Why investors should be cautious toward Meitu IPO

August 24, 2016 10:05
Liu Zichen (L), also known as ‘Snake spirit boy’, and Lee Hee Danae (R), ‘Snake spirit’, are among the Meitu users. Photos: Weibo

Chinese photo app developer Meitu plans to raise up to US$1 billion in a listing on the Hong Kong exchange. The company is valued at over US$5 billion and is regarded as the biggest internet IPO here since Tencent Holdings (00700.HK).

The company's Meitu Xiu Xiu is one of most popular selfie app tools in China. It is also widely used in Japan, South Korea and other Asian nations for easy photo editing and retouching.

Meitu, founded in Fujian province in 2008, has developed several apps including Meipai and StickerLabs. It's estimated that over one billion smartphones have been installed with Meitu Xiuxiu. And Meitu is already China's third-largest mobile app operator, after Tencent and Alibaba.

But compared with the two internet behemoths, Meitu has one big weakness, it has been losing money and so far there is no clear idea how it is going to turn profitable.

Meitu's loss in 2015 amounted to about 750 million yuan. The company continued to post a loss -- 280 million yuan -- in the first half this year, according to regulatory filings.

Meitu lost a total of over 6 billion yuan over the years. With assets estimated at around 2.47 billion yuan and liabilities at 9 billion yuan, the firm is in a position of negative equity.

The company is expected to break even in 2017.

A relative lack of tech firms in the Hong Kong market could be one of the reasons why Meitu picked the city as its listing venue.

The firm might be hoping that analysts and portfolio managers would value its shares more highly due to the Hong Kong listing, the Wall Street Journal cited a source as saying.

Hong Kong regulators have been under fire after Alibaba picked New York over Hong Kong for its record-breaking US$25 billion IPO in September 2014. Hence, officials are said to be quite keen on the Meitu deal.

Now, coming back to Meitu's performance, the company won't find it easy to monetize its services.

First of all, it's not a high tech service and there are lots of alternatives. If Meitu starts to charge users, they can easily switch to other apps.

Also, given its narrow functions, the usage frequency of Meitu apps cannot be compared to Tencent’s WeChat and Alibaba's Taobao. Hence, Meitu stands very little chance of becoming a platform or social media.

At present, Meitu can only generate limited income from advertising of products like cosmetics and skincare products.

To improve the earnings prospects, the company is reportedly building some kind of artificial intelligence into its app, which can detect users' age, skin condition and other facial features and then use the data to push skincare products.

Investors will wait and see if Meitu can indeed achieve that.

This article appeared in the Hong Kong Economic Journal on Aug. 23.

Translation by Julie Zhu

[Chinese version 中文版] 

– Contact us at [email protected]


Although Meitu Xiu Xiu is considered the best selfie app, there are lots of other free alternatives, which make it hard for Meitu to charge its users. Photo: Qudong.com

Hong Kong Economic Journal columnist