Xiaomo: China's AI application revenue growth is accompanied by cost increases, Meitu (01357) rating was upgraded to “increase holdings”

The Zhitong Finance App learned that J.P. Morgan Chase released a research report saying that the third-quarter results of Chinese AI application companies showed that the increase in AI revenue was accompanied by increased costs, and investors should pay more attention to the ability of revenue to eventually turn into profit. The bank raised the rating of Meitu (01357) from “neutral” to “increased holdings”, raised the target price from HK$4.5 to HK$5 for 12 months; downgraded the rating of Jinshan Office (688111.SH) from “increased holdings” to “neutral”, and lowered the target price from RMB 325 to RMB 251. At the same time, Kingdee International (00268) maintained its target price of HK$8.3, maintained the Users' Network (600588.SH) “reduced holdings” rating, and lowered its target price from RMB 6 to RMB 5.6.

The bank pointed out that almost all of the additional revenue from the SaaS business can be converted into additional profit, but every task in the AI business consumes tokens, so there may be a clear difference between revenue and profit growth. The price of each company's token is roughly similar, and the key difference is pricing ability. If AI can provide customers with new reasons to pay, set prices based on labor costs, and charge higher fees for heavy use, enterprises can pass on costs; if AI is only included in existing charges to retain customers, they need to bear the relevant costs themselves. As a result, the bank placed more emphasis on incremental gross profit, paid user growth, and cost discipline rather than AI usage or token consumption.

Meitu strengthens consumer-side monetization, and management controls enterprise-side expenses

J.P. Morgan pointed out that Meitu's consumer-side payment conversion rate still has room to improve in China, and overseas markets also have room for long-term growth. In the third quarter, paid subscribers recorded the biggest quarterly increase in a year. Although the AI business had token costs, revenue growth was sufficient to cover related costs. On the enterprise side, management sees every AI product as a cost recovery project, and has closed about half of the innovation studios.

In terms of valuation, Meitu's stock price is equivalent to about 12 times the predicted price-earnings ratio in 2027, and less than 10 times after net cash is excluded. The company's stock price has fallen by about 45% from the beginning of the year. The bank believes that the negative impact reflected in the stock price far exceeds the situation shown in the third quarter results. The bank expects the company's profit to grow at a compound annual rate of about 16% from 2026 to 2028, and to provide shareholders with returns equivalent to about 5% of market value.

Jinshan Office's AI costs are growing faster than revenue, and the room for profit growth is weakening

The bank pointed out that the AI function of WPS under Jinshan Office mainly enhances the value of existing members, and heavy use causes costs to increase faster than revenue. Adjusted net profit increased by only 8% year on year in the third quarter, while revenue increased 16% year over year, and WPS365 growth also slowed significantly. J.P. Morgan believes that the company's original business advantage is still there, but it can no longer see any upward profit margin that previously supported the “increase” rating. If the company clearly charges for heavy AI use, the bank's view may change if other conditions remain unchanged.

In terms of Kingdee International, the year-on-year subscription recurring revenue (ARR) growth rate accelerated to 19.3% in the third quarter, contract value for AI native products continued to rise, and J.P. Morgan kept its profit forecast and target price unchanged.

In terms of user networks, although AI-related revenue increased dramatically, the group's third-quarter revenue increased only 1.3% year over year, indicating that the AI business partially replaced the original project work. The bank lowered its revenue forecast as a result.