Bottom line: Meituan-Dianping’s IPO is likely to raise more than $2 billion and should get a strong reception when it comes, most likely by mid-year in New York, while ZTO Express’ $1-$2 billion IPO will get a cooler reception due to its steep losses.
After a quiet start to the year, the market for offshore Chinese IPOs is slowing coming to life with word of 2 listing plans that should both top the $1 billion mark. One would see leading group buying site Meituan-Dianping list, most likely in New York or possibly Hong Kong, in a deal that would probably raise at least $2 billion. The second is also Internet-related, and would see parcel delivery giant ZTO Express also raise up to $2 billion in a New York IPO.
Perhaps not surprisingly, both of these companies are losing money despite their position as industry leaders. That’s because competition has been cut-throat in both spaces, especially in the parcel delivery business that supports China’s booming e-commerce sector. Meituan and Dianping were also locked in heated competition before they merged late last year to face the current company, which still faces stiff competition from 2 of China’s leading Internet companies, Baidu (Nasdaq: BIDU) and Alibaba (NYSE: BABA).
Despite its money-losing status, I do expect that Meituan-Dianping will attract strong investor interest due to its sector-leading position and strong backing by Tencent (HKEx: 700), China’s largest Internet company by market value. ZTO Express is more likely to attract tepid interest, since it’s just one of a number of major delivery companies that are rushing to market in search of cash to continue funding their operations.
Let’s begin with Meituan-Dianping, whose IPO plans were revealed in a prospectus for a new plan to raise 200 million yuan ($31 million). (English article; Chinese article) This particular fund-raising is quite small and comes just a month after the company raised a much larger $3.3 billion in a round led by Tencent. (previous post) The small size and proximity to the last mega fund-raising hints that this new round is designed to help determine Meituan-Dianping’s proper valuation in the run-up to an IPO.
Seeking Higher Valuation
Media previously reported that Meituan-Dianping was valued at about $20 billion after its fund raising last month, though that value could have been artificially low due to Tencent’s participation as a strategic investor. Accordingly, this new round could value the company a bit higher, perhaps as much as $25 billion. Assuming it will put at least 10 percent of its shares into the offering, the IPO would probably be worth at least $2.5 billion.
The latest fund-raising plan is accompanied by a slew of financials, which are some of the first we’ve seen for the combined company and are also an indicator that it’s preparing an IPO. The most revealing of those show the company posted just over $1 billion in revenue last year and an operating loss of $1.6 billion. It also shows the company expects revenue to double over each of the next 3 years, and to reach operating profitability in 2018.
Next there’s ZTO, which is planning a New York IPO as soon as this year that could raise between $1-$2 billion, according to new reports (English article; Chinese article) The reports say that ZTO is also planning a $1 billion IPO in Hong Kong. That could mean that either the company hasn’t made a final decision yet on its listing location, or that it is planning a dual listing in both New York and Hong Kong.
The ZTO deal would be the latest by one of China’s many parcel delivery companies, which are all losing big money as they fight for share in the crowded market. Another major firm, STO Express (Shenzhen: 002468) made another recent backdoor listing that looks like it was completed in early January. Since then its shares have sunk 23 percent, though China’s broader markets have sunk by a similar amount over that time. Even so, I don’t expect offerings by these delivery companies to get very strong receptions due to the stiff competition, which is likely to persist for at least the next 4-5 years.
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