Is Meituan Dianping (03690) ipo worth investing?

Meituan Dianping is the leading e-commerce platform for common life services comparisons, on-demand delivery and hotel & travel services in China. They operate several mobile apps including Meituan, China’s leading online marketplace for services by Gross Transaction Volume in 2017, Meituan Waimai brand for on-demand delivery services and Dianping, China’s leading online destination for discovering lifestyle services by monthly active users in 2017. On April 4, 2018, Mobike ,a leading player in bike-sharing also became a wholly owned subsidiary of the company.

Meituan Dianping is the second listed company with weighted voting rights structure following Xiaomi. Is it worth investing? Let's take a look of it by using the question framework proposed in this blog previously.

1. Is the industry has a growing demand? What is the relationship between demand and supply in the industry?

With the rapid growth of China's economy, the growing demands of the industry are unquestionable. Urbanization, consumption upgrade, abundant labor supply for the consumer service industry and mobile technology advancements all contributed a sustainable growth in the future. Meituan Dianping will surely benefited with their leading edges in technologies, scales and networks. As they are the leader online in their service areas, their bargaining power is very strong over the advertising merchants.

2. Is the company profitable over a period of time and what are their average revenue and profit growth rates?

The company is not yet profitable.

Revenue growth from 2016 and 2017 is 223% and 161% respectively.
Gross profit growth from 2016 to 2017 is 113% and 105%.
Operating loss in 2015, 2016 and 2017 is RMB8473m, RMB6255M and RMB3826M.

This is a typical phenomenon of companies in the new economy. Heavy investment, rapid growth and not yet profitable. However, it can be foreseen that they will soon turn losses into profits with their continuous reduction of operating loss.

3. What is the company raising money for? Paying debts? Future development? etc

From the prospectus, the use of proceeds are follows :

a. approximately 35% (approximately HK$10,893 million) to upgrade our technology and enhance our research and development capabilities.

b. approximately 35% (approximately HK$10,893 million) to develop new services and products.

c. approximately 20% (approximately HK$6,225 million) to selectively pursue acquisitions or investments in assets and businesses which are complementary to our business and are in line with our strategies.

d. approximately 10% (approximately HK$3,112 million) for working capital and general corporate purposes.

It's good to know that the funds are used in future developments.
 

4. What are the major risk factors when investing in this company?

From the prospectus, some of the major threats are listed as below :
a. Their ability to sustain their historical growth rates.
b. The fact that they have incurred significant losses and may continue to experience significant losses in the future;
c. Their ability to successfully expand into new businesses;
d. The fact that they face intense competition in their businesses and the ability to compete effectively;

I won't worry about a and d and the company has demonstrated great success in the past. This is believed to be sustained with their advantages listed in question 1. However, the acquisition of Mobike is rather concerning. Though the management stated that "the acquisition of Mobike will further supplement the suite of services offered to consumers and increase our consumer touchpoints, and enable us to acquire and retain users at relatively low costs.", I still can't see much synergy over this action. Mobike is still posting great loss at the moment. 

5. Are there any odd numbers in their financial statements?

No odd numbers were found in their financial statements.

6. Is the IPO price reasonable when compared to its expected profits and dividends? Is it valuable when compared to those companies already get listed?

As the company has not yet posted any profits and dividends, it is not so meaningful to discuss on the IPO price from this aspect.

7. Find out some key ratios for study such as ROE, ROA, PE, PB, Debt to Equity ratio etc.

For new economy company, the traditional financial indicators seems not so significant as no profit has been produced.

8. Any strategic investors? Which investment bank is the underwriter?

Meituan Dianping has lined up $1.5 billion from five cornerstone investors for its IPO including Tengent, Oppenheimer, Lansdowne Partners, Darsana and China Structural Reform Fund. The underwriters are Goldman Sachs, Mongan Stanley and Merill Lynch.

From the above discussion, it is obvious that the traditional value investment analysis is quite difficult to apply to companies in the new economy as most of them has not yet been profitable. However, they has produced a track record of rapid growth and usually has the largest market share in their specialized area. From my past observations, "winners take all" is a common phenomenon in the new economy. Examples like Google, Amazon, Youtube, Facebook etc has demonstrated this. I can't see any strong competitors coming in the near future and Meituan Dianping will continue with their growth in China. I also like their idea of focusing developments in China instead of rapid expansions into overseas markets. I personally has been using their apps for many years and are satisfied with their services.

In conclusion, I would recommend to invest in this new ipo. 

