Meituan, The Food Delivery Leader of China
[3690.HK]
(Reading time: 16 minutes)
Meituan is one of the biggest (top 5) companies in China by market cap. It’s a well-known player among investors due to the scale of its data (customer preferences) and its end-to-end business model in the food delivery service). As Warren Buffett dictates “Invest only in companies you understand”. This research on Meituan aims provide investors with sufficient knowledge to make accurate and informed decisions.
1. The Company
1.1 Company History
The company is the result of a merger between Meituan Corporation (mainly food delivery) and Dianping Holdings (reviews for restaurant, bars etc.). The latter was started in 2010 by Wang Xing.
Wang Xing was often scrutinized for taking a U.S. business model and trying to make it work in China. His first attempt to entrepreneurship in China was a copycat version of Friendster in 2003, which didn’t work out. His next venture Xianei however, did. The Facebook-lookalike – it even had the same blue font – was a tremendous success, becoming the default social network in Asia. However, Wang Xing was forced to sell it because he didn’t have the money to support the site’s massive server costs after its population exploded.
At this point in time, Xing already made a decent amount of money, but he was no where near the level of wealth of other entrepreneurs in China or in the U.S. His next company would prove to be his golden ticket to establishing himself as one of the best known entrepreneurs in China.
In 2010, after some other ventures, he founded the group-buying site Meituan. Known for his copycat approach, he saw the lofty valuations of Groupon in the U.S. and he joined many others in setting up a likewise business model in China. Backed by Alibaba and Sequoia Capital in the initial years, it succeeded in penetrating this competitive market and coming out ahead as one of few remaining players.
In 2015, Meituan Corporation merged with Dianping Holdings, which focused on reviews for restaurant, bars and other food & beverage establishments. More on this merger in the qualitative segment.
In September of 2018, the company listed on the Hong Kong Exchange with a valuation around $ 55 billion at the time. Currently, the company is valued at a stock price 238 HKD (Hong Kong Listing) with a market cap of around $250 billion. To date, Wang Xing is still CEO and chairman of the board of directors. In December of 2020, Meituan was added to the prestigious Hang Seng index, the main index for Hong Kong listed equity.
1.2 Executive overview
It’s worth noting that the company, to our knowledge, does not have any specific roles assigned to a COO or CTO position. The company’s CTO, Daofeng Luo, left around January 2019. As to the Chief operating officer, the executive roles are organized in terms of product offering (e.g. Guo Qing as head of the Meituan platform).
1.3 Ownership
In 2014, Tencent acquired about a 20% stake in Dianping to strengthen location-based services offered by the company. A year after, the company merged with Meituan, becoming “Meituan Dianping” (now just Meituan). When the merged company did its IPO in 2018, Tencent invested an additional $400 million USD.
It’s worth noting that the company assigns different voting rights depending on the type of shares. A class A-share has 10 voting rights for every class B share. This allows the co-founders and mainly Wang Xing to keep control of the voting rights in the company.
2. Qualitative Analysis
2.1 Activity Overview
As mentioned before, Meituan derives the bulk of its revenue from food delivery services. Unlike the U.S., where the market is fragmented across the different areas of food delivery, Meituan offers a single end-to-end platform for customers.
In the U.S., what does the process for food delivery look like (pre-pandemic)?
In China, Meituan offers all of the above on a single platform. Customers are able to see reviews, while simultaneously allowing them to make reservations or if preferred, order delivery. This is where the real value of Meituan comes into place.
Merging with Dianping offered the company with an immense database of customer reviews. This enabled the company to target customers with activities and product tailored to their specific customer segment. As with all online platforms, customers who are shown more relevant deals and content, tend to stick around for longer, as noted by research company “Acquired”.
Once it merged with Dianping, review data became Meituan’s biggest competitive advantage vs other food delivery (and other product line) competitors. A deep database of reviews creates an incredible barrier to entry: any competitor can standup a set of listings, but without trusted reviews those listings are just “flat”. (Acquired, 2021)
Figure – An overview of the app with all the different functionalities (Source: Meituan Corporate Website).
