Question #4: Discuss the expected earnings mentioned in the prospectus and offer price compare with the actual result reported in the latest annual report and the stock price on the day off and one year after the announcement of the actual results.

MEITU was incorporated in the Cayman Islands under MEITU Inc. in July 2013, as one of the exempted companies with limited liability under the Companies Law. The business has been doing relatively well since its inception which has led to the exceptional business being generated by the company (Diri, 2017). Over the years, MEITU was incorporated into the stock market with its shares being traded publicly in the share marketplace. The company has two major segments namely the Internet Business segment and the Smart Hardware segment.

From the overview of the prospectus, the adjusted accumulated loss would likely be RMB 1.1billion by June 30^th, 2016. The company projects at making losses for the periods ending December 2016 and a half period of June 2017.

The expected earnings are usually among some of the critical information which the shareholders are typically interested in at a company. There is a need for the analysis of earnings management at MEITU(Diri, 2017). The earnings could be obtained from the consolidated financial statements and information.

The actual performance of MEITU in 2017 reported a positive figure in the gross profit, with the gross profit being RMB 184,993,000. From the smart hardware segment, the business realized a gross profit of RMB 859,493,000.

From a comparison between the actual results and the expectations, the expectation from the segment’s gross profit was at break even. However, the real value was RMB 185million. Therefore, the difference, in this case, was RMB +185million. For the indirect costs and other expenses, the expectation was at RMB 1,346million with the actual result being RMB 1,282million representing an RMB -64million difference.

The actual results reported by MEITU in 2017 outperformed the 2016 expectation in that the gross profit increased by 337% while the net loss decreased by 97%. The segment of Internet services became profitable, but the company remained a loss-making at the end of the financial year(Diri, 2017).

There was a positive change in the stock price that was reported in 2018. From the previous stock price in 2016 that stood at HK$8.50, there was a 19% change in 2018 with the stock price changing by +HK$1.58 to HK$10.08. However, due to the net losses reported by the company, this is likely to reduce by -68% to –HK$6.89 in 2019, and this could be attributed to the trade wars between China and USA that has existed since 2018. The monthly active users also decreased by 23.1% to 349million users(Diri, 2017). The change of the business model additionally created uncertainties to the future growth of the company.

A decision of whether to invest or not will be informed by an analysis of all the crucial elements as well as the determination of the most viable option after assigning all the dominant factors the appropriate weights. However, from the financial analysis of MEITU, the company remains loss-making for some years with risks arising from the change of the business models. Additionally, the stock price has reported a downward spiral which is a red sign for an investor who wants to buy the shares of the company(Diri, 2017). Therefore, the most effective decision will be not to invest in the company due to the aspects that are prevailing that are affecting the profitability of the company.

References

Diri, M. E. (2017). Introduction to Earnings Management (7th ed.). Basingstoke, England: Springer.

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