Leader of Macau Gambling Industry

Macau Gambling Industry is a major sector in Hong Kong Stocks Market. With the emergence of middle class in China and economic growth in Asian region, its prospect will even be brighter in the future. Several companies have been investing heavily in Macau and made Cotai of Macau a new bright star in the East. Some of the major participants are :

00027 Galaxy Ent

00200 Melco Int'l Dev

00880 SJM Holdings

01125 Wynn Macau

01928 Sands China

02282 MGM China

For investors, we would wonder which company will be the best to be invested in this sector? What I would say from what I have observed during my many visits to Macau, the trend of the gambling industry nowadays has changed from mainly focusing on gambling revenues to a whole relaxation and entertainment solution by building resorts combining gambling, entertainment, dining, conferencing and exhibitions. In such way, they can maintain a sustaining man flow and serving wider customer basis. Such changes have proved to be very successful in Las Vagas. The Sands group has brought these ideas to Macau and made them great success at the initial stage. However, a local company Galaxy Ent. also brought this concept to life when building their Galaxy Macau Resort. The resort has the attracting Grand Resort Deck boasting the world’s longest Skytop Aquatic Adventure River Ride at 575 meters and the world’s largest Skytop Wave Pool. The facility attracts visitors to stay in the luxury hotels built around it during summer time. Therefore, these two companies have evolved to be two leaders in Macau Gambling industry as time went by. For the others, Melco has a closer concept but works still have to be done in terms facility scale, attractions and service qualities. But which one is the true leader now? At this point, I recall the famous words from Ben Graham :  "Though the stock market functions as a voting machine in the short run, it acts as a weighing machine in the long run." The relative stock price of the two companies will give us some hints on it. Below are the relative prices chart of Sands China (Blue) and Galaxy Ent (Black) from 2005 to 20th Aug 2018 :

It is interesting to find that Sands China leaded Galaxy at the initial stage. However, a turning point came at early 2017. After that, Galaxy became the leader of Macau Gambling Entertainment industry as agreed by the market.

Looking at the future, I believe the stronger will always be the winner. Leaders will be benefited from their scales, reputations and words of mouth. The others can only focus on the niche markets and take the remaining shares. Therefore, we should invest in Sands China (01928) and Galaxy (00027). If only one can be chosen, it should be Galaxy (00027).

Devil lies in the details

Devil always lies in the details. Recently, the IPO of BaWang International (Group) Holding Limited (1338) becomes very "hot" in the stock market. When you look through the propectus of this company, you will find that this company is carefully packaged to give a good image to the public which is common for new IPOs. In the past, we have discussed how to read through the propectus in evaluating IPO. Bawang now gives us one typical example why we say "Devil lies in the details".

When we turn to page 7 of the propectus of Bawang, we have the "Consolidated Balance Sheet" with :

Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71,441 102,830 298,148

Of which the three figues represents the cash and cash equivalents up to 31st Dec of 2006, 2007 and 2008 respectively. Wow, the company has a cash and cash equivalent of 298,148,000 before 2009. You may start to think that how generous it is for Bawang's boss to leave such cash in the company before IPO. Oh, wait a moment. Devil lies in the details. When you turn to page 8 of its prospectus, you will find the following paragraph :

"Our Company declared to our sole shareholder, Fortune Station, two dividends of HK$166.7 million and HK$116.7 million on 7 January 2009 and 23 May 2009,respectively, based on the distributable profits at the end of 2008, and the same were paid in January 2009 and May 2009, respectively. For the avoidance of doubt, the holders of Offer Shares will not beentitled to any of the aforesaid pre-IPO dividends."

Oh, that's where the truth is. After the two dividends, the cash and cash equivalents has dropped to HK$14.748 million excluding the cash flow in the period between 1st Jan 2009 to 23rd May 2009. This looks more likely to a general behavior of IPO. Bawang's boss is no special to the others.

Correlation between Hang Seng Index and Other Indices

After my last post of correlation between VIX and some major indices, many of my blog readers show great interest in the topic. In this post, I will study the correlation between Hang Seng Index (HSI) and other major indices. As a common sense, the most influential indices to Hang Seng Index should be indices of US stock market and indices of China stock market. In such case, I have selected S&P500, NASDAQ (NQ) , SSE Composite Index (SHC) and Hang Seng Chinese Enterprise Index (HHI) as a reference for the correlation study. The correlation coefficients between HSI with these four indices are calculated based on the daily close of each index from 3rd Jan, 2005 to 31st Oct, 2008. The results are as below :

1. S&P500 with HSI : 0.76

2. NQ with HSI : 0.82

3. HHI with HSI : 0.99

4. SHC with HSI : 0.93

My Findngs :

1. SHC has a higher correlation with HSI than S&P500 and NQ which reflects the fact that more and more chinese enterprises are selected as components of HSI and the chinese economy is now more influential to the economy of Hong Kong.

2. To my surprise, NQ is more correlated to HSI that S&P500. The reason behind may be quite interesting to study.

3. The correlation between HHI and HSI is very high which is very predictable as these two indices are in the same stock market and share some common components.

Some poeple may raise the question : "How about the US stock market and Chinese stock market?" I also calculated the correlation coefficient between S&P500 and SHC. The result is positive with a correlation coefficient of 0.76.

