AI Wardrobe Reliance And Margin Pressures Will Challenge Expansion Yet Long-Term Prospects Remain Intact

Catalysts

About Meitu

Meitu develops AI powered photo, video and design applications that monetize through subscriptions, advertising and value added tools for consumers and merchants.

What are the underlying business or industry changes driving this perspective?

• Although AI Wardrobe, AI Flash and other leisure features are accelerating user growth and lifting subscription rates, sustained reliance on hit driven effects in a crowded imaging market could make it difficult to maintain double digit revenue growth if new launches underperform, which could limit top line expansion and ARPU.
• While RoboNeo has quickly reached over 1 million MAUs and showcases strong multimodal capabilities, the shift from low priced daily passes to durable subscription or enterprise packages may prove challenging if users view it as a novelty, potentially capping incremental revenue contribution and slowing operating leverage gains.
• Although globalization is driving faster growth outside Mainland China with overseas revenue already contributing more than one third of total sales, the need for higher marketing spend, localized product variants and region specific competition could pressure net margins even as international MAUs rise.
• While the model container approach and deep collaboration with Alibaba reduce heavy foundational model spending, long term dependence on external large models and cloud resources may expose Meitu to rising unit costs or strategic lock in, which could constrain future gross margin expansion from AI driven products.
• Although vertical productivity tools such as Kaipai and DesignKit are scaling rapidly with strong subscription growth, the narrow focus on specific industries and workflows means slower adoption if client segments tighten budgets, which would likely temper earnings growth and dilute the current high margin mix.

Assumptions

This narrative explores a more pessimistic perspective on Meitu compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts. How have these above catalysts been quantified?

• The bearish analysts are assuming Meitu's revenue will grow by 23.5% annually over the next 3 years.
• The bearish analysts assume that profit margins will shrink from 25.4% today to 19.6% in 3 years time.
• The bearish analysts expect earnings to reach CN¥1.3 billion (and earnings per share of CN¥0.36) by about December 2028, up from CN¥898.8 million today. However, there is some disagreement amongst the analysts with the more bullish ones expecting earnings as high as CN¥2.3 billion.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 40.9x on those 2028 earnings, up from 34.5x today. This future PE is greater than the current PE for the HK Interactive Media and Services industry at 14.0x.
• The bearish analysts expect the number of shares outstanding to grow by 0.08% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.47%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• User and revenue growth are increasingly tied to hit functions such as AI Wardrobe, AI Flash and RoboNeo. If future AI features fail to replicate recent viral success in a crowded imaging and generative AI market, subscription uptake and ARPU could decelerate and weigh on revenue growth over time.
• The globalization strategy depends on sustained outperformance outside Mainland China where MAUs and revenue are growing faster. However, higher reliance on influencer marketing, region specific product variants and intense competition from global AI and imaging tools could raise acquisition costs and limit margin expansion, pressuring net margins in the long run.
• Meitu’s AI roadmap is built around a model container strategy that leans heavily on Alibaba’s Tongyi and Wanxiang and other external models. Any unfavorable changes in pricing, access, performance gaps versus rival foundational models or an industry shift toward alternative ecosystems could increase AI unit costs and cap future gross margin and earnings growth.
• RoboNeo and vertical productivity tools like Kaipai and DesignKit are still early in monetization, with RoboNeo currently using low priced daily passes and overseas productivity tools generating limited profit. If users treat these products as short lived novelties rather than durable workflows, long term subscription penetration and operating leverage may fall short of expectations, constraining earnings.
• Operating expenses, including marketing tied to Products for leisure and rising administrative and talent costs, are growing quickly and are expected to remain a sizable share of revenue. If secular AI competition forces Meitu to keep spending aggressively to defend market share, the resulting cost structure could erode operating leverage and slow net profit and earnings growth despite solid top line trends.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The assumed bearish price target for Meitu is HK$10.08, which represents up to two standard deviations below the consensus price target of HK$12.85. This valuation is based on what can be assumed as the expectations of Meitu's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of HK$15.7, and the most bearish reporting a price target of just HK$10.08.
  
• In order for you to agree with the more bearish analyst cohort, you'd need to believe that by 2028, revenues will be CN¥6.7 billion, earnings will come to CN¥1.3 billion, and it would be trading on a PE ratio of 40.9x, assuming you use a discount rate of 8.5%.
  
• Given the current share price of HK$7.5, the analyst price target of HK$10.08 is 25.6% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.