Performance preview
Forecast 1H24 adjusted net profit to mother increased by more than 80%
Meitu released a 1H24 positive profit forecast. The company expects 1H24 net profit to be increased by no less than 30% year on year (i.e. more than RMB 0.296 billion) under IFRS, and the adjusted net profit to mother is expected to increase by no less than 80% year on year (that is, above RMB 0.272 billion), which is better than our expected 0.246 billion yuan, mainly due to higher margin subscription revenue growth than expected.
Key points of interest
Member subscriptions continue to grow rapidly. The company said in the forecast that 1H24 membership subscription revenue continues to grow rapidly, mainly due to: 1) Generative AI continues to drive user payments. The company said at the 2024 Video Festival that Meitu Design Office had a maximum MAU value of 17.73 million from January 2022 to May 2024, with monthly paying users reaching up to 0.93 million, and has served nearly 2 million e-commerce merchants; the AI broadcast video tool has achieved both user and revenue growth in one year. MAU reached 0.694 million, and monthly gross profit exceeded 1 million. At the same time, the company has also launched a variety of new products to cover segmented needs, including the design service platform “Zhanku Design Service”, the game advertising production and delivery platform “Kiki”, and the AI short film creation tool “MOKI”. We believe that through integration with more industry workflows, it is expected to open up new revenue growth space for the company.
2) Rapid global development. Since 2024, the company's products have performed well overseas. The company's video editing product, Wink, has successively topped the App Store list in Indonesia, Kenya, Thailand and other countries. We believe that the company has initially demonstrated the potential for successful domestic transplantation experiences overseas. According to the Meitu 2024 Video Festival, as of June 11, the number of Meitu global paid users had reached 10.63 million (9.11 million as of the end of 2023). We estimate that as of 1H24, the company's payment rate is expected to increase by 0.4 ppt to 4.1% month-on-month, and subscription revenue may increase by 56.2% to 0.94 billion yuan.
Operating leverage continues to be released, and R&D expenses may increase significantly. We believe that in the context of the company's higher gross profit subscription business, the trend of releasing operating leverage may continue. We expect 1H24 gross margin to increase 3.6 ppt to 63.4% year over year; in terms of operating expenses, considering the company's increased investment in models and AI applications, we expect R&D expenses to continue to increase by 1.2 ppt to 24.5% year over year.
Furthermore, due to the increase in the overall value of the 1H24 cryptocurrency, we expect that the company may reverse the impairment of confirmed cryptocurrencies and increase net profit under IFRS. In summary, we expect the company's 1H24 net profit to mother to increase by 31.6% to 0.3 billion yuan, and non-IFRS net profit to mother increased by 82.5% to 0.28 billion yuan, corresponding to a net profit margin of 16.0%, an increase of 4.0 ppt/0.9ppt, respectively.
Profit forecasting and valuation
Considering that the ARPPU increase in the company's subscription business was slightly better than expected, we raised our 2024 and 2025 revenue by 3% to 3.71 billion/4.7 billion yuan, and basically kept the adjusted net profit forecast unchanged. We believe that the company's subscription business still has room to expand in terms of productivity and overseas, and maintain an outperforming industry rating, but considering the recent decline in the sector valuation center, we lowered our target price by 26% to HK$3.2, corresponding 15 times the 2025 non-IFRS P/E. There is 42% room to rise compared to the current stock price. The current stock price is trading 11 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 users' spending intentions; and major shareholders reduced their holdings.