Meituan – New club member.

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A better shot at the $100bn club.

• Meituan has filed for an IPO which, in my opinion, has much better fundamental reasons to justify a $100bn valuation than Xiaomi where reality seems to be pushing the listing valuation gradually downwards.
• Meituan was created from the merger of Meituan and Dianping both of whom specialise in online to offline (O2O) transactions in China.
• O2O effectively means goods and services that are fulfilled by regular, offline types of businesses where the transaction is carried out online.
• Good examples of this are ride hailing, food delivery, movie tickets, train tickets, doctor appointments and so on.
• This has become a very large opportunity in China for two main reasons:
  • First, offline is terrible: In China most transactions that are carried out offline are slow, frustrating and offer a poor user experience.
  • This has meant that even a mediocre user experience (such as the use of QR codes for mobile payments) has resulted in a huge increase in the ease and quality of effecting a transaction.
  • The result has been a very rapid and almost universal acceptance of O2O as the easiest and best way to transact almost anything.
  • Second, mobile first: China is predominantly a mobile first market.
  • This is in contrast to developed markets where the preference is still (albeit declining) to use fixed networks and then mobile if fixed does not work or is not available.
  • The advent of mobile first in China has further increased the appeal of O2O for doing everything as the transacting device is always at hand.
• The net result is that when it comes to commercial transactions on mobile devices, China is far ahead of developed markets both in terms of total volume and in terms of innovative new ways to offer goods and services through a mobile device.
• This is why this sector in China is far more valuable than it is overseas and how Meituan managed to post $5.2bn (160% YoY) in revenues in 2017 from total transaction volume (GMV) of $55bn.
• In 2017, margins also saw improvements with net losses falling to $430m (-8.3%) compared to $874m (-45.3%) in 2016.
• Growth in 2018 is also looking very strong meaning that there is a good case to be made for this company to trade on a high multiple.
• Furthermore, Meituan is effectively becoming the O2O arm of Tencent meaning that it is part of the biggest and strongest digital ecosystem in China.
• This considerably reduces the risk profile of Meituan as it has one of the strongest backers that it could ask for.
• This is in stark contrast to Xiaomi which is limiting the profitability of its core business as well as trying to make it on its own as an ecosystem.
• Hence, I would be prepared to pay a much higher multiple for Meituan than I would for Xiaomi.
• However, I suspect that the issuers are more than aware of this fact meaning that the IPO is not going to come cheap.
• Hence, I will suspend judgement on this IPO until there is better clarity on financial performance, corporate governance and how much investors will be asked to pay.
• Either way, I suspect that it will be easier to make a case to invest in Meituan’s IPO rather than Xiaomi’s.