Positioning AI's net profit growth in 2023, with dividends of HK$0.036 per share. In 2023, the company's total revenue was 2,696 million yuan (+29.3% year over year); comprehensive gross profit margin of 61.4% (+4.5pct year over year); net profit to mother of 368 million yuan (+233.2% year over year). The company is an AI company founded the Meitu Imaging Research Institute, which specializes in improving computer vision and AI capabilities. About 83% of the hundreds of millions of images and videos processed by the company's users use pan-AI functions. In June 2023, the company released the self-developed generative AI model “Whimsical Intelligence”, which supports generative AI functions such as Wenshengtu, Tusheng, and Tusheng video. It is expected to launch more generative AI functions for image and video usage scenarios in 2024.

Video and design products are the company's largest revenue and gross profit business, and users in productivity scenarios are growing at a high rate. In 2023, the company's video and design product business revenue was 1,327 billion yuan (+52.8% year over year), accounting for 49.2% of total revenue (+7.6pct year over year). In 2023, the total number of monthly active users of the company's products was 249 million (+2.6% YoY), of which the total number of users in productivity scenarios was 17.66 million (+74.3% YoY); the total number of paid subscription users was 9.11 million (+62.3% YoY). In 2023, the company's productivity scenario application Meitu Design Office has extensive AI functions, achieving revenue exceeding 100 million yuan (up 229.8% year over year). Marketers and designers of large-scale e-commerce platforms, advertising agencies, and FMCG groups continue to increase their use of Meitu Design Studio. In 2024, the company will continue to enhance Meitu Design's capabilities in video content, based on “whimsical intelligence” model capabilities and enhanced writing capabilities to further expand the productivity user base. In 2023, according to geographical location, the company's users and paid subscribers from countries and regions other than mainland China each accounted for more than 30% of the total, bringing in more than 50% of the video revenue. The company has determined a more clear and aggressive global strategy, and has deployed imaging products in 195 countries and regions, combined with generative AI functions to accelerate the pace of product entry into the global market.

Aesthetic Solutions is the second-largest revenue business and is expected to continue to increase the level of gross margin. In 2023, the company's beauty solutions generated revenue of 569 million yuan (+29.1% year over year), accounting for 21.1% of total revenue. Revenue growth mainly came from cosmetics supply chain management services. The company provides ERP services to more than 10,000 offline cosmetics stores. The company has increased the number of partnerships with cosmetics brands, and will continue to introduce high-margin products to improve the gross profit structure in the future. At the same time, it also provides skin measurement hardware and AI skin measurement solutions for skincare brands, medical and aesthetic clinics and beauty salons through EveLab Insight.

The advertising business is growing steadily, and the Talent Content Marketing Solution (IMS) business is shrinking. In 2023, the company's advertising business revenue was 759 million yuan (+20.5% year over year). As the company's main business model changed to a subscription model, the advertising business is expected to grow steadily; other revenue of 40.4 million yuan (-72.3% year over year), the talent content marketing solutions business is weakly related to strategy, and the company sold this business in 2023.

The acquisition site perfects the construction of an imaging productivity ecosystem and continues to invest in AI. In February 2024, the company announced that it would purchase a cool website by issuing shares and cash at a total cost of HK$309 million. Zhanku is the most influential community among design and creative groups in mainland China.

Profit forecasting and valuation. Our revenue expectations by segment are as follows: 1) Imaging and design products: The total number of paid subscribers in 2023 was 9.11 million (+62% year over year), user payment rate 3.7% (+1.3 pct year over year), and the average annual revenue of subscribers was 180.23 yuan (-0.9% year over year). We expect that in 2024-2026, the number of global paying users will be 12.34 million, 15.6 million, and 19.03 million, respectively, with year-on-year growth rates of 36%, 26%, and 22%; subscription rates will be 4.8%, 5.9%, and 6.9%, respectively, up 1.1 pct, 1.1 pct, and 1 pct; and the average annual revenue of subscribers will be 185 yuan, 195 yuan, and 200 yuan, respectively. 2) Beauty industry solutions: We expect the company's revenue growth in 2024-2026 to be 30%, 28%, and 25%, respectively. 3) Advertising: We expect the company's revenue growth rate to be 5.5% in 2024-2026, respectively, to maintain steady development. Overall, we expect the company's revenue for 2024-2026 to be 3,565 billion yuan, 4.556 billion yuan and 5.578 billion yuan, respectively, with year-on-year increases of 32.2%, 27.8% and 22.4%, respectively; the company's net profit to mother will be 597 million yuan, 861 million yuan and 1,123 million yuan respectively, with year-on-year growth rates of 57.94%, 44.09% and 30.46% respectively. Referring to the 2024 average PE valuation of comparable companies, the company was given a PE valuation of 30-35 times in 2024, calculated at RMB 1 = HK$1.1036, corresponding to a reasonable value range of HK$4.36-5.08 per share, covered for the first time, and gave a “superior to the market” rating.

Risk warning: The increase in subscription user payment rates falls short of expectations, the expansion of users in product productivity scenarios falls short of expectations, and the growth rate of sales expenses in global expansion is accelerating.