Event: The company announced its 2024 interim results, achieving revenue of 1.62 billion yuan, a year-on-year increase of 28.6%, and adjusted net profit of 0.27 billion yuan, an increase of 80.3% over the previous year.

The net profit in the interim report increased dramatically, and globalization and commercialization continued to accelerate under the power of AI. The company achieved operating income of 1.62 billion yuan in the first half of the year, up 28.6% year on year, and adjusted net profit of 0.27 billion yuan, up 80.3% year on year, in line with the performance forecast. The gross profit reached 1.05 billion yuan, up 39.6% year on year, and the gross profit margin was 64.9%, up 5.1 pct year on year, mainly driven by a continuous increase in the share of revenue from the video and design business with high profit margins. In terms of cost, the expansion of the core business scale led to a 49.5% year-on-year increase in subscription related channel sharing costs, and 35.2% year-on-year increase in basic cloud and generative AI inference costs. In terms of expenses, R&D expenses increased 44.5% year over year to 4.25 billion yuan in the first half of the year, mainly due to computational power expenses related to generative AI training and R&D personnel expenses. Sales expenses decreased 7.5% year over year to 2.05 billion yuan, and management expenses increased 23% year over year to 1.78 billion yuan, mainly due to increased employee costs.

By business,

1) The video and design product business revenue was 0.93 billion yuan, up 54.5% year on year, mainly due to the continuous rise in subscription penetration. As of the first half of the year, the number of subscribers exceeded 10.81 million, up 50.1% year on year. Driven by the continuous launch of AI functions, the subscription penetration rate reached 4.2%. Among them, Meitu Xiuxiu, Wink, and beauty cameras performed strongly, and the number of new members added in the first half of the year reached 81% of the total number of new members; 2) Advertising revenue was 0.41 billion yuan, up 18% year on year, of which programmatic The advertising business performed well, with revenue up 45% year over year. Thanks to the company's continuous optimization of advertising operations and progress in globalization, advertising revenue outside mainland China achieved a 129% year-on-year increase in the first half of the year; 3) The revenue of beauty industry solutions was 0.27 billion yuan, a decrease of 5.5% year on year.

The core strategy of “productivity and globalization” is progressing steadily. In the first half of the year, the company focused on the core strategy of “productivity and globalization”, with a subscription and in-app purchase business model, which was complemented by advertising, which achieved impressive growth in revenue and profit. At the same time, the increase in the share of high-margin business led to a steady release of the company's operating leverage. Empowered by generative AI technology, product effectiveness continues to improve, driving user payments, and the company's product subscription penetration rate continues to rise to 4.2%; at the same time, the global strategy is progressing steadily, driven by AI-related functions, and the MAU of the key product Wink has increased by about 99% year-on-year as of June 30. It became the third-largest app after Meitu Xiuxiu and Beauty Camera, and topped the iOS App Store lists in Thailand and Indonesia. As of the first half of the year, MAUs from countries and regions other than mainland China accounted for 32.9% of the total number of MAUs, an increase of 2.9 pct over the previous year, and the pace of globalization continues to accelerate with AI.

Various product updates have been released at the Video Festival, and the number of paid members has reached a new high. On June 12, Meitu held the 3rd Meitu Video Festival with the theme of “Talking about AI Workflows” and released 6 products, including 3 existing product updates: Meitu Yunxiu V2, Meitu Design Studio V3, and 3 new products: Zhanku Design Service Platform, Qimi (AI Production and Delivery Platform for Game Materials), and MOKI (AI Short Film Production), covering the fields of commercial photography, broadcast video, e-commerce design, design services, game marketing, and video generation. As of the first half of the year, the number of AI-enabled productivity and payment rate improvement logic continued to be implemented. As of the first half of the year, the number of subscribers to the company exceeded 10.81 million, the number of subscribers to the productivity tool Meitu Design Office exceeded 0.96 million, and product revenue increased by more than 152% year on year.

The self-developed model continues to be upgraded, and the launch of the AI short film application accelerates the implementation of applications in the video field. The company's self-developed Meitu Miraclevision (MiraceVision) has been upgraded to V5, using Meitu's self-developed DIT technology architecture, covering large image models, large video models, audio models, and large text models. The company's AI video product, MOKI, was launched on July 31, covering the entire process from pre-setting to content generation and post-production. After pre-settings such as script, visual style, and characters are completed, AI can automatically generate spectral images and convert them into video material, which can be realized by connecting materials in series through functions such as intelligent editing, AI soundtrack, AI sound effects, and automatic subtitles. MOKI focuses on short film production. It can deeply understand the needs of video creators and achieve dual control of content and costs. Currently, it supports the creation of various video scenes, which is expected to further lower the threshold for short film production and accelerate the implementation of AI video applications.

Maintain a “Highly Recommended” investment rating. Since the company released various AI products in June 2023, the increase in payment rates has continued to accelerate. With the release of various productivity tool products, the company's application scenarios have gradually expanded from lifestyle and entertainment to productivity scenarios. Currently, the awareness of domestic and foreign users of payment for tool applications continues to increase, and target users of productivity tools are more willing to pay. The company has been deeply involved in the retouching application market for many years, has high user stickiness, and pioneered the launch of large-scale models in the visual field to enable users to improve efficiency. The acquisition site has further opened up the designer user market and gained insight into user needs. We believe that with the power of AIGC technology, the company is expected to open up commercial monetization space for productivity tools and achieve continuous growth in performance.

Considering that the company's video and design and advertising business continues to grow steadily, and that the presence of the beauty solutions business may be affected by the macro environment, we expect the company to achieve revenue of 3.63, 4.64, and 5.76 billion yuan in 24-26, adjusted net profit of 0.58, 0.86, and 1.09 billion yuan, corresponding PE of 17.6, 11.6, and 9.7x, maintaining a “highly recommended” investment rating.

Risk warning: AI product launch results fall short of expectations, VIP subscriber growth falls short of expectations, industry competition intensifies