 Global Research 24 October 2018

Initiation of Coverage

Meituan Dianping Equities

Secular growth in food delivery trumps competitive China concerns; initiate with Buy and HK$75 price target Internet Services

12-month rating Buy

Prior: Not Rated Investors are overly concerned by competition 12m price target HK$75.00 Prior: - Meituan Dianping is trading about 20% below its IPO price likely due to recent market weakness and investor concerns about heavier investments by Ele.me. However, UBS Price HK$55.05 Evidence Lab's survey suggests Meituan can increase market share this year despite RIC: 3690.HK BBG: 3690 HK competition, and our analysis of Meituan's unit economics indicates food delivery will turn profitable in 2019. In addition, recent news flow suggests the risk of higher rider Trading data and key metrics costs has decreased, and potential individual tax cuts in China should benefit food 52-wk range HK$72.65-0.35 delivery demand. We believe the stock's risk/reward is attractive, as it is trading at the Market cap. HK$302bn/US$38.6bn high end of large-cap internet stocks on 2020E PE despite offering much higher Shares o/s 5,491m (ORD) revenue and earnings growth over the next two years. Free float 100% Avg. daily volume ('000) 24,468 Meituan is maintaining food delivery share despite Ele.me's investments Avg. daily value (m) HK$1,643.9 UBS Evidence Lab's survey of food delivery users reveals Meituan's market share is Common s/h equity (12/18E) (Rmb43.9bn) about 60% in China, up slightly YoY (Figure 24). Our analysis indicates Meituan only P/BV (12/18E) NM needs a slight increase in order size and monetisation rate, and a decrease in rider cost Net debt / EBITDA (12/18E) 7.2x per order (where Meituan fulfils) – all smaller improvements in 2018-19 vs. prior years – in order for food delivery to turn profitable by 2019 (Figure 20). We believe Meituan EPS (UBS, diluted) (Rmb) From To % ch Cons. can reach 50m orders/day by 2022 with 150m food delivery monthly active users vs. 12/18E - (2.92) - (2.04) 120m today, and with each user ordering 10 times/month vs. 5 time today. 12/19E - 0.60 - (0.36) 12/20E - 2.31 - 1.42 New initiative investments are gaining traction and losses should narrow We see new initiative losses in 2018-20 ranging from Rmb9-12bn. We see losses Jerry Liu narrowing after 2019 as some initiatives gain traction. We are most positive on (1) Analyst cloud-based ERP and CRM, where 10% of merchants have adopted; (2) non-food [email protected] delivery, which accounts for nearly 10% of transactions and Meituan is partnering with +852-2971 7493 China's largest convenience store chains; and (3) Mobike, where UBS Evidence Lab Christine Peng, CFA analysis suggests healthy usage vs. Ofo and ride hailing services in recent months. Analyst [email protected] Valuation: initiate with Buy rating and price target of HK$75 +852-2971 7571 Our DCF-based price target (WACC 10.8%, terminal growth 2.5%) implies 3.9x price Angela Xu, CFA to 2019E revenues, which is below other large-cap Internet peers such as Alibaba and Analyst Tencent. It also implies 29x 2020E PE, which is ahead of peers, but its PEG is still a lot [email protected] +852-3712 4671 lower than peers given much higher revenue and earnings growth rates.

Highlights (Rmbm) 12/15 12/16 12/17 12/18E 12/19E 12/20E 12/21E 12/22E Revenues 4,019 12,988 33,928 65,266 102,682 146,121 187,560 224,758 EBIT (UBS) (8,474) (6,255) (3,826) (8,722) 823 13,245 24,370 29,991 Net earnings (UBS) (5,914) (5,348) (2,781) (7,787) 3,743 14,585 24,627 30,136 EPS (UBS, diluted) (Rmb) (5.56) (3.68) (1.82) (2.92) 0.60 2.31 3.82 4.58 DPS (Rmb) 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 Net (debt) / cash 16,804 9,377 19,409 43,634 34,474 49,332 73,601 101,366

Profitability/valuation 12/15 12/16 12/17 12/18E 12/19E 12/20E 12/21E 12/22E EBIT margin % -210.8 -48.2 -11.3 -13.4 0.8 9.1 13.0 13.3 ROIC (EBIT) % - 17.4 7.7 11.6 (1.0) (17.2) (31.4) (39.2) EV/EBITDA (core) x - - - -38.7 63.0 13.6 7.3 5.3 P/E (UBS, diluted) x - - - (16.7) 80.7 21.1 12.8 10.6 Equity FCF (UBS) yield % - - - (6.1) (2.2) 5.8 9.3 10.5 Net dividend yield % - - - 0.0 0.0 0.0 0.0 0.0 Source: Company accounts, Thomson Reuters, UBS estimates. Metrics marked as (UBS) have had analyst adjustments applied. Valuations: based on an average share price that year, (E): based on a share price of HK$55.05 on 23 Oct 2018 18:38 HKT

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This report has been prepared by UBS Securities Asia Limited. ANALYST CERTIFICATION AND REQUIRED DISCLOSURES BEGIN ON PAGE 43. UBS 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.

Meituan Dianping Buy (Price target HK$75.00)

UBS Research THESIS MAP a guide to our thinking and what's where in this report OUR THESIS IN PICTURES

PIVOTAL QUESTIONS Q: Can Meituan Dianping deliver 50m online food orders a day by 2022? Yes. We are positive on food delivery growth, driven by a secular shift away from cooking at home and as orders move online. China's 750m+ mobile internet user base generates a TAM of over 2bn meals per day, and Meituan currently covers less than 1%. We assume Meituan expands food delivery MAU of 120m to 150m by 2022, and their order frequency grows from 5 per user per month to 10. more Q: Can Meituan Dianping's food delivery turn profitable in 2019? Yes. We model Rmb7.0bn GAAP operating profit for food delivery business in 2019 based on slightly higher monetisation rate, lower per order delivery fee and fixed costs, and flat platform subsidies per order. Tougher competition from Ele.me and social security expenses could potentially delay profitability. Ultimately, we think both Meituan and Ele.me can turn profitable with increasing scale. more Q: Can Meituan Dianping turn profitable in 2019? Likely. We see food delivery turning profitable in 2019. Meituan's in-store, hotel & travel businesses should see strong growth and high margins. We see margins expanding as it is a classic marketplace model, and we think competition with Ctrip in low-end hotels is rational. Profits in these businesses should offset new initiatives investments. We estimate a non-GAAP net profit of Rmb3.7bn in 2019. more

UBS VIEW Meituan Dianping is the largest food delivery platform in China, and should achieve profitability in 2019. It is enjoying strong secular growth in food delivery, which should offset any slight share losses to Alibaba's Ele.me. Meituan Dianping's 'super apps' drive traffic to mid- and low-frequency services, which can generate high margins. We see several interesting long term opportunities in new initiatives, and expect the company to narrow its investment losses after 2019.

EVIDENCE Meituan Dianping has gained food delivery market share in the last few years despite tough competition, and UBS Evidence Lab's survey indicate it will maintain share in 2018 in spite of investments by Alibaba into Ele.me. In store merchants returned to growth in early 2018 after declining in 2017 post the Meituan and Dianping merger. UBS Evidence Lab's analysis of Mobike suggests sustained usage despite lower subsidies in recent months.

WHAT'S PRICED IN? We think investors are concerned about competitive risk from Ele.me in food delivery, which is backed by Alibaba's significant resources, and by Meituan Dianping's heavy investments in new initiatives, including incremental losses brought on by the Mobike acquisition earlier this year. more

UPSIDE / DOWNSIDE SPECTRUM

Value drivers Food delivery Food delivery Total revenue Food delivery Adjusted net (2020e) volume growth revenue growth growth OP margin margin $100 upside 43.0% 51.0% 56.0% 18.2% 14.0% $75 base 35.0% 41.5% 42.3% 14.9% 10.0% $45 downside 26.0% 30.4% 29.2% 9.8% 5.2% Source: UBS more COMPANY DESCRIPTION Meituan Dianping is a food-centric 'super app' (multi-service platform) that offers two core services: 1) local search: users can find restaurants and other services through... more 

Jerry Liu, Analyst, [email protected], +852-2971 7493

Initiation of Coverage: Meituan Dianping 24 October 2018  2

Meituan Dianping UBS Research

OUR THESIS IN PICTURES return 

Food consumption via service ecommerce in China 5,000 (GTV, Rmb bn)

4,000

3,000 2,464 2,247 Within the online portion, food delivery will account 2,046 for 30% of the market and is growing 30% CAGR from 2,000 1,815 2018 to 2020 1,446 1,000 1,089 745 1,339 1,542 504 872 1,117 441 479 662 0 96 216 126 305 2013 2014 2015 2016 2017E 2018E 2019E 2020E 2021E 2022E 2023E On-demand food delivery In-store dinning Online non-restaurant food retail

Online food platforms most often used, by city tier (2018) 0% 20% 40% 60% 80%

Meituan Waimai Ele.me Meituan Dianping Meituan Dianping is the market leader in food delivery KFC and has gained share in recent years despite intense Baidu Waimai competition RT-Mart Koubei Dianwo ba Hema

Meituan Dianping total revenue by segment (Rmb m) 160,000 250% 140,000 200% 120,000 100,000 150% 80,000 Food delivery could drive a 63% revenue CAGR for 60,000 100% Meituan Dianping over 2017-20E 40,000 50% 20,000 0 0% 2016 2017 2018E 2019E 2020E Food delivery In-store, hotel & travel New initiatives and others Total revenue YoY Meituan Dianping adjusted operating profit by segment (Rmb m) 25,000 20% 20,000 10% 15,000 0% 10,000 -10% 5,000 -20% Profitability in food delivery and in store, hotel & 0 -30% travel offset losses in new initiatives in 2019 (5,000) -40% (10,000) -50% (15,000) -60% 2016 2017 2018E 2019E 2020E Food delivery In-store, hotel & travel New initiatives and others Other gains Operating margin Sources for exhibits above: Company data, UBS Research

Initiation of Coverage: Meituan Dianping 24 October 2018  3

Meituan Dianping UBS Research

PIVOTAL QUESTIONS return 

Q: Can Meituan Dianping deliver 50m online food orders a day by 2022?

UBS VIEW Yes. We see 52m orders a day in four years up from 18m orders in 2018, growing 31% CAGR over this time. Food delivery in China is a large market with very low online penetration. We are positive on food delivery growth, driven by a secular shift away from cooking at home and as orders move online. At a high level, China's 750m+ mobile internet user base generates an addressable market (TAM) of over 2bn meals per day, and Meituan currently covers less than 1% of this market. More precisely, we conservatively assume the company slightly expands its food delivery monthly active user base of about 120m to 150m over the next four years, and their order frequency increases from 5 per user per month to 10 due to increasing user engagement and use cases (from lunch/dinner to breakfast, from weekdays to weekends, from offices/campuses to hotels and homes).

EVIDENCE According to iResearch, China's food consumption market is worth nearly Rmb10trn in 2018 with a 17.5% online penetration rate. Within that, the on- demand food delivery market is forecast to grow 29% CAGR from Rmb479bn in 2018 to Rmb1.3trn in 2022.

UBS Evidence Lab's survey of tier 1 to 4 city consumers indicates food delivery accounts for nearly 20% of meals. The survey suggests food delivery order frequency increased from 2.5x per week in 2016 to 2.8x in 2018, but average order size decreased from Rmb46.7 in 2016 to Rmb35.4 in 2018.

WHAT'S PRICED IN? We think investors question the growth potential of food delivery – both number of users and usage frequency – as cooking at home likely remains the preferred choice for most outside of top-tier city white collar workers.

Food delivery is Meituan Dianping's main growth driver Food delivery will account for 60% of Meituan Dianping's revenues by 2022 and 74% of its operating profits. We see strong growth mainly due to growth in number of transactions, which is further driven by increase in usage frequency. Below we list the key assumptions before going over the market in more detail.

Number of total transactions: We forecast daily transactions to increase from 18m in 2018 to 52m by 2022, or 31% CAGR, driven by monthly transacting users increasing from about 120m in 2018 to 150m by 2022, or 6% CAGR, and the rest by increasing frequency per user.

