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Meituan Dianping (3690.HK) Reiterate Buy on Favorable Risk-Reward, Despite Potential Volatility on Share

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Meituan Dianping (3690.HK) Reiterate Buy on Favorable Risk-Reward, Despite Potential Volatility on Share 20 March 2019 | 9:32PM HKT Meituan Dianping (3690.HK) Reiterate Buy on favorable risk-reward, despite potential volatility on share Buy lock up expiry 3690.HK 12m Price Target: HK$70.00 Price: HK$50.00 Upside: 40.0% Ronald Keung, CFA +852-2978-0856 | [email protected] Goldman Sachs (Asia) L.L.C. With Meituan Dianping’s 6-month share lock up having ended on Piyush Mubayi +852-2978-1677 | [email protected] March 20, whereby the % of free-float shares increase from c.6% Goldman Sachs (Asia) L.L.C. to nearly 60% from today, we believe the risk-reward remains Bill Liu, CFA +852-2978-0820 | [email protected] favorable given our unchanged 12-month TP of HK$70, despite Goldman Sachs (Asia) L.L.C. potential near-term share price volatility. We also include within the Elsie Cheng +852-2978-1666 | [email protected] note our key takeaways from our NDR meetings with Meituan Goldman Sachs (Asia) L.L.C. management last week. Key Data __________________________________ Market cap: HK$300.2bn / $38.2bn n Consensus expectations have mostly been reset: With over Enterprise value: HK$236.4bn / $30.1bn 3m ADTV: HK$413.0mn / $52.6mn Rmb3bn/Rmb1bn cuts in Bloomberg consensus China Asia Internet revenue/adjusted net loss for 2019 since 4Q results, where M&A Rank: 3 street estimates have moved closer to ours, we believe GS Forecast ________________________________ 12/18 12/19E 12/20E 12/21E expectations for more gradual food delivery growth ahead (as Revenue (Rmb mn) New 65,227.3 90,193.0 127,610.2 170,403.9 highlighted by management in its 4Q results call) are more well Revenue (Rmb mn) Old 65,227.3 90,163.6 128,698.9 172,354.7 EBITDA (Rmb mn) (4,733.8) (981.5) 13,717.9 27,895.0 understood. Our estimates have already factored in intense food EPS (Rmb) New (3.13) (0.96) 1.48 3.66 EPS (Rmb) Old (3.13) (0.97) 1.49 3.66 delivery subsidies over 2019. P/E (X) NM NM 28.9 11.7 P/B (X) 3.5 3.3 3.1 2.6 n Favorable risk-reward: Our updated scenario analysis suggests Dividend yield (%) 0.0 0.0 0.0 0.0 that risk/reward is skewed to the upside at the current share CROCI (%) (6.2) (4.3) 12.4 26.2 price, as our bear case valuation at HK$48 implies 4% downside 12/18 3/19E 6/19E 9/19E EPS (Rmb) (0.31) (0.46) (0.29) (0.16) risk, while we see 40% upside to our 12-m TP, and our 2021E GS Factor Profile ____________________________ fully loaded valuation is HK$115. Growth n We see potential catalysts in 2019 including: (1) Upside from Financial Returns monetization of in-store advertising and RMS (restaurant Multiple management system), (2) Further sequential narrowing of New Integrated Initiative losses through the year, (3) Potential inclusion into more stock indices given expanded free-float market cap, (4) Percentile 20th 40th 60th 80th 100th Potential launch of user membership program. 3690.HK relative to Asia ex. Japan Coverage 3690.HK relative to Asia Internet Source: Company data, Goldman Sachs Research estimates. See disclosures for details. Goldman Sachs does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. For Reg AC certification and other important disclosures, see the Disclosure Appendix, or go to www.gs.com/research/hedge.html. Analysts employed by non-US affiliates are not registered/qualified as research analysts with FINRA in the U.S. Goldman Sachs Meituan Dianping (3690.HK) Meituan Dianping (3690.HK) Balance Sheet (Rmb mn) __________________________________ Buy Rating since Oct 24, 2018 12/18 12/19E 12/20E 12/21E Cash & cash equivalents 17,043.7 10,495.0 12,336.1 39,924.9 Accounts receivable 466.3 644.8 912.3 1,218.3 Inventory 400.2 498.8 646.3 810.7 Ratios & Valuation _______________________________________ Other current assets 55,239.1 58,136.9 61,493.7 63,078.9 12/18 12/19E 