Meituan, China’s Amazon Of Services, Roars To Public Markets In IPO Filing
August 9, 2018 | Blog

Meituan, China’s Amazon Of Services, Roars To Public Markets In IPO Filing

Meituan-Dianping, the Chinese on-demand services unicorn, recently disclosed plans to go public on the Hong Kong Stock Exchange. The company hopes to raise about $4 billion, implying a valuation approaching $60 billion, or more than double its most recent private valuation. We reviewed the nearly 600-page filing, and recommend reading it if you are looking for a primer on China’s Internet ecosystem.

Meituan’s listing, however, follows Xiaomi’s somewhat disappointing IPO, which the market valued at almost half of the company’s initially expected $100 billion valuation. Fears of a trade war between the United States and China might have prompted investors to doubt whether Xiaomi could access the American market.

We believe Xiaomi IPO to be a milestone event and a sign for Chinese unicorns waiting to go public. Thanks to a boom in Chinese private tech companies, the nation now mints more unicorns than any other country in the world, including the United States.

More than $250 Billion Worth Chinese Unicorns Could Possibly Go Public in 12 Months

2017 was a record year for the Chinese venture capital ecosystem. Chinese venture capital fundraising hit $50 billion last year and is now approaching that of the United States. Traditional VCs along with tech giants, Alibaba, Tencent, and Baidu, poured an estimated $45 billion into Chinese startups last year. According to data by CB Insights, China is now home to more than 60 private companies with a market cap above $1 billion, compared to just a handful 5 years ago.

Exhibit 1: Growing Number of Unicorns from China
Exhibit 1: Growing Number of Unicorns from China
Source: SharesPost Research; CBInsights

A quick look at the world’s top 10 unicorns further highlights China’s ascent to a world leader in innovation. Six of the top 10 unicorns hail from China and enjoy a combined market cap of more than $400 billion. The remaining four American unicorns are worth $150 billion. For the Chinese unicorns, the potential of the Chinese and Asian markets, where these companies are dominant players, combined with large investments from SoftBank and Tencent, has boosted valuations in recent years.

Exhibit 2: Six out of the top 10 unicorns are from China
Exhibit 2: Six out of the top 10 unicorns are from China
Source: SharesPost Research; PitchBook; CB Insights
Xiaomi IPO: Underwhelming Valuation, But A Milestone Event For China Unicorns

The media has generally regarded Xiaomi’s entrance into the public markets as underwhelming and disappointing. Xiaomi’s $54 billion market valuation still places it among the top 5 largest IPOs of all time. That is no small feat.

We can attribute Xiaomi’s modest performance on current macroeconomic conditions and geo-political uncertainties. Tensions between Washington and Beijing, culminating in the possibility of an extensive trade war, has roiled capital markets. Public markets, however, have not suffered much— at least not yet.

Xiaomi might have also hurt its own IPO prospects with the way it pitched investors. Since hardware companies have traditionally struggled as publicly-traded firms, Xiaomi marketed itself as an Internet services company, even though the company generates only 8.6 percent of its annual revenue from this business. If Xiaomi wants its valuation to reach $100 billion, the company must continue to win a greater share of higher margin Internet services. Under the hood, Xiaomi is a strong company with sound growth potential beyond China. Notably, Xiaomi has increased its market share in India, edging out Samsung with most smartphones shipped in Q4 2017, according to Counterpoint Research.

Source: SharesPost Research; PitchBook; Various news articles
Meituan’s Potentially Blockbuster IPO

Meituan is China’s leading e-commerce platform for services, connecting hundreds of millions of consumers and merchants. In 2017, Meituan generated over 5.8 billion transactions, totaling RMB357 billion (roughly USD $53.50 billion) in gross transaction volume. Last year, Meituan served 310 million consumers and 4.4 million active merchants across 28,000 cities in China.

These impressive statistics highlight the enormous scale and reach of Meituan’s business. For its U.S. audience, Meituan combines key elements of restaurant reviews (Yelp), services (Angie’s List, Thumbtack), online deals and coupons (Groupon), food delivery (Grubhub, Postmates, Doordash, Instacart), and transportation (Uber, Kayak).

Source: Meituan filing at the Stock Exchange of Hong Kong Limited

Thanks to financial backing from gaming and social media company Tencent Holdings Ltd, investors valued Meituan at $30 billion last year. Other investors include venture capital firms (Sequoia Capital and DST Global) and sovereign wealth funds (Singapore’s GIC, Temasek Holdings and Canada Pension Plan Investment Board).

The Upside Scenario:

Growth track record: Meituan’s individual businesses have generated impressive sales growth, ranging between 1.5x and 2x to over 6.5x all in the course of just two years. When combined, the numbers become even more meaningful. As an app platform, Meituan has increased the number of users on its platform and average number of times users perform a transaction.

Equally important, Meituan has more than doubled the number of active merchants on its platform. More merchants means more offerings, which encourages repeat business from existing users and attracts new ones.

Source: Meituan filing at the Stock Exchange of Hong Kong Limited
One-stop shop for all products and services

Meituan’s filing provides a picture of the breadth of services offered on the platform. Beginning as simply a site to make restaurant reservations, the company now allows consumers to do everything from book movie and airline tickets to order food and groceries online, as well as offering businesses cloud-based ERP and supply chain solutions. While American companies like Groupon, Yelp, and Kayak offer individual services, Meituan collectively provides all of these services to Chinese consumers.

Source: Meituan filing at the Stock Exchange of Hong Kong Limited
The Downside Risk:

Ongoing losses and cash burn: For 2017, Meituan reported an RMB 3.8 billion operating loss and EBITDA loss of RMB 2.7 billion. Both these figures are an improvement compared to prior years. Given the level of planned investments, we believe Meituan will likely continue to burn cash throughout 2018 and 2019. As a result, Meituan’s gross margin declined to 32 percent last year from 69 percent in 2015.

