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Is Meituan Overvalued?

Jun 29, 2018 by A. Alfaro
Is Meituan Overvalued?

After successful IPO (Initial Public Offer) debut by mobile phone vendor Xiaomi, mobile-internet company Meituan is now gearing up for a stellar performance in listing its stocks in the Hong Kong stock exchange.

Meituan, operating a local life information and trading platform, handed its IPO prospectus to the Exchange on June 25th. The company is targeting to raise USD 6 billion at a market valuation of USD 60 billion.

The question is how a loss-making company attract such high market valuation? The answer lies in the diversification of Meituan’s business, which will soon be scrutinized by prospective investors.

However, a brief look at Meituan’s performance is enough to understand why the company has won the battle against its rivals. The company, founded in 2010, has already cornered 80% percent of the online group-buying industry. Last year, the company diversified into the food delivery market also, where it competes with Elema and Baidu.

Since then, the dynamics of the food delivery segment has also changed. Alibaba-backed Elema absorbed Baidu and now controls 49.8% of the market, while Meituan is close second at 43.5%. In 2017, Meituan Food Delivery reported revenue of USD 4.9 billion.

Earlier this year, Meituan also entered the online ride-booking industry and mopped up one of the leading bike-sharing startups Mobike for USD 2.7 billion. In the USD 2 billion bike-sharing segment, Meituan controls 56% of the market through Mobike, according to tech portal Qudong China.

Apart from these, Meituan has also spread itself across industries such as hospitality, housekeeping, powerbank-sharing, travel, and rental, among others. According to the company’s IPO prospectus, Meituan posted revenue of USD 5 billion in 2017, with more than 300 million users on its platform worldwide. In 2015, each user completed an average of 10.4 transactions on Meituan. That figure rose to 12.9 in the following year and to 18.8 in 2017. The top ten percent of most active users execute 98 transactions a year.

Subsequently, Meituan also posted a loss of USD 438 million in 2017. This value takes in account the value of its preferential stock. Without that adjustment, the figure is much higher at USD 2 billion. Mietuan’s losses, however, have consistently decreased from USD 894 million and USD 818 million in 2015 and 2016, respectively.

Still, recording losses for successive financial years could have been a roadblock for the company if it were to list stocks in Mainland China. The system in Hong Kong, however, does not necessarily require a company to dole out profits in order to list stocks.

The Hong Kong Stock Exchange now also allows dual-class share structures, which lets the founder keep control of the company, despite a public listing. According to official data from the Hong Kong Stock Exchange, tech companies have represented only 3% of the stock market in the last 10 years. In New York and London stock exchanges, this number stands much higher at 47% and 14% respectively.

Now, the things are changing. As tech companies find it increasingly difficult to find investors in tier-1 cities of China, they are flocking in hoards to the Hong Kong Stock Exchange, Xiaomi, live streaming app Douyu, Tencent Music, and job recruitment site Liepin, among others.

Meituan, however, is unperturbed by the losses. The founder has said in earlier statements that the company is unlikely to pare losses in the next few years. The company has instead reserved a war-chest of USD 7 billion, which the company plans to use for researching new technologies, services, and products in order to expand market.

Although, Meituan is the leader in group-buying segment and is also doing well in the food delivery business, Wang Xing has bigger plans for the company. He hopes to transform Meituan into an e-commerce and internet services giant like Amazon.

According to a research study by Southwest China University, there are over 200 million middle-class adults in China driving the demand for travel, electronic devices, and transportation. That’s the population Meituan is targeting to conquer. “Meituan revolves around customer’s demands”, Wang Xing says.

A. Alfaro

A. Alfaro is a Beijing-based freelance reporter. He focuses on China's politics, culture and society. He can be reached at varofaro@gmail.com. 

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