IPOs: Meituan-Dianping Heads List of Money-Losing New Listings

Bottom line: Meituan-Dianping’s IPO is likely to meet with lukewarm reception due to its big losses in several key areas, but could become more attractive over the medium term as it emerges as industry leader in one or two key areas.

Restaurant ratings leader takes IPO orders

As the rest of China continues to fixate on the sex scandal surrounding e-commerce giant JD.com’s (Nasdaq: JD) CEO, I thought I would end the week on a less controversial subject with a look at another blockbuster IPO by online-to-offline services giant Meituan-Dianping. The company has officially filed to make a listing in Hong Kong, and could be one of a growing number of Chinese Internet firms to choose the former British colony over the U.S. following a rule change earlier this year.

That change allowed companies to list in Hong Kong using a dual-class share structure that gives disproportionate voting power to company managers over ordinary shareholders. Previous prohibition of such a structure was the key element that led e-commerce giant Alibaba (NYSE: BABA) to make its own record-breaking IPO in New York instead of Hong Kong in 2014, and no doubt Hong Kong is still smarting over that loss.

All that said, Meituan-Dianping is no Alibaba, though it’s certainly quite a large company and a leader in several areas on China’s Internet. Most notably, the company is a huge money loser, thanks in no small part to its desire to try and muscle in on three of the most competitive areas on China’s online-to-offline (O2O) Internet, namely shared bikes, takeout delivery and Uber-like car services.

The company is aiming to raise up to $4.4 billion in its upcoming Hong Kong IPO, which could make it the year’s third largest listing if it reaches that target, behind only smartphone maker Xiaomi (HKEx: 1810) and cellular tower operator China Tower (HKEx: 0788), which both also listed in Hong Kong. (English article) Unlike many of China’s other Internet companies to list this year, Meituan-Dianping is a relative old timer.

The company was formed a few years ago through a merger of two major O2O companies, both with their roots in group buying following the early success of US giant Groupon (Nasdaq: GRPN). China saw an explosion of group buying firms around the time that Groupon burst onto the scene. That was followed by a bloody consolidation that left Meituan and Dianping as the two last big dogs standing, and those two later combined as well.

Aggressive Expansion

Not content to rest on its group buying laurels, which included a healthy restaurant ratings business similar to US giant Yelp (NYSE: YELP), Meituan, under the leadership of a brash and aggressive man named Wang Xing, has been seeking to follow in the footsteps of China’s other Internet titans. Wang has rushed into a number of new areas that I’ve described above, including the most recent that saw his firm acquire massively money-losing shared bike operator Mobike this spring for $2.7 billion.

At the same time, Meituan-Dianping is also operating a similarly massively loss-making takeout dining service that competes with Alibaba’s Ele.me. It also launched a car ride services firm that competes with market leader Didi Chuxing, but has indicated in its IPO prospectus that it won’t expand that service and could quite possibly shut it down to stem its losses.

The bottom line is that Meituan-Dianping reported a massive 18.9 billion yuan ($2.8 billion) loss last year, far bigger than the 5.8 billion yuan loss in 2016. Things appeared to improve in the first four months of this year, when the loss was just 2 billion yuan. Still, multibillion-yuan losses are hardly that attractive for a company of Meituan’s age and getting ready to go public.

The company has a powerful backer in the form of social networking and gaming giant Tencent (HKEx: 700), which has pledged to buy a big chunk of the IPO shares. But there’s no guarantee that Tencent will continue to support Meituan-Dianping indefinitely, especially as Tencent faces its own issues in China’s gaming market. (previous post).

At the end of the day, much will depend on how this company can do in the bike sharing and takeout dining businesses. If China continues its previous pattern where ultra competitive sectors ultimately get consolidated to a single player, I would say that Meituan probably has a winner with Mobike, since its only remaining major rival Ofo looks quite a bit shakier at the moment. But the jury is really still out as to whether there’s even a viable business model at all with shared bikes.

I would give Meituan less chance to emerge the winner with takeout dining, since Ele.me looks quite a bit stronger since it got acquired by Alibaba. Then there’s Meituan’s core group buying and restaurant rating business, which looks ok but isn’t all that exciting in terms of growth. On the whole, I would say this company probably has at least another year or two of big losses in front of it, though it will probably end up as a relatively attractive option over the medium term as it emerges as industry leader in one or two key areas and eventual becomes profitable.

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