Sep 24, 2020
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China’s Meituan Dianping Raises $4.2 Billion, But Will It Ever Make A Profit?

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Meituan Dianping s senior executives brief the media in Hong Kong at the company s upcoming IPO. [+] China s largest on-demand food delivery firm Meituan Dianping has already raised $4. 2 billion through its initial public offering in Hong Kong but the company s growth ambitions may soon get a reality check amid concerns over its profitability


The Beijing-based firm has priced its shares at HK$69 ($8. 79) each near the end end of its expected range of between HK$60 and HK$72 per share consistent with someone with knowledge of the matter. The listing which values the company at $53. 4 billion assuming an over-allotment option is exercised would be used to bankroll Meituan s rapid expansion into multiple markets


But beneath the company s impressive growth lies an important problem: Meituan can t seem to make money off its large user base leading to mounting losses that analysts say won t stop for years to come. Last year Meituan s losses tripled to 18. 9 billion yuan ($5 billion) on revenues that soared to 33


9 billion yuan. It’s chiefly because Meituan has been spending aggressively to gain market share. From January to April this year the company s selling and marketing expenses including consumer subsidies ballooned to $600 million from $380 million a year earlier consistent with its prospectus. Meituan s Mounting Losses (in billions of yuan) 2015 2016 2017
Revenue 4 12


9 33. 9
Loss for the year (10. 5) (5. 8) (18. 9) It’s the subsidies that kills profitability says Steven Zhu an analyst at research firm Pacific Epoch. They can t stop. You stop and you lose market share. Meituan s currently has about 340 million active users who may be able to use the platform to reserve meals book hotel rooms and arrange various varieties of transport


It combines a range of services with similarities to Groupon Yelp and Uber Eats during the 4. 7 million merchants that have joined the platform which in turn allows Meituan to earn its revenue through commissions and delivery fees. But the food delivery business is still the biggest source of Meituan s income accounting for 62% of revenues last year


Consultancy Trustdata says the company has amassed a 54% share of China s food delivery market that is estimated to have an overall value of $44 billion in the first quarter this year. But reaching such a huge size has come at a heavy cost. Meituan s competitors are going all out to lure consumer away with steep discounts in what has effectively become a race to the bottom


Alibaba s food-delivery unit Ele. me has set aside hundreds of millions of bucks to offer cheaper meals. The ride-sharing giant Didi Chuxing is also expanding its food-delivery service Didi Foodie that is now available in four Chinese cities since its beta-launch in April. Except for warding off heavy competition Meituan also has to spend to attract new users


Consistent with data from the National Bureau of Statistics the food-delivery market only accounts for less than 10% of China s total dining market. To grow the market further and get more people using its app Meituan has been subsidizing meal purchases so that consumers have greater incentive to go online and make more orders


In the near term the spending is likely to continue because growth is exceptional says Rob Sanderson managing director of analysis firm MKM Partners. Despite the losses some investors remain optimistic of Meituan s longer term prospects. The company has attracted five cornerstone investors including Chinese web giant Tencent and New York-based Oppenheimer Holdings who have each agreed to purchase $1


5 billion worth of shares. The IPO has also attracted personal investments from Hong Kong s richest man Li Ka-shing and Thomas Lau the chairman of department store operator Lifestyle International Holdings consistent with a similar person with knowledge of the offering. Meituan s latest filing says that its currently concentrated on expanding our customer base satisfying unmet customer needs and embellishing our network rather than prioritizing monetization now


A spokesman said the company has no comment at the pricing of its shares and the investments from Li and Lau. Still some analysts say Meituan s proposed valuation is hard to justify. Daniel Hellberg an independent analyst estimates that Meituan is worth between $34 and $42 billion. In a report published on research platform Smartkarma he said the reported valuation range would be extremely difficult to justify according to what we know about its business today


Meituan and other Chinese tech stocks seem in a hurry to sell shares before conditions deteriorate any further. Smartphone maker Xiaomi and Zhong An Online Insurance both saw their shares dip after their trading debuts. The market s benchmark Hang Seng Index has already fallen into bear territory by declining more than 20% since its peak in January amid fears of the escalating Sino-U


S. trade dispute. They are afraid that the window will close even further MKM Partners s Sanderson says. They want to get out now in case it gets even worse

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