In its 2020 annual report, the company disclosed the average number of transactions per year is 28.1 Let that number sink in for a while. On average, every customer does 28.1 annual transactions on the Meituan platform. Compare this with Uber Eats, the average number is 7.7 transactions per user. Compare it with Airbnb, it’s about 0.5 transactions per year.
2.2 Operating Metrics
Other metrics that indicate a positive trend is the growth in average transaction value by 7 percent year-on-year to 48.2 RMB (around 7 USD) and the growth in gross total transaction volume by 24.5%. It’s worth noting that the monetization rate of the food delivery business decreased slightly from 14% in 2019 to 13.6% in 2020, likely as a result of stronger competition.
Meituan also wants to increase the quality of the restaurants on its platform. With this objective in mind, it launched the “New Restaurant Manager” program in the last quarter of 2020. This program would help restaurant owners and managers embrace the trend towards digitization and increase their profitability. It’s a fine illustration on how Meituan strives to remain on good terms with restaurants while keeping the focus on quality improvement as a way to keep customers ordering through its platform.
Meituan, due to its scale, helps to provide low-skilled job seekers with employment opportunities. By the end of 2020, a total of 9.5 million delivery riders had earned income on the Meituan platform. Among them, around 2.3 million came from impoverished counties and had therefore been effectively lifted out of poverty through their work with Meituan.
2.3 Overview of activities
The company is the largest food delivery services company in China, but has since its merger diversified beyond its core business. Other offerings include a) in-store, hotel & travel booking b) wedding planning and c) bike-sharing & ride-haling activities, among many others.
Recent initiatives include contactless food delivery, in-store dining business for light, high-quality meals and food delivery options on the platform now including breakfast, afternoon teas and night-time snacks.
A major initiative in 2020, called “Meituan Select”, involves the move to consumers from rural areas and sourcing directly from local farmers in these areas. Much like the Pinduoduo model, this market is expected to grow significantly but has recently come under regulatory attention as regulators expressed concerns that group-buying (facilitated by large platforms) is a way to increase market share through subsidizing various offerings and thereby monopolizing markets.
Another important segment is the “Meituan Instashopping”, which is the marketplace model for non-food categories including flowers, medicine and others.
When it comes to food delivery, market share for Meituan is estimated in excess of 60% for the food delivery services market (FSM1, 2020), with Meituan Waimai being the food delivery arm of Meituan. Its closest competitor is ele.me, the food delivery service firm under tech giant Alibaba, with a market share of close to 30%. Meituan saw increased customer adoption and launched contactless delivery throughout the pandemic period, but still felt the impact on its bottom line (see quantitative segment).
3. Quantitative Analysis
3.1 Financial Statements – Revenue segments (in Thousand RMB)
The company announced its full-year 2020 results on 26 March 2021, after market close. Let’s look at where the company derives the bulk of its revenue and what the current valuation tells us about market expectations.
In fiscal year 2021, revenue for Meituan grew 17,7% to 114 bln RMB. The largest revenue segment, food delivery, represents around 58% of revenue followed by the smaller (aggregated) segments of new initiatives and in-store, hotel and travel services. New initiatives is the fastest growing segment, with revenue growth of 33.6% over the course of 2020.
COVID-19 and associated lockdown measures in certain Chinese cities in the early part of the year have caused significant disruption to Meituan’s business operations as evidenced by its smaller revenue growth and poor performance of some business segments. The in-store, hotel & travel segment saw a decline of 4.6% while the company derives the bulk of its operating income from this segment with operating margins of around 40%. However, the COVID-19 likely also helped to further entrench the market of food delivery in China, as illustrated by the 24.5% YoY growth in gross transaction volume for this business segment (CFR. qualitative segment).
In-store services include in-store dining with a broad range of supplementary offerings like escape rooms, auto-related services, health care, medical aesthetics facilities, pet care and many others.
