Meituan Dianping 3690:HK
February 20, 2019 - 1:20am EST by
2019 2020
Price: 56.70 EPS 0 0
Shares Out. (in M): 5,493 P/E 0 0
Market Cap (in $M): 311,437 P/FCF 0 0
Net Debt (in $M): -68,041 EBIT 0 0
TEV ($): 243,396 TEV/EBIT 0 0

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Meituan Dianping is China’s 2nd largest e-commerce platform in terms of transacting users, focusing on a fresh e-commerce template of local lifestyle services (eg, food delivery, Yelp, TripAdvisor + Booking) and holding clear market leadership in this field. Its business model of taking high frequency services to cross sell low frequency but high margin ones appears to be working. Today, 9-year old Meituan is number 1 in food delivery, hotel OTA, consumer reviews, and group buying. Industry’s organic growth rate is strong due to extremely low online penetration rates. Long runway is gets broadened as new categories get added for cross selling. Meituan’s platform strategy is also unique in building overlapping 2-sided platforms, further benefiting from ownership of China’s main consumer reviews platform (Dianping), which provides a moat in terms of traffic generation and conversion catalyst. CEO has proven to be a strong strategic thinker, fierce competitor and capital allocator along the lines of Amazon. Recent concerns over Alibaba’s acquisition of Meituan’s main rival has resulted in a weak post-IPO performance, though this write-up aims to show why fears over competitive dynamics and BABA’s motivations are misunderstood. I believe that Meituan presents an opportunity to get in on a very well managed compounder that has a long and broadening runway. Current stock price provides ~80% to 100% upside with above-30% rates of revenue compounding and margin expansion to come.


Company Overview


Meituan Dianping is the result of a 2015 merger between Meituan (“beautiful group”; “group” as in group buying) and Dazhong Dianping (“people’s reviews”).


Meituan started out as a group buying company along the lines of Groupon, though its focus has always been on being a platform for local lifestyle services.


Dianping is a highly popular consumer reviews service that is sort of like Yelp and TripAdvisor all rolled into one. There is no real competitor to Dianping, just like Yelp and TripAdvisor. Most Chinese check Dianping for discovering restaurants or local services (eg, foot reflexologist or manicurist); Baidu isn’t as popular. In this regard, Dianping is not unlike Amazon as the first port of call for consumers searching for local services instead of via the dominant search engine. This is an important source of moat since customer acquisition cost is much lower, while conversion rates are better.


Despite remaining 2 separate apps, the content is the same. Meituan has also stated that it will fold Dianping into Meituan soon to create a single point of traffic and a consistent brand.


“Super app” or Everything Store


Meituan is often called a “super app” since it provides everything from food delivery to group buying deals, hotel bookings, weekend trips, movie tickets, local services booking (eg, bridal photography), and more recently, bike sharing. The common theme that binds Meituan’s offerings are that they provide users a way to discover and book local lifestyle services, often at a generous discount.


The local lifestyle services market similar in size vs conventional goods retail. Meituan noted that the size of the consumer services industry in China was CNY 18.4 tril in 2017 (22.2% of GDP vs 39.1% of GDP for total consumption), though it has defined its immediate addressable market as a CNY 4 tril one. This is huge and Meituan doesn’t have to win it all. Consider the average person’s monthly expenditure on eating out, food delivery, haircuts, gym, travel, etc vs his/her purchases from Amazon or Taobao/Tmall; a 56% allocation to services vs 44% for stuff seems reasonable.


Meituan had 382.3 mil annual transacting users as of 3Q18, vs BABA’s 636 mil. This makes Meituan China’s 2nd largest e-commerce platform, serving half of the 800 mil strong online population. Put another way, half of China’s online population orders 1.6 meals per month from Meituan’s food delivery, and the ordering frequency continues to rise.


Meituan’s key tool in customer acquisition/demand generation comes from Dianping’s trove of unbiased customer reviews, which also act as the catalyst in closing a transaction on the platform (eg, Amazon reviews often help in the purchase decision). The entire system thus forms a nice closed loop of variety, discovery, reviews, and transaction. If this everything store concept sounds familiar, it is because Meituan’s CEO Wang Xing is an admirer of Amazon.


This podcast episode (link) of “Invest Like The Best” discussed how Amazon, Alibaba, Tencent and Meituan are similar in that they are customer aggregation platforms. Products/services that users want are continuously added, piggybacking on the existing user base to add revenue streams that require little incremental customer acquisition cost. The CAC savings thus provide a pricing advantage, while the stacking of products/services create stickiness. Hayden Capital has a good discussion of this and Meituan in its 4Q18 letter to investors (link).


Below is a screenshot of Meituan’s app home page (translations in red), which I clicked on to expand the category. 2nd set of screenshots comes from Meituan’s prospectus showing some of the other services offered.