Expanding Global AI Imaging And Smartphone Adoption Will Drive Engagement

Key Takeaways

• Rapid AI feature integration, strategic partnerships, and e-commerce expansion are strengthening Meitu's engagement, diversifying revenue streams, and positioning for long-term top-line growth.
  
• Rising global demand for digital self-expression fuels robust subscription growth, boosting user engagement, higher ARPU, and improved operational efficiency for sustained profit increases.
  
• Rising competition, reliance on third-party AI, shifting user trends, weak overseas monetization, and mounting costs threaten Meitu's growth, innovation, and long-term profitability.

Catalysts

About Meitu

An investment holding company, engages in the development and provision of products that streamline the production of photo, video, and design with other AI-powered products in Mainland China and internationally.

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

• Rapid international user growth-particularly outside of Mainland China, where monthly active users increased by 15.3% and revenue by 35.9%-signals Meitu is benefitting from expanding smartphone penetration and global demand for AI-enhanced imaging tools, likely to drive sustained increases in user base and recurring subscription revenue.
  
• Successful integration of advanced AI features (AI Wardrobe, AI Flash, and RoboNeo) has significantly improved user engagement and willingness to pay, demonstrated by a 45.2% year-on-year revenue growth in the core Photo, Video, and Design (PVD) segment and a rising subscription rate, pointing to higher future ARPU and improved gross margins.
  
• Strategic partnerships with leading AI/cloud providers (notably Alibaba) are accelerating the rollout of vertical AI applications and new monetization opportunities, including e-commerce integrations (AI try-on, image tools for merchants), which can diversify revenue streams and support top-line growth.
  
• Meitu's ability to quickly deploy and iterate AI-powered features using a model container approach reduces R&D inefficiencies and positions the company to capitalize on industry convergence between content creation, social engagement, and commerce, supporting both operational leverage and future earnings expansion.
  
• The societal shift among Gen Z and Millennials toward digital self-expression and creation of video/image-centric content underpins robust long-term engagement with Meitu's platforms, reinforcing a foundation for recurring premium subscriptions and continued net profit growth.

Meitu Future Earnings and Revenue Growth

Assumptions

How have these above catalysts been quantified?

• Analysts are assuming Meitu's revenue will grow by 25.1% annually over the next 3 years.
• Analysts assume that profit margins will increase from 19.0% today to 27.6% in 3 years time.
• Analysts expect earnings to reach CN¥2.1 billion (and earnings per share of CN¥0.45) by about July 2029, up from CN¥732.6 million today.
• In order for the above numbers to justify the price target of the analysts, the company would need to trade at a PE ratio of 21.8x on those 2029 earnings, down from 25.2x today. This future PE is greater than the current PE for the HK Interactive Media and Services industry at 10.1x.
• Analysts expect the number of shares outstanding to decline by 0.23% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 9.12%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• Intensifying competition from major global players in AI-powered imaging and content creation, as well as rapid advancements in generative models (including from large general AI companies), could erode Meitu's market share and dilute pricing power, potentially leading to slower revenue growth or margin compression over time.
  
• Continued dependence on third-party foundational AI models (such as Alibaba's Tongyi and Wanxiang), rather than building proprietary foundational models, may constrain Meitu's ability to differentiate and innovate in the long run, and exposes the company to risks if partnerships falter or costs increase, thus pressuring net margins and earnings sustainability.
  
• Saturation and changing consumer preferences in the mobile photo editing and beauty app market-especially a shift toward authenticity and less filtered content-may gradually reduce the appeal of Meitu's core products among younger demographics, impacting active user growth and, as a result, limiting subscription and advertising revenue.
  
• Limited monetization of Meitu's international productivity and leisure tools, as indicated by lower profitability outside Mainland China and uncertainty around subscription conversion rates, exposes the company to elevated earnings volatility if domestic growth slows or if global expansion fails to deliver significant recurring revenue.
  
• Structural cost pressures, including growing R&D, talent, and marketing expenses to keep pace with industry innovation and user acquisition (particularly for vertical and overseas markets), may outpace revenue growth if new product launches and productivity tools do not achieve hoped-for scale or monetization, compressing future net profit margins.

Valuation

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

• The analysts have a consensus price target of HK$8.97 for Meitu based on their expectations of its future earnings growth, profit margins and other risk factors.
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of HK$12.32, and the most bearish reporting a price target of just HK$6.76.
• In order for you to agree with the analysts, you'd need to believe that by 2029, revenues will be CN¥7.5 billion, earnings will come to CN¥2.1 billion, and it would be trading on a PE ratio of 21.8x, assuming you use a discount rate of 9.1%.
• Given the current share price of HK$4.72, the analyst price target of HK$8.97 is 47.4% 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.