Average transaction value: Meituan Dianping's average transaction value was Rmb42 in 2017. We expect it to remain largely stable, with a slight increase to Rmb45-46 over 2018-20E. Inflation and more higher-end orders especially from existing users should mix order size up, but that is offset by newer users and

Initiation of Coverage: Meituan Dianping 24 October 2018  4

smaller order sizes for certain incremental usage scenarios such as breakfast. If restaurants increase their subsidies, then order size could decrease further.

Monetisation rate: Meituan Dianping's monetisation rate improved significantly from 1.1% in 2015 to 12.3% in 2017. We believe there is room to further improve monetisation rate especially for orders fulfilled by Meituan Dianping, which we forecast will reach 15% by 2020, as these orders generate high incremental margins for restaurants.

Figure 1: Food delivery – number of total transactions and Figure 2: Food delivery – gross transaction value (GTV) average transaction value and monetisation rate

14,000 50 700 16%

45 12,000 600 14% 40 12% 10,000 35 500 30 10% 8,000 400 25 8% 6,000 20 300 6% 15 4,000 200 10 4% 2,000 5 100 2% 0 0 0 0% 2016 2017 2018E 2019E 2020E 2016 2017 2018E 2019E 2020E Number of total transactions (m)-LHS Gross transaction volume (Rmb bn) Monetisation rate % Average transaction value (Rmb)-RHS Source: Company data, UBS estimates Source: Company data, UBS estimates

Sizing the food delivery addressable market Online penetration of China's consumer service merchants could reach 74% by 2022, from less than 50% in 2017. There were 11.8m consumer service storefronts in China in 2017. iResearch forecasts a 2.3% 2017-23 CAGR to 13.5m by 2023, slightly down from a 2013-17 CAGR of 3.2%. We believe the adoption of service ecommerce could help merchants reach more customers and improve operating efficiency.

Figure 3: Number of consumer service merchant storefronts and online penetration in China

16 90%

14 80%

70% 12 60% 10 50% 8 40% 6 30% 4 20%

2 10%

0 0% 2013 2014 2015 2016 2017 2018F 2019F 2020F 2021F 2022F 2023F

Service Merchant Storefronts (m) Online Storefront Penetration (%) Source: iResearch

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Gross transaction value (GTV) of consumer service ecommerce industry will increase from Rmb2,7trn in 2017 to Rmb8.0trn by 2023, a CAGR of 19.8%, according to iResearch. China’s consumer service industry GTV achieved a 13.7% CAGR over the past five years. Amid growing consumer demand and merchants' increasing online penetration, more consumers are likely to shift to ecommerce platforms across multiple service categories.

Figure 4: Consumer service market (GTV, Rmb bn) Figure 5: Consumer service ecommerce market (GTV, Rmb bn)

35,000 30% 8,011 30,000 25% 7,207 25,000 6,405 20% 20,000 5,550 15% 15,000 4,583 10% 3,633 10,000 2,705 5,000 5% 1,876 0 0% 1,211 711 434 2013 2014 2015 2016 2017 2018F 2019F 2020F 2021F 2022F 2023F Consumer service market size (Rmb bn) 2013 2014 2015 2016 2017 2018F 2019F 2020F 2021F 2022F 2023F Online penetration of consumer services Note: Consumer services include restaurant delivery and dining, food retail, local Source: iResearch transportation, flight ticket purchases, hotel booking, train ticket purchases, vacations, beauty services, karaoke clubs, wedding services, parent & child services, laundry services, housekeeping services, car after-sales services, house renovations, movie ticket purchases, and other live entertainment services. Source: iResearch

Food consumption is the largest category in the consumer service ecommerce market. Food consumption generated GTV of Rmb1,166bn in 2017, compared to Rmb971bn GTV for travel-related services, which used to be the largest category before 2017. Within food consumption, iResearch forecasts a 31.0% CAGR for the on-demand food delivery segment during 2017-23.

Figure 6: Consumer service ecommerce market breakdown (GTV, Rmb bn)

100% 28 53 93 138 181 226 279 343 418 505 600 5 90% 20 50 113 205 258 316 378 450 525 604 80%

70% 1,232 1,482 1,691 1,867 2,041 2,213 517 746 971 248 348 60% 306 352 388 419 50% 223 263 182 143 40% 111 73 30% 57 2,243 2,832 3,317 3,749 4,176 1,166 1,694 20% 441 736 216 10% 96 0% 2013 2014 2015 2016 2017 2018F 2019F 2020F 2021F 2022F 2023F Food consumption Hotel booking Travel-related services Local transportation Other services

Source: iResearch

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Food delivery is the second largest category within the food consumption market

Food consumption is a large market with low online penetration. According to iResearch, China's food consumption market is worth nearly Rmb10trn in 2018, with 17.5% online penetration; within this market, Rmb5.3trn is from restaurant consumption and Rmb4.4trn is from non-restaurants. iResearch expects the whole market to deliver an 8.3% CAGR over 2017-23, slightly above UBS’s GDP forecast for the period. Chinese consumers have been spending more on food and dining services, as income and living standards improve. Online spending is likely to increase even faster, as online penetration of China's food consumption market reaches 29.5% by 2023, up from 13.4% in 2017, based on iResearch data.

Figure 7: Food consumption market and online penetration (GTV, Rmb bn)

16,000 35%

14,000 30% 12,000 25% 10,000 20% 8,000 15% 6,000 10% 4,000

2,000 5%

0 0% 2013 2014 2015 2016 2017 2018F 2019F 2020F 2021F 2022F 2023F

Restaurant consumption (Rmb bn) Non-restaurant consumption (Rmb bn) Online penetration rate (%) Source: iResearch

China's on-demand food delivery market could see a 31% CAGR over 2017- 23, driven by consumer desire for convenience and increasing ability to afford it. iResearch estimates the on-demand food delivery segment at Rmb479bn and forecasts it to grow to Rmb1,542bn by 2023, as online penetration increases and users shift away from cooking at home.

Figure 8: Food consumption via service ecommerce in China (GTV, Rmb bn)

2,464 2,247 2,046 1,815 170 1,446 162 1,089 154 145 745 135 1,339 1,542 504 126 1,117 116 662 872 345 106 479 70 156 96 305 2013 2014 2015 2016 2017 2018F 2019F 2020F 2021F 2022F 2023F On-demand food delivery In-store dining Online non-restaurant food retail Source: iResearch

Initiation of Coverage: Meituan Dianping 24 October 2018  7

The number of single-person households in China reached 80m in 2017, or 17.2% of the total number of households, according to Euromonitor. And this is forecast to increase further to 98m or 19.4% of all households by 2023. The expected increase in the proportion of single-person households should help boost the demand for food delivery, in our view. Smaller households have less economies of scale when it comes to cooking at home, and the person in such households are less likely to have time to cook. The increase in single-person households alone can drive the majority of the food delivery monthly active user growth we forecast for Meituan Dianping from 2018 to 2022.

Figure 9: Number of households in China (m)

600 25%

500

400 20%

300

200 15%

100

0 10% 2013 2014 2015 2016 2017 2018F 2019F 2020F 2021F 2022F 2023F Total number of household Number of single person household Single person household % (rhs) Source: Euromonitor

Food delivery is the most popular alternative to cooking at home Food delivery accounts for nearly 20% of meals among UBS Evidence Lab survey respondents. While cooking at home remains the preferred choice among survey respondents, we note the popularity of food delivery, especially among young people. Respondents aged 18-34 said that food delivery accounted for almost 20% of their total meals, indicating much room for online food delivery platforms to increase coverage given the current low penetration.

Figure 10: Dining choices in the past 12 months Figure 11: Dining choices in the next 12 months

0% 10% 20% 30% 40% 50% 60% 0% 10% 20% 30% 40% 50% 60% Cooked the meal from scratch at Cooked the meal from scratch at home home

Ate leftover food Ate leftover food

Cooked meal kits or heated ready- Cooked meal kits or heated ready- to-eat meals to-eat meals

Ordered food delivery Ordered food delivery

Picked up cooked food Picked up cooked food

Other Other

Total 18-24 25-34 35-54 Total 18-24 25-34 35-54 Source: UBS Evidence Lab Source: UBS Evidence Lab

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Alternatives to food delivery are growing much slower. Ready-to-eat meal sales were 0.2% of China's food service market, or less than 0.1% of China's entire food market in 2017, and saw a -3% sales CAGR over 2013-17, according to Euromonitor. From 2017-22, Euromontor expects 2% sales CAGR for ready-to- eat meals, significantly below iResearch’s 2017-23 forecasts of a 31% sales CAGR for the food delivery market. Quick service restaurant (QSR) sales were 20.1% of China's food service market in 2017 and delivered a 5% CAGR in 2013-17, according to Euromonitor, which expects a 4% CAGR over 2017-22 for QSRs.

Figure 12: Sales growth by store type in China

25% Home delivery/takeaway only 20% Cafés/bars 15% Full-service restaurants 10% Fast food/QSRs

5% Self-service cafeterias

0% Street stalls/kiosks 2014 2015 2016 2017

-5% 2018F 2019F 2020F 2021F 2022F Ready-to-eat meals

-10% Note: When a store offers both eat-in and home delivery/takeaway services, it is categorised under a particular store type (e.g., full-service restaurant) instead of "home delivery/takeaway only". Source: Euromonitor

Figure 13: Proportions of China’s total foodservice market, by store type

100% Ready-to-eat meals 90% 80% Street stalls/kiosks 70% Self-service cafeterias 60%

50% Fast food/QSRs 40% Full-service restaurants 30% 20% Cafés/bars 10% 0% Home delivery/takeaway only 2013 2014 2015 2016 2017 2018F 2019F 2020F 2021F 2022F Note: Ready-to-eat meals are not part of the foodservice market. When a store offers both eat-in and home delivery/takeaway services, it is categorised under a particular store type (eg, full-service restaurant) instead of "home delivery/takeaway only". Source: Euromonitor

Higher order frequency vs. lower order size UBS Evidence Lab data suggest growing order frequency from 2016 to 2018, particular in tier-3 cities. Among survey respondents, average orders per week for online food delivery grew to 2.8 per week in 2018, up from 2.6 in 2017 and 2.5 in 2016. Order frequency in tier-3 cities increased the most, reaching 3.3

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orders per week in 2018 compared to 2.5 orders in 2017 and 2.6 orders in 2016. We expect demand for online food delivery to continue to grow, and we are particularly positive on the potential in tier-3 cities, given the strong demand and relatively low penetration of online food delivery services. This is also more positive for Meituan Dianping vs. competitors given their higher penetration in lower tier cities.

Figure 14: Overall average orders per week by city tier (2016-18)

3.3 3.0 3.0 2.8 2.7 2.6 2.6 2.6 2.6 2.5 2.4 2.5 2.5 2.5 2.3

Total T1 T2 T3 T4 2016 2017 2018 Source: UBS Evidence Lab

However, the increase in frequency was offset by a decrease in order size in our survey. On average, order size decreased from Rmb46.7 in 2016 and Rmb 46.9 in 2017 to Rmb35.4 in 2018. We think the decrease was due to the smaller order size of some incremental orders, such as breakfast or afternoon/late night snacks. In addition, restaurant subsidies, which increased YoY in 2018, likely lowered the average order size in the eyes of the user. However, we are optimistic about the increase in frequency of orders, which should offset some of the potential order size decrease.

Figure 15: Average spend on online Figure 16: Average spend on online Figure 17: Average spend on online meal orders, by city tier (2016) meal orders, by city tier (2017) meal orders, by city tier (2018)

1% 10% 6% 5% 7% 2% 3% 2% 5% 8% 11% 10% 13% 9% 6% 7% 12% 9% 20% 15% 16% 22% 17% 23% 23% 21% 21% 22% 31% 22% 56% 53% 51% 49% 51% 51% 45% 43% 43% 50% 47% 55% 51% 48% 45%

22% 19% 22% 26% 19% 15% 19% 20% 15% 12% 17% 16% 17% 12% 14% Total T1 T2 T3 T4 Total T1 T2 T3 T4 Total T1 T2 T3 T4

Rmb100 or more per meal Rmb100 or more per meal Rmb100 or more per meal Rmb80-Rmb99 per meal Rmb80-Rmb99 per meal Rmb80-Rmb99 per meal Rmb50-Rmb79 per meal Rmb50-Rmb79 per meal Rmb50-Rmb79 per meal Rmb20-Rmb49 per meal Rmb20-Rmb49 per meal Rmb20-Rmb49 per meal Less than Rmb20 per meal Less than Rmb20 per meal Less than Rmb20 per meal Source: UBS Evidence Lab Source: UBS Evidence Lab Source: UBS Evidence Lab

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Figure 18: Overall average order size, by city tier (Rmb, 2016-18)

51.2 49.7 48.6 46.7 46.9 47.6 44.7 44.4 45.4 44.2 40.0 38.6 35.4 33.5 30.1

Total T1 T2 T3 T4 2016 2017 2018 Source: UBS Evidence Lab

Food delivery costs are similar to cooking at home

Online food delivery appears to be an economical alternative to home cooking in China. To consumers, the economic costs associated with online food delivery versus home cooking could be an important consideration when choosing between the two options. Our analysis suggests it is on average 3% (or Rmb1.7) cheaper in China to order food online and have it delivered to your doorstep than preparing a meal at home. We believe this is a key reason why food delivery penetration in China could be much higher than developed countries, where food deliveries tend to be less economical compared to cooking at home.

