AI Narrative Fine-tuning, Valuation Remains Key; Maintain Meitu Buy Rating

Overview

This report updates UBS's views on the China Software & IT Services industry. The core view is that although there is a subtle emotional shift in market concerns over "AI disrupting the terminal value of software companies," where investors begin to demand reverse proof of the specific paths of AI disruption, UBS believes this narrative shift itself is not sufficient to constitute a strong buy reason for the entire sector. The report focuses on analyzing risks such as intensifying competition and execution challenges faced by the industry, and specifically covers Meitu Inc. (1357.HK), maintaining a Buy rating based on its solid business performance.

Core views

Emotion regarding the AI narrative is undergoing a subtle shift. Previously, investors generally believed that the terminal value of software companies would decline due to AI disruption, and imposed the burden of proof on companies to "prove themselves immune to disruption," leading to compression of sector valuations throughout the year regardless of short-term execution. However, with covered software companies reporting steady or even accelerated revenue and profit growth driven by AI adoption, the market began to re-examine this initial assumption. Now, the market asks the opposite question more often: Where exactly will AI disruption appear? Through what mechanisms? Over what time frame? Since most software stocks are heavily shorted, marginal improvements in sentiment could trigger disproportionate price reactions, including short covering. The stock price performance of Meitu after releasing Q1 business updates on May 6, and the steady growth of its multiple key performance indicators (KPIs), embodies this logic. While acknowledging the shift in narrative tone, UBS emphasizes that this alone does not constitute a strong buy argument for the sector. AI capabilities are still evolving rapidly, which brings risks of intensified competition, as well as execution challenges for existing software companies regarding talent management, organizational complexity, and effective implementation of AI strategies. Therefore, whether valuations are cheap enough remains a key consideration. Regarding Meitu Inc., UBS points out specific upside and downside risks. Upside drivers include globalization progressing faster than expected, breakthroughs in DesignKit product capabilities accelerating paid user growth, and leveraging user data on hand to speed up the evolution of proprietary generative AI model MiracleVision. Downside risks include globalization slower than expected, larger competitors launching more competitive products, and intensifying competition as large language model inference costs decrease.

Analysis framework

UBS's analysis focuses primarily on "expectation gap" and "valuation anchor." First, the institution identifies the divergence between market consensus (AI disruption leads to valuation compression) and actual fundamentals (AI-driven growth), pointing out the transfer of market burden of proof as a key catalyst for sentiment repair. Second, at the industry level, UBS does not blindly go long despite improved sentiment, but introduces perspectives on competitive landscape and execution difficulty, emphasizing the double-edged sword effect of AI technology iteration. Finally, for specific targets, it uses DCF cash flow discount models for valuation, combined with product pipelines (such as DesignKit, MiracleVision) and commercialization progress (globalization, paid user growth) to derive target prices and ratings.

Methodology notes

• Event Game and Behavioral FinanceExpectation Gap/Expectation Management

  Transfer of Market Burden of Proof

  The report indicates that the market shifting from requiring companies to prove "not being disrupted" to asking "when disruption will occur," this adjustment in expectation framework is a key behavioral finance factor triggering stock price revaluation and short covering.

• Valuation MethodDCF Cash Flow Discount

  DCF Valuation Model

  UBS explicitly uses the DCF model to value China software companies, meaning their target prices rely highly on assumptions about future free cash flows, growth rates, and discount rates, rather than simple relative valuation multiples.

• Industry/Industrial Analysis FrameworkSupply and Demand Framework

  AI Supply Shock and Demand Response

  The report analyzes how rapid evolution on the AI technology supply side (such as LLM evolution, reduced inference costs) affects the demand side of the software industry (corporate IT budgets, paid user growth) and competitive landscape.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• Meitu Inc. (1357.HK)

  Beneficiary target: AI application landing drives revenue growth, multiple KPIs perform steadily, and there is potential for short covering.

  Strengths

  Q1 business updates show multiple KPIs growing steadily; owns proprietary generative AI model MiracleVision and DesignKit product line.

  Weaknesses

  Faces fierce competition from hyperscale cloud providers and AI startups; AI inference cost reduction may intensify price wars.

  Risks

  Globalization process slower than expected; product capability breakthroughs below expectations; LLM evolution restricted by GPU or intensified competition.

Key data

• Meitu Current Share Price4.72 HKDClosing price as of May 7, 2026
• Meitu Target Price8.40 HKDUBS maintained 12-month target price
• Meitu RatingBuyMaintaining Buy Rating
• Recent High PriceAround HKD 12+Peak reached around August 2025, subsequently declined

Impact & implications

For the industry, the report warns investors should not blindly chase highs just due to "AI narrative shift" but must be alert to competition risks and execution risks brought by technology iteration. For Meitu Inc., as a representative of AI application landing, if breakthroughs can be made in DesignKit and MiracleVision models and acceleration of globalization, valuation repair space is expected to be realized; however, if facing giant competition or globalization blockade, there exists downward pressure. Overall, the report suggests paying attention to the match between valuation safety margin and fundamentals.

Risks

• Corporate cuts to IT budgets under macro headwinds, despite strong willingness to adopt AI.
• Further GPU restrictions lead to slowing evolution of Chinese Large Language Models (LLMs).
• Enterprise cloud migration speed slower than expected.
• Rapid evolution of AI capabilities brings intensified competition and execution challenges for incumbent companies (e.g., talent management, organizational complexity).

What to watch

• Whether the evolution speed of Chinese Large Language Models (LLMs) exceeds expectations.
• Whether AI solutions validate scalable commercial release capabilities.
• Whether enterprises increase IT budgets due to macro improvement or government policies.
• Breakthroughs in Meitu DesignKit product capabilities and paid user growth situation.
• Evolution of Meitu proprietary generative AI model MiracleVision and user data utilization status.
• Speed of Meitu globalization process.