China’s largest on-demand food delivery firm, Meituan Dianping, has already raised $4.2 billion through its initial public offering in Hong Kong, but the company’s growth ambitions may soon get a reality check amid concerns over its profitability.
The Beijing-based firm has priced its shares at HK$69 ($8.79) each, near the top end of its expected range of between HK$60 and HK$72 per share, according to a person with knowledge of the matter. The listing, which values the company at $53.4 billion assuming an over-allotment option is exercised, will be used to bankroll Meituan’s rapid expansion into multiple markets. But beneath the company’s impressive growth lies a significant problem: Meituan can’t seem to make money off its large user base, leading to mounting losses that analysts say won’t stop for years to come.
Last year, Meituan’s losses tripled to 18.9 billion yuan ($5 billion) on revenues that soared to 33.9 billion yuan. This is chiefly because Meituan has been spending aggressively to gain market share. From January to April this year, the company’s selling and marketing expenses, which include consumer subsidies, ballooned to $600 million from $380 million a year earlier, according to its prospectus.
| 2015 | 2016 | 2017 | |
| Revenue | 4 | 12.9 | 33.9 |
| Loss for the year | (10.5) | (5.8) | (18.9) |
“It is the subsidies that kills profitability,” says Steven Zhu, an analyst at research firm Pacific Epoch. “They can't stop. You stop and you lose market share.”
Meituan’s currently has about 340 million active users who are able to use the platform to order meals, book hotel rooms and arrange various forms of transport. It combines a range of services with similarities to Groupon, Yelp and Uber Eats through the 4.7 million merchants that have joined the platform, which in turn allows Meituan to earn its revenue through commissions and delivery fees.
But the food delivery business is still the largest source of Meituan’s income, accounting for 62% of revenues last year. Consultancy Trustdata says the company has amassed a 54% share of China’s food delivery market, which is estimated to have an overall value of $44 billion in the first quarter this year. But reaching such an immense size has come at a heavy cost.
Meituan’s competitors are going all out to lure consumer away with steep discounts in what has effectively become a race to the bottom. Alibaba’s food-delivery unit Ele.me has set aside hundreds of millions of dollars to offer cheaper meals. The ride-sharing giant Didi Chuxing is also expanding its food-delivery service Didi Foodie, which is now available in four Chinese cities since its beta-launch in April.
Aside from fending off heavy competition, Meituan also has to spend to attract new users. According to data from the National Bureau of Statistics, the food-delivery market only accounts for less than 10% of China’s total dining market. To grow the market further and get more people using its app, Meituan has been subsidizing meal purchases so that consumers have greater incentive to go online and make more orders.
“In the near term, the spending is likely to continue because growth is phenomenal,” says Rob Sanderson, managing director of research firm MKM Partners.
In spite of the losses, some investors remain optimistic of Meituan’s longer term prospects. The company has attracted five cornerstone investors, including Chinese web giant Tencent and New York-based Oppenheimer Holdings, who have each agreed to buy $1.5 billion worth of shares. The IPO has also attracted personal investments from Hong Kong’s richest man, Li Ka-shing, and Thomas Lau, the chairman of department store operator Lifestyle International Holdings, according to the same person with knowledge of the offering.
Meituan’s latest filing says that its currently focused on “expanding our customer base, satisfying unmet customer needs and enhancing our network, rather than prioritizing monetization now.” A spokesman said the company has no comment on the pricing of its shares and the investments from Li and Lau.
Still, some analysts say Meituan’s proposed valuation is difficult to justify. Daniel Hellberg, an independent analyst, estimates that Meituan is worth between $34 and $42 billion. In a report published on research platform Smartkarma, he said the reported valuation range would be “extremely difficult to justify based on what we know about its business today.”
Meituan and other Chinese tech stocks seem to be in a rush to sell shares before conditions deteriorate any further. Smartphone maker Xiaomi and Zhong An Online Insurance both saw their shares dip after their trading debuts. The market’s benchmark Hang Seng Index has already fallen into bear territory by declining more than 20% since its peak in January amid fears of the escalating Sino-U.S. trade dispute.
“They are afraid that the window will close even further,” MKM Partners’s Sanderson says. “They want to get out now in case it gets even worse.”