Key assumptions for this analysis:

(1) an average ticket value of Rmb47 per online food delivery order, and Rmb7 delivery fee; (2) ingredient cost of Rmb13.5 for a meal, which is 30% of the Rmb45 ticket value, and consistent with KFC and Pizza Hut operator Yum China's food costs as a proportion of revenue; (3) one hour of wage forgone, equivalent to Rmb28.4, in order to prepare a meal, based on an average annual wage of Rmb60,000 in urban regions in China, based on Wind data, and 22 working days per month, eight working hours per day; (4) opportunity cost of Rmb12.8 associated with using the kitchen, based on the average monthly rental cost of Rmb40/square metre, according to Analysys, and a kitchen size of 8 square metres, and 25 home-cooked meals per month; (5) utility cost of Rmb1 for preparing a meal.

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Figure 19: Cost analysis of online food delivery vs. cooking at home, China

Rmb 60

7.0 12.8 40

28.4 47.0 20

13.5 0 Online delivery Cooking at home Utility Opportunity cost of using kitchen Wage forgone from time spent on cooking (1 hour) Ingredients Delivery fee Order value Source: Analysys, Wind, company data, UBS estimates

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Meituan Dianping UBS Research

PIVOTAL QUESTIONS return 

Q: Can Meituan Dianping's food delivery turn profitable in 2019?

UBS VIEW Yes. We model Rmb7.0bn of GAAP operating profit for the food delivery business in 2019 based on slightly higher monetisation rate (similar average order size), lower per order delivery fee (higher order density), lower fixed costs, and unchanged platform subsidies per order (separate from restaurant subsidies). Tougher competition from Ele.me and social security expenses are potential risks that could delay profitability. Ultimately, we think both Meituan Dianping and Ele.me can turn profitable with increasing scale. While it is a winner takes most dynamic within each city, on a national level we think market share splits could sustain somewhere around 60%/40%, where it is today, to 50%/50%, what Ele.me is targeting. Ele.me could leverage Alibaba's ecosystem (Hema, Taobao, 88VIP), and Meituan Dianping could leverage Dianping (stronger than Koubei) and its higher share in lower tier cities.

EVIDENCE Meituan Dianping has the largest on-demand delivery network in the world in terms of number of deliveries in 2017, and its food delivery market share reached 59% in 1Q18, according to iResearch. Food delivery operating margins have improved in the last three years as it gained scale.

Meituan Dianping's food delivery business drives traffic to its other services, lowering its customer acquisition costs and improving profitability overall. Around 52% of Meituan Dianping's users for other lifestyle services in 2017 used its food delivery or in-store dining services.

Ele.me has been subsidizing more per order, including a Rmb3bn summer promotion campaign this year, but Meituan Dianping still gained share as the market consolidated in the last few years. The UBS Evidence Lab survey suggests Meituan Dianping will retain its leadership position going forward.

WHAT'S PRICED IN? We believe investors are concerned that fierce competition from Ele.me, which is supported by Alibaba's ecosystem, will hurt Meituan Dianping's food delivery profitability.

Our unit economics analysis suggests food delivery should turn profitable in 2019 Food delivery profitability is predicated on three key drivers: revenues, rider cost, and other costs and expenses. All these drivers benefit from scale, and Meituan Dianping has the largest on-demand delivery network worldwide in terms of number of deliveries in 2017, according to iResearch, with approximately 531,000 daily average active delivery riders in Q417. This gives us conviction that this business can turn profitable in 2019 despite competition. Below we list our key assumptions before going over the competitive dynamics in more detail.

Revenues: This breaks down to order size and monetisation rate. As we explained in the prior section, we expect a small increase in monetisation rate but little change in order value beyond 2018. Both increased significantly in prior years

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despite tough competition. Meituan Dianping fulfilled a total of 2.9bn orders in 2017, accounting for more than 70% of the total deliveries on its platforms, according to the company. For orders it fulfils, we expect Meituan Dianping to gradually improve its monetisation rate to 20% by 2021. With a slight improvement to order size to high-Rmb40s, this implies close to Rmb10 revenues per order. The other orders were delivered by merchants directly. Meituan Dianping has a mid-single digit monetisation rate on these orders, which lowers the average rate for the company.

Rider cost: We estimate Meituan Dianping's rider cost will fall slightly, from high- Rmb7 in 2017 to low-Rmb7 by 2019, aided by higher order density. We estimate full time riders deliver mid-20 orders per day. So our assumption implies just a few more orders per day. We conservatively expect rider cost per order to remain stable going forward beyond 2019 though this could improve with even higher order density from food deliveries and increasingly non-food deliveries. We also estimate Meituan Dianping's rider cost per order is at least Rmb1 lower than its major competitors due to scale.

Other costs and expenses: This embeds about Rmb1 of platform subsidies. We expect this to remain stable, which already implies a big increase in the subsidy pool going forward as the number of orders grows. Beyond subsidies, we expect other fixed expenses to see leverage, falling from nearly Rmb1 per order in 2018.

Figure 20: Unit analysis of Meituan Dianping's food delivery service (Rmb)

12

8

4

0

(4)

(8)

(12) Revenue Rider cost Other costs and Operating profit expenses 2016 2018E 2020E Source: UBS estimates

Meituan Dianping is the market leader in food delivery

Meituan Dianping surpassed Ele.me in terms of market share in 2016. Meituan Dianping has expanded its lead over time, reaching 59% market share in terms of food delivery gross transaction value as of 1Q18. Baidu merged its food delivery business (Baidu Takeout Delivery) with Ele.me in August 2017. The merger should be positive for the overall online food delivery market landscape, which saw intense competition and heavy subsidies in the earlier years. Meituan Dianping was also able to take advantage and continued to gain share during this consolidation period.

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Figure 21: China online on-demand delivery market share (based on GTV)

59.1% 56.0%

46.7%

36.8% 35.4% 36.0% 36.0% 31.7%

16.5% 15.0% 9.9% 8.0% 4.9% 3.0% 3.8% 1.1%

2015 2016 2017 Q118 Meituan Dianping Company 1 Company 2 Others

Source: iResearch

UBS Evidence Lab survey indicates the popularity of Meituan Dianping's food delivery service continues to increase. The market data above is corroborated by our consumer survey. Nearly 60% of respondents said Meituan Dianping is the food delivery platform they use most often in our 2018 survey, increasing from 45% in 2016 and 47% in 2017. Meituan Dianping remains more popular in tier 4 cities, and its tier 1 popularity saw a notable uptick in 2018. Ele.me also saw a slight uptick from mid-20% in prior years to 31% in 2018, suggesting the market is consolidating. Baidu Waimai lost share, and we did not see the quick service restaurant (QSR) platforms gain any share.

Figure 22: Online food platforms Figure 23: Online food platforms Figure 24: Online food platforms most often used, by city tier (2016) most often used, by city tier (2017) most often used, by city tier (2018)

0% 20% 40% 60% 80% 0% 20% 40% 60% 80% 0% 20% 40% 60% 80%

Meituan Waimai Meituan Waimai Meituan Waimai Ele.me Ele.me Ele.me Meituan Dianping KFC KFC Baidu Waimai Baidu Waimai Baidu Waimai RT-Mart Koubei Koubei Koubei Dianwo ba Dianwo ba Dianwo ba Hema T1 T2 T3 T4 T1 T2 T3 T4 T1 T2 T3 T4

Source: UBS Evidence Lab Source: UBS Evidence Lab Source: UBS Evidence Lab

We think market splits of 60%/40% to 50%/50% between the leading companies are sustainable. Online food delivery is a location-based service, where regional economies of scale matter. Given the limited delivery distance, market share in one neighbourhood may not translate to another adjacent one. We think the market leader in a city should still have 70% or even 80% share, but at a national level, market share could sustain a more even split. Historically, Meituan Dianping, which is headquartered in Beijing, has focused more on Northern China, while Ele.me started operations in Shanghai and maintained its leading position in Shanghai and Hangzhou. Long term, we can see both platforms

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split top tier cities while Meituan Dianping maintains its lead in lower tier cities as it has economies of scale in more lower tier cities today.

Stickiness has become the major reason for users to increase their use of Meituan Dianping's food delivery service, according to UBS Evidence Lab's survey. Over the past year, user engagement and loyalty have become increasingly important for Meituan Dianping to retain customers, with 54% of survey respondents saying they use Meituan Dianping's food delivery more frequently now based on habit vs. 44% in 2017. The change suggests it will get increasingly harder for another platform to take Meituan Dianping's users based on aggressive subsidies that are not sustainable.

Figure 25: Reasons for using Meituan Dianping food delivery more frequently (2017 vs. 2018)

0% 10% 20% 30% 40% 50% 60%

A habit to use this platform

More restaurants to choose from

Faster food delivery

Easier to use

More variety of food type to choose from

Higher subsidies and lower price

More credible reviews

More mobile payment options available

Better customer service

2017 2018

Source: UBS Evidence Lab

There is less overlap among online food delivery platforms than most investors realize. A large majority of survey respondents said they only browse one platform for food delivery (27%) or occasionally others (59%), while only 13% of respondents browse several platforms. The low overlap among food delivery platforms reinforces the importance of improving user engagement, and corroborates the idea that users for habits and stick to the platform they know well.

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Figure 26: Number of food delivery platforms used (2018)

13%

Browse others occasionally

Browse only one 27% 59% Browse several

Source: UBS Evidence Lab

Why do consumers choose Meituan Dianping?

Attractive pricing and subsidies, and wide restaurant coverage are the leading consumer perceptions of Meituan Dianping and Ele.me. Meituan Dianping also scores slightly better than Ele.me on variety of food types. Interestingly, the two leaders have poorer perceived customer service compared to the smaller platforms, retailers, and quick service restaurants (QSRs).

Figure 27: Perception of line food delivery platforms

Meituan Baidu EXPECTED VALUE ANALYSIS Ele.me Koubei Dianwo ba KFC Hema RT-Mart Waimai Waimai Attractive in terms of pricing and subsidies 7% 3% -6% 3% 6% -2% -5% -6% Wide restaurants coverage 8% 9% 1% 0% -4% -9% -12% 3% Wide variety of food type 0% 3% 2% 0% 0% -14% 5% 1% Fast food delivery 1% 0% -5% -2% -1% 7% 2% -1% Good customer service -16% -12% -2% -6% 13% 11% 10% 4% Many mobile payment options available -3% -5% 3% 3% 0% -1% 4% 0% Easy to use 7% 3% 6% 2% -13% 3% -10% 5% Credible reviews -5% -2% 1% 0% 0% 6% 5% -7%

Source: UBS Evidence Lab

UBS Evidence Lab survey actually suggests lower subsidies

The portion of food delivery orders that are subsidised has largely stabilised in China, according to a UBS Evidence Lab survey. In 2018, 34.0% of total orders were subsidised based on the perception of respondents, similar to 33.6% in 2017, but both are higher than 30.8% in 2016. We note a slight decline in subsidy penetration in tier 1 and 2 cities. However, subsidy penetration in tier 3 and 4 cities slightly increased over the past year, suggesting that competition in food delivery may be shifting towards lower-tier cities.

