Competition waits for no one; across the ocean, OpenAI has launched the chatbot ChatGPT, sparking a new wave of generative AI. For over a year, Chinese companies, from internet giants to startups, have either been eagerly releasing large models or swiftly integrating them into their business operations.
The unprecedented investment and astonishing evolution of technology companies have led China's AI race to quickly progress from competing for talent and computational power to competing for ecosystem development.
However, despite the immense potential of AI technology, AI applications are generally facing the dilemma of profitability. Many companies have made significant investments in research and development but are stuck in a slow commercialization process, with a clear imbalance between input and output.
Among the numerous AI companies in China, Meitu seems to be an exception. Generative AI has become a strong stimulant for Meitu's performance. According to its financial report released on August 28th, in the first half of the year, Meitu's revenue was 1.62 billion yuan, a year-on-year increase of 28.6%. The adjusted net profit attributable to the parent company was 270 million yuan, a year-on-year increase of 80.3%.
This article attempts to use Meitu as an example to see what kind of achievements Chinese companies have made in this wave of artificial intelligence, what the reasons are, what challenges remain, and more importantly, when the entire industry is still in a profit dilemma, what kind of ideas can Meitu provide for the industry?
I. Developing Global Applications in the AI Era
"In the era of the great explosion of AI technology, Meitu's positioning is to develop AI applications based on user needs," said Meitu's chairman, Wu Xinhong, at the 2024 mid-term performance conference, once again confirming the company's positioning.
When talking about this, Wu Xinhong quoted Peter Thiel: "Competition is a game for losers." This is also one of the most famous views of this investor, meaning that enterprises should get rid of low-quality competition and try to seek moats and even create monopolies.
Wu Xinhong expressed agreement, stating that Meitu would avoid homogenized involutionary competition and delve into the industry to find real differentiated value points.
Combining a series of recent news, Meitu seems not to be talking idly.By precisely positioning itself in the current wave of AI, Meitu's series of moves have caught the attention of Silicon Valley's top venture capital firm a16z. In a16z's "Top 100 Consumer-Grade Generative AI Applications" list, Meitu's flagship app, Meitu Xiuxiu, ranks ninth, making it the only Chinese product to break into the top ten of the list.
This is backed by the advancement of Meitu's globalization strategy. "During the globalization process, we have gained a lot of recognition," Wu Xinhong introduced at the interim performance conference on August 28th. Currently, Meitu has implemented differentiated product positioning and market strategies for Asia and Europe and America.
Meitu also disclosed some operational data: Monthly active users in countries and regions outside of Mainland China are close to 85 million, accounting for about 33% of the total monthly activity of 258 million. Additionally, according to Meitu's CFO, Yan Jinliang, revenue outside of Mainland China has seen significant growth, with a faster pace than domestic growth.
In the first half of 2024, Meitu's relatively mature photography and design products have repeatedly topped the charts in the App Stores of Japan, South Korea, Thailand, Vietnam, and other countries. The globalization of new photography products is also actively advancing, which Wu Xinhong attributes to "relying on strong product effects and refined operations."
Meitu also revealed that it is establishing branches in multiple countries around the world, aiming to integrate the product and operations teams more into local cultures.
II. The Unique Secret to Making Money with AI
Meitu's paying subscriber base has also increased—with the number of paying subscribers reaching 10.81 million and the paying subscription penetration rate exceeding 4%.
At the interim performance conference, Wu Xinhong introduced that Meitu, which began exploring the subscription model early on, has fortunately welcomed the gradual maturation of the subscription model domestically, allowing the originally accumulated massive user base and rich scenarios to be put to good use. In Wu Xinhong's view, based on AI-driven growth, the growth space for the paid subscription model is huge and highly sustainable.
CFO Yan Jinliang also expressed a similar view at the performance communication meeting, believing that the development logic of Meitu's photography and design products is very clear, and increasing the subscription penetration rate is the most critical growth indicator for this business.Yan Jinliang stated that the subscription model is particularly beneficial for the imaging and design field where Meitu is situated, "Because many of our features are developed in-house, the pool of materials and effects will grow larger over time, and the value users perceive from paying will always be present, making it very stable in the long run."
Currently, Meitu's subscription penetration rate is around 4.2%. When asked about the ideal subscription penetration rate, Yan Jinliang frankly admitted that the previously set goal was to achieve 10% in the main consumer (C-end) life scenarios, with the potential to reach even higher in productivity scenarios.
The performance of the paid subscription business directly drives the improvement of Meitu's revenue structure.
Looking at the gross margin situation disclosed in this financial report, the company's overall gross margin is 64.9%, an increase of 5.1 percentage points year-over-year.
Further analysis in conjunction with the changes in the business structure over the past few years reveals that the revenue proportion of imaging and design product business, which has a high gross profit business attribute, has been continuously increasing. In the first half of last year, this business accounted for 38.2% of total revenue, and this year it has further increased to 57.4%.
