Meituan-Dianping – Long hard climb.

Risk that many partners don’t come back at all. 

• Meituan-Dianping reported good Q4 19 results that no one really cared about with all attention being placed upon how this company has fared during the crisis and what shape the recovery will take.
• Q4 19 Revenues / Adj. Net Income were RMB28.2bn / RMB2.3bn well ahead of forecasts of RMB26.5bn / RMB0.5bn.
• This triggered a rally in the share price which pared back during the session as the market digested some of the unknowns with regard to the Q1 2020 outlook and beyond.
• All of Meituan’s three business lines, food delivery, shared transportation and hotel and travel have really struggled during the shut-down.
• The food delivery business impact has been mitigated somewhat by switching from restaurant food delivery to grocery delivery but the other two parts have been almost at a complete standstill during February.
• With the exception of its bike-sharing service, Meituan-Dianping is a simple marketplace which matches merchants of goods and service with buyers.
• This has suffered significantly from both the unwillingness of consumers to use the services as well as buy goods and the inability of merchants to supply those goods and services.
• Meituan has pulled out all the stops to support the supply side of its marketplace as it has correctly identified this as the part that is most at risk.
• China is keen to push the image that its pandemic is over, but the fact that most restaurants, schools, shops, cinemas and places of entertainment remain closed, is evidence that the restrictions remain very much in place.
• Furthermore, China has stopped all foreign entries into the country and even national travel from one city to another requires a 14-day self-quarantine making travel completely impractical.
• It will not be until these restrictions are lifted that the local economy will begin to properly recover, and I suspect that this will be a slow and gradual process.
• The result is that Meituan is forecasting a decline in YoY revenues in Q1 2020 (would not say how much) and has no idea how the rest of the year is going to pan out.
• In March the company has seen a gradual recovery particularly in its food delivery business but active merchants in its other areas have remained at a very low level all through March.
• The real problem is that there is no way of telling at the moment how many of its supply partners will be able to re-open and how many have already gone to the wall.
• This could be a real problem as it will take time and money for new merchants to start-up operations to replace the ones that failed once demand comes back online.
• This is why Meituan is doing everything it can to support the merchants by waiving commissions, providing free services and so on to prevent them from going under.
• There is no doubt that Meituan will survive this crisis and there is a strong argument that this crisis will accelerate the shift to online as it is easier to practice social distancing using online services.
• Hence, in a bear market recession, Meituan will outperform the wider market but that could still mean its shares still fall, just less than average.
• This is the wider uncertainty that prevents me from really wanting to buy any equities at all at the moment as I have no benchmark that compels me to do so.