Tech

Tim Culpan is a technology columnist for Bloomberg Gadfly. He previously covered technology for Bloomberg News.

Initial share sale documents filed by China's Meitu to the Hong Kong exchange Monday unveil a side of the technology group hitherto hidden from view.

Much like the millions of users who've downloaded its beautifying photo software, Meitu's image as a selfie-app maker stands in stark contrast to the reality that it is, in fact, a smartphone company.

Founded in 2008, Meitu's debut product was MeituPic, a PC-based software application that offered "one-click enhancement" of photos, ahead of the launch of a mobile app version in 2011. The business model is simple: get millions of people to use your app, then sell ads to monetize those users.

But in 2013, two things happened that transformed Meitu from being just another maker of photo-editing software. The first was BeautyCam, a second app conceived solely to make users look prettier after the company discovered that MeituPic was primarily being used to enhance selfies. Now, millions of Chinese are using this new app to whiten teeth, brighten eyes, remove zits and even lengthen their legs. 

Hardware Health
Meitu's smartphone business has been the overwhelming driver of revenue, now accounting for 95 percent of sales
Source: Meitu, HKEX

That same year, Meitu took the nascent selfie craze a step further and decided to make its own phones. By outsourcing the manufacturing to FIH Mobile, Meitu could stuff its own-brand handsets with everything a selfie-obsessed user could want, including a better camera, clearer screen and the software to make them look more beautiful.

What Meitu's IPO prospectus shows us is that a business that started as a Meitu sideline offering is now its chief money spinner, not just in terms of revenue but also profit. Even at the gross operating level, where you simply deduct input costs from revenue, Meitu's app business lost money while its smartphone business was profitable in the six months to June 30.

Smartphones now account for 95 percent of sales and 146 percent of gross profit, while the gross margin for Meitu's app business is negative 5.9 percent.

Mobile Margins
Rapid spending and slowing sales at Meitu's app business has pushed that unit into the red while hardware remains in the black
Source: Meitu, HKEX
Note: Figures are for gross profit and don't account for operating costs.

A massive rise in spending for the app business -- labeled internet services and others -- hasn't been matched by sales growth, driving that portion of Meitu into the red last year. (A lot of those costs come from Meitu ramping up new services, such as live video streaming.)

Despite what the financials show, Meitu wants to hang onto its image as an app maker focused on monetizing the 446 million active users it had in June: 

"We view ourselves as a mobile Internet company with a massive, active and fast-growing user base as our core asset."

Clinging to the internet moniker isn't uncommon. Even smartphone maker Xiaomi likes to call itself an internet company instead of a hardware maker, and with smartphone profits declining and former giants dropping like flies, I can see why.

Yet as I've argued in past columns, there's a clear and profitable market for those device manufacturers that can offer unique and compelling features. Apple and Samsung are the primary examples, with Huawei also learning fast. While Xiaomi's financials remain secret, as do those of Oppo, OnePlus and most others, it's hard to see any of them offering the same functionality that warrants the 30 percent price premium Meitu can charge.

By leveraging its photo-editing technology and know-how, and showing that it can pull off the rare feat of delivering profits from hardware, Meitu demonstrates the label "smartphone maker" need not be an automatic curse.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

  1. Xiaomi's Mi5 premium version went on sale for 2,699 yuan ($406). Meitu's V4s retailed for 3,499 yuan.

To contact the author of this story:
Tim Culpan in Taipei at tculpan1@bloomberg.net

To contact the editor responsible for this story:
Katrina Nicholas at knicholas2@bloomberg.net