ATM spending

Wang Xing, the co-founder and chief executive of Meituan Dianping, was dubbed the “mad man” of China’s internet sector at the outset of his entrepreneurial career. That was owing to a series of bold attempts (and failures) to create local copycats of proven US internet successes (see WiC117). So when he told his senior executives in mid-2015 that Meituan had the potential to grow into an online heavyweight worth more than $100 billion, most of them agreed that their boss was indeed insane.

Founded in 2010 and then known as Meituan.com, the company had been created as China’s answer to Groupon, and it was still well off Wang’s valuation target when it merged with major rival Dianping in 2015 (a fundraising round at the time valued it at $7 billion).

It was also burning cash at an alarming rate, thanks to diversifications into areas including food delivery and bike-sharing.

But last week Wang’s predictions turned out to be rather accurate, as Meituan’s market capitalisation indeed surpassed $100 billion. It becomes only the third Chinese internet firm to reach that valuation milestone, with analysts now wondering how his firm will shape the ongoing battle between China’s biggest internet titans, Alibaba and Tencent.

From BAT to ATM

For nearly a decade Baidu, Alibaba and Tencent – known by the acronym BAT ­– were the dominant trio in the industry.

Back in 2011 Baidu was the most valuable of the three and as late as October 2017 its “All-in AI” strategy had propelled the search firm’s market value to $95.4 billion. However, that was as close as it got to the $100 billion mark. Baidu’s performance then stuttered, with the departure of a number of key executives in 2018 (see WiC411). As of this week, its New York-listed shares were worth about $37 billion, or only 6% of Alibaba’s market value.

Meituan’s fortunes have headed in the opposite direction. Regular readers of WiC should be familiar with the growth track of China’s biggest food delivery firm. Our first mention of a new group of challengers in the internet sector – under the ‘TMD’ acronym – was in January 2018, when the fast-growing start-ups Toutiao (part of Bytedance), Meituan and Didi Chuxing, were talked about as rivals to the BAT (see WiC394). But now the new label that seems more likely to emerge is ATM (i.e. Alibaba, Tencent and Meituan).

Meituan went public in Hong Kong in September 2018 at an offering price of HK$69 per share. Its shares dipped to a low of HK$44 several months later but the stock has since rebounded to more than HK$155.

As of this week, Meituan’s market value has more than doubled from its IPO valuation to HK$905 billion ($116 billion) – triple that of Baidu.

Wang himself is worth nearly $10 billion, 36Kr.com noted, which ranks him as one of China’s 20 richest people.

“From BAT to ATM, the rise of Meituan has completely reshaped the landscape at the top of the Chinese internet,” Sina Finance claimed, adding that Meituan had actually overtaken Baidu (in value terms) in March last year. The gap between the two has since widened to such an extent that the BAT acronym has lost all relevance, Sina says.

Does Meituan make money?

The 10 year-old firm turned profitable for the first time in 2019 with a net profit of Rmb2.2 billion ($309.32 million). A year earlier it had given investors a major scare by reporting a staggering Rmb115 billion loss (see WiC445), although the headline number included huge one-off losses relating to “fair value changes” in its preferred shares.

Meituan’s shareholders have shouldered nearly a decade of hefty operating losses, thanks to the company’s seemingly relentless diversification. Wang led the company in expanding into wholly new areas such as ride-hailing, tourism and travel bookings, and most recently fresh food supply, as part of its efforts to establish a reputation as China’s “all-in-one app”.

Much of that effort has succeeded. WeChat, Tencent’s ubiquitous social media platform, allows its users to preset nine of their most used apps in a 3×3 grid, according to 36Kr.com. At least three of those spots are typically occupied by Meituan or one of its units, it points out.

Wang’s core strategy has put revenue growth before profit margin, and consistently deferred payouts in exchange for reinvesting in new businesses. Much of that strategy was borrowed from Amazon, which was lossmaking for nearly two decades but eventually earned huge profits from its dominant status in e-commerce and cloud computing.

