Chinese beauty-app phenomenon Meitu makes muted tech debut

Chinese beauty apps sensation Meitu Inc. clung to its offer price on its first day of trade, a less-than-stellar debut for Hong Kong’s largest technology initial public offering in almost a decade.

It was also the city’s biggest coming-out party since the start of a program that made it easier for mainland Chinese investors to buy and sell stocks in Hong Kong. Meitu’s shares closed at HK$8.50, unchanged from an IPO price already set at the bottom of a marketed range. The mobile apps developer and phone maker remains valued at HK$35.9 billion ($4.6 billion).

Meitu, which had raised $629 million, became a household name in China by tapping a cyber-savvy generation’s growing desire to look attractive online. Its apps, with more than 456 million monthly active users, help people appear comelier in photos by slimming faces, lengthening limbs and even applying virtual make-up. The company hopes its beauty-conscious loyalists can be turned into a lucrative base for e-commerce and advertising.

While its flat showing came on a day most Asian markets fell after a U.S. Federal Reserve rate tightening, skeptics point out it still generates 95 percent of its revenue from selling mobile phones and hasn’t demonstrated an ability to earn.

“There’s still uncertainty about Meitu’s ability to make money. Its mobile phone focuses on a niche space in a very competitive market,” said Yu Jianpeng, a Hong Kong-based analyst at ICBC International Research Ltd. “Its apps aren’t used by people as frequently as other social networking apps, so it’s much harder to attract advertisers.”

By listing in Hong Kong, the Xiamen-based company wants to rake in the benefits of a Hong Kong-Shenzhen link that began this month, as mainland Chinese seek alternative investments to diversify their assets, Chairman Cai Wensheng said in an interview. Meitu is trying to capture more overseas users in the U.S. and Southeast Asia, as it generates more money from advertising and e-commerce.

“Meitu’s majority of users are still in the mainland; they acknowledge our value and we are providing a chance for them to become Meitu’s shareholder,” Cai said on Tuesday. “It’s hard for Chinese to go to the U.S. and open stock brokerage accounts, but because of the Shenzhen-Hong Kong link, everyone can buy our stock.”

Hong Kong’s link to Shenzhen, a technology hub and home to China’s second-largest equity market, kicked off this month. While it enables mainland investors to buy Hong Kong stocks directly, there are quotas and restrictions on the shares that can be bought, including that they are a member of key indexes.

“Meitu has a chance of getting a better valuation in Hong Kong than if it listed in the U.S.,” said Marie Sun, an analyst at Morningstar Investment Service. “It can attract more funding in Hong Kong because people are familiar with its product.”

The listing marks the biggest initial public offering by a technology company in Hong Kong since 2007, when Alibaba.com Ltd. listed. While mobile devices now account for the lion’s share of its revenue, Cai envisions that proportion dropping to less than 30 percent within three years as services and software take off.

The company, which runs apps including Meitu, Meipai and BeautyPlus, is ratcheting up a presence in overseas markets to lure more people beyond existing users. Beauty Plus currently has more than 160 million users including in Japan, Indonesia and India. It will develop more localized features for people in the U.S., including tools that make people look tanned in their photos, said Cai.

Meitu expects its internet services and others segment, which includes ads and virtual gifts, could break even by the end of next year, according to its prospectus. For its e-commerce business, it will work with brands including Dior and Ports to focus on the mid-to-high-end market, said Cai.

The controlling shareholder of Hong Kong-listed fashion company Portico International Holdings Ltd. agreed to buy $120 million of stock in Meitu’s IPO as a cornerstone investor. Chinese property developer Kingkey Group committed to invest $40 million. Such stock buyers typically agree to keep their holdings for six months in return for early, guaranteed allocation.

Morgan Stanley, Credit Suisse Group AG and China Merchants Securities Co. were joint sponsors of the offering.