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Meituan delivers strong dish with weak sides

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A sign of Meituan delivery service is seen on a delivery box on a scooter, in Beijing's Central Business District, China July 15, 2020. REUTERS/Tingshu Wang

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HONG KONG, May 31 (Reuters Breakingviews) - Meituan (3690.HK) has delivered a lukewarm meal for investors. The $207 billion group’s main food delivery business more than doubled quarterly sales to $3.2 billion from a year earlier. But new bets helped serve up a $1.3 billion operating loss. Regulatory heat threatens to spoil the whole package.

The pandemic has changed the habits of Chinese diners and restaurants. Even as life in the People's Republic mostly returned to normal, daily orders on Meituan's food delivery platform topped 32 million on average in the three months to March - more than double the volume a year earlier. Heady growth and fewer subsidies helped the unit, which accounts for over half of Meituan's top line, swing to an operating profit from a loss last year. Meituan's travel, hotel booking and other services divisions have also bounced back.

Disappointing performance elsewhere leaves a bitter aftertaste, however. Boss Wang Xing is aggressively expanding into online groceries and community group-buying – a twist on Groupon (GRPN.O) for rural and less developed regions - taking on the likes of (9988.HK) and Pinduoduo (PDD.O). Operating losses from these new initiatives alone ballooned nearly six-fold in the period, resulting in an overall net loss of $761 million in the quarter. The company will likely be in the red this year; analysts' estimates published by Refinitiv showed an average net loss of $1.9 billion.

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To make matters worse, antitrust regulators are investigating the company for forcing restaurants and other merchants to use its platform exclusively. The maximum penalty of 10% of revenue would easily wipe out Meituan’s forecast operating cash flow for 2021. The central government is also piloting a new law that will require it to provide employment injury insurance for delivery riders, which will eat into razor-thin margins. In community group buying, officials have fined Meituan and peers for "improper pricing behaviour" and are cracking down on other practices.

Shares of the Beijing-based company rallied as much as 8% on Monday following the results, but are still down nearly 40% since a February peak this year. With its core food delivery business and newer ventures under pressure, shareholders may not have the appetite to stomach huge losses for long.

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CONTEXT NEWS

- China's Meituan on May 28 reported revenue of 37 billion yuan ($5.8 billion) in the three months to March, up 121% year on year. Its net loss for the period increased to 4.8 billion yuan, compared to 1.6 billion yuan a year earlier.

- The food delivery business posted an operating profit of 1.1 billion yuan, compared to an operating loss of 70 million yuan the same period last year.

- Meituan is facing public criticism of its treatment of delivery riders, most of whom are not covered for basic social and medical insurance. During the February seven-day Spring Festival holiday in China, the company said it offered benefits and incentives for delivery riders totalling over 500 million yuan.

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