Incident: 2024H1 achieved revenue of 1.621 billion yuan, yoy +28.6%, adjusted net profit of 0.273 billion yuan, yoy +80.3%. The results were in line with previous performance forecasts.

The performance of imaging and design products has maintained rapid growth, and the global strategy has achieved remarkable results. 2024H1's imaging and design product business achieved revenue of 0.931 billion yuan, yoy +54.5%, and continued to grow at a high rate. Mainly, generative AI technology continued to enhance the appeal of the company's series of products, providing users with better image and video processing, visual design creation, etc., and driving the increase in paid subscription user penetration rate and paid subscription revenue. The number of paid subscription users of 2024H1 exceeded 10.81 million, yoy +50.1%, and a paid subscription rate of 4.2%, yoy+1.3pct. In terms of user size, 2024H1's MAU reached 0.258 billion, yoy +4.3%, of which overseas MAU reached 0.085 billion, yoy +15.0%, which is the main driving force for user size growth, and its share of the overall MAU has increased to 32.9%.

Looking ahead, we are optimistic that the company will continue to implement a global strategy, enrich AI functions, and drive steady growth in MAU, paid penetration rate, and paid subscription revenue.

The productivity layout continues to be deepened, and the product matrix is gradually being expanded. The company built productivity tools around “building AI workflows for vertical digital content scenarios”. As of 2024H1, the number of Meitu Design Studio subscribers focusing on the “e-commerce design AI workflow” was about 0.96 million (about 0.87 million at the end of 2023), product revenue increased by more than 152% year-on-year, and the cumulative number of content produced by users who started the “broadcast video AI workflow” exceeded 50 million. The company continues to expand its product matrix, releasing and upgrading 6 productivity tools at the 2024/6/12 Meitu Video Festival, adding areas covering AI production and delivery of game materials and AI short film production. At the same time, 2024H1 has successfully completed the acquisition of Website Cool and launched a new online service platform for freelance designers. Looking forward to the future, we expect the company's productivity tool product capabilities to continue to increase, strategic collaboration with Zhanku to continue to increase, and performance flexibility is expected to be steadily unleashed.

Cost control is good, and R&D costs fluctuate in the short term due to increased AI investment. 2024H1's gross profit margin was 64.93%, yoy+5.13pct, increasing the revenue share of mainly high-margin imaging and design products. 2024H1's sales/management/R&D expense rates were 12.64%, 10.95%, and 26.23%, yoy-4.93pct, -0.48pct, and +2.89pct, respectively. Among them, the year-on-year increase in R&D expenses was mainly due to an increase in costs related to generative AI training. Looking ahead, we expect R&D investment will be more effectively controlled as the company implements a large-scale AI model strategy that places equal emphasis on self-research and external procurement.

Profit forecast and investment rating: Considering AI R&D investment, we slightly lowered our previous profit forecast. The adjusted net profit for 2024-2026 is 0.55/0.9/1.18 billion yuan, respectively (previously 0.59/0.93/1.21 billion yuan), corresponding to the current market value PE 27/18/11 times, respectively. Optimistic about the company's competitive advantage on the video circuit, while productivity and global strategies continue to advance, maintaining a “buy” rating.

Risk warning: The increase in payment rates falls short of expectations, AIGC technology and applications fall short of expectations, and the expansion of productivity scenarios falls short of expectations