IPOs: Meitu Aims High with Price Range, Attracts Low-Brow Investors
Bottom line: Meitu’s shares are likely to price and debut weakly due to skepticism about its profit potential from big western investors, but could perform better over the longer term if the beauty app can monetize its large user base.
What’s likely to be Hong Kong’s biggest high-tech IPO in nearly a decade is creeping ahead, with word that beauty app operator Meitu has set a price range for its widely watched offering that puts it within reach of its target to raise $750 million. But a read between the lines shows that this offering could easily price at the lower end of its range, following earlier investor worries that Meitu might have difficulty leveraging its huge customer base into meaningful profits anytime soon.
Meitu’s quandary is hardly unique, in an Internet universe where having huge user numbers doesn’t always translate to big profits. In this case Meitu, operator of an app that lets users tweak selfies to make themselves look more attractive, is quite rich in terms of traffic, with 450 million active users. But it hasn’t found a way to actually make money from that audience, and instead earns 95 percent of its revenue from sales of smartphones that draw people to its app.
According to the latest headlines, Meitu has set a price range of HK$8.50 to HK$9.60 for its IPO, which will include the sale of 574 million shares. (English article) At the top end of that range, Meitu would be able to raise as much as $710 million, or not too far below the $750 million it had originally targeted. The company will begin marketing the shares today, and is aiming to set a final price on December 8.
Media have been pointing out the offering would be Hong Kong’s largest tech listing by a Chinese company in nearly a decade. The last time someone tried something similar was when Alibaba (NYSE: BABA) listed its B2B marketplace, Alibaba.com, in an offering that raised $1.7 billion in 2007. Market watchers will recall that offering did quite well initially, but eventually ended up a dud and was privatized by the larger Alibaba in 2012.
Tough for Tech
The fact of the matter is that Hong Kong has been a tough place for high-tech IPOs, with the lone exception of Internet titan Tencent (HKEx: 700). Most tech companies to list there have been game operators like Linekong (HKEx: 8267) and Forgame (HKEx: 484), and none has done very well, partly because they’re not very strong companies. By comparison, most premier Internet names like Alibaba, Baidu (Nasdaq: BIDU) and NetEase have found more success with listings in New York.
That brings us back to the Meitu offering and how it’s likely to fare in Hong Kong. While the price range theoretically allows it to almost reach its fund-raising target, and presumably the $5 billion valuation it has been seeking, the company’s list of cornerstone investors tells a different story. That list is anchored by 2 relatively obscure names that both appear to be Hong Kong-based, including a fashion company called Ports International Enterprises, and a real estate company Kingkey Group.
The absence of bigger, global investors from the list, such as investment banks, sovereign wealth funds and pension funds, suggests these more sophisticated buyers are skeptical of Meitu’s potential, which has dogged the IPO all along. That certainly doesn’t bode well for the offering, and I suspect it will end up pricing near the bottom of its range, meaning the company could end up raising around $630 million.
That’s certainly nothing to sneeze at, and I personally still believe that Meitu could be a good proposition over the longer term. That’s because such a large user base is crucial to success, and Meitu seems to have a good position to develop itself into a social networking tool similar to Facebook (Nasdaq: FB) or Twitter (NYSE: TWTR) if its management takes the right steps. But that may take a while, and in the meantime Meitu shares could struggle for an audience in the tough Hong Kong market for their first year or two.
