Exits, IPO, Venture Capital

Meituan In Full Strategic Retreat As It Nears Completion of $4.4B HK IPO

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Meituan Dianping's management, with Wang Xing, middle, pose for photos during its IPO press conference.

Meituan Dianping, the largest Chinese on-demand services provider close to completing a US$4.4 billion Hong Kong IPO, is in full strategic retreat from new businesses and overseas expansions.

"We will first focus on our businesses in China as we see great growth potential domestically…We have 1.3 billion people and 8 million restaurants," Wang Xing, CEO of Meituan Dianping, answered China Money Network’s questions during a press conference held today in Hong Kong. "We will build upon our existing platforms to serve Chinese consumers’ needs in China and outside of China."

At the same time, Meituan has previously indicated that it would not further invest more capital and resources in its ride-hailing operations. It launched the ride-hailing service in early 2017 and is now operating only in Shanghai and Nanjing, capital of China’s eastern Jiangsu province. Mobike, the Chinese bike sharing company Meituan acquired in April 2018 for US$2.7 billion, is pulling out of Manchester in early September because of “unsustainable” losses from theft and vandalism.

This is a reversal from Meituan’s growth strategy during more optimistic times a year ago. At that time, the company appeared aggressive in expanding its business lines and also marching into overseas markets. Meituan has been conducting car-hailing trials in Nanjing since early 2017, and said in December 2017 that it aimed to launch the service in at least seven cities, including Beijing and Shanghai. In April 2017, the company introduced the Airbnb-like Zhenguo Homestay, with a goal to branch out into more online to offline (O2O) verticals.

Meituan’s move into ride hailing was a controversial topic inside the company. Founder and CEO Wang Xing insisted on entering the highly capital intensive business despite opposition from other members of the team and advisors, according to insiders. The acquisition of Mobike is biting into the company’s financial performance as well. In the four months ended April 2018, Meituan’s revenue surged 95% to RMB15.8 billion, while its loss nearly tripled to RMB22.8 billion. That losses are related to amortization of Mobike’s assets, the management said today.

As the company is to begin trading on the Hong Kong Stock Exchange as a public company, Meituan is returning to a more pragmatic approach. For example, it sees enterprise services as a key growth engine going forward. In this business, Meituan provides software systems to restaurants to manage their back-end operations including supply chain management. The company also wants to drive growth in issuing loans to small and medium enterprises (SMEs) to finance their expansions. As Meituan already serves 8 million restaurants in China. Converting a portion of those enterprise users will generate solid earnings.

Beijing-based Meituan Dianping was the result of a merger of group buying firm Meituan and peer-review portal Dianping. The two companies were respectively viewed as Chinese equivalents of Groupon and Yelp.

The company said that it currently has 340 million active users. And its revenue more than doubled in 2017 even though it has yet to turn a profit. According to its IPO filing, Meituan posted an adjusted net loss of RMB2.8 billion (US$430 million) in 2017. That was lower than the RMB5.4 billion (US$830 million) loss it reported in 2016.

Meituan will sell more than 480 million shares at an indicative price range of HK$60 (US$7.64) and HK$72 (US$9.17) per share. This could value Meituan at more than US$50 billion, and see it raise as much as US$4.4 billion in the initial public share offering.

Tencent, a long-time backer of Meituan, has committed to buy US$400 million of Meituan’s stock, as one of its cornerstone investors. Other investors including Oppenheimer, Landsdowne Parnters, Darsana Capital have committed to purchase US$500 million, US$300 million and US$200 million shares.

Meituan expects to take investor orders through September 12 and price the offering that day. The company will begin trading on the Hong Kong stock exchange on September 20.

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