While revenues on new initiatives such as hail riding, grocery retail, bike rental etc. grew 33.6% over the course of 2020, the operating loss deepened from 6.7 billon RMB to 10.8 billon RMB.
Unallocated items include share-based compensation expenses, amortization of intangible assets resulting from acquisitions and fair value changes of financial assets, among others.
In the last quarter of 2020, which ended December 30th, we noticed significant improvements to the overall business. The in-store, hotel & travel sector rebounded by 12.2% year-on-year while total revenue (all segments combined) rose 34.7% year-on-year. Operating loss, however deepened to 2.8 billon RMB due to a cost explosion in the new initiatives segment.
Management indicated the rise in costs related to the expansion of the Meituan Select model, which is an E-commerce platform for food delivery with a focus on rural areas and sourcing from local farmers. Meituan seems to be taking Pinduoduo heads-on with this strategic move.
“During the fourth quarter, we quickly expanded our community e-commerce model “Meituan Select” in around 2,000 cities and counties. As a result, Meituan Select now covers more than 90% of the cities and counties in China. While this business is still at an early stage, we believe that it can create tremendous value for consumers and up-stream suppliers, including farmers”
3.2 Financial Statements – Main financial figures (in Thousand RMB)
3.3 Valuation Metrics
Let’s have a look at the valuation metrics, the numbers were obtained on March 27th, 2021.
From the above valuation metrics, we can see that Meituan is trading at expensive valuation multiples, with 15 times price to sales and 13.7 price to enterprise value. However, when comparing with Pinduoduo, these numbers are all relative, as the latter is trading more expensive while the total market cap is almost the same.
Pinduoduo sets itself apart through its number of annual active users, which increased 35% in 2020 to 788 million, outpacing its rivals such as Meituan and Alibaba. Comparing with the US, we notice Doordash trading significantly higher in terms of valuation multiples than Grubhub, despite its size. The market is likely factoring in market share as an important metric for future earnings growth, as the capital-intensive food delivery market doesn’t leave room for a large number of market participants. To conclude, deciding whether the Meituan is worth its current valuations depends on a number of factors, with earnings growth and regulatory actions being the most important. Should earnings continue to grow at the rate of the last quarter (~35%), the above multiples can be justified. We’ll discuss the regulatory aspect in the risks segment.
3.4 Recent Insider Transactions
Transactions from company insiders don’t indicate any recent selling activity. It is telling that Huiwen Wang, the co-founder, sold his shares at prices of 136 and 172 HKD. We consider this reasonable as we know he left his active management role in December 2020. We believe investors shouldn’t perceive this as the co-founder believing the above share prices to reflect actual value, as other factors (i.e. him leaving the company 6 months after) were present.
3.5 Short Interest
To our surprise, Meituan has very high short interest on its outstanding shares.
Figure 3 Short interest. Source: fintel.io
While short interest has been on the decline for some time now, a 40% short interest is still very high. Institutional investors are bearish on the stock, something (retail) investors should keep in mind in their decision making.
4. Risks
4.1 Regulatory Risk
Over the past few months, regulators in both China and the US have taken a stronger stance with regards to antitrust regulations. Recent action from Chinese regulators include fines for group-buying offerings, with both Pinduoduo and Meituan having to pay 1.5 mio Yuan (232 mio USD) for selling below cost price and subsidizing products on their platforms as a way to gain market share.
As with Alibaba and other technology firms, regulators are looking at whether these platforms might be endangering the “level playing field” so often discussed when it comes to antitrust regulation.
U.S. regulators are also taking action by demanding overseas companies to allow regulators to review the financial audits of these companies. China has long refused this request, as it cited “national security” concerns. The penalty for non-compliance, as stipulated by a law Congress approved in December, is ejection from the New York Stock Exchange or Nasdaq (SCMP, 2021). The continuation of the tough stance on China under the new U.S. administration is likely to have an impact on U.S./China relations and the valuations of Chinese companies listed on U.S. exchanges.
