1H24's revenue fell short of our expectations. The adjusted net profit was basically in line with our expectations for 1H24:1H24 revenue increased by 28.6% to 1.62 billion yuan, lower than our expected 1.73 billion yuan, mainly due to the fact that beauty solutions and advertising revenue fell short of expectations; adjusted net profit to mother also increased 80.3% to 0.273 billion yuan, which is in line with the company's previous guidelines. It is also basically in line with our expectations of 0.276 billion yuan.

Development trends

User indicators are growing healthily, and the globalization strategy is beginning to bear fruit. 1H24's MAU increased 4.3% year-on-year to 0.258 billion, and the growth rate rebounded from 2.6% in 2023, mainly due to the successful promotion of the company's globalization strategy and the favorable impact of AI functions on the user side. The company stated at the 2023 results meeting that it will adopt a more aggressive globalization strategy. At present, initial results have been achieved. 1H24 MAU from countries and regions other than mainland China also increased 15.0% to 0.085 billion, accounting for 32.9% of MAU from 29.8% in the same period last year.

The membership business maintained a high growth rate, and the increase in payment rates was the main driving force. The subscription revenue of 1H24 Company also increased 54.5% to 0.93 billion yuan. As of 1H24, the number of paid members increased by about 50% to more than 10.81 million, and the payment rate increased by 1.3ppt and 0.5ppt to 4.2%, respectively. The growth of paid users was mainly driven by lifestyle related products such as Meitu Xiuxiu, Wink, and beauty cameras. The increase in membership of the three in 1H24 accounted for about 81% of the overall membership increase; in terms of productivity, as of 1H24, the number of paid users of Meitu Design Office reached about 0.96 million (compared to 0.87 million at the end of 2023), and product revenue also increased by more than 152%.

We believe that as the company continues to enrich its product matrix and continuously improve its AI technology capabilities, we expect the payment rate to further increase to 4.8% by the end of 2024, and we expect subscription revenue to increase by 55.6% to 2.07 billion yuan in 2024. In terms of other business, 1H24 Beauty Solution's revenue also decreased by 5.5% to 0.27 billion yuan, and advertising revenue also increased by 18.3% to 0.41 billion yuan.

The growth of high-margin business drives an increase in gross margin, and R&D expenses are increasing due to AI investment. 1H24's gross margin was 64.9%, up 5.1pp/2.0ppt, respectively, from the same period last year, mainly due to the increase in the share of revenue from member business and advertising business in the relatively high-margin business; R&D expenses increased by 44.5%, and the R&D cost ratio increased by 2.9ppt to 26.2% year over year, mainly due to the company's increased investment in generative AI. The company stated that subsequent large-scale model development will be relatively manageable through a strategy of parallel procurement and self-development. Furthermore, due to the rise in cryptocurrency value during the period, 1H24 confirmed that cryptocurrency impairment losses were refunded around $68.1 million. Overall, the company's non-IFRS net profit also increased by 80.3% to 0.273 billion yuan. Considering that revenue from the membership business is still expected to maintain high growth, we expect the high profit side growth trend to continue.

Profit forecasting and valuation

Considering that beauty industry solutions and advertising revenue growth fell short of expectations, we lowered our 2024/2025 revenue by 7%/7% to 3.45/4.35 billion yuan, taking into account better cost control and keeping the adjusted net profit forecast unchanged. Maintaining the “outperforming industry” rating and the target price of HK$3.2, corresponding 15 times the 2025 non-IFRS P/E. There is 36% upside 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 consumer intentions; and major shareholders reduced their holdings.