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Figure 28: Average proportion of subsidised meals, by city tier (2016-18)

36.3% 33.6% 34.0% 35.0% 34.5% 34.1% 34.3% 32.5% 32.7% 32.3% 30.8% 31.7% 31.8% 29.8% 29.5%

Total T1 T2 T3 T4 2016 2017 2018 Source: UBS Evidence Lab

We also note a decrease in the subsidy amount across all city tiers. Respondents estimate subsidies accounted for 11.9% of their order size in 2018, down from 13.4% in 2017 and 13.1% in 2016. During the early years of the food delivery market, operators heavily subsidised orders to acquire users and gain market share, leading to intense competition. Market consolidation, organically and inorganically (Ele.me and Baidu Takeout Delivery merged in August 2017), has slowly driven down subsidies and improved margins.

Figure 29: Average amount of subsidies received, by city tier (2016-18)

14.3% 13.7% 13.6% 13.1%13.4% 13.5% 13.1% 12.5% 12.7%12.7% 12.3% 11.9% 11.7% 11.8% 11.5%

Total T1 T2 T3 T4 2016 2017 2018 Source: UBS Evidence Lab

Subsidies from merchants may be increasing for online food delivery. Over the past one to two years, restaurants have become aware of the importance of online food delivery platforms as a main way to supplement their offline businesses, and have shifted to support and collaborate with food delivery platforms. Some merchants have spent heavily on subsidies to attract users, while a number of top restaurant chains have started delivery services. Restaurants in aggregate already have a larger subsidy pool than the platforms, as they compete for users. We see room for subsidies to increase further, based on how merchants

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historically acted on Taobao, as they are willing to invest as long as incremental margins are high.

Food delivery unlocks incremental restaurant demand. As long as food delivery creates some incremental demand for restaurants by cannibalising cooking at home and do not purely shift demand from offline to online, then restaurants are willing to invest to gain these orders. Restaurants can generate high incremental margins as they do not need more wait staff and incur higher rent. They may need to increase kitchen staff as utilization increases.

Key risk 1: competition with Ele.me intensifies Ele.me might increase subsidies to compete with Meituan Dianping. In late- July 2018, Ele.me CEO Wang Lei announced a plan to launch an Rmb3bn summer promotion campaign, according to Sohu Tech. While Ele.me lacks scale, parent company Alibaba has significant resources to invest if Ele.me is serious about increasing its market share from 40% to 50% over three years as it has stated.

Alibaba could generate synergies with several of its key assets:

Hema Supermarkets: Meituan Dianping is opening more Ella Supermarkets but its scale is much smaller than Hema. Alibaba can cross promote food and groceries on Ele.me and Hema. Ele.me fulfilment resources could also help Hema during non-peak hours, giving Ele.me more order density.

88VIP: Alibaba recently launched a membership programme covering a variety of services including Ele.me. We believe this could help Ele.me acquire new customers. Alibaba said at its recent Investor Day that for every 100 new 88VIP members, 32 of them also start to use Ele.me.

Koubei: Alibaba's in-store dining platform is a direct competitor of Dianping. Similar to Meituan and Dianping, the combination of Ele.me with Koubei give consumers an integrated O2O experience within Alibaba's ecosystem, and help both apps expand their user bases at relatively low cost. Alibaba may merge Ele.me, Koubei and Hema, and raise additional cash for the entity, according to The Wall Street Journal.

Potentially higher subsidies might lead food delivery profitability by one year. We estimate Meituan Dianping subsidies Rmb1 per order, as we calculated above, which implies Rmb6-7bn total subsidies in 2018. We assume the subsidies per order remains constant going forward. As orders increase 30% CAGR over the next few years, this already implies significant growth in the subsidy pool. However, if Ele.me maintains its current subsidy rate of Rmb1bn per month, then it would double Meituan Dianping's subsidies. We do not believe the latter has to match Ele.me due to its larger scale. However, if Meituan Dianping is forced to increase subsidies next year to match Ele.me then that would roughly wipe out its food delivery business operating profits, which we current estimate to be Rmb6.9bn.

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Key risk 2: Meituan Dianping has to pay social insurance for riders

While Meituan Dianping does not need to pay social insurance for its riders, we see this as a potential risk to profitability. Social insurance rates vary in China depending on the region. Employers pay roughly 30% of payroll and employees 10% of payroll. For Meituan Dianping, its riders are technically not its employees, but investors are concerned that the company might have to pay potentially due to competition for riders (for example, JD pays for its riders) or as policies change. If Meituan Dianping has to pay an additional 30% on top of its rider costs, that would amount to about Rmb2 per order. However, even if Meituan Dianping pays we do not think it will be this high as it could split the cost with temp agencies and the 30% rate is likely coming down over time. Therefore, we think in a downside case, this could delay Meituan Dianping's food delivery profitability by about one year. We estimate the company will generate about Rmb1 of operating profit per order by 2020, assuming no social insurance expense.

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Meituan Dianping UBS Research

PIVOTAL QUESTIONS return 

Q: Can Meituan Dianping turn profitable in 2019?

UBS VIEW Likely. As noted above, we see food delivery turning profitable in 2019 as monetisation rate increases, rider costs per order decreases, and subsidies per order remains unchanged. Meituan Dianping's in-store, hotel & travel businesses should see strong growth and high margins. Number of merchants has returned to growth after a period of adjustments post the Meituan and Dianping merger. We see margins expanding as it is a classic marketplace business model, and we think competition with Ctrip in low-end hotels is rational and manageable. Profits in both of these businesses should offset new initiatives investments. We estimate a non-GAAP net profit of Rmb3.7bn or GAAP net profit of Rmb1.0bn in 2019.

EVIDENCE Meituan Dianping's in store and travel merchants grew 18% YoY in the first four months of 2018, compared to -5% in 2017. Hotel room nights grew 53% YoY in the first four months of this year, close to 55% in 2017, and better than market expectation for a deceleration.

The company plans to invest an incremental Rmb10bn in new initiatives. While these initiatives will not turn profitable in the next few quarters, we are seeing good traction in several key initiatives. First, Meituan Dianping is now China's largest ERP solution provider with 10% of its merchants using its platform. Second, Meituan Dianping's non-food delivery transactions account for 10% of total transactions, and it has already signed up China's largest convenience store chains, 7-11, Lawson and Carrefour. Third, according to UBS Evidence Lab data, bike-sharing apps in China has gained traction and even temporarily surpassed usage of ride on demand (such as Didi) apps in 2017.

WHAT'S PRICED IN? Compounding the concerns around food delivery competition with Ele.me, we think investors are concerned by Meituan Dianping's significant investments into multiple new initiatives, which are absorbing most of its profits generated by its food delivery and in store, hotel & travel businesses in 2019.

We forecast Meituan Dianping to turn profitable in 2019 Profitability in food delivery and in store, hotel & travel offset losses in new initiatives in 2019. We forecast an adjusted operating loss of Rmb8.5bn for Meituan Dianping in 2018, improving to Rmb3.0bn of profits in 2019 and to Rmb16.0bn in 2020. Operating margins improve from -13.0% to 10.9% then over the three years. We summary our assumptions by business line below.

Food delivery: As we covered in the prior section, a higher monetisation rate, lower rider cost per order, and unchanged subsidies per order drive food delivery from a small loss in 2018 to a profit.

In-store, hotel & travel: We expect gradual margin improvement in Meituan Dianping's hotel reservation business over time. Low-end hotel business is already profitable today, however high-end hotels could still face margin pressure in the near term, given marketing spending at an initial expansion stage. The in-store

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business has around 20% operating margin, and we expect that to improve with scale. In-store, hotel & travel is a largely platform businesses, with high-80% gross margins and 30%+ operating margins long term.

New initiatives and others: Losses increased Rmb8bn in 2018 mainly due to the consolidation of Mobike and its associated bike depreciation expenses. Meituan Dianping also plans to invest roughly Rmb10bn to develop its new initiatives this year. We expect that to continue in the next two years. Therefore, we forecast Meituan Dianping to generate operating losses of Rmb9.8bn in 2018, deteriorating to Rmb11.9bn in 2019 before improving back to Rmb9.8bn of losses in 2020. We see investments in four main areas: merchant software-as-a-service, merchant supply chain services, consumer non-food deliveries, and Mobike. We do not expect ride-hailing to be a significant area of investment, as management has operational and regulatory concerns, and there are relatively fewer synergies between ride-hailing and Meituan Dianping's major food-related businesses. Meituan Dianping is operating pilot ride-hailing services in Shanghai and Nanjing.

Figure 30: Meituan Dianping – gross profit (Rmb m) and Figure 31: Meituan Dianping – adjusted operating profit gross margin (RHS) (Rmb m) and adjusted operating margin (RHS)

60,000 50% 25,000 20%

45% 50,000 20,000 10% 40% 15,000 0% 40,000 35% 10,000 -10% 30% 30,000 25% 5,000 -20% 20,000 20% 0 -30% 15% 10,000 (5,000) -40% 10% 0 (10,000) -50% 5% (10,000) 0% (15,000) -60% 2016 2017 2018E 2019E 2020E 2016 2017 2018E 2019E 2020E Food delivery In-store, hotel & travel Food delivery In-store, hotel & travel New initiatives and others Other gains New initiatives and others Gross margin Operating margin Source: Company data, UBS estimates Source: Company data, UBS estimates

Figure 32: Meituan Dianping – adjusted operating Figure 33: Meituan Dianping – adjusted net profit (Rmb expenses breakdown (Rmb m) m) and adjusted net margin

30,000 70% 20,000 20%

25,000 60% 15,000 10% 50% 20,000 0% 10,000 40% 15,000 -10% 30% 5,000 10,000 -20% 20% 0 5,000 10% -30%

0 0% (5,000) -40% 2016 2017 2018E 2019E 2020E

Sales and marketing expenses (10,000) -50% Research and development expenses 2016 2017 2018E 2019E 2020E General and administrative expenses Sales and marketing expenses as % of revenue Research and development expenses as % of revenue Adjusted net profit Adjusted net margin General and administrative expenses as % of revenue Source: Company data, UBS estimates Source: Company data, UBS estimates

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What is Meituan Dianping's strategy? Meituan Dianping provides a one-stop shop for almost all local and lifestyle-related services. In the US, it is quite common for consumers to read restaurant reviews on Yelp, make reservations through OpenTable, order food using GrubHub, buy movie tickets on Fandango, and book hotels using Booking.com and Airbnb. In China, all of that can be accomplished using one super app. The ease of use and convenience allow Meituan Dianping to acquire and retain users at a lower cost than competitors. It also allows the company to offer low-frequency services at a reasonable cost, and personalised services based on preferences reflected by other Meituan Dianping services a user has used.

Meituan Dianping cross-sells its wide range of lower-frequency services, such as hotel, travel, beauty and entertainment, leveraging its mass-market, high-frequency services, mainly food delivery and in-store dining. Dianping was established in 2003 with a focus on restaurant reviews, while Meituan was established in 2010, initially focused on group-buying related services. Later, Meituan introduced movie-ticketing, hotel-booking, on-demand food delivery and travel-booking services during 2012-14. In 2015, Meituan merged with Dianping. Since then, the company has launched a number of initiatives, including grocery stores, car-hailing, on-demand grocery delivery, as well as bike-sharing via the acquisition of Mobike. Today, more than 80% of the company's new hotel- booking consumers came from its high-frequency services in 2017, and around 52% of its transacting users for other lifestyle services in 2017 used its food delivery or in-store dining services, according to the company.

Figure 34: Expansion of Meituan Dianping's service categories

2018 2017 • On-demand grocery 2016 • Alternative delivery accommo- • Bike-sharing 2015 • Supply dation chain • Grocery 2014 • Air solutions store ticketing • Integrated • Car-hailing 2013 • Attraction • Train payment ticketing ticketing • Cloud- 2012 • On- demand based ERP 2010 • Movie food ticketing delivery 2003 • Local • Hotel services • Restaurant booking

Source: Company data

The company's new initiatives reveal additional complementary B2C and B2B offerings that could fit onto this platform. On the consumer side, Meituan Dianping is offering non-food delivery, leveraging the same riders. It sees Mobike and ride-hailing as the next logical service after users find the store they are looking for on Dianping. We believe Meituan Dianping can further improve its user frequency, GTV and cross-selling by introducing a membership service, similar to Amazon Prime, though that is still in the drawing board. On the business side, Meituan Dianping aims to offer more cloud-based ERP and CRM, and supply chain services to help digitalise merchants and further integrate them onto Meituan Dianping's platforms.

