Banking & Finance

Super app, super loss

Should investors be panicked by the red ink at Meituan-Dianping?


Lost a whopping Rmb115 billion

Weighed down by a $2 billion loss from unauthorised bets on the forex market, Citic Pacific’s HK$12.7 billion ($1.6 billion) loss in 2008 was one of the worst by a Hong Kong-listed firm in recent memory. Chalco’s Rmb16.3 billion ($2.4 billion) deficit in 2014 – the worst by an A-share firm – also takes some beating.

Yet both were lightweight losses compared to Meituan-Dianping’s financial results last week.

China’s biggest food delivery firm reported a staggering Rmb115 billion loss for the year ended December 2018. Fortunately, the headline number included a Rmb104 billion exceptional loss because of the “fair value changes of convertible redeemable preferred shares”. Taking out this non-cash item, Meituan said its adjusted net loss ‘only’ amounted to Rmb8.5 billion for the period, compared with Rmb2.9 billion a year earlier.

Investors were still spooked, sending the company’s shares down by about 10% in the subsequent trading session.

According to international financial reporting standards (IFRS), price differences between ordinary shares and preferred shares have to be accounted for in the profit-and-loss account. Meituan was only founded in 2015 and prior to its IPO last year it issued large numbers of preferred shares to investors and employees. These fundraisings helped to fuel its extraordinary ascent – Meituan was worth more than HK$300 billion ($38 billion) as of this week.

A similar situation applied at fellow unicorn Xiaomi. The smartphone maker reported a Rmb129 billion loss for the year ended December 2017 in its IPO prospectus last year and its bottom line included an $8.5 billion charge after a rapid rise in the market value of its preferred shares.

Xiaomi and Meituan are the first of the so-called “W-shares” listed in Hong Kong, referring to “weighted voting rights”. These dual-shareholding structures are common among Chinese tech start-ups – allowing founders to retain control – but companies that used them were only allowed to go public in Hong Kong after the bourse’s rules were changed last year (a move that resulted from missing out on Alibaba’s IPO, see WiC392).

So far the performance of the W-shares hasn’t been too encouraging. Both Xiaomi and Meituan dipped below their IPO prices in the first week after their trading debuts and both are now trading some 30% below where their stock was offered, says Hong Kong Economic Times. Most of their earliest shareholders (aka the preferred shareholders) are still sitting on handsome profits but the newspaper thinks that jaundiced fund managers will be more reluctant to assign richer valuations to other W-shares in future.

At the operating level Meituan managed to nearly double its 2018 revenues to Rmb65 billion, driven primarily by its food delivery services, which now see 2.7 million riders drop off meals to more than 400 million customers. This army of urban workers accounted for Rmb30.5 billion in commissions last year, the weightiest item in Meituan’s operating cost breakdown.

Meituan has been dubbed as ‘China’s super app’ and ‘the biggest daily life service platform’ because of its diversified offering. It also provides the most popular restaurant review app and it has entered the car-hailing and bike-sharing businesses.

But analysts have questioned whether Meituan has overstretched itself by battling on so many fronts. To rebut these concerns, it must show an ability to monetise the sea of Big Data that it has been collecting across its different platforms, the Securities Times says. A positive example: its food delivery and restaurant review services are generating valuable insights that Meituan is selling back to eateries and hotels.

More such instances may be required for the ‘super app’ to convince investors that the heady inflation in its valuation over the past four years was justified.

The company reached another telling moment in its history, the Hong Kong Economic Times reported, when the lock-up period on share sales by a number of pre-IPO investors and employees expired on Tuesday. These owners hold a large chunk of Meituan’s shares – as much as HK$200 billion of its stock – and they could start taking profits in the weeks ahead.

Meanwhile Xiaomi’s shares fell nearly 5% on Wednesday on disappointing fourth quarter results – with smartphone sales down 28% versus the previous quarter (for more on Xiaomi, see page 12).


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