China Consumer

Soul-searching

Why app developer Meitu thinks its future is in skincare

Meitu-w

Cosmetic change: Meitu is diversifying into beauty products

Every industry has its clichés. “Pivoting” qualifies as one in the world of start-ups and venture capital. Referred to as a shift in business strategy – either to test a new approach to a company’s business model or product – pivoting is often a necessary rite of passage for fledgling firms. But if it happens too quickly, or too often, it might just as well be a euphemism for desperation – especially when the company in question is more than a decade old and has never made an annual profit.

This might be the conclusion drawn by shareholders of Xiamen-based Meitu. Nearly 74% of them – who turned out to vote – rejected the company’s recent plan to do a share-swap with video game publisher Leyou. That effectively killed Meitu’s acquisition of a 31% interest in a company that indirectly owns the popular shooter game Warframe.

The company said it will continue to scout for acquisition opportunities as it seeks to diversify and become a bigger player in social media. The announcement of the failed Leyou deal sent Meitu’s Hong Kong-listed shares down 7% on the first trading day after the Easter holiday. And the rejected purchase represented just the latest setback for management: early this month it divested its lossmaking smartphone and e-commerce businesses. The two operations were taken over by Xiaomi and an associate of the Beijing-based e-commerce firm Secoo Holdings respectively.

Starting out as a smartphone software developer in 2008, Meitu is best known for its eponymous selfie app that enhances the user’s looks. But it was phone handsets that became Meitu’s moneymaking operation, accounting for 95% of its total income by the time it went public in 2016 in Hong Kong. The company was once popular among investors. Its market value neared HK$100 billion ($12.8 billion) in 2017 although it has since fallen to about HK$13 billion as of this week.

Its handset sales halved last year, resulting in a 38% decline in overall revenue to Rmb2.79 billion ($420 million), and a six-fold increase in its net loss to Rmb1.24 billion. In a bid to turn a profit, Meitu slashed 30% of its staff in the latter half of 2018. Meitu parted with its handset business, its CFO Gary Ngan noted, because its phones are no longer unique. Their key functionalities – such as specialised image processors or beautifying filters – have been incorporated by many other handset makers.

So what’s next for the chameleon? Its latest new business line is an all-in-one home-use facial machine powered by artificial intelligence and ‘ionic technology’. The company said the device – which it promises helps cleanse, massage and introduce nutrients to the skin – is meant to complement its core beauty regimen app.

Does it sound like a better bet than its beauty-enhancing smartphones? The device will sell for Rmb598 and Meitu will hope its looks-obsessed client base will buy them en masse. However, China’s skincare industry is brutally competitive, so any optimism on this latest strategic shift will be of the cautious variety.


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