4% last year to 12.6 million.

Equally important is Meitu’s success growing its user base outside China, especially as the Chinese economy slows and consumers become more cautious. Its China-based users totaled 171 million at the end of last year, roughly the same as a year earlier. But its international user base grew 22% to 94.5 million, accounting for 36% of its total.

Alibaba no doubt likes Meitu’s in-app selling ability, and also its growing international user base. Meanwhile, Meitu is undoubtedly salivating at a chance to get its apps into the smartphones and PCs of Alibaba’s hundreds of millions of users worldwide.

Alibaba will “prioritize the promotion of (Meitu’s) AI e-commerce tools on its global e-commerce platforms, assisting the company in developing new tools and/or features for data-driven e-commerce image and video generation,” Meitu said in its announcement. It added that the two companies will also “cooperate and jointly develop various foundational models and vertical-domain large language models, including video generation models, image generation models, multimodal models and voice models.”

As part of the deal, Meitu has also agreed to buy 560 million yuan worth of services from Alibaba’s cloud unit within the first 36 months of the agreement, suggesting another area where the pair could collaborate in the future.

Following the rally for its stock this year, Meitu’s shares currently trade at a price-to-earnings (P/E) ratio of 31. While that looks somewhat high, it’s actually well below the 43 for Salesforce (CRM.US) and even higher 83 for Shopify (SHOP.US). That suggests Meitu’s stock could still have some further upside potential, especially if it leverages the new Alibaba tie-up to maintain or even accelerate its recent growth.

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