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Figure 35: Service offerings to consumers assume this is the company?

Service offerings to consumers Frequency

Food delivery Online food delivery High Dining High Hotel reservation Mid-to-low In-store, hotel & travel Travel Mid-to-low Other lifestyle services (beauty clinics, wedding, parent-child) Mid-to-low Grocery and other non-food delivery services High-to-mid New initiatives and others Transport ticketing Mid-to-low (services to consumers) Bike-sharing High Pilot car-hailing services High

Source: Company data, UBS

Tencent provides traffic but we see further opportunities to integrate. Tencent directs online traffic to Meituan Dianping's main platforms through access points in Weixin (WeChat) and Mobile QQ apps. Meituan Dianping has three different entry points on Weixin Pay (Meituan, Dianping and Mobike). However, we estimate only less than 10% of Meituan Dianping's food delivery orders go through Tencent. While we believe management wants to create an independent platform, we see opportunities to further integrate into Weixin and leverage its social features in Meituan Dianping's competition with Alibaba's Ele.me. For example, we think an ability to order with friends and colleagues within Weixin could become a very popular feature.

Figure 36: Access to Meituan Dianping’s platforms on Weixin

Source: Company data

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In-store: we see strong growth in both number of merchants and revenue per merchant

We expect a 36% revenue CAGR for in-store dining and travel businesses over 2017-20E. The active merchant base of Meituan Dianping's in-store dining and travel segments decreased by 5% in 2017, as the combined platform reduced irrational subsidies following the merger between Meituan and Dianping. We forecast the merchant base to resume growth in 2018 and reach 3.1bn by 2020, representing a 2017-20E CAGR of 21%. We think the average revenue per merchant is likely to maintain a steady growth pace to about Rmb6,700 by 2020E, a 12% 2017-20E CAGR.

Figure 37: In-store dining and travel – number of active merchants and average revenue per merchant

3,500 8

3,000 7 6 2,500 5 2,000 4 1,500 3 1,000 2

500 1

0 0 2016 2017 2018E 2019E 2020E

Number of active merchants ('000)-LHS Average revenue per merchant (Rmb '000)-RHS

Source: Company data, UBS estimates

Hotel: room nights drive continued growth in the low-end

Meituan Dianping is the market leader in the low-end. The company entered the online hotel-booking market in 2013, and became the number one platform in terms of room nights in 1Q18, with a 33.6% market share. In April 2018, Meituan Dianping had secured room supply from around 355,600 hotels in China. In recent years, China's online hotel industry has expanded significantly, driven by an increasing number of hotels (especially those available online), rising disposable income, improving transportation infrastructure, as well as supportive government policies.

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Figure 38: China online hotel industry market share (by domestic room nights)

40.1% 37.8% 33.6% 33.7% 33.0% 31.3%

24.5% 24.8%

19.6% 20.6% 17.2% 15.6% 11.6% 11.2% 11.9% 12.1%

5.7% 5.9% 5.7% 4.2%

2015 2016 2017 1Q18 Company 1 Meituan Dianping Company 2 Company 3 Others Source: iResearch

We expect revenue from Meituan Dianping's hotel revenues to grow at a 43% 2017-20E CAGR. In 2017, more than 200m domestic hotel room nights were booked through Meituan Dianping. We expect this to expand to 454m by 2020E. We see a gradual improvement in the average transaction value to Rmb169 in 2017 to Rmb207 in 2020 or 7% CAGR. Bookings of low-end hotels on Meituan Dianping’s platform have been growing by over 10% over the past years, and we expect the trend to continue. For high-end hotels, domestic room nights booked on Meituan Dianping’s platform have largely outpaced those of low-end ones, and both have exceeded the overall hotel booking industry. We forecast the total GTV of Meituan Dianping's hotel reservation business to increase from Rmb35bn in 2017 to Rmb94bn in 2020, at a CAGR of 39%. We forecast monetisation rate to improve from 7.7% to 8.3% during the same period.

Figure 39: Hotel reservation – number of domestic room Figure 40: Hotel reservation – GTV and monetisation rate nights and average transaction value

500 250 100 9%

450 90 8%

400 200 80 7% 350 70 6% 300 150 60 5% 250 50 4% 200 100 40 3% 150 30 2% 100 50 20 50 10 1% 0 0 0 0% 2016 2017 2018E 2019E 2020E 2016 2017 2018E 2019E 2020E Room nights (m)-LHS Average transaction value (Rmb)-RHS Gross transaction volume (Rmb bn) Monetisation rate %

Source: Company data, UBS estimates Source: Company data, UBS estimates

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New initiatives – other services to merchants: SaaS the highlight

Other services to merchants mainly include cloud-based ERP and CRM systems, integrated payments, and a nascent supply chain business. We model 109% 2017-20E revenue CAGR. Meituan Dianping had accumulated 0.59m merchants as of end-2017. We expect this to increase to 1.9m by 2020E, at a 47% three-year CAGR. We estimate average revenue per active merchant could increase from Rmb3,207 in 2017 to Rmb9,186 in 2020, at a CAGR of 42%.

Meituan Dianping's cloud-based ERP and CRM help merchants further digitalise operations. Meituan Dianping's SaaS-based enterprise resource planning (ERP) system is an integrated platform assisting merchants to provide more efficient and digitalised services to consumers, including table reservations, digital menus, takeout delivery, customer relationship management (CRM), etc. Through cloud-based ERP and CRM, merchants can better manage online and offline demand, and various other functions such as membership management and data analysis, which can help optimise their operations and improve efficiency.

Meituan Dianping's ERP management system is progressing well, adopted by over 10% of merchants on its platform. Management expects to cover more than 50% of total merchants within the next 2-2.5 years. Traditional restaurant ERP is a highly fragmented market in China, and few service providers offer ERP to small and medium enterprises (SMEs). Meituan Dianping entered the market by offering a SaaS-based system for SMEs and has become China's largest ERP solution provider to merchants, converted 200,000 merchants to its ERP system within only two to three years by leveraging its existing strong sales team.

Subscription-based SaaS service is a profitable business. The company has to invest in marketing and system integration at the initial stage. But the business should generate high margin subscription revenues over time, which should drive up the average margin level of the company.

New initiatives – other services to consumers: non-food delivery could see strong growth

Other services to consumers include non-food deliveries, Ella Supermarkets, and ride hailing. We model 308% 2017-20E revenue CAGR. We forecast the number of transactions to grow significantly from 44m in 2017 to 886m in 2020, implying a three-year CAGR of 172%. We estimate average revenue per transaction could improve from Rmb3 in 2017 to Rmb11 in 2020, at a 54% three-year CAGR.

Initiation of Coverage: Meituan Dianping 24 October 2018  27

Figure 41: Other services to merchants – number of Figure 42: Other services to consumers – number of merchants and average revenue per active merchant transactions and average transaction value

2,000 10,000 1,000 12

1,800 9,000 900 10 1,600 8,000 800 1,400 7,000 700 8 1,200 6,000 600 1,000 5,000 500 6 800 4,000 400 4 600 3,000 300 400 2,000 200 2 200 1,000 100 0 0 0 0 2017 2018E 2019E 2020E 2017 2018E 2019E 2020E Number of merchants ('000)-LHS Number of transaction (m)-LHS Average revenue per active merchant (Rmb)-RHS Average revenue per transaction (Rmb)-RHS Source: Company data, UBS estimates Source: Company data, UBS estimates

In July 2018, Meituan Dianping launched its non-food delivery service called Shangou. This extended its on-demand delivery service to categories such as groceries, fresh foods, plants and flowers, healthcare and medicine, as well as apparel and general merchandise. This new platform offers fast delivery services within 30 minutes. The minimum spend per order is generally Rmb20, and the delivery charge range from Rmb3-8. In 2017, Meituan Dianping launched its first offline grocery store, Ella Supermarket, in Beijing. The store mainly serves customers within a 3-5 kilometre radius with a delivery time of 30-60 minutes.

The ramp-up of non-food delivery services could generate both incremental revenues and cost synergies. Non-food delivery transactions account for less than 10% of total transactions on Meituan Dianping's platform, but the new business is growing fast due to increasing demand for instant and convenient consumption in China, and by leveraging Meituan's existing user base in food related services. The ramp-up of non-food delivery could better utilise Meituan Dianping's existing comprehensive food delivery network and reduce unit delivery costs for both food and non-food consumption, in our view.

We see strong initial adoption by merchants and stores. Shangou has successively launched cooperation agreements with 7-11, FamilyMart and Lawson, the three most popular convenience store brands in China. Domestic convenience store chains Meiyijia, OurHours, TODAY, Hongqi Chain, Everyday and Kedi have also launched. The total number of offline stores listed on Meituan Shangou's platform has exceeded 10,000, according to media reports. Nearly 5,000 HLA (Chinese menswear group) and Japanese's fast fashion brand Miniso's 311 offline stores are also connected to Meituan Shangou's platform. In addition, SF Express's SF Best and Meituan Shangou is trialing a partnership service.

New initiatives – bike sharing: limiting bikes to increase utilization

Mobike will improve profitability by increasing utilization. We model a 23% 2018-20E revenue CAGR. We forecast the number of active bikes to fall from 7.1m in 2018 to 5m by 2020, as there is an oversupply today. Therefore, we

Initiation of Coverage: Meituan Dianping 24 October 2018  28

believe average revenue per bike could achieve significant growth from Rmb236 in 2018E to Rmb512 in 2020E.

Figure 43: Bike sharing – number of active bikes and average revenue per bike

8,000 600

7,000 500 6,000 400 5,000

4,000 300

3,000 200 2,000 100 1,000

0 0 2018E 2019E 2020E Number of active bikes ('000)-LHS Average revenue per bike (Rmb)-RHS Source: Company data, UBS estimates

We estimate Mobike has about Rmb300m of expenses per month, including depreciation. Mobike charges either Rmb1.0 per 30-minute ride or Rmb20 for monthly usage, which does not fully compensate for the depreciation cost. In the future, Meituan Dianping could also include Mobike in its membership plan. The bundling of services can be a more efficient way to monetise the value of Mobike and facilitate synergies with Meituan Dianping's other services, in our view.

UBS Evidence Lab data suggest bike sharing is popular in China and Mobike has a strong competitive positioning. We note a strong ramp-up of bike-sharing services in China during 2017, taking share from ride on demand services such as Didi and taxis, based on daily active users of these apps and usage frequency. In fact, usage surpassed ride on demand apps for most of 2017, likely due to aggressive subsidies and warmer weather. Despite the subsequent slowdown in bike-sharing, partly due to fewer subsidies, we believe this service solves real pain points in users' daily transportation needs. Therefore, we believe Mobike can improve its profitability once it and the rest of industry achieve the right installed base of bikes as competition rationalizes.

Initiation of Coverage: Meituan Dianping 24 October 2018  29

Figure 44: Share of sessions of ride on demand vs. bike Figure 45: Share of time spent of ride on demand vs. bike sharing sharing

0.25% 0.14% 0.12% 0.20% 0.10%

0.15% 0.08%

0.06% 0.10% 0.04% 0.05% 0.02%

0.00% 0.00% Jul-15 Jul-16 Jul-17 Jul-18 Jan-15 Jan-16 Jan-17 Jan-18 Jul-18 Jul-17 Jul-16 Jul-15 Sep-15 Sep-16 Sep-17 Nov-15 Nov-16 Nov-17 Jan-18 Jan-17 Jan-16 Jan-15 Mar-15 Mar-16 Mar-17 Mar-18 Oct-17 Oct-16 Oct-15 May-15 May-16 May-17 May-18 Apr-18 Apr-17 Apr-16 Apr-15

Ride-on-demand / Taxi including Carpool Bike sharing Ride-on-demand / Taxi including Carpool Bike sharing

Source: UBS Evidence Lab, Sensor Tower Source: UBS Evidence Lab, Sensor Tower

Figure 46: Share of DAU of major ride on demand and Figure 47: Share of sessions of major ride on demand and bike-sharing apps bike-sharing apps

1.8% 0.16% 1.6% 0.14% 1.4% 0.12% 1.2% 0.10% 1.0% 0.08% 0.8% 0.06% 0.6% 0.4% 0.04% 0.2% 0.02% 0.0% 0.00% Jul-15 Jul-16 Jul-17 Jul-18 Jul-15 Jul-16 Jul-17 Jul-18 Jan-15 Jan-16 Jan-17 Jan-18 Jan-15 Jan-16 Jan-17 Jan-18 Sep-15 Sep-16 Sep-17 Sep-15 Sep-16 Sep-17 Nov-15 Nov-16 Nov-17 Mar-15 Mar-16 Mar-17 Mar-18 Nov-15 Nov-16 Nov-17 Mar-15 Mar-16 Mar-17 Mar-18 May-15 May-16 May-17 May-18 May-15 May-16 May-17 May-18

Didi Dida Mobike Ofo Didi Dida Mobike Ofo

Source: UBS Evidence Lab, Sensor Tower. Source: UBS Evidence Lab, Sensor Tower.

