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China tech

Chinese startup Meituan's IPO marks comeback for founder

Food delivery unicorn aims for $4.2bn listing in Hong Kong amid struggles

A Meituan Dianping delivery person in Shenzhen. The company’s initial public offering in Hong Kong will give it a valuation of $52.8 billion, greater than U.S.-listed JD.com. (Photo by Nikki Sun)

HONG KONG -- In China, where people attach great importance to food, there is an old saying: min yi shi wei tian, which translates as "food is heaven to ordinary people."

Wang Xing, founder of Meituan Dianping, clearly understands the role eating plays in the country. The internet services platform -- known for its food-delivering services and restaurant reviews -- has drawn 340 million customers, almost half of China's internet users, in the eight years since it was founded.

Meituan Dianping shares rose 6% to HK$73.15 in early trading on Thursday following the company's $4.22 billion initial public offering in Hong Kong. So far it is the most actively traded stock of the session. At a market capitalization of 402.5 billion Hong Kong dollars ($51.31 billion), Meituan dwarfs the $4.08 billion market value of Yelp, the U.S. site focused on online reviews of restaurants and other services. 

The IPO marks a notable comeback for Wang, a serial entrepreneur, after two unsuccessful experiences in social network startups -- Xiaonei.com and Fanfou, the Chinese equivalents of Facebook and Twitter, respectively.

Xiaonei, which was founded in 2005, was sold the following year due to a cash drain. Fanfou, which was founded in 2007, was banned by government authorities in 2009 over politically sensitive content involving riots in the Xinjiang Uighur Autonomous Region in northwest China.

Wang, a graduate of Tsinghua University in Beijing, then set up a group-purchase platform in 2010 and quickly shifted its focus to dining. Meituan has gained market dominance after years of cash-burning competition that squeezed out thousands of smaller rivals. Tencent Holdings, the Chinese technology conglomerate, is a major investor in the company with a stake of about 20%.

Meituan's market share in food-delivery services in China stood at 53.9% last year, according to Beijing-based research company DCCI, or Data Center of China Internet, followed by Alibaba Group Holding's Ele.me at 29.8% and Baidu's food take-away platform at 13.7%.

Still, Wang is not satisfied. He envisions a one-stop app that covers nearly every aspect of modern life in China. The platform also offers non-dining services, such as hotel reservations, bike-sharing and ticket sales for movies, entertainment, and air and ground travel. Wang's logic is simple: If the company can get its customers hooked on its food-related services, it can easily persuade them to use the same app for things.

Last year, about 74% of the company's newly acquired customers in non-dining categories, including travel and hotel bookings, were converted from food delivery and in-store dining services, according to Meituan's prospectus.

Wang Xing, founder of Meituan Dianping, envisions a one-stop services app that covers nearly every aspect of modern life in China. (Photo by Nikki Sun)

Wang plans to explore more value-added services that can monetize its huge customer base in dining, and will allocate 35% of the IPO proceeds, or about $1.4 billion, for developing new services and products.

But not all of his plans have worked out as he had envisioned. Earlier this month, Meituan halted further expansion of its car ride-hailing business -- a year after its official launch -- because the service is not generating the expected synergies with its core food operations. It also took investors by surprise after disclosing that Mobike, a bicycle-sharing startup it acquired in April for $2.7 billion, had lost more than 400 million yuan ($58.3 million) in just 26 days.

The ambitious new businesses have dragged Meituan, which has yet to earn a profit, further into the red, with losses in 2017 tripling to 19 billion yuan compared with the previous year.

Still, the company has priced its shares at 69 Hong Kong dollars ($8.80) each, close to the top end of its offering price range, despite current weak market sentiment. Over the past two months, both Chinese smartphone maker Xiaomi and wireless infrastructure operator China Tower priced shares at the bottom of the price ranges for their Hong Kong listings.

But even in Meituan's core food-related services, analysts say the company's business model may not be sustainable.

Andy Xie, an independent economist in Shanghai and the former head of Morgan Stanley's Asia-Pacific economics team, said China's internet-based service providers like Meituan compete with heavy subsidies, which boosts their market valuation but does not necessarily bring in profits. Subsidies are made to riders and customers in order to push down retail prices.

"They are only changing the format, not innovating the core technology," Xie said, and that is not enough to bring about a change. His says that is partly because Meituan relies on some 500,000 low-level delivery people to maintain its service quality and competitiveness. That large transportation team is key to the company's promise to deliver food within 30 minutes, but many were not happy when it lowered the salary of its workers.

Ling Minhua, assistant professor at Chinese University of Hong Kong, found in her research that since last year many workers employed by food-delivery companies have quit their jobs because of low pay. And labor costs are set to rise with a shrinking employment market in China.

The country's current economic slowdown presents another risk, because many white-collar workers could substantially reduce their consumption of takeout food and in-store dinning, she said.

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