March 12, 2019 / 3:47 AM / 14 days ago

Breakingviews - Meituan Dianping drives itself to distraction

Drivers of food delivery service Ele.me (in blue) and Meituan (in yellow) are seen in Beijing, China April 11, 2018. Picture taken April 11, 2018.

HONG KONG (Reuters Breakingviews) - Meituan Dianping has driven, and pedalled, itself to distraction. The $42 billion Chinese super-app operator grew the top line by an impressive 89 percent in the fourth quarter, as its all-important food delivery business shows new signs of strength against Alibaba-owned Ele.me. Other ventures increasingly seem like costly diversions.

Distributing dumplings and other fare is the most tantalising dish in Meituan’s smörgåsbord of services. Those sales soared by two-thirds in the final three months of 2018, to $1.6 billion. Fears about intense competition may be overcooked. While subsidies and other hefty expenses ballooned Meituan’s operating loss to $1.6 billion in 2018 from $570 million a year earlier, there may be a payoff in the works.

The company offers customers 28 percent more restaurants than Ele.me, and holds a bigger lead in higher-growth, lower-tier cities, according to fresh research from Bernstein analysts. What’s more, a third of the 5,000 surveyed eateries were exclusive to Meituan, while only half as many restricted themselves to its rival. Bernstein forecasts that Meituan’s food-delivery unit, which claims to have 60 percent of the market, will be profitable by 2021.

That inspires a degree of confidence about some initiatives. One, for example, supplies ingredients, and technology, to restaurants. The valuable data being gathered might be put to profitable use down the road.

For now, however, little value is ascribed to the sprawl. U.S.-based food-delivery peer Grubhub and Germany’s Delivery Hero trade on a blended enterprise value to expected sales multiple of 5.3 times. Apply that to Meituan’s biggest business, using a UBS revenue forecast of $8.2 billion, and it would be worth $44 billion. The imputed valuation approximates Meituan’s entire market cap.

Ride-hailing and bike-sharing are a big part of the problem. Meituan plowed some $660 million into driver-related expenses in 2018 to challenge Didi Chuxing. Buying Mobike has been pricey, too, contributing a nearly $680 million loss in less than a year. The strategy and any synergies aren’t obvious. At least Meituan vows to narrow losses in these two businesses, and to be more “selective” and “disciplined” with other initiatives. It’s one thing to say it, though, and quite another to deliver. 

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