Meitu Inc (1357.HK): Expanding AI opportunity meets declining feature scarcity; initiate at Neutral

We initiate coverage of Meitu (1357.HK) with a Neutral rating and a Dec-27 HK$4.5 price target, based on 15x 2028E P/E. AI is expanding the visual-creation market by lowering production costs and increasing content volumes, supporting Meitu's Photo, Video and Design revenue growth of 30.9% YoY in 1H26 and adjusted attributable net profit growth of 39.5%. However, the investment case is becoming more balanced under our opportunity × scarcity × value capture framework. Foundation models and AI features embedded in high-frequency platforms are making common image-editing capabilities easier to replicate, while 1H26 provided limited evidence of a meaningful acceleration in Productivity monetization. Productivity paid users rose c.30% YoY to 2.4mn in 1H26 and ARR reached c.Rmb620mn, with ARPU around 1.5x Leisure. 1H26 revenue rose 22.1% YoY and adjusted attributable net profit increased 39.5%, although gross margin declined 3.8ppt to 71.5% as AI products increased inference and cloud costs.