September 07, [Meitu, Inc. ] Market Cap: US$6,512m; Free Float: 47.2%; 3-months Average Daily Turnover: US$56.3m Analyst: Mark Po

Transcription

1 COMPANY NEWS Meitu, Inc. [1357.HK; HK$11.96; Not Rated] - Its share price has been volatile since its IPO but we expect news flow on positive side going forward. Market Cap: US$6,512m; Free Float: 47.2%; 3-months Average Daily Turnover: US$56.3m Analyst: Mark Po September 7, 217 The Company. Meitu, Inc. (Meitu) offers mobile application software. The Company researches, produces, and markets image editing, live broadcasting, and other related social media software. Meitu is also involved in mobile design and retailing around the world. Its shares were listed on the HKEX on 15 Dec 216 at an IPO price of HK$8.5 per share. The Company sold 574m shares, raising US$629m. Meitu s IPO was the one the biggest IPOs in the technology sector in Hong Kong since 27. Its current market cap is US$6.1bn, based on yesterday closing price of HK$ Meitu is one of the sizable HK-listed TMT names in terms of market cap. Originally, it was a selfie app maker; later it expanded its business into both software and hardware. Meitu provides a portfolio of innovative photo and community apps, smartphones and a mobile game. It currently operates two business segments: (a) smart hardware, and (b) Internet services and others. Regarding smart hardware, Meitu currently designs and develops Meitu smartphones, and subcontracts smartphone manufacturing to contract manufacturers. Meitu sell most of its smartphones primarily to strategically selected online and offline distributors and retailers to better expand its smartphone market share and geographic coverage. 1H 217 results show progress in non-hardware business. Meitu s internet services and other segments reported a 762.% YoY increase in turnover to RMB246.8m, accounting for 11.3% of total turnover in 1H 217. In the internet services and others segment, online advertising revenue rose 219% YoY to RMB82.6m and IVAS and other revenue rose 5,919.8% YoY to RMB164.2m. The reasons for the strong growth in turnover in the internet services and others segment was an increase in the number of brand advertisers, paying users and ARPPU. Meitu s paying users reached 324.8k in 1H 217, up from 224.5k in 2H 216 and 58k in 1H 216. ARPU also improved from RMB7.8 in 1H 216, RMB32.9 in 2H 216 and RMB84.2 in 1H 217. Because of strong operating leverage (since bandwidth and storage-related costs are not growing in line with revenue), Meitu s internet services and other segment turned profitable at the gross level, with a gross profit margin of 15.8% in 1H 217. Meitu started testing its e-commerce platform Q2 217 to get insights into user spending behavior and experience during the testing phase. The Company s turnover in the smart hardware segment increased by 247.1% YoY to RMB1,933.m in 1H 217, from RMB556.8 m in 1H 216 due to an increase in both sales volume and average selling price (ASP). It sold 847,9 smartphone units in 1H 217 compared to 289,79 in 1H 216. In 1H 217, Meitu launched two new models, Meitu T8 in Feb and Meitu M8 in May. The ASP of its smart hardware was RMB2,272 in 1H 217 compared to RMB1,93 in 1H 216. The profitability of the smart hardware segment also improved YoY in 1H 217, as the gross profit margin improved from 19.5% in 1H 216 to 2.5% in 1H 217. Meitu management indicated that all of Meitu s apps will be upgraded to social platforms gradually and that the company will focus on adopting AI/AR/cloudbased technologies in next generation of products to drive user engagement and monetization in 2H17. For the internet services and others segment, apart from fast-growing sales of virtual gifts, Metiu will launch in-app purchases and VIP memberships (in Meipai) in the next stage. Meitu will also introduce more features on Meitu Personalized and Meipu in 2H17E. We fined-tuned our expectations for Meitu after its 1H 217 results announcement. We expect Meitu s turnover to report YoY growth of 21.8% in 217 and 86.2% in 218. The strong turnover growth in 217 and 218 will be driven by sales of both smart hardware and internet services. If its business develops on track, we believe that Meitu will make a profit in 218. We would like to highlight that we expect a higher contribution from the non-hardware segment than in our previous comment on Meitu in Mar 217. Meitu s valuation is as high as 49.7x 218 PER, but the re-rating of other leading internet names has made Meitu