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.