Correlation between VIX, Dow, S&P500, Yield

Recently the market becomes more and more volatile. Many people turn to VIX to see if there is any indication in the future trend of stock market. VIX is the ticker symbol for the Chicago Board Options Exchange Volatility Index, a popular measure of the implied volatility of S&P 500 index options. it represents one measure of the market's expectation of volatility over the next 30 day period. Generally, VIX is referred to as Fear Index which shows whether the market "fears" about the future. When VIX is high, the more "fears" the market is.

In order to have a more scientific view on the relationship bewteen VIX and common market indices, I have done an analysis between VIX and Dow (Dow Jones Industrial Average Index), S&P500 and 10 Year Treasury Notes Yield. The analysis is to calculate the Correlation Coefficient* of VIX to the other three to see how these more indices or figures are correlated. Five year data (daily close from 31 Oct 2003 to 31 Oct 2008) are taken in this analysis.

Below is the result of calculation :

Correlation between VIX , dow and 10 Year Treasure Notes Yield :

VIX & Dow : -0.02577

VIX & SP500 : -0.15889

VIX & 10 Year Treasury Notes Yield : -0.44814

Analysis of result :

1. All three are negatively correlated with VIX which means when VIX goes higher, Dow, S&P500 and Yield will goes lower. This is very close to our general thoughts. When the market has more "fears", the stock market will goes lower as people are more likely to sell their securities. On the other hand, more people will buy treasury notes which drives the yield lower.

2. On the level of correlation, S&P500 has a higher correlation than Dow which is also expected as VIX is the IV of S&P500 in the coming 30 days. However, it is a surprise that the correlation between Dow and VIX is close to zero which means they are almost non-correlated. Therefore, we should NOT use VIX to indicate the trend of Dow. S&P500 represents a broader market and the indication to its trend from VIX is more effective. However, the correlation for these both is rather low.

3. The correlation of 10 Year Treasury Notes Yield is the highest among the three. More people will park their money to the relatively safer Treasury Notes when they feel more fears. When VIX is higher, the Treasury Notes Yield is more likely to be lower.

Conclusion :

From the above analysis, we can see that VIX is not a very effective indicator of Stock Market but more indicative to Treasury Notes Yield. Higher VIX will drive a lower yield.

*Correlation coefficient is measure of linear association between two variables X and Y. The coefficient lies from -1 to 1. Correlation coefficient -1 means the set of data are negatively correlated and 1 means positively correlated. 0 means non-correlated.

Warren Buffett's Latest Essay on New York Times

Undoubtedly, Warren Buffet is the best practitioner in Value Investing by now. In his latest essay "Buy American. I am" dated 16th October, 2008 for The New York Times. He outlined the basic and most essential ideas of Value Investing. Below are some of the major points abstracted from his essay :

"A simple rule dictates my buying: Be fearful when others are greedy, and be greedy when others are fearful. And most certainly, fear is now widespread, gripping even seasoned investors. To be sure, investors are right to be wary of highly leveraged entities or businesses in weak competitive positions. But fears regarding the long-term prosperity of the nation’s many sound companies make no sense. These businesses will indeed suffer earnings hiccups, as they always have. But most major companies will be setting new profit records 5, 10 and 20 years from now."

"Let me be clear on one point: I can’t predict the short-term movements of the stock market. I haven’t the faintest idea as to whether stocks will be higher or lower a month — or a year — from now. What is likely, however, is that the market will move higher, perhaps substantially so, well before either sentiment or the economy turns up. So if you wait for the robins, spring will be over."

If you want to have a full idea of his essay, you may click the following links for full details :

http://www.nytimes.com/2008/10/17/opinion/17buffett.html?_r=2&ref=opinion&oref=slogin&oref=slogin

Take a look. You will be most benefited.

Warren Buffett Comments on China

Recently, Warren Buffett mentioned in an interview on CNBC that he has tried to bid on one Chinese stock but was not accepted. This has become a very hot topic in Hong Kong media and everyone is interested in finding which stock it is. But very few people are interested in what Warren Buffett has told CNBC in the interview. Actually Mr Buffett also talked about his view on China economy and its future which is very meaningful for us. The name of the program is :

"THREE HOURS WITH WARREN BUFFETT - LIVE FROM OMAHA" ON CNBC'S SQUAWK BOX WITH BECKY QUICK, FRIDAY, AUGUST 22, 2008.

You may find the full part of his interview on CNBC.com (http://www.cnbc.com/id/19206666/). For those who are interested in his view on China, you should pay attention to TRANSCRIPT/VIDEO PART ONE and TRANSCRIPT/VIDEO PART SIX. Mr Buffet has told Becky about China that "But it's a terrific--it's going to be a terrific area for business. So, under the right circumstances, you could see us with a lot of money there."

It seems that Mr Buffett is very optimistic about China's Economy and its future!