Initiation of Coverage: Meituan Dianping 24 October 2018  30

Meituan Dianping UBS Research

WHAT'S PRICED IN? return 

Stock performance since IPO

The stock is trading over 20% below its IPO price as the market has weakened. Alibaba and Tencent are both down 10% since Meituan Dianping's pricing on September 13, 2018. The Hang Seng index is down 4% over the same period. We believe Meituan Dianping has underperformed as investors became more risk averse and the company lacks near-term profitability. It also speaks to investor concerns regarding Alibaba competition and secondarily due to potential increases in labour costs.

However, Meituan Dianping stock is down less than mid- and small-cap China Internet stocks due to its strong secular tailwinds especially in food delivery and its leading market share in this market. This is an environment where investors favour high-quality stocks and where they have long-term conviction. While Meituan Dianping is a controversial stock, we believe there are significant number of investors that are positive on the company long term. In addition, recent news suggests social insurance headwinds is incrementally less negative (discussed below), and individual tax cuts likely favours white collar workers and will benefit Meituan Dianping and food delivery in general.

News flow since IPO

In recent months, we think investors increasingly believe Alibaba will invest more in Ele.me, and have increased their expectations for Ele.me revenues this year as a result. Correspondingly, they could be more concerned about near-term competition with Meituan Dianping. While investors likely perceive Meituan Dianping as the stronger food delivery platform today, it is likely that they do not want to underestimate Alibaba's resolve to catch up through heavier investments and subsidies.

Offsetting competitive concerns is some more positive news flow in the last month. Meituan Dianping reported 1H18 results, which give investors two more months of data compared to the first four month results reported before IPO pricing. In particular, the incremental data suggest profitability of the food delivery business increased significantly in the last two months. From January to April of 2018, Meituan Dianping generated Rmb903m of gross profits in food delivery, but from January to June, it generated Rmb1.9bn.

In addition, the government recently released a draft of the Individual Income Tax Law, which is reducing taxes for households in multiple areas. These cuts could be a boost to consumption, with white collar workers likely receiving a bigger benefit. This is Meituan Dianping's target market for food delivery. Combined with the easing potential burden of social insurance (discussed in an earlier section), the impact of policy is incrementally more positive for Meituan Dianping's businesses.

Initiation of Coverage: Meituan Dianping 24 October 2018  31

Peer comparison analysis Meituan Dianping stock is trading at 22x 2020E earnings, still at a slight premium to large-cap China Internet stocks like Alibaba and Tencent likely due to its stronger growth. We believe 2020E PE is a more meaningful metric than 2019E for Meituan Dianping, as the business is experiencing fast growth but showing little to no profit next year. The stock also implies 2.8x 2019E P/S and 1.9x 2020E P/S based on our estimates. This is significantly below Alibaba, Tencent, and other food delivery platforms, as Meituan Dianping has a lower margin profile.

Compared to the company's initial expectations, we believe investors have been less willing to price in Meituan Dianping's new initiatives. Our discussions with investors suggest that some have even discounted the company's cash balance to reflect further investments, while others who believe in the secular growth of food delivery have been more willing to recognize the value of that business, in part by referencing existing food delivery companies in Europe, which trade at higher multiples.

Figure 48: Peer comparison – valuations

Share Price Market Cap P/E PEG P/S PSG P/Gross profit EV/EBIT 2018-20 CAGR (LC) (US$m) 2018E 2019E 2020E 2019E 2020E 2018E 2019E 2020E 2019E 2020E 2018E 2019E 2020E 2018E 2019E 2020E Sales Gross profit Earnings China Internet Platforms Meituan Dianping 58.50 40,976 NM 85.7x 22.4x NM 0.1x 4.1x 2.8x 1.9x 0.1x 0.0x 15.6x 7.8x 5.1x NM NM 18.2x 46% 75% NA Alibaba Group 148.80 386,731 30.2x 24.2x 18.2x 0.9x 0.5x 7.2x 5.2x 3.8x 0.1x 0.1x 14.3x 11.1x 8.4x 22.5x 18.2x 13.9x 37% 30% 31% Tencent 291.20 346,493 31.3x 26.6x 21.9x 1.4x 1.0x 7.4x 6.0x 4.8x 0.3x 0.2x 15.8x 13.4x 11.0x 29.2x 24.7x 20.6x 25% 20% 20% Baidu 196.19 68,039 19.8x 18.1x 14.3x 1.9x 0.5x 4.4x 3.9x 3.3x 0.3x 0.2x 8.5x 7.6x 6.3x 18.5x 16.3x 12.9x 16% 16% 18% JD.com 23.54 33,490 105.8x 61.2x 33.7x 0.8x 0.4x 0.5x 0.4x 0.4x 0.0x 0.0x 3.5x 3.0x 2.5x MN MN 185.8x 14% 18% 81% Ctrip 33.45 15,833 26.5x 20.6x 14.3x 0.7x 0.3x 3.4x 2.8x 2.2x 0.1x 0.1x 4.2x 3.4x 2.7x 23.5x 16.2x 11.0x 23% 24% 36% 58.com* 64.75 9,550 26.5x 18.8x 14.7x 0.4x 0.5x 5.0x 4.2x 3.6x 0.2x 0.2x 5.6x 4.7x 4.0x 22.0x 15.6x 12.8x 19% 18% 34%

US Internet Platforms Yelp 42.99 3,811 110.4x 58.9x 37.8x 0.6x 0.6x 3.9x 3.3x 2.9x 0.2x 0.2x 4.2x 3.5x 3.1x 19.2x 13.4x 10.3x 17% 17% 80% Expedia Group 118.50 18,373 22.7x 18.5x 15.2x 0.8x 0.7x 1.6x 1.5x 1.4x 0.2x 0.1x 2.0x 1.8x 1.6x 16.3x 13.7x 11.5x 9% 9% 23% Booking Holdings 1,827.29 88,715 20.6x 17.7x 15.3x 1.4x 1.2x 6.2x 5.5x 5.0x 0.4x 0.5x 6.2x 5.5x 5.0x 16.3x 14.8x 13.4x 11% 11% 13% Alphabet 1,101.16 774,387 28.5x 23.7x 21.3x 1.1x 1.7x 7.1x 5.9x 5.2x 0.3x 0.4x 10.0x 8.5x 7.6x 25.4x 18.1x 16.2x 16% 15% 17% Amazon 1,789.30 894,650 98.7x 79.2x 56.6x 3.1x 1.4x 3.8x 3.2x 2.7x 0.2x 0.1x 9.5x 7.7x 6.4x 52.5x 42.3x 32.6x 20% 22% 33% TripAdvisor 47.27 6,523 33.7x 32.6x 28.7x 7.0x 1.8x 4.0x 3.6x 3.3x 0.3x 0.3x 4.3x 3.8x 3.5x 20.9x 19.6x 16.9x 11% 11% 10% Delivery Hero* 35.62 7,625 NM NM NM NA NA 8.7x 6.1x 4.5x 0.1x 0.1x 14.1x 10.0x 7.2x MN MN MN 39% 39% -54% Takeaway.com* 57.60 2,866 NM 525.0x 55.5x MN 0.1x 10.5x 7.9x 6.3x 0.2x 0.3x 12.7x 9.7x 7.8x MN 163.6x 38.8x 29% 27% NA GrubHub* 116.77 10,563 61.0x 48.9x 36.4x 2.0x 1.1x 10.7x 8.4x 6.9x 0.3x 0.3x 17.4x 13.4x 9.9x 48.4x 37.6x 29.1x 25% 32% 29%

US SaaS Salesforce.com 142.95 107,784 58.8x 51.5x 39.8x 2.9x 1.2x 8.3x 6.9x 5.8x 0.3x 0.3x 10.9x 9.0x 7.6x 48.3x 36.9x 28.2x 19% 19% 25% Workday 129.72 30,617 117.0x 74.9x 59.0x 1.2x 1.8x 11.3x 9.0x 7.3x 0.4x 0.3x 15.0x 11.9x 9.6x 122.2x 68.2x 49.6x 24% 25% 47% Shopify* 134.37 14,299 628.5x 217.0x 110.7x 1.1x 1.0x 13.8x 10.0x 7.6x 0.3x 0.2x 24.2x 17.3x 13.2x 3107.0x 243.6x 102.6x 35% 35% 151% Square* 75.72 31,078 167.3x 97.1x 63.8x 1.2x 1.1x 20.1x 14.2x 10.6x 0.3x 0.3x 28.7x 20.2x 16.3x 154.1x 77.4x 53.9x 37% 33% 70% Note: Priced as of 22 October. *Thomson Reuters consensus. Source: Thomson Reuters, UBS estimates

Initiation of Coverage: Meituan Dianping 24 October 2018  32

Meituan Dianping UBS Research

UPSIDE / DOWNSIDE SPECTRUM return 

Meituan Dianping is trading at HK$55.05 (as of 23 October).

Value drivers Food delivery Food delivery Total revenue Food delivery Adjusted net (2020e) volume growth revenue growth growth OP margin margin $100 upside 43.0% 51.0% 56.0% 18.2% 14.0% $75 base 35.0% 41.5% 42.3% 14.9% 10.0% $45 downside 26.0% 30.4% 29.2% 9.8% 5.2% Source: UBS

Upside (HK$100): Alibaba competition is less than feared. Ele.me is content with market share in the 40-50% range. Both players turn profitable in food deliveries. Investors start to value Meituan Dianping's new initiatives, mainly cloud-based ERP and CRM, and non-food deliveries. Mobike losses narrow as utilization increases and competition is more rational. Meituan Dianping trades at 30x 2020E earnings, at a premium to large cap Internet peers, due to much faster growth though its PEG is still below peers.

Base (HK$75): Meituan Dianping turns profitable in 2019, as Ele.me competition is manageable. Meituan Dianping does not increase subsidies per order, and rider costs decrease as order density increases. New initiatives losses peak in 2019 before operating leverage shows. Our valuation is driven by our DCF, which implies 3.9x price to 2019E revenues, which is below other large cap Internet peers, and 29x price to 2020E earnings, where its PEG is also below peers.

Downside (HK$45): Alibaba's aggressive investments in Ele.me take its toll. We assume food delivery breakeven, and therefore the company's overall turn to profitability is delayed by a year. Meituan Dianping increases subsidies in order to fight for market share with Ele.me. New initiative losses have no end in sight as Meituan Dianping competes with other large platforms in China for supremacy. The stock trades down to 20x 2020E earnings, which is in line with other large cap China Internet peers, as investors are concerned by competition and do not pay for Meituan Dianping's higher growth.

Initiation of Coverage: Meituan Dianping 24 October 2018  33

Valuation

Discounted cash flow analysis

We base our valuation on DCF methodology. We assume a WACC of 10.8% based on a beta of 1.2, and forecast free cash flow for 10 years until 2028. Over time, we expect net revenue growth to remain healthy, but gradually decelerate as the business matures. We expect EBIT margin to maintain an upward trend in the near term and be largely stable over the longer term.

We derive a valuation of HK$75 per share. Our valuation implies 29x 2020E PE, 3.9x 2019E P/S and 2.8x 2020E P/S.

