March 29, 2018 / 4:42 AM / 6 months ago

Breakingviews- Chinese food-to-flights app offers half-baked IPO

HONG KONG (Reuters Breakingviews) - Meituan-Dianping needs more time in the oven before it is fit for public consumption. The Chinese takeaways-to-taxis startup has selected banks to help it prepare for a Hong Kong listing, Reuters says. At this stage in the group’s life, prospective investors could suffer indigestion.

The Meituan logo is seen in this illustration photo October 19, 2017. REUTERS/Thomas White/IllustratioN

The Tencent-backed group, last valued at $30 billion, is growing fast: revenue more than doubled to $5.4 billion last year. But it has two big problems: it has not been consistently profitable, according to investors, and operates in a mishmash of sectors such as food delivery, taxis and travel booking.

Companies like Amazon and Tesla show stock-market investors are willing to back loss-making or barely profitable technology outfits they believe will dominate clear niches. But in trying to become a super app, Meituan-Dianping is waging numerous battles at once, and will not necessarily win any of them.

To make things worse, Chinese tech firms often heavily subsidise customers and suppliers in their eagerness to dominate a market. Uber lost $1 billion a year connecting cabs and passengers in the People’s Republic, before it conceded defeat to rival Didi Chuxing.

In this case, Meituan-Dianping’s food-delivery business was loss-making as of February, following a subsidy war with Alibaba’s Ele.me. And Didi is also entering the sector, a person familiar with the matter says. Meanwhile, Meituan-Dianping is moving the other way, into ride-hailing.

These fights could make Meituan-Dianping’s stock volatile, especially if it starts with a high valuation, only for heavy investment or stiff competition to cause drastic swings in earnings estimates. There could also be clashes between management and investors about when to cut and run in underperforming areas. So the transition to public markets could be distracting for Chief Executive Wang Xing and his team.

Meituan-Dianping is flush with cash: it just raised $4.1 billion, and has a roster of loyal investors who would probably inject more capital if needed. Staying private until it has a clearer edge over competitors would make for a more straightforward market debut.

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