relatively less expensive than what it was several months ago. We share the [Meitu, Inc. ] (HK$) Dec16 Feb17 Apr17 Jun17 Aug17 Key Financials (in HKDm) Turnover (RHS) Source: Bloomberg, Company Data, CGIS Research Price (LHS) (HK$ million) view that it is not appropriate to compare Meitu with other listed internet platforms. But increasing attention to AI (especially face recognition) and more TMT IPO activity, especially (MAU/DAU based TMT names) will benefit Meitu in terms of increasing market interest. Our view. Meitu s share price movement has been volatile since its IPO, given southbound flows, the offloading associated with the end of the lock-up period, and failure to be included in the MSCI for technical reasons. But we maintain the view that Meitu s sizable market cap and massive active user base will continue to attract market attention. The technical issue has been solved, and it is possible that Meitu will be included in the MSCI in the next review. Meitu is still at an early stage of monetization, and the Company s ARPU per MAU and ad fill rate are low, but Meitu has shown progress in its internet services business development. Based on our estimation, Meitu will still have about RMB5.bn in net cash on its balance sheet in 217, which offers financial resources for the Company to grow its business. Currently, Meitu relies heavily on sales of smartphones, and its growing internet services business will create growth potential. We share the view that the market has been cautious on Meitu regarding its growth outlook since its listing. The Company s 1H 217 results show that the Company s development is in line with management s expectations. We also believe that the news flow (both industry and Company specific) on Meitu will be on the positive side going forward, which will boost sentiment on Meitu and its share price performance. Management put special emphasis on AI and AR regarding the Company s future development, so the market might treat Meitu as a quasi-ai name. Catalysts. 217 results, news flow on new business development, especially e-commerce, and the launch of new hardware E 218E 219E Revenue , ,95.7 9, ,437.3 Change (YoY %) Gross Profit ,1.2 2, ,16. Gross Margin % Net Profit (2,236.9) (6,261.4) (241.8) 1,22. 1,67. Net Margin % (31.5) (396.6) (4.9) EPS (Basic) (1.14) (2.2) (.6) Change (YoY %) n.a. n.a. n.a. n.a. 57% DPS $. $. $. $.24 $.38 ROE (%) 74.6 (77.7) (4.1) Dividend Yield (%) PER (x) n.a. n.a. n.a PBR (x) n.a FCF Yield (%) -9.37% -2.2% -.62% 1.57% 2.43%

2 Figure 1: Meitu s turnover breakdown Figure 2: Meitu s operating profit trend 14,. Smart hardware Advertising Ecommerce Others RMBm 2,. Operating profit 12,. 1,. 8,. 1,5. 1,. 6,. 5. 4, E 218E 219E 2,. (5.) E 218E 219E (1,.) Figure 3: Meitu s net profit trend RMBm 3,. 2,. 1,. - (1,.) E 218E 219E (2,.) (3,.) (4,.) (5,.) (6,.) (7,.) Figure 4: Meitu s hardware operating statistics units Volume ( units) ASP (Rmb) RMB 2,5 3,5 3, 2, 2,5 1,5 2, 1, 1,5 1, E 217E 218E 219E

3 Figure 5: Meitu s IVAS operating statistics units Paying user ASP (Rmb) RMB E 217E 218E 219E

4 Figure 6: Peer Comparison Ticker Company PE EV/EBITDA HK Listed IT Services & Internet Names Price Market Cap 217F 218F 219F 217F 218F 219F F F F F 1M 3M 6M 12M YTD Lcy US$m x x x x x x x x % % % % % % % % % % % IT Sservices 268 HK Kingdee International , HK Sinosoft Technology Group Lt HK Chinasoft International Ltd , HK Inspur International Ltd n.a. n.a. n.a. n.a. n.a. n.a. 1.1 n.a. 3.4 n.a. 2. n.a. 1.4 n.a HK DC Holdings Ltd n.a. 21. n.a n.a HK Vst Holdings Ltd HK Chanjet Information n.a n.a n.a HK ZTE , Game Developer & Social Networking 434 HK Boyaa Interactive Internatio HK Kingsoft Corp Ltd , n.a HK Ourgame International Holdin n.a. n.a. n.a. 1. n.a n.a HK Linekong Interactive Group C n.a. n.a. n.a..6 n.a n.a n.a HK Baioo Family Interactive Ltd n.a. n.a. n.a. n.a. n.a. n.a..8 n.a. 2.3 n.a. 1.9 n.a.. n.a HK Igg Inc , HK Forgame Holdings Ltd n.a. n.a. n.a. n.a. n.a. n.a. 1.9 n.a n.a n.a.. n.a HK Tian Ge Interactive Holdings n.a. n.a. n.a HK Pacific Online n.a. n.a. n.a. n.a. n.a. n.a. 1.4 n.a n.a. 11. n.a. 9.7 n.a HK Tencent Holdings Ltd , HK Meitu Inc ,512 n.a n.a n.a n.a. n.a n.a HK Netdragon Websoft Holdings L , HK Dx.Com Holdings Ltd n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a n.a. n.a. n.a.. n.a Online-entertainment 751 HK Skyworth Digital Hldgs Ltd , HK Tcl Multimedia Technology HK Huiyin Smart Community Co Lt n.a. n.a. n.a. n.a. n.a. n.a. 4.4 n.a n.a n.a.. n.a HK V1 