12/20E 12/21E Total current assets 73,149.469,775.575,388.5 105,032.8 P/E (X) NM NM 28.9 11.7 Net PP&E 3,978.8 3,646.8 3,066.0 3,202.3 P/B (X) 3.5 3.3 3.1 2.6 Net intangibles 33,876.0 32,634.1 31,398.7 30,170.0 FCF yield (%) (7.8) (2.4) 0.8 10.5 Total investments 8,345.4 8,555.7 8,787.1 9,041.6 EV/EBITDA (X) NM NM 14.6 6.1 Other long-term assets 1,311.9 1,564.8 2,881.6 1,955.0 CROCI (%) (6.2) (4.3) 12.4 26.2 Total assets 120,661.5 116,176.9 121,521.8 149,401.8 ROE (%) (37.1) (7.1) 11.2 24.2 Accounts payable 5,341.0 5,134.0 6,652.4 8,344.6 Net debt/equity (%) (70.4) (69.7) (67.7) (84.2) Short-term debt 1,800.0 1,800.0 1,800.0 1,800.0 Interest cover (X) (225.8) (98.2) 144.0 377.7 Other current liabilities 24,684.1 28,431.7 25,905.5 32,870.2 Days inventory outst, sales 1.4 1.8 1.6 1.6 Total current liabilities 31,825.1 35,365.734,357.9 43,014.8 Receivable days 2.5 2.2 2.2 2.3 Long-term debt -- -- -- -- Days payable outstanding 29.2 30.6 26.6 27.0 Other long-term liabilities 2,326.7 2,565.9 2,924.4 3,334.5 DuPont ROE (%) (9.8) (7.5) 10.8 22.0 Total long-term liabilities 2,326.7 2,565.9 2,924.43,334.5 Turnover (X) 0.5 0.8 1.1 1.1 Total liabilities 34,151.737,931.637,282.446,349.3 Leverage (X) 1.4 1.5 1.4 1.4 Preferred shares -------- Total common equity 86,504.3 78,239.9 84,234.0 103,047.0 Growth & Margins (%) ____________________________________ Minority interest 5.45.45.45.4 12/18 12/19E 12/20E 12/21E Total liabilities & equity 120,661.5 116,176.9 121,521.8 149,401.8 Total revenue growth 92.3 38.3 41.5 33.5 Gross cash invested (ex cash) 78,618.2 81,883.5 90,032.7 87,503.9 EBITDA growth (75.9) 79.3 NM 103.3 Net debt, adjusted (61,329.8) (55,034.6) (57,470.5) (86,771.0) EPS growth (67.6) 69.2 253.8 147.1 Average capital employed 5,758.9 70,408.2 71,626.8 69,315.4 DPS growth NM NM NM NM BVPS (Rmb) 14.41 12.90 13.75 16.66 EBIT margin (15.5) (6.6) 6.9 13.5 EBITDA margin (7.3) (1.1) 10.7 16.4 Cash Flow (Rmb mn) ______________________________________ Net income margin (13.1) (6.5) 7.1 13.3 12/18 12/19E 12/20E 12/21E Net income (8,517.2) (5,839.8) 9,073.4 22,640.6 Price Performance _______________________________________ D&A add-back 5,366.8 4,994.7 4,954.5 4,910.4 3690.HK (HK$) Hang Seng Index Minority interest add-back -- -- -- -- Net (inc)/dec working capital (5,614.4) 352.2 (5,737.8) 7,937.9 80 34,000 Other operating cash flow (415.0) (2,424.6) (3,079.3) (3,827.6) 70 32,000 Cash flow from operations (9,179.8)(2,917.6) 5,210.7 31,661.4 60 30,000 Capital expenditures (1,424.0) (3,398.8) (3,107.1) (3,776.6) 50 28,000 Acquisitions (130.8) (210.3) (231.4) (254.5) Divestitures -- -- -- -- 40 26,000 Others (21,883.9) (21.9) (31.0) (41.4) 30 24,000 Cash flow from investing (23,438.7) (3,631.1) (3,369.5) (4,072.6) Apr-18 Jul-18 Oct-18 Jan-19 Dividends paid (common & pref) -- -- -- -- 3m 6m 12m Inc/(dec) in debt 1,968.1------ Absolute 11.5% (31.2)% -- Other financing cash flows 28,336.80.00.00.0 Rel. to the Hang Seng Index (2.6)% (35.5)% -- Cash flow from financing 30,304.90.00.00.0 Total cash flow (2,313.6) (6,548.7) 1,841.227,588.8 Source: FactSet. Price as of 20 Mar 2019 close. Free cash flow (10,603.8) (6,316.4) 2,103.6 27,884.7 Income Statement (Rmb mn) _______________________________ Source: Company data, Goldman Sachs Research estimates. 12/18 12/19E 12/20E 12/21E Total revenue 65,227.3 90,193.0 127,610.2 170,403.9 Cost of goods sold (50,096.3) (62,430.2) (80,894.5) (101,472.5) SG&A (18,800.1) (26,003.1) (27,779.9) (33,287.9) R&D (6,431.5) (7,735.8) (10,172.4) (12,658.9) Other operating inc./(exp.) -- -- -- -- EBITDA (4,733.8)(981.5) 13,717.927,895.0 Depreciation & amortization (5,366.8) (4,994.7) (4,954.5) (4,910.4) EBIT (10,100.6) (5,976.2) 8,763.5 22,984.6 Net interest inc./(exp.) 249.3 164.6 258.2 444.4 Income/(loss) from associates (48.3) (48.3) (48.3) (48.3) Pre-tax profit(8,515.3) (5,839.8) 9,073.4 23,630.8 Provision for taxes (1.9) 0.0 0.0 (990.2) Minority interest -------- Preferred dividends -- -- -- -- Net inc.
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