August 22, 2018 / 7:17 AM / a month ago

Breakingviews - Chinese beauty app reveals ugly tech reality

HONG KONG (Reuters Breakingviews) - A Chinese beauty app just revealed an ugly tech reality. Meitu unveiled dismal first-half results, which lopped nearly a fifth off its $2.9 billion market capitalisation. A strategic makeover designed to focus more on social media offered little solace. Stiffer competition and regulatory crackdowns are taking their toll.

Meitu Inc Chairman Cai Wensheng attends a news conference on the company's results in Hong Kong, China August 21, 2018. REUTERS/Bobby Yip

Meitu lost about $19 million in the first six months of the year. Though that was narrower than a year ago, revenue slipped 6 percent. Investors are accustomed to startups burning cash to acquire customers and secure their loyalty, but 66,000 – or 16 percent – of Meitu’s monthly active users vanished between January and June. So, too, did some $500 million of equity value on Wednesday, as the shares tumbled to less than half their 2016 initial public offering price.

    Things aren’t pretty elsewhere either. Shares of U.S.-based Snap are trading at less than $12 apiece after going public at $17 less than two years ago. In Hong Kong, Chinese tech companies ranging from index heavyweight Tencent to recently listed China Literature have run into skeptical headwinds, too.

    As with many of its Chinese tech peers, Meitu’s business model aggregates loosely related functions. It sells smartphones targeted at people obsessed with photographing themselves and makes a popular app that allows users to doctor selfies. Neither segment has proven easy to defend from competitors. The hardware business, which supplies three-quarters of the company’s revenue, is shrinking.

   Meitu’s solution is diversification. It invested in a plastic surgery website and is planning a new social media service intended to increase usage of its app, and attract more male users. Neither idea is original, but means the company “will de-emphasize net profit generation” until it can implement the new strategy. Tech investors typically have been patient about promises of future prosperity, especially if there is appreciable top-line or customer growth. At Meitu, and increasingly at similar outfits, those features are no longer in the picture.

Breakingviews

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