Group Ltd n.a. n.a. n.a. n.a. n.a. n.a..5 n.a n.a n.a.. n.a E-commerce 493 HK Gome Electrical Appliances.83 2, HK Cogobuy Group HK Hc International Inc HK Coolpad Group Ltd n.a. n.a. 18. n.a. n.a n.a Media 16 HK Alibaba Pictures Group Ltd ,284 n.a. n.a. n.a. n.a. n.a. n.a. 1.7 n.a n.a n.a.. n.a HK Digital Domain Holdings Ltd n.a. n.a. n.a. n.a. n.a. n.a. 2.5 n.a n.a n.a.. n.a Average A-share Listed Software plays 3253 CH Winning Health Technology-A , n.a CH Beijing Orient National-A , n.a CH Yonyou Network Technology-A , n.a CH Beijing Thunisoft Corp Ltd-A , n.a CH Beijing Teamsun Technology-A 1.2 1,724 n.a. n.a. n.a. n.a. n.a. n.a. 2.3 n.a. 1. n.a. 1.8 n.a. n.a. n.a CH Neusoft Corp-A , n.a n.a CH Inspur Electronic Informat-A , n.a CH Bringspring Science And Te-A n.a. n.a. n.a. n.a. n.a. n.a. 4.7 n.a. 3.7 n.a. 3.4 n.a. n.a. n.a CH Ygsoft Inc -A , n.a. n.a. n.a. n.a n.a. n.a. n.a CH Digital China Information -A , n.a n.a CH Songcheng Performance Deve-A , n.a CH Baofeng Group Co Ltd-A 2.2 1, n.a. n.a. n.a. n.a n.a. n.a CH Zhejiang People Culture Co-A ,38 n.a. n.a. n.a. n.a. n.a. n.a. 3.5 n.a. 6.1 n.a. 5.5 n.a. n.a. n.a CH Alpha Group-A , n.a CH Nanji E-Commerce Co Ltd-A , n.a CH Shanghai U9 Game Co Ltd-A ,274 n.a. n.a. n.a. n.a. n.a. n.a. 3.8 n.a. 5.5 n.a. 5.5 n.a. n.a. n.a CH Zhe Jiang Daily Media Grp -A , n.a CH Bus Online Co Ltd ,15 n.a. n.a. n.a. n.a. n.a. n.a. 3.5 n.a. 4.6 n.a. 4.5 n.a.. n.a CH Beijing Kunlun Tech Co Ltd-A , n.a CH Wangsu Science & Technolog-A , n.a Average Overseas Listed IT Services Plays SAP GY Sap Se , n.a CRM US Salesforce.Com Inc , IBM US Intl Business Machines Corp , ORCL US Oracle Corp , MSFT US Microsoft Corp , N US Netsuite Inc n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a n.a. n.a. n.a. n.a. n.a. n.a. n.a. AMZN US Amazon.Com Inc , FB US Facebook Inc-A , GOOG US Alphabet Inc-Cl C , n.a n.a TWTR US Twitter Inc , SNAP US Snap Inc - A ,347 n.a. n.a. n.a. n.a. n.a. n.a n.a n.a NFLX US Netflix Inc , HPE US Hewlett Packard Enterpris , Average US Lited China Software & Internet plays RENN US Renren Inc-Adr n.a. n.a. n.a. n.a. n.a. n.a..7 n.a n.a n.a.. n.a CYOU US Changyou.Com Ltd-Adr 4.2 2, KZ US Kongzhong Corp-Adr n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. 1. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. NTES US Netease Inc-Adr , SINA US Sina Corp , SOHU US Sohu.Com Inc ,82 n.a. n.a BABA US Alibaba Group Holding-Sp Adr , BIDU US Baidu Inc - Spon Adr , FENG US Phoenix New Media Ltd -Adr n.a n.a VIPS US Vipshop Holdings Ltd - Adr 9.7 5, CTRP US Ctrip.Com International-Adr , JD US Jd.Com Inc-Adr , ATHM US Autohome Inc-Adr , BITA US Bitauto Holdings Ltd-Adr , JMEI US Jumei International-Adr n.a. n.a. n.a. n.a..8 n.a. 3.7 n.a. 2.5 n.a.. n.a MOMO US Momo Inc-Spon Adr , WB US Weibo Corp-Spon Adr , TOUR US Tuniu Corp-Spon Adr n.a. n.a n.a. n.a n.a CMCM US Cheetah Mobile Inc - Adr , YY US Yy Inc-Adr , Average P/B ROE ROA Div yield Share Price Performance HSI Index Hang Seng Index HSCEI Index Hang Seng China Ent Indx SHSZ3 Index Csi 3 Index SHCOMP Index Shanghai Se Composite MXCN Index MSCI China

5 Disclaimer This research report is not directed at, or intended for distribution to or used by, any person or entity who is a citizen or resident of or located in any jurisdiction where such distribution, publication, availability or use would be contrary to applicable law or regulation or which would subject China Galaxy International Securities (Hong Kong) Co., Limited ( Galaxy International Securities ) and/or its group companies to any registration or licensing requirement within such jurisdiction. This report (including any information attached) is issued by Galaxy International Securities, one of the subsidiaries of the China Galaxy International Financial Holdings Limited, to the institutional clients from the information sources believed to be reliable, but no representation or warranty (expressly or implied) is made as to their accuracy, correctness and/or completeness. This report shall not be construed as an offer, invitation or solicitation to buy or sell any securities of the company(ies) referred to herein. Past performance should not be taken as an indication or guarantee of future performance, and no representation or warranty, express or implied, is made regarding future performance. The recipient of this report should understand and comprehend the investment objectives and its related risks, and where necessary consult their own independent financial advisers prior to