17 July 2019
Meituan Dianping application icons are displayed on a smartphone screen. The Chinese tech startup is planning a Hong Kong listing with a dual-class share structure. Photo: Bloomberg
Meituan Dianping application icons are displayed on a smartphone screen. The Chinese tech startup is planning a Hong Kong listing with a dual-class share structure. Photo: Bloomberg

Should you invest in Meituan-Dianping?

Online services platform Meituan-Dianping has lodged an application for a Hong Kong IPO as it seeks to bolster its capital and expand its business amid escalating competition in the China market.

The Beijing-based firm, which was created in 2015 through the merger of two smaller entities, has emerged as a one-stop place for online services, with an array of offerings such as food delivery, movie ticketing, restaurant and travel bookings, ride-hailing facilities, etc.

Given its business and growth potential in the world’s most populous nation, the tech startup is likely to draw a lot of investor attention when it launches its share sale, which reports suggest could happen in about three to four months from now. 

That said, Meituan-Dianping would do well to bear in mind that people will have some concerns about the listing and won’t pull out their wallets easily, despite the firm’s links with internet giant Tencent Holdings.  

There will be questions about the valuation and shareholder voting rights, among other things.  

Meituan marks the second Chinese firm, after Xiaomi, which is seeking to raise funds under a weighted voting rights structure, after the Hong Kong bourse amended its rules in a bid to lure tech listings.

The online services platform, which counts Tencent among its backers, didn’t reveal the planned IPO fund target in its filing with the Hong Kong bourse, but media reports put the deal size at around US$6 billion.

Meituan will seek a valuation of US$60 billion in the IPO, according to the reports.

That, however, will be a stretch, given the fact that the company is still losing a lot of money and its business growth seems to rely on burning huge amounts of cash. 

The business model, in fact, raises a question as to whether the company is fit for getting listed, as of now.

One can very well argue that Meituan must improve its balance sheet before coming to the market. 

According to information contained in its filing with the Hong Kong bourse, the Chinese tech firm posted losses in the past three years. In 2017, it recorded a 19 billion yuan (US$2.9 billion) loss, steeper than in the previous two years.

Adjusted net loss was 2.85 billion yuan last year, after a loss of 5.35 billion yuan in 2016. Revenue, however, jumped to 33.9 billion yuan, from 12.9 billion yuan a year earlier.

Apart from the red ink on the balance sheet, Hong Kong investors will also be concerned about the shareholding and voting rights structure.

Meituan has adopted a weighted voting rights structure which gives its top three key executives — CEO Wang Xing and two other co-founders Mu Rongjun and Wang Huiwen — voting control through special Class-A shares.

Each Class-A share has 10 votes, against the one vote for each Class B share. As CEO Wang has more than 573 million Class-A shares, it will mean he will have 5.73 billion votes.

The three key executives altogether will have 7.34 billion votes through the Class-A shares, according to reports. Other stockholders, including retail investors, will only get one vote for each share they hold. They will have little say or power to vote down any controversial decisions made by the founders.

While tech listings draw a lot buzz given the huge success of some debutants in the recent past, investors should take a look at Meituan’s business model before placing bets on the company.

Meituan has an “online to offline” business model which aims to bring online and mobile internet traffic to merchants in the real world.

For example, mobile users can search for restaurants on the Meituan app, and they can reserve a table at their preferred restaurant via the app before going to the place and enjoying their meal. Meituan earns commission fee from the restaurant, with such income the major source of revenue.

While Meituan did not detail its IPO size, it provided information as to what it intends to do with the proceeds from the share sale. The company said it plans to use 35 percent of the funds for upgrading technology and enhancing research and development capabilities, while another 35 percent will go into developing new services and products.

About 20 percent of funds raised will be used to selectively pursue acquisitions or investments in assets and businesses which are complementary to the firm’s business and are in line with its strategies, it said, adding that the remainder will be go towards working capital.

Such funding usage is normal for all IPO candidates. But for Meituan, given its weighted voting rights structure, investors may need to be cautious as to how the top three key executives with Class A shares will use the funds — whether they will really use the fresh capital to improve Meituan’s business prospects, or simply try to enrich themselves.

In Meituan’s IPO prospectus, there is a disclosure that the company plans to take stakes in five different companies and make them suppliers to the Meituan ecosystem. Meituan will pay 20 million yuan to 91 million yuan in exchange for less than 20 percent stake in each of the target.

Among the things that should warrant some queries is a deal for a 3 percent stake in a restaurant software services company for a consideration of 91 million yuan.

The company is also paying 30 million for 6.67 percent stake in a medical and cosmetology software as a service company. It is quite clear that Meituan founders are very much focusing on the development of “software as a service” model. The investments should play an important role in integrating different companies joining Meituan ecosystem, otherwise, there should be no reason for the company to make such investment.

Now, one wonders whether all the investments are sound, given the no-so-good track record of Chinese entrepreneurs, many of whom often engage in related-party transactions and other questionable deals.  

Another thing that investors should bear in mind us that Meituan is facing keen competition in the online to offline market in China.

Competitors include food-delivery platform, which is backed by e-commerce giant Alibaba, while in the ride-hailing segment, which Meituan forayed into recently, it has to contend with Didi Chuxing, a battle that can prove very expensive.

Alibaba Group has expanded its efforts in the online to offline market, taking on Meituan-backer Tencent. The two Chinese internet giants are eyeing local services as an entry point to make more people to use their payment services, namely Alipay and WeChat Pay.

As Alibaba uses various fronts such as to capture the online services market, Meituan could find itself burning more cash to defend its market share, denting the bottom line further.

Investors take note!

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EJ Insight writer

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