Incident: Meitu announced its 2023 results, achieving full year revenue of 2.70 billion yuan, an increase of 29.3% year on year; adjusted net profit to mother reached approximately RMB 370 million, an increase of 233.2% year on year. From the user side, on December 31, 2023, the number of monthly active users of the company reached about 250 million, up 2.6% year on year; the number of productivity app users reached 17.7 million, up 74.3% year on year; and the number of paid subscription users was 9.11 million, a significant increase of 62.3% year on year.

The full-year performance verifies the resilience of free subscription transfers and business growth: the core contributions to 23 years of performance growth are mainly 1) Driven by generative AI technology, the penetration rate of paid subscribers in the video product portfolio increased 2) The number of paying users around the world grew steadily under a clearer and more aggressive globalization strategy. Earlier discussions about the company's payment rate were difficult to find comparable companies in the same industry, the same competitive pattern, and the same market, so there was great disagreement about the increase in the payment rate and the ceiling. However, after the release of the company's 2023 results, we believe that 1) after the acceleration of subscription transfers for the first time in many years as a software circuit that has been deeply cultivated in value tools, we can be moderately optimistic about the natural growth and ceiling of the company's payment rate this year; 2) against the backdrop of no deterioration in the competitive environment and improving subscription habits, we firmly believe that the acceleration in payment rates of leading Tool Software companies is expected to maintain the previous trend.

Improved corporate governance has created scarce tool software targets: We also emphasized many times in the early stages that after Meitu successfully switched business models and the founder became chairman again, comprehensively focused on the main business already achieved strong revenue growth in its main business, and at the same time, the company's competitive advantage on the C-side may be underestimated. In the generative AI era and in the process of accelerated integration and innovation of lightweight tool software, Meitu has the ability to re-seize the original professional tool software market, and the process of seizing it may be similar to Canva, that is, it does not involve competition with tool software expenditure budgets, but instead attracts customers through higher ROI and lighter and more collaborative tool software, and the trend of lightweight creative content has already emerged overseas before generative AI and LLM. We believe that there are still potential domestic business opportunities. Meitu is one of the few core standards that have both lightweight and tool software production Yes.

The next step is to go overseas, or give the company new room for growth: Looking ahead to 24-25, we believe that the AIGC strategy and business-focused tool software set from the top are expected to bring continued revenue and profit growth to Meitu. This overseas business may be an underestimated new growth engine during the year, and the main reasons for this part of the underestimation are: 1) the company's ability to operate many major products overseas or launch more localized products; 3) The combination of generative AI and tool software has many opportunities to successfully transfer domestic products. possible. Overall, the company's subscription business operating leverage is expected to continue to grow, driven by overseas, driving the company's 24-25 performance to continue to exceed expectations.

Generative AI returns to the main line of work flow, focusing on leading manufacturers with profitability: In 2024, we believe that the profit model for generative AI applications will be more important. Under the trend of gradual extension of the capabilities of leading model manufacturers, whether generative AI that segments the racetrack can be combined with workflows to quickly achieve profits is more important. We think the biggest opportunity for the generative AI graphics circuit may come from 1) the material library (images, fonts, AI models) and 2) the workflow upgrades brought about by lightweight tool software. We believe it is expected to gradually replace the cross-coverage market of some traditional professional design tools and lightweight tool software in terms of basic design functions.

Investment advice: We continue to be optimistic that 2024 will be a big year combining AI and tool software. As a leading product in the segmentation circuit, subscription member penetration rate and member conversion rate are expected to continue to increase. In this round of generative AI and tool software global opportunities, Meitu may be expected to summarize past lightweight tool software experience and pass it on to the B-side market to establish the experiential advantage of lightweight tool software. We expect the company's revenue for 24/25/26 to be 35.25/41.75/4.915 billion yuan. Referring to US stocks and A-share tool software companies and the same type of PLG overseas tool software companies Figma and Canva, the average PS after primary market valuation/ARR is 17 times. Considering that the Hong Kong stock discount gives 8XPS a market value of RMB 28.2 billion, corresponding to a market value of HK$30.32 billion, corresponding to a target price of HK$6.82, maintaining the “buy” rating.

Risk warning: 1) The effect of the large model falls short of the expected risk; 2) competition in the tool software market intensifies; 3) B-side and overseas market expansion falls short of expectations;