any investment decision. Where any part of the information, opinions or estimates contained herein reflects the personal views and opinions of the analyst who prepared this report, such views and opinions may not correspond to the published views or investment decisions of China Galaxy International Financial Holdings Limited and any of its subsidiaries ( China Galaxy International ), directors, officers, agents and employees ( the Relevant Parties ). All opinions and estimates reflect the judgment of the analyst on the date of this report and are subject to change without notice. China Galaxy International and/or the Relevant Parties hereby disclaim any of their liabilities arising from the inaccuracy, incorrectness and incompleteness of this report and its attachment/s and/or any action or omission made in reliance thereof. Accordingly, this report must be read in conjunction with this disclaimer. Disclosure of Interests China Galaxy Securities Co., Ltd. (6881.HK; CH) is the direct and/or indirect holding company of the group of companies under China Galaxy International. China Galaxy International may have financial interests in relation to the subjected company(ies) the securities in respect of which are reviewed in this report, and such interests aggregate to an amount may equal to or more than 1 % of the subjected company(ies) market capitalization. One or more directors, officers and/or employees of China Galaxy International may be a director or officer of the securities of the company(ies) mentioned in this report. China Galaxy International and the Relevant Parties may, to the extent permitted by law, from time to time participate or invest in financing transactions with the securities of the company(ies) mentioned in this report, perform services for or solicit business from such company(ies), and/or have a position or holding, or other material interest, or effect transactions, in such securities or options thereon, or other investments related thereto. China Galaxy International may have served as manager or co-manager of a public offering of securities for, or currently may make a primary market in issues of, any or all of the entities mentioned in this report or may be providing, or have provided within the last 12 months, significant advice or investment services in relation to the investment concerned or a related investment or investment banking services to the company(ies) mentioned in this report. Furthermore, China Galaxy International may have received compensation for investment banking services from the company(ies) mentioned in this report within the preceding 12 months and may currently seeking investment banking mandate from the subject company(ies). Analyst Certification The analyst who is primarily responsible for the content of this report, in whole or in part, certifies that with respect to the securities or issuer covered in this report: (1) all of the views expressed accurately reflect his or her personal views about the subject, securities or issuer; and (2) no part of his or her compensation was, is, or will be, directly or indirectly, related to the specific views expressed by the analyst in this report. Besides, the analyst confirms that neither the analyst nor his/her associates (as defined in the code of conduct issued by The Hong Kong Securities and Futures Commission) (1) have dealt in or traded in the securities covered in this research report within 3 calendar days prior to the date of issue of this report; (2) will deal in or trade in the securities covered in this research report three business days after the date of issue of this report; (3) serve as an officer of any of the Hong Kong-listed companies covered in this report; and (4) have any financial interests in the Hong Kong-listed companies covered in this report. Explanation on Equity Ratings BUY SELL HOLD : : share price will increase by >2% within 12 months in absolute terms share price will decrease by >2% within 12 months in absolute terms : no clear catalyst, and downgraded from BUY pending clearer signal to reinstate BUY or further downgrade to outright SELL Copyright Reserved No part of this material may be reproduced or redistributed without the prior written consent of China Galaxy International Securities (Hong Kong) Co., Limited. China Galaxy International Securities (Hong Kong) Co. Limited, CE No.AXM459 Room , 35/F, Cosco Tower, Grand Millennium Plaza, 183 Queen s Road Central, Sheung Wan, Hong Kong. General line: