Lackluster IPO and post-IPO struggle
Meituan’s roller coaster ride began with its Hong Kong IPO in September last year.
Already one of China’s most valuable internet firms, Meituan’s decision to go public was not a surprise. However, it underperformed expectations. Media reports suggested that the company was originally shooting for a valuation of $55 billion—or even $60 billion—for the listing. But the market considered the valuation “overconfident.” Meituan had to settle for a more modest $51 billion after raising $4.2 billion from the IPO.
Despite a short-lived spike at the debut, Meituan shares remained in the doldrums for the first few months, sliding below its HK$69 IPO price and bottoming out in January at just above HK$40 apiece.
Though the firm is based in China, it had made a lot of sense for Meituan to go public in Hong Kong, a market within the country and with a good understanding of its business model. This rationale underpins the Hong Kong listing of many a Chinese tech firm, but it was particularly important for Meituan as there is no exact counterpart for the company in overseas markets.
Though it describes itself as the “Amazon of Services,” there is no clear analogue for their range and scope. Singapore’s Grab, for instance, is evolving from a ride-hailing to delivery platform, but lacks Meituan’s scale.
However, its IPO timing was not ideal. After the 2018 IPO frenzy, Hong Kong reclaimed its crown as the top global IPO market. The city saw 125 companies raise $36.5 billion in 2018, the highest since 2010. Of the total, technology, media, and telecommunications (TMT) firms accounted for 39% of all funds raised, according to Refinitiv Data. The IPO craze overshadowed Meituan, especially considering the underwhelming Hong Kong market debuts by Xiaomi and China Tower.
Demand for capital increased along with the list of IPOs during the year. China’s macroeconomic headwinds, fierce competition within the sector, and profitability pressures as a result of user subsidies contributed to a downturn in Meituan’s share price through the end of the year.
In its core food-delivery business, Meituan was facing the rise of a formidable competitor, Alibaba, which runs the rival food-delivery platform Ele.me as well as the lifestyle service platform Koubei. Alibaba merged the two units into one local services platform in October 2018, just a month after Meituan’s IPO.
Additionally, in July of last year, Ele.me CEO Wang Lei had committed RMB 1 billion in subsidies for a “summer battle,” with the express aim of growing Ele.me’s market share and disrupting Meituan’s IPO. Capital is a key element in gaining supremacy in China’s food-delivery market, where players burn a lot of cash to lure customers and crush rivals.
Meituan also devoted considerable resources to expand into multiple crowded industries such as new retail, ride-hailing, and bike rentals. Mobike, the bike rental firm that Meituan acquired for $2.7 billion in August 2018, weighed down its profit margin. Research from equity firm China Tonghai Securities has forecast that Mobike will continue to be a drag on overall profitability until 2021.
Financial pressures forced the company to redouble their money-making efforts by increasing the commissions they charge from merchants and by reducing pay to their delivery fleets. Both moves were poorly received, fueling concerns about the company’s operational leadership and profitability prospects.
After operating losses rocketed to RMB 3.7 billion in Q4 2018, more than double the amount of the same period a year ago, the company shifted its growth strategy, promising improved cost controls in 2019.
To wind down its cash-burning non-core businesses, Meituan closed lower-tier city locations for its Ella supermarkets (a rival to Alibaba’s new retail platform Hema), downsized Mobike’s overseas operations, increased bike rental fees, and cut back subsidies for its ride-hailing business.
Meanwhile, the competitive pressure from Ele.me’s massive subsidy battle had ended after the summer of 2018, when the company CEO pledged an end to subsidy wars. Additionally, industry analysts found that results from the Ele.me and Koubei merger—including improvements to order volume, take rate, and cost efficiency—were disappointingly “soft.”
With a sharpened focus, Meituan widened its lead over Ele.me. Its market share rose to 65.1% in Q2 2019 from 54.4% in Q1 2018, taking share from Ele.me, which fell to 27.4% of the market in Q2 from 35% in Q1, according to data analysis platform Trustdata.
Revenue from Meituan’s food delivery and online travel businesses helped the company swing into profit in Q2, compared with RMB 7.7 billion (around $1.1 billion) in losses accrued in the same period a year earlier.
Meituan CFO Chen Shaohui stressed that the Q2 profitability was due to seasonality, and that the company would continue to prioritize scale over profit for its food-delivery business.
Industry watchers agree that the company’s newfound profitability may stay relatively modest as it matures. “The company is probably not going to push too much further here and will just operate around the break-even line for a long time to come, so that they can keep growing and expanding their boundaries,” the private investor ZQ Ong told TechNode.
Rising consumption demand from food delivery, travel, and ticketing during the October Golden Week pushed the company’s share price to new heights, reaching HK$89 on October 8, the conclusion of the holiday.
Meituan’s comeback this year has restored investor confidence in its management’s ability to execute as well as in the company’s new strategy. Adopting a more disciplined approach to its development, the company that had been known for its aggressiveness is gradually making compromises and finding a balance.