INTERNET: Money Losers Meituan, Luckin Search for Profits

Bottom line: Meituan’s opening of its delivery unit to more customers looks smart but will require execution to succeed, while shares of money-losing Starbucks challenger Luckin will move steadily downward in the months after its super-sized IPO. 

Meituan opens up delivery service

A couple of money-losers are in the headlines these last few days, casting a spotlight on how profits continue to evade many of China’s hottest tech companies and what they’re doing to try to change that. This kind of loss-making isn’t all that uncommon for such startups. But in at least one of the cases we’re looking at today, the company Meituan Dianping (HKEx: 3690), is already a decade old or more, depending on which piece of it you look at. That hardly qualifies as a startup by most people’s definition, even though the company is still losing massive money.

The news involving Meituan has it opening up one of its biggest money gobblers, which specializes in restaurant takeout delivery, to other third-party customers besides just restaurants. The other news involves Luckin, an app-only coffee chain that wants to challenge Starbucks (Nasdaq: SBUX). That news had the company significantly supersizing its IPO plan to $500 million despite the fact that it’s just two years old. 

Again, the bigger theme here is that China seems to be a different creature from the rest of the world when it comes to investor tolerance for massive losses. Meituan Dianping’s origins go all the way back to as early as 2003 with the founding of Dianping, often likened to the Yelp (NYSE: YPL) of China. And yet despite that, the company only managed to finally go public last year and posted a massive loss of 115 billion yuan ($17 billion) for all 2018.

A big reason for the company’s continued losses is its nonstop movement into new businesses, which is a common theme among Chinese Internet firms in general. One of those businesses, takeout dining, is at the heart of the latest news bit. According to the latest headlines, Meituan is opening up the delivery part of its takeout dining business to other businesses as well. (English article)

Under the expansion, other third parties such as supermarkets and presumably e-commerce operators will be able to utilize Meituan’s huge network of delivery scooters and other logistical infrastructure to delivery their goods. Thus the unit will become more like a delivery and logistics company rather than solely serving its current clientele of mostly restaurants.

This looks like a major plank in Meituan chief Wang Xing’s vowed effort to get more efficiencies — and eventually profits — out of his many different businesses. The move looks generally positive, though we’ll have to wait and see how well it’s executed, especially since China’s courier space is also quite crowded.

Luckin Goes Looking for Funds

Next there’s Luckin, which first announced its plan to make a New York IPO just three weeks ago with an initial target of raising $100 million. (previous post) The company has just updated its prospectus and listing plans, and now says it has lifted its fund-raising goal five-fold to a massive $500 million. (English article) What’s more, the company appears to be racing to market, with plans to make its trading debut toward the end of next week.

Again, this is a company that’s losing massive money, including a massive 3.2 billion yuan loss last year. That’s not too surprising, since the company is opening stores at a breakneck clip that has it on track for 4,500 shops by the end of this year — a figure that would easily eclipse Starbucks’ current total of about 3,600 China stores.

At the time of its filing I expressed surprise at how quickly Luckin was moving to an IPO so early in its development. This massive super-sizing of its fund-raising goal, and also the lightning pace that things are moving ahead, is continuing to surprise me as well. I honestly don’t see many U.S. investors being that interested in a company with so little operating history and no profits anytime soon.

Again, I suppose it all comes back to something about the China Kool-Aid, and how it makes investors salivate over the country’s huge market size and forget about the most basic company fundamentals. I previously predicted the Luckin IPO would flop and possibly not make it to market at all. It’s looking like I could be wrong, though I’d still be willing to wager the stock trades weakly and moves steadily downward regardless of any hype when trading begins.


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