That’s also why he sounded undeterred last week in announcing Meituan had sunk back into the red with another Rmb1.58 billion net loss for the first quarter this year. The warning was that a quick turnaround was unlikely during the rest of the year because of “the Covid-19 situation”. But Wang also reasserted that short-term profitability isn’t Meituan’s priority.

In fact, the company is gearing up for another round of new investment in a bid to grow its market share further. 36Kr.com reported last month that Meituan has placed orders with Japanese firms for a million electric bicycles for its bike-sharing operation Mobike, which it acquired in 2018 for $2.7 billion. Mobike’s former rival Ofo has been struggling to stay afloat (see WiC436). With Meituan’s backing, Mobike sees a chance to take fuller command of the sector.

In the same style, Wang announced that Meituan had delivered 15 million orders a day (mostly of meals) in the most recent quarter. But he says the company aims to hit 100 million orders a day by 2025 as it broadens its portfolio from food deliveries to speedy fulfilment of a much wider range of goods.

What are Meituan’s main challenges?

One priority is to stay in the good graces of the government. Take Didi Chuxing, one of the aforementioned TMD trio. The car-hailing app was riding high after merging with its two main rivals: Kuaidi and Uber’s China unit. There were plans to expand into Meituan’s food delivery business too (see WiC404). Then two high-profile murders committed by two drivers on its ride-sharing platform created a political firestorm. The subsequent regulatory crackdown completely derailed its expansion plan (see WiC422).

Meituan will need to tread carefully as it expands further into new sectors, creating new enemies. That also means keeping the government onside as far as it can. One way it can do that is by highlighting job creation in the O2O economy. Despite dropping the official growth target for 2020, the State Council still plans to add nine million new jobs this year. Meituan’s business model can help, especially as millions more migrant workers swap positions on the production line for delivery mopeds in the “new economy” (see WiC444).

In a social responsibility report Meituan published in March, nearly four million riders were said to be working from the company’s delivery platform last year (up from 2.7 million in 2018 and 2.2 million in 2017). Meituan accounts for 6.4% of the total number of delivery people working around the country. The report made sure to emphasise the point, claiming that more than 253,000 people from poorer regions had been “lifted out of poverty” after becoming a Meituan rider.

These riders connect 450 million Meituan customers with nearly 6.2 million active merchants. The latter, mainly small and medium-sized enterprises (SME), are another prized community at central government level, which has promised to support them through the financial privations of the pandemic and its aftermath. That puts more pressure on Meituan to resolve a new row with many of the smaller firms, which are complaining that the super-app operator has been squeezing their dwindling profits during the Covid-19 outbreak.

A key factor in Meituan’s turnaround in 2019 was its so-called “monetisation rate” – effectively the amount that it squeezes out of its partners for hooking up to its online platform. The rate rose to 14% from 8% in 2016.

In good times Meituan’s platform – and the huge customer base that uses it – has helped many smaller eateries grow their incomes. But during the virus outbreak, when Meituan’s “contactless” delivery service was one of the few available sales channels, the terms seemed to tighten against them. In April the Guangdong Restaurant Association (GRA) complained in an open letter that Meituan had exploited its “monopoly” status to push commission rates to a point “beyond the level merchants can accept”, claiming that the platform was now taking as much as 26% of the price of some transactions. That sparked a public row between Meituan and one of the largest industry bodies in the catering sector, although Meituan eventually offered an olive branch in promising to refund up to 6% of commission fees to “good-quality merchants”.

The crisis is an indicator of another of Meituan’s major challenges: how to position itself as a gateway to new opportunities for millions of China’s smaller businesses, but avoid accusations that it is exploiting the power the platform provides.

Meituan is competing head-on with Alibaba too?

One of Meituan’s mantras is that there are no boundaries in its ambitions for where its business can grow. But that means it is starting to run into some major rivals, not least Alibaba and the Hangzhou firm’s ‘New Retail’ strategy.

