Meitu looks for new growth story as China’s economy slows

The beauty app operator expects to report its adjusted profit rose 80% or more in the first half of the year, representing a sharp slowdown from the growth rate in 2023

Key Takeaways:

• Meitu said its profit rose 30% or more in the first half of this year, while its adjusted profit rose by 80%
• Analysts and investors are relatively cool on the company, reflecting worries about its heavy exposure to China’s slowing economy

By Doug Young

For a while, Meitu Inc. (1357.HK) excited investors with its story of transformation from a money-losing B2C beauty services provider to a profitable business providing similar services to beauty industry professionals. Now, the company is trying to keep investors interested with its newer story of globalization, as it seeks to diversify beyond its China base where a slowing economy is undermining consumer and business spending.

Meitu’s positive profit alert issued on Wednesday extends its transformation story, sparking a 7.5% jump for its shares the next day. But the analyst community remains decidedly cool on the company, suggesting many believe its stock could be fully valued and even come under pressure if it fails to deliver strong interim results next month. Of the seven analysts who follow the stock, four – or more than half – currently rate it a “hold.”

Despite its status as a supplier of content and services to the beauty industry, Meitu currently trades at a discount to major stocks from both categories. Its price-to-earnings (P/E) ratio of 27 trails the 35 for global cosmetics giant L’Oreal (OR.PA) and 31 for domestic cosmetics firm Chicmax (2145.HK). It’s also well behind the 72 for Visual China (000681.SZ), the leading supplier of photos and videos in the Chinese market.

That could indicate that analysts and investors are worried about the company’s exposure to China’s rapidly slowing economy. Its status in a highly discretionary space for beauty-related products and services could be particularly problematic, since both businesses and consumers could scale back their spending in those areas if budgets become tight. Against that backdrop, investors will probably be watching closely for progress in Meitu’s global expansion that can serve as a hedge against a China slowdown.  

Meitu’s positive profit alert looks relatively in-line with market expectations. The company said it will report its net profit rose 30% or more year-on-year in the first half of 2024, while its adjusted profit, which excludes items like stock-based employee compensation, rose 80% or more. Analysts are expecting the company’s net profit to rise about 44% this year, according to seven polled by Yahoo Finance.

Meitu didn’t provide any revenue guidance, though it noted that revenue from its photo, video and design products “continued to surge rapidly” in the first half of the year. That’s significant since revenue from this category, which centers on the supply of photos, videos and related design services, grew 53% last year and accounted for half of the company’s total.

“The rapid development of the creator economy is clearly a global phenomenon and we believe we are in a position to capture that opportunity,” Meitu said, repeating an assessment from its previously issued annual report for 2023. “We will continue to build image and video apps localized to the aesthetic standards of global market, and ultimately aim to become a global company.”

Fast growth

Meitu began as a beauty app largely focused on average consumers, who used the program to touch up selfies to share with friends. But it quickly learned that such consumers don’t like to pay for such services, and shifted its focus to providing products and services to businesses like cosmetics stores and professional photographers who are more willing to pay.

The vast majority of the company’s users are still non-paying. Its monthly active users (MAU) rose 2.6% last year to 249 million, with most of those as casual users. But its professional users, classified as “productivity” in its financial reports, rose 74% by the end of last year to 17.7 million from 10.1 million at the end of 2022. Most importantly, its paying users rose by a similarly strong 62.3% year-on-year to 9.11 million by the end of last year.

As it built up its base of professional users, the company’s revenue jumped 29% last year to 2.7 billion yuan ($371 million), lifted by a 53% jump from its photo, video and design products category that accounted for about half of its total. Meitu’s remaining revenue came from its beauty industry solutions, mostly selling supply chain management services to cosmetics stores, and from advertising.

Significantly, the company said that half of the revenue from its photo, video and design products came from outside its Mainland China base last year. That means it now gets a quarter of its revenue or more from non-Mainland Chinese sources.

“To date, we have rolled out our image products in 195 countries and regions,” the company said in its latest annual report. “Users and paying subscribers from outside Mainland China represent over 30% of our total base, yet they generate more than half of our image revenue.”

A central piece to its international business is Singapore-based Pixocal, which Meitu spun off as a separate company last year for a potential future IPO. Pixocal operates subscription services for two of Meitu’s most popular apps outside China, with Meitu continuing to hold 80.6% of the company after the spinoff.

In addition to Pixocal, Meitu has also made several investments over the last year to bolster its core products and services. The largest of those saw it pay $40 million in March for Zcool Network Group, a visual content-trading platform with more than 400 million pictures and video files. Last year Meitu also acquired a minority stake in a company that offers AI chips and related software for AI training.

As its paying subscriber base grew, Meitu recorded its first annual profit in 2022. Its adjusted profit more than tripled to 368 million yuan last year from 110 million yuan in 2022, and its gross margin also improved by 4.5 percentage points to 61.4% from 56.9% over the same period.

All this shows the company is on a positive track, though the profit growth rate is already slowing as Meitu settles into its new business model. The signals in the latest profit alert look relatively encouraging, though the lack of specific revenue guidance suggests the growth rate for that figure may also be slowing. Such a slowdown would be disappointing but not unexpected, though strong gains for its international business could help to offset some of that disappointment.

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