Figure 49: Meituan Dianping – WACC assumptions

WACC derivation

Risk-free rate 4.8% Risk premium 5.0% Equity beta 1.2 Cost of equity 10.8% D/(D+E) 0.0% Cost of debt 6.8% Marginal tax rate 25.0% WACC 10.8%

Source: UBS estimates

Figure 50: Meituan Dianping – DCF valuation

FCF Calculation (in Rmb m) 2018E 2019E 2020E 2021E 2022E 2023E 2024E 2025E 2026E 2027E 2028E Total revenue 65,266 102,682 146,121 187,560 224,758 260,782 294,684 324,153 346,843 367,654 386,037 YoY % 92.4% 57.3% 42.3% 28.4% 19.8% 16.0% 13.0% 10.0% 7.0% 6.0% 5.0% EBIT (8,722) 823 13,245 24,370 29,991 36,241 41,394 46,019 49,934 53,666 57,121 EBIT margin % -13.4% 0.8% 9.1% 13.0% 13.3% 13.9% 14.0% 14.2% 14.4% 14.6% 14.8% EBIAT (8,687) 823 11,258 20,714 25,492 30,804 35,185 39,117 42,444 45,616 48,553 Effective tax rate 0.4% 0.0% 15.0% 15.0% 15.0% 15.0% 15.0% 15.0% 15.0% 15.0% 15.0%

Add: Depreciation and amortization 2,661 2,778 3,223 3,522 3,940 4,442 4,430 4,224 3,826 3,688 3,487 As % of revenue 4.1% 2.7% 2.2% 1.9% 1.8% 1.7% 1.5% 1.3% 1.1% 1.0% 0.9% Less: Increase in working capital (9,631) (7,787) 1,479 1,334 (421) (893) (1,010) (1,111) (1,188) (1,260) (1,323) As % of revenue -14.8% -7.6% 1.0% 0.7% -0.2% -0.3% -0.3% -0.3% -0.3% -0.3% -0.3% Less: Capex (2,370) (3,935) (3,104) (3,984) (4,775) (5,540) (5,965) (6,238) (6,328) (6,340) (6,270) As % of revenue -3.6% -3.8% -2.1% -2.1% -2.1% -2.1% -2.0% -1.9% -1.8% -1.7% -1.6%

FCF (18,027) (8,122) 12,856 21,586 24,237 28,813 32,639 35,992 38,755 41,705 44,447 YoY % 54.9% n/a 67.9% 12.3% 18.9% 13.3% 10.3% 7.7% 7.6% 6.6%

DCF discount process (in Rmb m) 2018E 2019E 2020E 2021E 2022E 2023E 2024E 2025E 2026E 2027E 2028E Discount year 0.25 1.25 2.25 3.25 4.25 5.25 6.25 7.25 8.25 9.25 Discount factor 0.97 0.88 0.79 0.72 0.65 0.59 0.53 0.48 0.43 0.39 PV of the FCFs (7,917) 11,316 17,156 17,392 18,669 19,096 19,014 18,486 17,962 17,285

Terminal value (TV) 552,214 TV discounted year 10 TV discounted factor 0.36 PV of the Terminal Value 198,916 Enterprise value 347,374

Cash and cash equivalents 54,709 Total asset value 402,083 Debt value 1,117 Minority interests 59 Investment in associates 2,083 Equity value (in Rmb m) 402,989 Equity value (in US$ bn) 58.11 Equity value (in HK$ m) 455,544 Total shares outstanding (m) 6,075 Fair Value per share (HK$) 74.98 Source: UBS estimates

Initiation of Coverage: Meituan Dianping 24 October 2018  34

Sum of the parts

We cross-check our DCF using a SOTP analysis and derive a value of HK$75 per share. For food delivery and in-store & travel businesses, we assume a slight premium to Alibaba in terms of EV/EBIT based on Meituan Dianping's faster growth. These two segments account for 54% of the valuation. For the hotel business, we assume a slight premium to Ctrip for the same reasons.

We break down the company's new initiatives into third segments. For new initiatives to businesses, which are mainly cloud-based ERP and CRM, and integrated payment systems, we value it at a discount to US SaaS peers. For new initiatives to consumers, mainly non-food delivery, Ella Supermarket, and ride- hailing, we value it at a discount to other platform companies. For Mobike, we use the valuation from Meituan Dianping's acquisition.

Figure 51: Meituan Dianping – SOTP valuation

Valuation based on 2019E EV/EBIT and P/S GTV Revenue EBIT Valuation (m) Comparison Methodology Multiple RMB (m) RMB (m) RMB (m) RMB HKD USD Mix

Food delivery 430,123 62,368 7,048 143,770 162,516 20,731 35% 20% premium to Alibaba EV/EBIT 20.4 In-store & travel 162,462 14,622 4,021 75,192 84,996 10,842 18% 10% premium to Alibaba EV/EBIT 18.7 Hotel 72,539 5,876 1,616 28,083 31,745 4,049 7% 10% premium to Ctrip EV/EBIT 17.4 New initiatives to businesses 11,993 58,166 65,750 8,387 14% 50% discount to avg. US SaaS P/S 4.9 New initiatives to consumers 5,772 28,859 32,621 4,161 7% Discount to avg. platform company P/S 5.0 Mobike 2,052 18,725 21,166 2,700 5% Historical acquisition valuation Net cash/(debt) 53,592 60,580 7,728 13% Minority interests 59 67 9 0% Investment in associates 2,083 2,355 300 1%

Total 102,682 408,410 461,661 58,890 100% Total Meituan Dianping P/S 4.0

Source: UBS estimates

*UBS Evidence Lab provides our research analysts with rigorous primary research. The team conducts representative surveys of key sector decision-makers, mines the Internet, systematically collects observable data, and pulls information from other innovative sources. They apply a variety of advanced analytic techniques to derive insights from the data collected. This valuable resource supplies UBS analysts with differentiated information to support their forecasts and recommendations—in turn enhancing our ability to serve the needs of our clients.

For this report, UBS Evidence Lab conducted the 3rd wave of online survey with 1,952 Chinese consumers who had made payment for product / service purchases and/ or made money transfer via smartphone mobile app in the past 3 months (hereinafter termed as “mobile payment users”). Respondents surveyed were aged 18-54, who reside in tier 1, 2, 3 and 4 cities in the North, South, Central, East and Southwest regions. Conducted in August 2017, conclusions based on the total sample of adults have a potential sampling error of just +/-2.11% at a 90% confidence level.

Initiation of Coverage: Meituan Dianping 24 October 2018  35

Financials Figure 52: Meituan Dianping – consolidated income statement

(in Rmb m) 2016 2017 2018E 2019E 2020E Total revenue 12,988 33,928 65,266 102,682 146,121 YoY % 223.2% 161.2% 92.4% 57.3% 42.3% Food delivery 5,301 21,032 39,193 62,368 88,261 YoY % 2933.4% 296.8% 86.4% 59.1% 41.5% In-store, hotel & travel 7,020 10,853 15,294 20,497 28,382 YoY % 86.0% 54.6% 40.9% 34.0% 38.5% New initiatives and others 667 2,043 10,779 19,817 29,478 YoY % 846.9% 206.1% 427.6% 83.8% 48.7%

Cost of sales (7,047) (21,708) (47,908) (66,099) (89,968) As a % of revenues -54.3% -64.0% -73.4% -64.4% -61.6%

Gross profit 5,941 12,220 17,358 36,583 56,153 Gross margin % 45.7% 36.0% 26.6% 35.6% 38.4% YoY % 113.8% 105.7% 42.1% 110.8% 53.5% Food delivery (406) 1,699 6,271 17,151 24,713 Gross margin % -7.7% 8.1% 16.0% 27.5% 28.0% In-store, hotel & travel 5,939 9,579 13,459 18,243 25,544 Gross margin % 84.6% 88.3% 88.0% 89.0% 90.0% New initiatives and others 408 941 (2,371) 1,189 5,896 Gross margin % 61.1% 46.0% -22.0% 6.0% 20.0%

Total operating expenses (12,426) (16,727) (27,592) (35,760) (42,908) As a % of revenues -95.7% -49.3% -42.3% -34.8% -29.4% YoY % 10.5% 34.6% 65.0% 29.6% 20.0% Sales and marketing expenses (8,337) (10,909) (17,794) (23,537) (28,034) As a % of revenues -64.2% -32.2% -27.3% -22.9% -19.2% YoY % 16.8% 30.8% 63.1% 32.3% 19.1% Research and development expenses (2,367) (3,647) (6,696) (8,428) (10,245) As a % of revenues -18.2% -10.7% -10.3% -8.2% -7.0% YoY % 96.6% 54.1% 83.6% 25.9% 21.6% General and administrative expenses (1,723) (2,171) (3,101) (3,795) (4,629) As a % of revenues -13.3% -6.4% -4.8% -3.7% -3.2% YoY % -40.7% 26.1% 42.8% 22.4% 22.0%

Operating (loss)/profit (6,255) (3,826) (8,722) 823 13,245 Operating margin % -48.2% -11.3% -13.4% 0.8% 9.1% YoY % 26.2% 38.8% -128.0% n/a 1509.6% Food delivery (4,628) (4,599) (2,156) 7,048 13,151 Operating margin % -87.3% -21.9% -5.5% 11.3% 14.9% In-store, hotel & travel (1,030) 1,795 3,212 5,637 9,905 Operating margin % -14.7% 16.5% 21.0% 27.5% 34.9% New initiatives and others (827) (1,704) (9,778) (11,861) (9,812) Operating margin % -123.9% -83.4% -90.7% -59.9% -33.3%

Financial income 22 61 215 248 202 Financial costs (56) (19) (21) (65) (40) Fair value changes of convertible redeemable preferred shares (4,313) (15,139) (24,850) - - Share of (losses)/gains of equity investments and others (28) (10) 7 - - Income tax (268) (54) (134) - (2,011)

Net (Loss) / profit (5,795) (18,988) (33,505) 1,006 11,396 Net margin % -44.6% -56.0% -51.3% 1.0% 7.8% YoY % 44.9% -227.7% -76.5% n/a 1033.0% Net (Loss) / profit attributable to equity holders (5,790) (18,917) (33,471) 1,004 11,369

NON-IFRS measures Adjusted (loss) / profit from operations (5,572) (3,536) (8,457) 3,047 15,952 Adjusted operating margin % -42.9% -10.4% -13.0% 3.0% 10.9% YoY % 5.1% 36.5% -139.2% n/a 423.6% Adjusted EBITDA (4,998) (2,692) (5,796) 5,825 19,176 Adjusted EBITDA margin % -38.5% -7.9% -8.9% 5.7% 13.1% YoY % 12.2% 46.1% -115.3% n/a 229.2% Adjusted net profit (5,348) (2,781) (7,787) 3,743 14,585 Adjusted net margin % -41.2% -8.2% -11.9% 3.6% 10.0% YoY % 9.6% 48.0% -180.0% n/a 289.6%

GAAP EPS, basic (Rmb) -3.99 -12.37 -12.57 0.18 1.99 Non-GAAP EPS, basic (Rmb) -3.68 -1.82 -2.92 0.67 2.55 GAAP EPS, diluted (Rmb) -3.99 -12.37 -12.57 0.16 1.80 Non-GAAP EPS, diluted (Rmb) -3.68 -1.82 -2.92 0.60 2.31 Source: Company data, UBS estimates

Initiation of Coverage: Meituan Dianping 24 October 2018  36

Figure 53: Meituan Dianping – consolidated balance sheet

(in Rmb m) 2016 2017 2018E 2019E 2020E Property, plant and equipment 511 916 6,145 7,792 8,146 Intangible assets 19,149 19,853 34,333 33,843 33,370 Deferred tax assets 399 243 234 221 283 Investments accounted for using equity method 2,385 1,952 1,652 1,652 1,652 Financial assets at fair value through profit or loss 5,570 5,920 3,354 3,354 3,354 Prepayment, deposits and other assets 69 312 261 205 263 Total non-current assets 28,082 29,196 45,978 47,067 47,067

Inventories 37 88 412 319 482 Trade receivables 266 432 1,356 1,458 3,346 Financial assets at fair value through profit or loss - 25 - - - Prepayments, deposits and other assets 1,022 4,186 9,137 13,349 17,827 Short-term investments 12,608 25,838 2,838 5,238 6,238 Restricted cash 325 4,459 5,959 5,959 5,959 Cash and cash equivalents 9,377 19,409 43,634 34,474 49,332 Total current assets 23,635 54,438 63,336 60,796 83,184 - - - - - Deferred tax liabilities 1,173 1,050 914 513 658 Deferred revenues 860 834 653 513 584 Redemption liabilities 370 316 10 10 10 Convertible redeemable preferred shares 62,413 101,418 126,268 126,268 126,268 Total non-current liabilities 64,816 103,618 127,845 127,305 127,520 - - - - - Trade payables 1,300 2,667 3,055 3,697 5,911 Payables to merchants 4,305 9,364 6,853 6,674 9,936 Advance from transacting users 2,044 2,290 2,611 1,540 2,119 Deposit from transacting users - - 5,221 4,107 4,384 Other payables and accruals 2,339 3,920 4,242 2,054 2,922 Borrowings 1 162 1,000 1,000 1,000 Deferred revenues 1,213 2,114 2,284 2,054 2,922 Convertible redeemable preferred shares 1,274 - - - - Total current liabilities 12,476 20,517 25,267 21,126 29,195 - - - - - NET (LIABILITIES) / ASSETS (25,575) (40,501) (43,797) (40,568) (26,464)