Alibaba’s Ele.me is the main competitor to Meituan’s food delivery service, its core business. A battle over steeper subsidies for riders and merchants has been brewing for a while. Besides food delivery, Alibaba has been launching like-for-like apps in most of the major services that Meituan is offering. “Alibaba is doing whatever we have been doing,” Wang Huiwen, an executive director of Meituan, complained to Southern Metropolis Daily last year. “This [locking horns with Alibaba head-to-head] is an unavoidable question for us.”

Alibaba was actually one of Meituan’s earliest investors. A $50 million contribution back in 2011 provided early funding for Meituan to outlive many other Groupon copycats in China. According to 36Kr.com, Jack Ma even allowed Gan Jiawei, Alibaba’s employee number 67, to join Meituan as its chief operating officer.

Others have suggested that Gan was sent into Meituan to prepare the ground for Alibaba to take control. Huxiu.com reports that Alibaba wanted Alipay to become Meituan’s sole payment gateway, although the request was refused outright by Meituan. “Mad man” Wang has always been reluctant to cede authority to anyone, Huxiu commented, and his ambitions for Meituan to stay independent conflicted with Alibaba’s preference to exert managerial control over its takeover targets.

That hasn’t been quite the same issue with Tencent, which has taken over as Meituan’s senior investor, because it puts more emphasis on “connectivity to its ecosystem” than shareholding control (Tencent’s Pony Ma likes to describe the company as a “super connector” linking up its portfolio firms and allowing their founders to retain managerial authority).

Meituan started to part ways with Alibaba following a merger with Tencent-backed Dianping in 2015. Tencent’s stake in the new entity was later increased to more than 10% following the merger, while that of Alibaba was diluted to less than 7%. A later decision to arrange $1 billion round of investment led by Tencent, Huxiu said, was only relayed to Alibaba 12 hours beforehand.

The rift between Alibaba and Meituan has been much publicised by the Chinese media. When the former was working to acquire Ele.me in 2018, Meituan crashed the party with a counteroffer. The intervention forced Alibaba to raise its bid to $9.5 billion from $7 billion. Last year, Wang’s interview with Bloomberg fuelled the rivalry, when he told the news agency that he still thinks Jack Ma “has an integrity problem” because of a decision in 2011 to spin-off payment unit Alipay without the approval of Alibaba’s board (see WiC112).

Expect a battle royale as the two firms clash further?

One way of understanding Meituan’s rise is as a proxy for Tencent to attack Alibaba in its rival’s backyard, Huxiu claimed (a similar theory has been mooted in relation to Tencent-backed Pinduoduo, now one of Alibaba’s biggest challengers in e-commerce).

ATM rivalry also translates to the Hong Kong stock market, where all three firms have listings. Companies with weighted-voting rights, or so-called “W-shares” such as Alibaba, Meituan and Xiaomi, will be eligible for inclusion in some of the city’s indices from August and the prospect of more buying by tracker funds has fuelled investor interest, partly explaining Meituan’s accession into the $100 billion club.

According to ASI Analytics, a Hong Kong-based Big Data research firm, Meituan’s share price surge in recent months has coincided with the spike in the number of internet searches of the company and the debates surrounding W-shares among financial columnists and social media influencers.

Hong Kong Economic Times reports that both Alibaba and Meituan could be included in the Hang Seng Index (HSI) in future, although for the time being their W-shares would carry a weighting in the Hong Kong benchmark capped at 5% each.

Tencent, with a nearly 10% weighting, has long been the major index and market mover on the Hong Kong bourse (for more on Tencent’s new Rmb500 billion growth strategy see this weeks “Internet and Tech”).

It is probable that the ATM could soon count for as much as 20% of the HSI – meaning that anyone buying a fund that tracks the index will be taking on major exposure to China’s internet industry.

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