An IPO in Hong Kong: China’s No. 1 selfie-editing app maker Meitu’s bitter and sweet moment

Selfie-editing app maker Meitu on Thursday had its initial public offering (IPO) in Hong Kong. The offering price was HKD 8.5 (USD 1.1); after an up and a down, it closed flat at HKD 8.5 on the first trading day, with support from underwriter Morgan Stanley, The Wall Street Journal reported.

The IPO brought Meitu a net profit of HKD 4.7 billion and pushed its valuation to nearly USD five billion. According to Chinese tech blog Ifanr, Meitu stated that 29% of the profit will be used for expanding Meitu’s businesses in smartphones and other smart devices, 22.6% for investing and acquiring assets that will enhance Meitu’s own strengths, and 19.7% for marketing.

Second only to Tencent, Meitu’s listing is the largest IPO of an internet company at the Hong Kong Stock Exchange (HKEX), and the largest IPO of a tech company that HKEX has seen in 10 years.

The Meitu IPO.
The Meitu IPO.

Why Hong Kong?

HKEX was founded in 1891 and, with a valuation of USD 2.83 trillion, it ranks the sixth biggest globally, as of August 2016. However, HKEX does not strongly feature in the history of tech company IPOs. In fact, according to the WSJ, tech companies account for a mere 10% of Hong Kong’s market capitalization.

Nevertheless, Hong Kong holds more chances for faster financing, and has relatively more consummate rules and regulations for the capital market, compared with mainland China. In addition, Meitu co-founder Cai Wensheng said at the IPO event, “We have millions of users in Hong Kong, and this adds to our courage.”

What’s special about Meitu

Among Meitu’s major products are its flagship photo editing and sharing app Meitu Pic, Beauty Camera, and Meipai, an app that beautifies mobile videos, which can then be shared to friends. These major products have been installed on 1.1 billion devices, winning Meitu 430 million total overseas users, and 456 million monthly active users globally.

A Meitu phone.
A Meitu phone.

However, behind the sweetness is the lesser known bitterness: the large number of users have failed to bring in corresponding profitability. According to Ifanr, the total revenue of Meitu in 2013, 2014 and 2015 was RMB 85.88 million (USD 12.37 million), RMB 488 million and RMB 742 million respectively; in contrast, the total losses were RMB 25.81 million, RMB 1.77 billion and RMB 2.22 billion.

Meitu products.
Meitu products.

What’s next after the IPO?

So what’s after the IPO? How might Meitu’s business model finally lead it to profits?

Venture investor Kai-Fu Lee, an early backer of Meitu, said that with Meitu having built up its brand, it can be expected to hold great potential.

Among the many pathways to profit, one of them is perhaps shifting focus towards making devices. Although Meitu may not be technically superior to other smartphone makers in many ways, the Meitu smartphone, targeted specifically at Meitu fans who love beautified photos and videos, could contribute to Meitu’s success.

Meitu CFO Yan Jingliang said that the smartphone business already enjoys a gross margin of 18% to 20% of the revenue, although research and development costs, as well as overseas marketing, accounted for much of the loss.

Other than making devices, Meitu may also profit from online ads, added-value web services, as well as e-commerce.

(All photos from Baidu Images)

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