The online food delivery giant is said to be looking to expand into markets outside mainland China, starting with Hong Kong

Key Takeaways:

  • Meituan poached Tony Qiu, head of international business at Kuaishou Technology, in July this year to pave the way for overseas expansion, and Hong Kong seems the best starting point
  • DBS projects an adjusted annual net profit of around 3 billion yuan for the company this year, but investors are still worried about the impact of China’s zero-Covid policy on third-quarter revenue

By Ken Lo

With challenges mounting on the home front, many Chinese companies are looking for opportunity overseas.  Even food delivery giant Meituan (3690.HK) is reported to be widening its horizons in the search for new revenues, hoping to tickle the taste buds of consumers outside China.

Bloomberg reported that the online titan, whose services range from takeout to travel and entertainment, is exploring expansion into Hong Kong and beyond, citing sources with knowledge of the strategy. It said the push into overseas markets to offset slowing domestic growth would be directed by Tony Qiu, a former head of international business at content-sharing platform Kuaishou Technology (1024.HK), who was poached by Meituan this year.  But the report also stressed that the plans were still in their infancy and subject to change. The company has not made any comment.

Hong Kong is already teeming with Chinese and foreign food-delivery companies. Food Panda, an online platform headquartered in Germany, is the go-to food option for many Hong Kong consumers, according to data published by market research institution Statista. In the survey, 75% of respondents named it as their most-used food delivery app as of August last year.

During the Covid-19 pandemic, the Hong Kong authorities put restrictions on restaurant dining, which in turn boosted the online food delivery business. But the fierce competition for food orders has taken a toll on some suppliers, forcing U.S.-funded giant Uber Eats to suspend Hong Kong operations at the end of last year. So, there could be more to Meituan’s Hong Kong ambitions than meets the eye.

Without capital controls, Hong Kong has an edge over mainland China in its ability to leverage international capital. Therefore, it is more likely that the company intends to use Hong Kong as a springboard for further expansion overseas.

The reported interest in overseas expansion comes as many Chinese companies are grappling with increasing anti-monopoly scrutiny, a slowing economy at home, and government pressure to demonstrate social solidarity during these tougher times.

Responding to the government’s “common prosperity” policy, many big tech companies recently allocated large sums to bolster employee benefits or to help hard-pressed merchants by cutting commissions for use of their platforms. Both Tencent Holdings (0700.HK) and Alibaba Group (BABA.US; 9988.HK) have rolled out initiatives designed to contribute to common prosperity, each pledging around 100 billion yuan ($14 billion). Companies such as Xiaomi Corporation (1810.HK) and JD.com (JD.US; 9618.HK) have made similar efforts to give back to society.

As a nod to new government guidelines, Meituan reformed its commission system last May. And in March this year, the company reduced charges to merchants again to help support their low-margin online business as the pandemic resurgence dealt a heavy blow to the restaurant trade.

A potential drag on profits

The company said in its first-quarter investor briefing that social responsibility was at the core of its business, potentially signaling further measures to help small businesses and consumers if China’s economy slows further. Moreover, the company plans to raise the pay and social security benefits for its couriers. As these reforms are gradually phased in over the next year or so, they could squeeze Meituan’s profit margin.

Meituan is a broad web-based services business covering catered food, consumer products and retail services. Its business operations mainly divide into “core local commerce” and “new initiatives”.  The former includes established services in the food delivery, in-store, hotel and tourism sectors, as well as Meituan Instashopping, accommodation and transportation ticketing. These business segments are performing quite well, with a steady increase in the number of annual active users and active merchants.

The new initiatives include platforms such as Meituan Select and Meituan Grocery, along with B2B food distribution, ride sharing, bike sharing, and restaurant management systems.

The latest earnings report shows that company’s revenues jumped just over 20% in the first half of the year to 97.21 billion yuan, while its net loss shrank by almost 17% to 6.82 billion yuan. In the second quarter its net loss shrank by almost 67% to 1.12 billion yuan and the company logged an adjusted net profit of 2.06 billion yuan. A breakdown of the second-quarter financials shows operating profit from the core local commerce business reached 8.26 billion yuan while the cash-burning new initiatives were still mired deeply in the red with operating losses of 6.79 billion yuan, weighing heavily on the company’s fortunes.

Facing challenge from Eleme

A report published by DBS expects Meituan to post around 3 billion yuan in adjusted net profit for the whole year after outperforming market expectation in the second quarter. But investors are still concerned about the impact of the zero-Covid policy on third-quarter operating revenue, and the company’s ability to stem the losses from its new initiatives.

However, the risks extend far beyond the pandemic impact and the sluggish macro-economy in China. Competition is another key factor. Eleme, China’s second biggest food delivery platform by market share, announced on Aug. 19 it would collaborate with short-video giant Douyin, the Chinese version of TikTok, in seeking to connect buyers and sellers more closely with video content, quality products and delivery services.

With more than 700 million users in mainland China, Douyin will have the power to boost Eleme’s competitiveness, potentially threatening Meituan’s market dominance.

Meanwhile, a major shareholder has been progressively cutting its stake in Meituan, creating even bigger uncertainty for the share price. Sequoia Capital and its founder Neil Shen, who acts as a non-executive director of Meituan, have cashed out more than 50 billion yuan so far. When the company first went public in 2018, Shen and other investors related to Sequoia Capital held 12.05% of shares in the company, but the stake had shrunk to just 2.69% by the end of July this year.

In describing Shen’s role, Meituan said he was “providing advice to the company on investment and business strategy as well as financial discipline”. The fact that he has been selling his shares will reflect poorly on the company’s prospects in the eyes of investors.

Meituan’s reported intention to expand overseas has so far done little to prop up its share price, indicating that flagging domestic business is uppermost in investors’ minds for now.

The share price fell below the 10-day and 20-day moving average after Oct. 10. It also breached the HK$160 support level, viewed as critical by the market, to slump to a new half-year low of HK$141.6 on Monday. But Meituan’s forward price-to-earnings (P/E) ratio remains as high as 86 times. So, the stock is still not cheap, and investors should bear in mind that the price still has room to fall.

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