A leader in aesthetic creative tools to occupy the minds of users and build a moat
Meitu is a leading company in the domestic video design industry. It has been deeply involved in image editing for many years. With the popular app Meitu Xiuxiu, it has occupied the minds of users, maintained the number one market share for a long time, and has high user stickiness.
The company built a ToC and ToB product matrix around the “face value economy”. The product form and service user base continued to expand, from the C side to “big C (such as KOL) and small B (such as e-commerce sellers)”, from mass users to communicators; the product form extended from life scenarios to productivity scenarios, and began to serve industries such as content generation and advertising e-commerce. The market response for new products in the productivity scenario has been positive. According to the annual report, Meitu Design's revenue in 2023 has exceeded RMB 100 million, an increase of 229.8% over the previous year, which is close to double the original target.
The B-side welcomed a sharp rise in volume and price, and the subscription transformation moved towards a positive business cycle
Moving from a lifestyle scene to a productivity scene is expected to bring about a sharp rise in volume and price. 1) Higher paid penetration rate: Thanks to the productivity scenario, users are more willing to pay, which has led to an increase in the overall subscription penetration rate, which increased from 1.7% in 2021 to 3.7% in 2023. Expanding B-side users is expected to further open up the ceiling of the company's paid penetration rate. 2) Higher ARPPU value: In terms of product pricing, the company uses a subscription as the main fee+single purchase as a supplement. The membership model provides users with value-added benefits. The monthly or annual fee is charged, and the customer unit price for productivity tools such as Meitu Design Studio and Production will be slightly higher.
From the diversion model to the subscription model, achieve a positive cycle between revenue growth and user retention. As the traffic dividend was exhausted, the diversion model that the company once relied on faced bottlenecks. In order to solve the monetization problem, the company actively sought a growth path. After successfully verifying the subscription model for overseas products (BeautyPlus and AirBrush), Meitu's domestic products also began testing the subscription model in 2020.
The core of a subscription is product power. Users are willing to renew the product power, thereby achieving a positive cycle between revenue growth and user retention. By the end of 2023, the number of Meitu paid subscribers surpassed 9.11 million, a record high, with a year-on-year increase of 62.3%.
AIGC promotes equal creative rights. The large space for communicators can help AIGC reduce the learning costs and usage threshold for creators, greatly improve the efficiency of users in producing digital content, and act as a creative aid to provide visual and conceptual inspiration. It allows non-professionals who were once far from technology to quickly experience the technological achievements of AI, so that more industries can enjoy the dividends brought by equal rights in technology.
According to Adobe's estimates, the market space for communicators represented by KOL, e-commerce, and new media operations is as high as US$31 billion. In recent years, this field has gradually attracted attention due to the “influencer economy.”
At the same time, AI creative equality has attracted various players, including companies such as Adobe, Canva, Meitu, and Wenshengtu, which emerged last year. We believe that in a situation where there is enough room for communicators and the market pattern is still unclear, each company can hope to gain market share with its unique advantages. Meitu relies on traffic advantages and AI native attributes to expand more “big C, small B” paying users, and is expected to overtake corners in the wave of artificial intelligence.
Investment advice:
We expect the company's revenue from 2024 to 2026 to be RMB 36.07/44.69/RMB 5.424 billion, respectively, and net profit to mother of RMB 522/7.44/995 million yuan, respectively. For the first time, the investment rating given to Buy-A was covered. The target price for 6 months was HK$3.70, which is equivalent to a dynamic market sales ratio of 5 times that of 2024. (Note: The target price and stock price are both in Hong Kong dollars. The share capital was calculated using the latest tradable share capital, or 4,535 billion shares. (The exchange rate assumes 1HKD=0.93 CNY, the date is 2024-06-21)
Risk warning:
The commercialization of new AI products falls short of expectations, AI technology development falls short of expectations, subscriber growth falls short of expectations, industry competition increases the risk, and the risk of assumptions falling short of expectations.