IPOs: Meitu Marches Towards HK Listing, Draws Value Skeptics

Bottom line: Meituan should be able to eventually monetize the vast audience for its selfie app, but may have to settle for a valuation below the $5 billion it wants for its IPO due to shorter-term investor skepticism. 

Plans for a Hong Kong listing by selfie app Meitu are steaming ahead, but are also drawing some differing opinions from different sides of the East-West border. It seems Chinese fans of the app that lets users enhance photos of themselves to show their best face have quite a high opinion of this local beauty, believing it could be worth up to $5 billion. But westerners are a tad more skeptical, noting that Meitu now derives most of its money from smartphone sales rather than from anything directly related to the app.

If I had to weigh in on the subject, I would probably side with the Chinese view, surprisingly enough. I’m usually immune to Chinese hype, as the mantra of “1.3 billion consumers” seems a bit passe by now, mostly because probably 1 billion of those don’t really have the income to spend on something as frivolous as a vanity app like Meitu or related products.

But I’ve been in China long enough to know that economics here don’t always work the same way as they do in the west. I’ve seen far too many country folks using iPhones here that probably cost them several months salary, even though they could have purchased adequate domestic models for far less. What’s more, early doubters of popular but revenue-challenged products like Facebook (Nasdaq: FB) later turned out to be completely wrong, proving that the size of your user base is indeed a powerful money-making tool.

All that said, let’s turn our attention to what could easily be the biggest tech IPO in Hong Kong this year or next, depending on when the offering makes it to market. I first wrote about the IPO plan back in August, noting the company’s unusual choice of Hong Kong for the offshore listing rather than the more typical destination of New York. (previous post)

Reports at that time said the company was aiming for a valuation of about $5 billion, versus a figure of $3.8 billion at the time of its last fund raising earlier this year. Now the latest reports are saying the offering is still on track, with key investor meetings now taking place. Those meetings are likely to produce a rough valuation for Meitu sometime after December 2, and Meitu is looking to raise around $750 million in the IPO sometime after that.

Big Deal for HK

We should start by pointing out that such a listing would actually be the largest tech offering in Hong Kong in nearly a decade, which returns to my earlier point that this kind of listing would more typically go to New York or possibly China’s Nasdaq-style ChiNext board. But the more interesting point is the argument surrounding valuation, which I’ve noted above.

Skeptical western investors are pointing out that Meitu may boast an impressive 450 million active users, but that the company still derives a whopping 95 percent of its revenue from smartphone sales. The company’s revenue is still quite modest at the equivalent of about $88 million in the first half of this year, though that figure is up three-fold from what it was a year earlier. It lost 279 million yuan ($40 million) during that period, which was about 8 percent narrower from a year earlier.

Meitu certainly isn’t the first or only company faced with the challenge of how to monetize a vast audience. Tencent (HKEx: 700) is currently trying to do the same thing for its wildly popular WeChat mobile instant messaging platform, and seems to be making slow but steady progress. Then again, for every successful Facebook and WeChat that succeeded in the effort, there are far more popular apps and websites like MySpace that failed, often because they simply couldn’t retain their audiences.

That could be one of the bigger challenges for Meitu, since it’s quite possible that people may tire of posting enhanced photos of themselves online for all their friends to see. But vanity does seem to have a certain timelessness, and there’s no reason Meitu shouldn’t be able to one day monetize its audience if it can keep adding new features to take advantage of that fact.