China’s most popular photo touch-up app maker Meitu’s planned listing might be the next big tech IPO in Asia. However, the Xiamen-based firm will have to do more to convince investors it’s able to turn around its loss-making business model.
Meitu has filed for an initial public offering in Hong Kong. The firm is preparing to raise at least $500 million in an IPO later this year, hoping to achieve a valuation of $5 to $6 billion, a person with knowledge of the matter told Forbes Asia. That would make Meitu the second-largest technology IPO globally this year, after Japanese messaging app Line, which raised $1.3 billion through a dual listing in New York and Tokyo in July.
Following a financing round completed in April, Meitu has been valued at $3.7 billion. It has also won over a list of powerful backers: Venture capital firms IDG, Qiming and Tiger Global have all invested in Meitu.
But the share sale documents offer good reasons for skepticism in its future prospects.
Meitu’s most talked-about photo edit apps, which can make one look fairer, slimmer and taller with just a few clicks, have become the daily essentials of hundreds of millions of young Chinese women.
Its apps boast 446 million monthly active users, ahead of Twitter’s 310 million and Line’s 218 million, according to its initial prospectus. Currently, four out of China’s top 10 photo apps in Apple iOS store are from Meitu, according to app tracking and analytics company App Annie.
What worries potential investors most is that the company has no sure way to monetize its huge user base and projected future growth is slow in emerging.
Meitu’s main revenue growth comes from selling smartphones, which accounts for 95% of its 585 million yuan in total revenues in the first half this year, according to the listing document. Since 2013, the company has been selling smartphones with cameras that improve the quality of images to entice more customers.
The company, however, faces fierce competition from top smartphone makers such as Huawei, Xiaomi and rising star OPPO.
The share sale document shows that Meitu only shipped 289,079 units in the first half this year, compared with Huawei’s 60.6 million during the same period. Last year, loss from operations amounted to 752 million yuan, compared with 119 million yuan from 2014, as the company invests more in marketing, research and its nascent live-streaming and social media platform Meipai.
“Meitu won’t become a mainstream smartphone company,” says Jessie Ding, a research analyst with market research firm Canalys. “It will remain a niche brand.”
Meitu is trying to diversify its business but so far the progress has been slow. Meitu founder Cai Wensheng told Forbes Asia in an April interview that the company wanted to do more in online advertising and e-commerce. Advertising in Meitu’s selfie apps accounts for only 4.4% of total revenues in the first half, while online sales of virtual gifts through its live-streaming platform Meipai were just starting in June.
Advertisers generally prefer social networks such as Facebook where users spend a lot of time on. Meitu’s products, by comparison, are tools that people use for just a few minutes, says Jing Bing, associate professor of marketing at the Cheung Kong Graduate School of Business in Beijing.
Given its lack of a profitable and sustainable business model, Meitu’s target valuation is a pricey one, analysts say. It is likely that Meitu will be valued at 60% to 70% of its target valuation, as investors in Hong Kong regard it as more of a smartphone maker instead of a software company with future growth in social media and e-commerce, says Ken Xu, a partner at Shanghai-based venture capital firm Gobi Partners.
Still, an IPO is the best choice for Meitu. Given the tepid fundraising market in China, it is very difficult for the company to raise more money at a valuation higher than $3.7 billion through private placements. That, coupled with investors’ pressure to exit, is leading to Meitu’s imminent public debut, Xu says.