4.2 High-margin travel business & increased competition
As discussed in the previous segments, the travel business was an important growth area for Meituan, with high margins across the different offerings. Should demand travel in a post-pandemic remain low, this will ultimately affect the top and bottom line for this segment. Fortunately, the fourth quarter result showed an improvement in this segment.
Furthermore, its initiative “Meituan Select” is operating in close competition with Pinduoduo, as it involves the move to consumers from rural areas and sourcing directly from local farmers in these areas. This market is expected to grow significantly, but an existing platform with high user growth might prove to be a very challenging environment for Meituan in the years to come. For now, initial research indicates both players are operating in different focus areas.
4.2 Relationship with Tencent & New Initiatives
Despite the 20 % of Tencent in Meituan, the activities of both companies somewhat overlap. Domestically, Meituan now challenges Tencent’s own WeChat as China’s most versatile super-app (Technode, 2020). This being a result of its increased product offerings. This is a risk from both a regulatory (antitrust) angle as well as from a stakeholder relationship angle. Potential conflict of interests between the two companies might become current. This leaves Tencent with some options as regards its ownership stake, some of which less beneficial for Meituan.
5. Conclusion & Investment Strategies
5.1 Summary
Meituan is a fascinating company, likely one of the most data-rich technology firms in China. Its customers are using the app for a range of different activities, allowing Meituan to effectively cross-sell a lot of its offerings.
In its outlook, management disclosed that significant investments in new initiatives hampered the companies’ overall profitability in 2020, but indicated that these new initiatives are creating a lot of value for consumers, merchants, our business partners.
Its position in the food delivery market is very strong, and we expect Meituan to continue its path of revenue growth by improving the quality of its offerings, focusing on high-margin segments and investing in a range of new initiatives.
Current regulatory risks are an important factor on why, for now, we remain somewhat cautious on the stock. We expect regulatory news to continue to (negatively) affect the stock, which can bring valuations up to a point where we feel comfortable in taking on the first position. In the current environment, we’re looking at taking on a position around the 270 HKD range.
Despite current valuations, we believe that with the current business model, Meituan can grow to the likes of E-commerce giants Alibaba and Tencent as data will be the fuel (or rather, electric power) in 2021 and beyond.
5.2 How to invest
Meituan is trading on the Hong Kong Exchange and is also part of the Hang Seng Index, the main equity benchmark index in Hong Kong. The ticker is [3690.HK] and on the time of writing (27th of March, 2021) the stock is trading at 325,80 HKD. Investors who don’t have access to trading on the Hong Kong exchange can also buy shares on the U.S. OTC markets, ticker [MPNGF:US].
6. Bibliography
Acquired. (2021, 3 10). The Complete History and Strategy of Meituan. Retrieved from acquired.fm: https://www.acquired.fm/episodes/meituan#:~:text=Meituan%20enjoys%20an%20average%20of,of%200.5%20transactions%2Fyear).
FSM1. (2020, 02 13). Meituan Dianping: The undisputed king of China’s 45 billion dollar online food delivery industry. Retrieved from fundsupermart.com: https://secure.fundsupermart.com/fsm/article/view/rcms204700/meituan-dianping-the-undisputed-king-of-china-s-45-billion-dollar-online-food-delivery-industry#:~:text=With%20a%20market%20share%20of%2065%25%2C%20Meituan%20is%20currently%20the,in%20China
SCMP. (2021, 03 25). US starts implementing law that risks Chinese stock delistings from NYSE and Nasdaq. Retrieved from scmp.com: https://www.scmp.com/business/banking-finance/article/3126859/us-starts-implementing-law-risks-chinese-stock-delistings
Techinasia, C.Custer. (2015, 9 1). Why one of China’s most successful founders isn’t afraid to be a copycat. Retrieved from techninasia.com: https://www.techinasia.com/chinas-successful-founders-afraid-copycat
Technode. (2020, 1 13). Tencent: How a global investment empire flies under the radar. Retrieved from technode.come: https://technode.com/2020/01/13/tencent-how-a-global-investment-empires-flies-under-the-radar/
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