1357.HK
Meitu spins off Pixocial unit

The unit being spun off, AI-powered digital design platform Pixocial, was a major contributor to Meitu’s net profit last year

Key Takeaways:

  • Meitu has completed a new funding for its Singapore-based Pixocial unit that accounted for a major portion of the company’s net income in 2022
  • The new funding raised $22 million from participants including Fidelity’s Eight Roads investment arm, valuing Pixocial at more than $100 million

  

By Edith Terry

Meitu Inc. (1357.HK) is no slouch when it comes to looking for new ways to monetize its popular beauty apps. The company started out by creating a popular app that let people beautify selfies and share them with friends. Then it went on to create its own branded selfie phones and operated an e-commerce site for skin type analysis. It even got into cryptocurrencies at one point, in a poorly timed move that ended up costing it dearly.

Now, co-founder and CEO Wu Xinhong is hoping to recapture some of their company’s former glory that briefly made him a billionaire with plans to spin off Meitu’s Singaporean Pixocial unit that has become its latest money spinner, the company announced last week.

Meitu’s stock briefly soared not long after its 2016 Hong Kong IPO, but has sagged since then and now trades at less than half its listing price. But its latest move seems to have won favor with investors. The stock jumped by nearly 7% after the Xiamen-based company announced it completed a spinoff for Pixocial, its artificial intelligence (AI) digital solutions provider.

That deal also included $22 million in new funding that valued the company at about $140 million – a relatively small amount compared with Meitu’s own market value of HK$17.5 billion ($2.24 billion).

The deal may set up Singapore-based Pixocial for its own eventual IPO. It includes a share option scheme whose beneficiaries so far are Wu, who is Pixocial’s new chairman, as well as Song Mingyang, its new CEO. Song is Meitu’s former director of global product innovation, has a master’s degree in computer science from Carnegie Mellon University, and was based in California before moving to Singapore to co-found Pixocial.

Following the spinoff and fundraising, Pixocial is 80.6% owned by Meitu. It posted 2022 net income of 75 million yuan, making it a major contributor to Meitu’s own 94.1 million yuan in net income that year. Investors in the latest funding include Eight Roads, which is backed by U.S. fund giant Fidelity, as well as Hong Kong-based Future X Capital. The deal gives Eight Roads about 7% of Pixocial, while two Future X funds will collectively hold 6.3%.

So, what is Pixocial? The Singapore-based Meitu subsidiary has been around since 2015, originally established as Meitu Technology (Singapore). In 2019, it became the first Meitu subsidiary to roll out subscription services on AirBrush and Beauty Plus, the overseas versions of Meitu’s most popular apps. Pixocial will be responsible for expanding AirBrush and Beauty Plus to other foreign markets, according to an announcement of the spinoff in October, as well as for its B2B SaaS platform for “creatives.” The two documents on the spinoff gave no other specific data on the company.

Growing subscription business

Meitu’s overall subscription business revenue, which presumably includes contributions from Pixocial’s Airbrush and Beauty Plus, grew 146.9% in 2021, when it had 4 million customers globally. In 2022, its subscription-based business grew 57.4% and was the company’s largest revenue contributor, at 782.2 million yuan ($110 million) out of its 2.1 billion yuan total. Meitu also pointed out in its 2022 annual report that 10% of users for one of its overseas apps were paying users, compared to a paid user penetration rate of just 2.3% for its domestic VIP subscription business.

Meitu’s other big revenue source is its “solutions for beauty industry,” which is its software as a service (SaaS) business for B2B clients like hair salons, and is now one of its most profitable divisions. That business grew by 62.2% to 286.4 million yuan in the first half of this year, accounting for 22.7% of its total revenue of 1.26 billion yuan. Its photo, video and design products business, which includes subscription services, grew by 29.8% to 602.1 million yuan, or 47.7% of the total. It posted a 209.4 million yuan profit for the period, compared to a loss of 281.6 million yuan in the year-ago period.

While there’s no breakout for Pixocial in any of its previous reports, investors may like the spinoff because it nicely ringfences two of Meitu’s popular overseas apps targeted at business customers, called design “creatives”, according to the Pixocial website. In restructuring its business this way, Meitu is following in the footsteps of Mainland giants like ByteDance and PDD Holdings (PDD.US) that are trying to draw clear lines around their China- and foreign-based operations.

Such clear divisions could allay foreign government concerns about the data privacy of users in their home markets, and keeping such data out of reach of the Chinese government. The U.S. has expressed particular concerns in that regard, especially towards ByteDance’s TikTok app that has gained a huge following in the market.

That doesn’t mean Pixocial will necessarily target the U.S. market. In December 2022, Meitu’s app was at the top of Japan’s download rankings for free iPhone downloads, thanks to an anime adaptation that launched in the Mainland domestic market on November that year and followed in global markets three days later. For a while in 2022, the Meitu app was also among the top three in the Apple App Store in the U.S., Brazil, Canada, Australia and New Zealand, according to CEO Wu. It wasn’t clear if those overseas Meitu apps were operated by Meitu itself or Pixocial.

But app users are fickle, and today Meitu, BeautyPlus and Airbrush are nowhere on either the App Store or Sensor Tower download charts. Could that change? Like many start-ups, Pixocial now has the capital to build its own business outside of China, and perhaps eventually list its own shares separately from Meitu.

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