Based on the industry outlook and the still relatively low base of paid penetration rates, it is not difficult to judge that Meitu's paid penetration rate has a very considerable room for improvement, which to some extent also brings a relatively certain expectation for the growth of its subsequent gross profit and performance.
III. Why Meitu?
David Cahn, a partner and Chief Operating Officer at Sequoia Capital, published an article titled "The $200 Billion Question for Artificial Intelligence" last September, directly pointing out the profitability challenge in the AI industry. The core question of his article is "Where is the revenue?"David Cahn made a crucial observation: AI companies that focus on delivering tangible value to end-users are more likely to reap substantial market rewards.
To put it bluntly, the real profit opportunities in AI do not lie in flashy stunts; the core is to create products or services that users truly need and are willing to pay for. This also answers why Meitu can earn money from AI.
The most direct and critical explanation is that the AI products and services launched by Meitu meet market demands, and there are people willing to pay for them.
Meitu's CFO, Yan Jinliang, stated that satisfying users' needs through products is the core concept of Meitu. Meitu's differentiated competition is based on accurate user insights.
Meitu's lifestyle products are undoubtedly successful; Meitu Xiuxiu and Beauty Camera have long occupied the top position in China's imaging track. In the words of the media: almost every girl has a "Meitu Xiuxiu" on her phone.
Wu Xinhong hopes to transfer this product thinking to productivity scenarios. In Wu Xinhong's view, there are significant differences between products in productivity scenarios and lifestyle scenarios. Meitu's productivity tools must be able to "help users make money."
"Products in productivity scenarios may not spread quickly by hitting a user demand hotspot like lifestyle products do; they require a longer period of accumulation," Wu Xinhong emphasized. "Meitu will persist in this direction."
Data confirms Meitu's understanding of user needs. As of June 30, 2024, the monthly active user count of Meitu's products focused on productivity scenarios has grown by more than 40% year-over-year. Products focused on productivity scenarios, such as Meitu Design Studio and Kaipai, have all seen growth to varying degrees, with Meitu Design Studio's revenue increasing by more than 152% year-over-year, and the cumulative number of user-created content on Kaipai surpassing 50 million.
Through this, we can see that Meitu is delving into the real user needs of various scenarios and leveraging AI for product upgrades and creation, thereby finding its own comfortable profit zone.
IV. Is Meitu's profitability sustainable?Looking at the present, does Meitu AI's profitability have sustainability?
Against the backdrop of the AI industry's widespread struggle with profitability, Meitu's continuous performance and multiple domestic and international deployments have given it stronger risk resistance capabilities. This allows it to better cope with market fluctuations, maintaining business stability and continuous development.
Wu Xinhong confidently stated last year that Meitu could become the first large-scale profitable big model company in China. Currently, while optimizing market supply, Meitu is indeed continuously reaping the dividends of AI evolution. From 2021 to 2023, Meitu's adjusted net profit attributable to the parent company has been increasing year-on-year, at 39.7%, 29.9%, and 233.2% respectively.
"We have preempted many pitfalls that many companies need to step into, which has led to our current relatively good performance," Wu Xinhong said. Meitu is a very fortunate company, able to achieve good growth in the dividends of the mobile Internet and generative AI eras.
Although adopting a differentiated competition approach, AI is still a money-burning game. In the first half of 2024, Meitu's R&D investment was 430 million yuan, a year-on-year increase of 44.5%.
Fortunately, Meitu's blood-making ability exceeded industry expectations. Meitu's advantage lies in its massive user base, rich scenarios, and the ability to continuously create successful commercial products.
"We are now in the first two years before the explosion of generative AI. In the future, AI can drive more innovation and more effectively empower the industry, reducing costs and improving efficiency. From this perspective, Meitu is still in a very early stage, and we are also very excited to have the opportunity to participate in an era of industrial revolution," Wu Xinhong said.
Everbright Securities research report stated: Against the backdrop that domestic AIGC native applications are still in the initial stage, Meitu has established a solid foundation in lifestyle scene products, and productivity scene products can also seize a certain market share. They are optimistic about the future development of Meitu.
V. What is Meitu's valuation?
Back to the capital market, how should we view Meitu's current valuation?On the one hand, the change in Meitu's revenue structure, especially the reshaping of revenue and profit structure brought by the high gross margin AI business, gives it higher certainty and growth potential.
In the current situation where AI investment anxiety overlaps with global macroeconomic uncertainty, the market tends to focus more on safe assets. Meitu's existing profitability and foreseeable growth opportunities make it more of a high-quality asset. This will help the market adjust its past valuation judgment.
On the other hand, in the past, listed companies with tool attributes had fewer market valuation benchmarks, and the market found it difficult to give higher valuations to such companies.
With the advent of the generative AI era, a series of AI applications have been launched in vertical scenarios, and the increase in market supply has provided more reference systems for Meitu's valuation. This also gives the market an opportunity to further recognize the real value of the company.
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