Meitu IPO - Might Be Listing Too Early; No Means of Pinning Down Valuation

Independent TMT Analyst

Edison Lee, CFA

Equity Capital Markets

<ul><li>Meitu, Inc. offers six photo-editing apps and one video and live broadcasting app, as well as sells its own branded handsets. Its apps have been among the top 10 most popular photo and video apps in China according to iOS download ranking. </li><li>Even though it had 446m monthly active users (MAUs) on its apps by the end of 1H16, 95% of its revenue came from handset sales. It offers two series of smartphones that have very high-resolution cameras (21 MP), proprietary imaging software and one-touch buttons for taking selfies.</li><li>Given its apps focus on making personal photo images look more beautiful, Meitu believes it has built a significant community of female users who appreciate beauty, and thus it can monetize by offering advertising and online retail of such products as cosmetics, skincare and apparel.</li><li>Its eCommerce platform will likely face significant competition from Meili United, which was created via a merger of Meilishuo, Mogujie and Taoshijie in June this year. Meili United's eCommerce platform aims to serve young, female users and is backed by Tencent.</li><li>Meitu has not yet been profitable. In 2015 its adjusted net loss was Rmb710m and in 1H16 it was Rmb258m. Given the need to continue investing in integrating all the users and developing an advertising and eCommerce platform, we believe it may not be profitable for another three years.</li><li>Meitu currently is roughly 54% owned by the two founders and 46% by VCs and strategic investors. In the last round of fund raising (April 2016), the company was valued at US$3.5bn. According to WSJ, the company is looking to raise up to US$1bn in the IPO at an equity valuation of up to US$5bn.</li><li>To justify an equity valuation of US$4bn to 5bn, we estimate Meitu will need to generate revenue of Rmb11bn-13bn by 2021. That would likely require 1) an increase in handset sales volume of 6x to 7x from the 2015 level, with no deterioration in ASP and margin, and 2) achieving advertising/eCommerce revenue of Rmb6.5bn to 7.2bn, which will be similar to the run rate of Tencent achieved in 2014. That also compares with Weibo's advertising revenue of Rmb3bn in the last 12 months with 282m monthly active users (MAUs).</li></ul>

Meitu, Inc. offers six photo-editing apps and one video and live broadcasting app, as well as sells its own branded handsets. Its apps have been among the top 10 most popular photo and video apps in China according to iOS download ranking. Even though it had 446m monthly active users (MAUs) on its apps by the end of 1H16, 95% of its revenue came from handset sales. It offers two series of smartphones that have very high-resolution cameras (21 MP), proprietary imaging software and one-touch buttons for taking selfies.Given its apps focus on making personal photo images look more beautiful, Meitu believes it has built a significant community of female users who appreciate beauty, and thus it can monetize by offering advertising and online retail of such products as cosmetics, skincare and apparel.Its eCommerce platform will likely face significant competition from Meili United, which was created via a merger of Meilishuo, Mogujie and Taoshijie in June this year. Meili United's eCommerce platform aims to serve young, female users and is backed by Tencent.Meitu has not yet been profitable. In 2015 its adjusted net loss was Rmb710m and in 1H16 it was Rmb258m. Given the need to continue investing in integrating all the users and developing an advertising and eCommerce platform, we believe it may not be profitable for another three years.Meitu currently is roughly 54% owned by the two founders and 46% by VCs and strategic investors. In the last round of fund raising (April 2016), the company was valued at US$3.5bn. According to WSJ, the company is looking to raise up to US$1bn in the IPO at an equity valuation of up to US$5bn.To justify an equity valuation of US$4bn to 5bn, we estimate Meitu will need to generate revenue of Rmb11bn-13bn by 2021. That would likely require 1) an increase in handset sales volume of 6x to 7x from the 2015 level, with no deterioration in ASP and margin, and 2) achieving advertising/eCommerce revenue of Rmb6.5bn to 7.2bn, which will be similar to the run rate of Tencent achieved in 2014. That also compares with Weibo's advertising revenue of Rmb3bn in the last 12 months with 282m monthly active users (MAUs).

Meitu, Inc.'s IPO Preview - Not As Pretty As What Its Apps Will Make You Look

Meitu Inc

Meitu, Inc.'s IPO Preview - Not As Pretty As What Its Apps Will Make You Look