Meitu shares make muted trading debut in Hong Kong after US Fed move

Shares of the developer of China’s most-used photo-enhancing software closed unchanged at HK$8.50

PUBLISHED : Thursday, 15 December, 2016, 9:59am
UPDATED : Thursday, 15 December, 2016, 10:51pm

Shares of Meitu Inc made a muted debut in Hong Kong, as the developer of China’s most-used photo-enhancing mobile application began trading amid a declining market in the aftermath of the US Federal Reserve’s first interest rate increase in a year.

Shares began trading at a 3.3 per cent premium, swung to a 2 per cent loss and closed unchanged at HK$8.50. The benchmark Hang Seng Index closed 1.8 per cent lower.

The initial public offering, which raised a net amount of HK$4.6 billion, makes Meitu the second largest technology company listed in Hong Kong, after Tencent Holdings’ 2004 listing.

“The debut performance is not bad compared with the benchmark indexes,” said Ample Finance Group’s director Alex Wong Kwok-ying. “The major concern among investors is whether Meitu can monetize the large user traffic of its application.”

Founded in 2003, Meitu has been reporting losses for the last three years although its photo editing application attracts more than 400 million monthly active users (MAU) amid China’s popularity for taking self portraits and sharing them via social media.

The Xiamen-based company may turn a profit in the fourth quarter of next year, Meitu’s chairman Cai Wensheng said today in Hong Kong.

The company’s continuous losses were partly due to Meitu issuing preferred stocks to its staff and investors, Cai said.

As much as 95 per cent of Meitu’ s 585.5 million yuan in revenue came from hardware sales including smartphones in the first half. Online advertising will increase, gradually reducing the proportion of contribution by smartphone sales to the top line, he said.

Meitu recorded a first-half net loss of 2.2 billion yuan, which widened 72.5 per cent from last year, according to its listing prospectus.

“The online advertising business is still at a very early stage and the gross profit margin is quite low,” said CASH Financial Services Group’s research analyst Bruce Kwok, who doubts the company can be profitable within a year. “It’s not easy to turn to profit that quickly.”

Monetization is harder for Meitu’s photo-editing apps, compared with the communication tools of Tencent such as QQ and WeChat, which require more interpersonal interactions, Wong said.

“Meitu has a large users’ traffic. Not many apps can generate that many users,” he said, adding that the company still has a potential to bring price gains for investors.

Analysts have been worried that Meitu’s IPO would face pricing hurdles, as Hong Kong investors are used to evaluate a company by its profitability, and would doubt whether Meitu can make enough profit to justify its high valuation of about US$5 billion.

Meitu set the offering price at HK$8.5 on Wednesday, the lower end of the indicative range between HK$8.5 to HK$9.6 after its share sale was oversubscribed 1.39 times in the retail tranche.