Adjusted net profit for 2023 was better than we expected
The company announced 2023 results: 2023 revenue also increased by 29.3% to $2.70 billion, lower than our expectations of 3%, mainly due to lower than expected revenue from membership subscriptions and beauty solutions; adjusted net profit to mother also increased 233.2% to $368 million, falling within the company's previous forecast range ($33-370 million), better than our expectations of 7%, mainly due to good cost and expense control.
Development trends
Member subscriptions continue to grow at a high rate, and the global layout is being actively promoted. In 2023, the company's membership subscription revenue also increased by 52.8% to 1.33 billion yuan. The trend of paid penetration continues. By the end of 2023, the number of paid members of the company increased by 62.3% to 9.11 million, the payment rate increased by 1.4ppt to 3.7% year over year, and ARPU decreased by 0.3% to 180 yuan/year, mainly due to promotional activities carried out by some 2H23 members. Overseas, overseas contributed 51% of subscription revenue with 34% of subscribers in 2023. The company said it will adopt a more active globalization strategy to strengthen local operations and self-communication capabilities in 2024. We believe that with its more mature payment habits and higher pricing levels, the overseas market is expected to become another important driving force for the company's subscription revenue growth. We expect the company's paid penetration rate to reach 4.8% in 2024, and subscription revenue may increase 48% to 1.96 billion yuan.
The visual model ecosystem has been strengthened, and revenue growth from productivity tools has been impressive. Using MiracleVision as a base, the company's AIGC products were quickly recognized by the market. The company stated that its applications generated more than 3 billion copies of AI content in 2023, and currently close to 83% of the content is processed through AI. Meanwhile, the company acquired the leading domestic designer community website on February 2, 2024, to further strengthen the data asset barrier. In 2023, the company's productivity scenario MAU also increased by 74.3% to 17.66 million. The company said that the payment rate for its core product, Meitu Design Office, had reached 6%, driving its revenue to increase by 229.8% to more than 100 million yuan in 2023. We believe that by continuously exploring vertical scenario requirements and constructing AI native workflows, the company is expected to continue to penetrate more segmented scenarios and increase the payment penetration rate.
Operating leverage continues to show, and investment will increase in 2024. The company's gross margin in 2023 was 61.4%, up 4.5ppt year over year, mainly due to the increase in the share of high-margin membership subscription and advertising revenue. In 2023, the company's sales/management/R&D expenses rate was 15.9%/11.2%/23.6%, respectively, and the three expenses together increased by 8.2%, maintaining good cost discipline. Furthermore, benefiting from the increase in cryptocurrency value during the period, the company confirmed that cryptocurrency impairment losses would be refunded about RMB 270 million in 2023, increasing net profit under IFRS standards.
Looking ahead to 2024, the company stated at the performance meeting that it will focus on building brand influence in terms of globalization and increase investment in AI R&D. The company expects R&D expenses to increase by 30% in 2024, but thanks to the high growth in membership subscriptions, we believe that operating leverage will continue to show in 2024.
Profit forecasting and valuation
As the increase in ARPU was slightly lower than expected, we reduced 2024/2025 revenue by 3% to $36.1/4 to $36.1/4 billion, and adjusted net profit for 2024/2025 by 4% to $58/81 million. Maintaining the “outperforming industry” rating and the target price of HK$4.3, corresponding 20 times the 2025 non-IFRS P/E. There is 36.5% upside compared to the current stock price. The current stock price is trading 15 times the 2025 non-IFRS P/E.
risks
Progress in AI technology and innovation fell short of expectations; payer penetration fell short of expectations; market competition intensified; cryptocurrency value fluctuations and regulatory risks; macroeconomic fluctuations affected consumer intentions; and major shareholders reduced their holdings.