Competition across the board: Per its filing, Meituan’s primary competitors include Alibaba Group and Ctrip.com, two large companies with significant resources. Meituan competes on food delivery and in-store services with Alibaba and hotel and travel and transportation ticketing services with Ctrip.com. Meituan also competes with its own backer, Tencent, on its payments service. Additionally, with so many services offered, Meituan faces competition from smaller companies that each offer these individual services.

Significant sales and marketing spend: Despite decreasing over the past three years, selling and marketing expenses still represent a significant percentage of revenue. As the company continues to grow, Meituan will require significant cash to maintain and support that growth.

Source: The Stock Exchange of Hong Kong Limited
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Analyst compensation is based upon various factors, including the overall performance of SharesPost, Inc. and its subsidiaries, and the performance and productivity of such analyst, including feedback from clients of SharesPost Financial Corporation and other stakeholders in our ecosystem, the quality of such analyst’s research and the analyst’s contribution to the growth and development of our overall research effort. Analyst compensation is derived from all revenue sources of SharesPost, Inc., including brokerage sales.

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This report does not contain a complete analysis of every material fact regarding any issuer, industry, or security. The opinions expressed in this report reflect our judgment at this date and are subject to change. The information contained in this report has been obtained from sources we consider to be reliable; however, we cannot guarantee the accuracy of all such information.

Any securities offered are offered by SharesPost Financial Corporation, member FINRA/SIPC. SharesPost Financial Corporation and SP Investments Management are wholly owned subsidiaries of SharesPost, Inc. Certain affiliates of these entities may act as principals in such transactions.

Investing in private company securities is not suitable for all investors. An investment in private company securities is highly speculative and involves a high degree of risk. It should only be considered as a long-term investment. You must be prepared to withstand a total loss of your investment. Private company securities are also highly illiquid and there is no guarantee that a market will develop for such securities. Each investment also carries its own specific risks and you should complete your own independent due diligence regarding the investment, including obtaining additional information about the company, opinions, financial projections and legal or other investment advice.

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Alejandro Ortiz

Alejandro Ortiz

Alejandro is a Research Analyst, Private Investment Research for SharesPost Research LLC. Prior to joining SharesPost, he was a Valuation Analyst at Duff & Phelps with a focus on TMT industries.
PLEASE READ THESE IMPORTANT LEGAL NOTICES & DISCLOSURES

CONFLICTS

This report is being published by SharesPost Research LLC, and distributed by SharesPost Financial Corporation, a member of FINRA/SIPC. SharesPost Research LLC, SharesPost Financial Corporation and SP Investments Management, LLC, an investment adviser registered with the Securities and Exchange Commission, are wholly owned subsidiaries of SharesPost, Inc.

Recipients who are not market professionals or clients of SharesPost Financial Corporation should seek the advice of their own personal financial advisors before making any investment decisions based on this report. None of the information contained in this report represents an offer to buy or sell, or a solicitation of an offer to buy or sell, any security, and no buy or sell recommendation should be implied, nor shall there be any sale of these securities in any state or governmental jurisdiction in which said offer, solicitation, or sale would be unlawful under the securities laws of any such jurisdiction.

This report does not constitute an offer to provide investment advice or service. Registered representatives of SharesPost Financial Corporation do not (1) advise any member on the merits or advisability of a particular investment or transaction, or (2) assist in the determination of fair value of any security or investment, or (3) provide legal, tax, or transactional advisory services.

ANALYST CERTIFICATION

The analyst(s) certifies that the views expressed in this report accurately reflect the personal views of such analyst(s) about any and all of the subject securities or issuers, and that no part of such analyst compensation was, is, or will be, directly or indirectly related to the specific views contained in this report.

Analyst compensation is based upon various factors, including the overall performance of SharesPost, Inc. and its subsidiaries, and the performance and productivity of such analyst, including feedback from clients of SharesPost Financial Corporation and other stakeholders in our ecosystem, the quality of such analyst’s research and the analyst’s contribution to the growth and development of our overall research effort. Analyst compensation is derived from all revenue sources of SharesPost, Inc., including brokerage sales.

DISCLAIMER

This report does not contain a complete analysis of every material fact regarding any issuer, industry, or security. The opinions expressed in this report reflect our judgment at this date and are subject to change. The information contained in this report has been obtained from sources we consider to be reliable; however, we cannot guarantee the accuracy of all such information.

Any securities offered are offered by SharesPost Financial Corporation, member FINRA/SIPC. SharesPost Financial Corporation and SP Investments Management are wholly owned subsidiaries of SharesPost, Inc. Certain affiliates of these entities may act as principals in such transactions.

Investing in private company securities is not suitable for all investors. An investment in private company securities is highly speculative and involves a high degree of risk. It should only be considered as a long-term investment. You must be prepared to withstand a total loss of your investment. Private company securities are also highly illiquid and there is no guarantee that a market will develop for such securities. Each investment also carries its own specific risks and you should complete your own independent due diligence regarding the investment, including obtaining additional information about the company, opinions, financial projections and legal or other investment advice.

Accordingly, investing in private company securities is appropriate only for those investors who can tolerate a high degree of risk and do not require a liquid investment.

SharesPost, the SharesPost logo, My SharesPost, the SharesPost Index, and SharesPost Investment Management are all registered trademarks of SharesPost, Inc. All other trademarks are the property of their respective owners.

Copyright SharesPost, Inc. 2019. All rights reserved.