【Stock】A thorny profiting way behind Meitu’s listing ambition
It has been more than a decade for the Hong Kong stock exchange to see a huge initial public offering (IPO) from a technology company since Tencent (0700) raised HK$1.44 billion net proceeds in 2004. Meitu Inc., a mainland mobile app developer famous for its selfie beautifying app MeituPic (Meitu Xiuxiu), has filed for a local listing to raise up to US$1 billion (about HK$7.8 billion) in the fourth quarter but this loss-making company may face challenges with its profit model largely depending on hardware sales.
(Picture of Meitu smartphone from its Weibo account)
The IPO will value Meitu as high as US$5 billion (about HK$40 billion), similar to the size of Lenovo (0992), which has a market capitalization of about HK$57 billion. Ivan Li Sing-yeung, head of research at SinoPac Securities (Asia), said Meitu’s expected valuation was relatively high but still reasonable, considering the company’s large user base with apps active on over 1.1 billion unique devices. “Many other technology companies suffering long-term losses were valued high,” he said.
“American companies Amazon and Tesla both had a history of loss making, but they changed the ecosystem of the industry and thus investors would like to believe they can make profit someday,” added Li. However, he noted that it was still questionable whether Meitu could achieve that in its industry.
Based upon Meitu’s successful high-valuation-listing, Li expected an “anchoring effect” that could attract other mainland technology companies, such as Didi Chuxing, a ride-hailing app company, and Xiaomi, a Chinese technology company notably for smartphones, to list on the Hong Kong bourse.
CNIT-Research, an Internet data analysis provider in China, said Meitu’s high valuation was due to its’ Internet and mobile-based business nature, which few Hong Kong listed companies had. As the end of July, technology companies only accounted for about 10 per cent of the total market capitalization of the local stock market.
As mentioned by Ivan Shum Wai-chuen, the co-founder and chairman of Angel Investment Foundation, the valuation model for Internet companies was mostly based on the market size, the company’s market share, and the revenue generated by each user. Therefore, the valuation could be “astonishingly high”.
Meitu’s prospectus reveals its global Monthly Average Users (MAU), by the end of this June, hitting 446 million. Also, users of Meitu have uploaded or viewed over 7.3 billion photos through its core photo apps, including MeituPic and BeautyCam, and 430 million videos on Meipai, its short-video application.
(Picture posted on Meitu's Weibo account)
“The combined effect of the user size, growth potential, brand recognition and its future development is important for investors,” noted Ivan Shum. Besides, the synergy effects arose from the business value generated by users increased Meitu’s valuation.
Meitu’s prospectus lists five rounds of investments received, with the total amount reaching US$500 million. However, Ivan Shum admitted, “When investing in Internet companies, Venture capital (VC) investors need to devote a substantial amount of money. Sometimes, those companies fail before listing because of the high costs from technology innovation and competition. Therefore, the investment failure rate is quite high.”
Meitu depends on the hardware sales to profit
The prospectus shows Meitu's product portfolio and its profit model
Positioning as a mobile Internet company, Meitu, on the other hand, recorded about 90 per cent of its 741.8-million-yuan revenue last fiscal year from sales of smartphones. The other 10 per cent from Internet services include online advertisements and the sales of virtual items on its mobile games and Meipai.
Although its net profit per phone is equivalent to that of the iPhones, the market share of Meitu’s smartphones is less than 0.1 percent in 2015 based on 457 million units of shipped smartphones in China, according to the Frost & Sullivan’s report.
The profit model shows a hardware-based characteristic instead of its widely-known Internet-based business, a mainstay of its uplifted valuation. “This is not a big problem but perhaps a good news”, said Li. While charging fees to apps is infeasible, the sales of smart phones bring the company a good source of income, which is cared most by investors. Besides, the company said it would use the listing proceeds raised to support further hardware development. However, whether the sales of hardware can be maintained is still questionable.
Meitu failed to make any net profit for three consecutive years, despite its large user base and brand recognition. According to its prospectus, the company recorded 6.3 billion yuan accumulated loss as of June 30 this year due to the substantial amount of liabilities including preference shares and shareholders’ rights drive, an incentive scheme to reward the management.
Once Meitu floats on the local bourse, the preference shares will be converted to ordinary shares, and the adjusted real accumulated loss will be 1.08 billion yuan (less than US$200 million), says the prospectus. That amount of loss is relatively small compared with other mainland Internet giants, such as Didi Chuxing and the food delivery app Ele.me, which have suffered several or dozens of billion losses in US dollar.
(Reporting by SONG Ge, editing by LI Yinzhou)
《The Young Financial Post 新報人財經》
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