Share capital 0 0 0 0 0 Share premium 8,568 9,339 37,771 37,771 37,771 Other reserves (2,743) 466 466 466 466 Accumulated losses (31,447) (50,364) (82,092) (78,862) (64,759) Non-controlling interests 47 58 58 58 58 TOTAL EQUITY (25,575) (40,501) (43,797) (40,568) (26,464) Source: Company data, UBS estimates

Initiation of Coverage: Meituan Dianping 24 October 2018  37

Figure 54: Meituan Dianping – consolidated cash flow statement

(in Rmb m) 2016 2017 2018E 2019E 2020E Loss before income tax from Continuing operations (10,631) (18,934) (33,371) 1,006 13,407 Discontinued operation 5,104 - - - - Depreciation and amortization 586 844 2,661 2,778 3,223 Provision for doubtful accounts 281 64 - - - Non-cash employees benefits expense-share-based payments 913 971 1,776 2,224 2,708 Compensation to shareholders - - - - - Gain from business and investment disposals (5,922) (86) - - - Fair value changes of convertible redeemable preferred shares 4,313 15,139 24,850 - - Impairment provision 147 13 - - - Share of losses of investments accounted for using equity method 28 10 - - - Changes in fair value from investments measured at fair value through profit or loss (17) (498) - - - Dividend income and interest classified as investing cash flows (182) (346) - - - Finance costs - 10 (194) (183) (162) Foreign exchange (losses)/ gains, net 15 8 - - -

Change in working capital 3,451 2,512 (9,631) (7,787) 1,479 Decrease/(increase) in restricted cash (323) (4,133) (1,500) - - Increase in trade receivables (45) (182) (923) (102) (1,889) (Increase)/decrease in prepayments, deposits and other assets 1,681 (2,538) (4,951) (4,211) (4,478) Increase in inventories (17) (38) (324) 93 (162) Increase/(decrease in trade payables 860 1,353 388 641 2,215 Increase in payables to merchants 731 5,059 (2,511) (179) 3,262 Increase/(decrease) in advance from transacting users (377) 246 320 (1,070) 579 (Decrease)/increase in deferred revenue 395 875 170 (231) 869 Increase/(decrease) in other payables and accruals 547 1,871 322 (2,189) 869 Increase in other non-current liabilities - - (623) (540) 215 Decrease in deposit from transacting users - - - - - Cash (used in)/generated from operations (1,914) (292) (13,908) (1,962) 20,655 Income tax paid (4) (19) (134) - (2,011) Net cash (used in) / generated from operating activities (1,918) (310) (14,042) (1,962) 18,644

Purchase of property, plant and equipment (353) (738) (2,354) (3,910) (3,069) Proceeds from disposals of property, plant and equipment 6 4 - - - Purchase of intangible assets (3) (8) (16) (25) (36) Proceeds from disposals of intangible assets - 0 - - - Payments for business combinations, net of cash acquired (150) (321) (20,000) - - Purchase of short-term investments (54,008) (65,567) (20,000) (2,400) (1,000) Proceeds from disposals of short-term investments 42,914 51,407 43,000 - - Acquisition of investments accounted for using the equity method (51) (786) (600) - - Proceeds from disposal of investments accounted for using the equity method - 888 900 - - Acquisition of investments measured at fair value (513) (380) 25 - - Proceeds from disposal of investments measured at fair value 24 13 2,566 - - Cash inflow (outflow) arising from disposal of subsidiaries 2,395 (26) - - - Interest income received 182 346 215 248 202 Dividends received - 12 - - - Increase in prepayment for investments - (2) - - - Others - - 5,282 (1,045) 157 Net cash used in investing activities (9,557) (15,157) 9,017 (7,133) (3,745) - - - - - Proceeds from borrowings - 312 28,432 - - Repayments of borrowings - (151) 838 - - Finance costs paid - (10) (21) (65) (40) Proceeds from issuance of convertible redeemable preferred shares 5,591 25,803 - - - Exercise of option and RSU vesting - 170 - - - Repurchase of ordinary shares (1,786) (651) - - - Proceeds from disposals of non-controlling interests - 60 - - - Payment for acquisition of non-controlling interests - (25) - - - Others - - - - 0 Net cash generated from / (used in) financing activities 3,805 25,508 29,249 (65) (40) - - - - - Net increase in cash (7,670) 10,040 24,225 (9,160) 14,858 Cash at the beginning of the year 16,804 9,377 19,409 43,634 34,474 Effect of foreign exchange rate changes 242 (8) - - - Cash at the end of the year 9,377 19,409 43,634 34,474 49,332 Source: Company data, UBS estimates

Initiation of Coverage: Meituan Dianping 24 October 2018  38

Meituan Dianping UBS Research

COMPANY DESCRIPTION return 

Revenues by segment (%) Meituan Dianping is a food-centric 'super app' (multi- service platform) that offers two core services: 1) local 100% search: users can find restaurants and other services 5.1% 6.0% 90% 16.5% 19.3% through personalised search results and comprehensive 20.2% 80% reviews; and 2) O2O transactions: users can order food 32.0% 70% 23.4% 20.0% 19.4% deliveries from nearby restaurants. Meituan Dianping 54.0% 60% monetises its services primarily through commissions on 50% transactions and advertisements. The company is adding 40% complementary merchant services in cloud ERP and CRM, 30% 62.0% 60.1% 60.7% 60.4% and supply chain, and individual services in non-food 20% 40.8% deliveries, car and bike sharing, etc. 10% Industry outlook 0% 2016 2017 2018E 2019E 2020E Online penetration of China's consumer service merchants Food delivery In-store, hotel & travel New initiatives and others could reach 74% by 2022, from less than 50% in 2017.

Gross transaction value (GTV) of consumer service Source: Company data, UBS estimates ecommerce industry will increase from Rmb2,7trn in 2017 to Rmb8.0trn by 2023, a CAGR of 19.8%, according to EBIT by product segment iResearch. Food delivery in China is a large market with very low online penetration. We are positive on food 15,000 delivery growth, driven by a secular shift away from cooking at home and as orders move online. China's on- 10,000 demand food delivery market will grow 31% CAGR over 2017-23F, driven by people's desire for convenience and 5,000 increasing ability to afford it. 0

(5,000)

(10,000)

(15,000) 2016 2017 2018E 2019E 2020E

Food delivery In-store, hotel & travel New initiatives and others Source: Company data, UBS estimates

Initiation of Coverage: Meituan Dianping 24 October 2018  39

Meituan Dianping (3690.HK)

Income statement (Rmbm) 12/15 12/16 12/17 12/18E % ch 12/19E % ch 12/20E 12/21E 12/22E Revenues 4,019 12,988 33,928 65,266 92.4 102,682 57.3 146,121 187,560 224,758 Gross profit 2,779 5,941 12,220 17,358 42.1 36,583 110.8 56,153 75,575 91,352 EBITDA (UBS) (8,296) (5,682) (2,982) (6,060) -103.2 3,601 - 16,468 27,892 33,931 Depreciation & amortisation (178) (574) (844) (2,661) 215.2 (2,778) 4.4 (3,223) (3,522) (3,940) EBIT (UBS) (8,474) (6,255) (3,826) (8,722) -128.0 823 - 13,245 24,370 29,991 Associates & investment income 0 0 0 0 - 0 - 0 0 0 Other non-operating income (1) (28) (10) 7 - 0 - 0 0 0 Net interest (43) (34) 42 194 364.9 183 -5.6 162 236 358 Exceptionals (incl goodwill) (725) (4,313) (15,139) (24,850) -64.1 0 - 0 0 0 Profit before tax (9,243) (10,631) (18,934) (33,371) -76.3 1,006 - 13,407 24,606 30,348 Tax 12 (268) (54) (134) -146.3 0 - (2,011) (3,691) (4,552) Profit after tax (9,231) (10,899) (18,988) (33,505) -76.5 1,006 - 11,396 20,915 25,796 Preference dividends and Minorities 0 5 71 33 -53.2 (2) - (27) (49) (61) Extraordinary items (1,288) 5,104 0 0 - 0 - 0 0 0 Net earnings (local GAAP) (10,519) (5,790) (18,917) (33,471) -76.9 1,004 - 11,369 20,866 25,736 Net earnings (UBS) (5,914) (5,348) (2,781) (7,787) -180.0 3,743 - 14,585 24,627 30,136 Tax rate (%) 0.0 0.0 0.0 0.0 - 0.0 - 15.0 15.0 15.0

Per share (Rmb) 12/15 12/16 12/17 12/18E % ch 12/19E % ch 12/20E 12/21E 12/22E EPS (UBS, diluted) (5.56) (3.68) (1.82) (2.92) -60.7 0.60 - 2.31 3.82 4.58 EPS (local GAAP, diluted) (9.89) (3.99) (12.37) (12.57) -1.6 0.16 - 1.80 3.24 3.91 EPS (UBS, basic) (5.56) (3.68) (1.82) (2.92) -60.7 0.67 - 2.55 4.23 5.07 Net DPS (Rmb) 0.00 0.00 0.00 0.00 - 0.00 - 0.00 0.00 0.00 Book value per share (3.22) (4.67) (7.39) (7.99) -8.1 (7.25) 9.2 (4.64) (0.40) 4.60 Average shares (diluted) 1,063.29 1,451.77 1,528.83 2,663.56 74.2 6,196.80 132.7 6,320.74 6,447.15 6,576.09

Balance sheet (Rmbm) 12/15 12/16 12/17 12/18E % ch 12/19E % ch 12/20E 12/21E 12/22E Cash and equivalents 16,804 9,377 19,409 43,634 124.8 34,474 -21.0 49,332 73,601 101,366 Other current assets 5,070 14,258 35,029 19,702 -43.8 26,322 33.6 33,852 35,864 41,068 Total current assets 21,874 23,635 54,438 63,336 16.3 60,796 -4.0 83,184 109,464 142,434 Net tangible fixed assets 446 511 916 6,145 NM 7,792 26.8 8,146 9,063 10,337 Net intangible fixed assets 17,789 19,149 19,853 34,333 72.9 33,843 -1.4 33,370 32,914 32,474 Investments / other assets 2,780 8,422 8,427 5,501 -34.7 5,432 -1.3 5,552 5,636 5,686 Total assets 42,890 51,717 83,634 109,314 30.7 107,863 -1.3 130,251 157,078 190,932 Trade payables & other ST liabilities 10,243 12,476 20,517 25,267 23.1 21,126 -16.4 29,195 31,729 35,845 Short term debt 0 0 0 0 - 0 - 0 0 0 Total current liabilities 10,243 12,476 20,517 25,267 23.1 21,126 -16.4 29,195 31,729 35,845 Long term debt 0 0 0 0 - 0 - 0 0 0 Other long term liabilities 50,317 64,816 103,618 127,845 23.4 127,305 -0.4 127,520 127,638 127,673 Preferred shares 0 0 0 0 - 0 - 0 0 0 Total liabilities (incl pref shares) 60,560 77,292 124,136 153,112 23.3 148,431 -3.1 156,715 159,367 163,518 Common s/h equity (17,670) (25,622) (40,559) (43,855) -8.1 (40,625) 7.4 (26,522) (2,346) 27,356 Minority interests 0 47 58 58 0.0 58 0.0 58 58 58 Total liabilities & equity 42,890 51,717 83,634 109,314 30.7 107,863 -1.3 130,251 157,078 190,932

Cash flow (Rmbm) 12/15 12/16 12/17 12/18E % ch 12/19E % ch 12/20E 12/21E 12/22E Net income (before pref divs) (10,519) (5,790) (18,917) (33,471) -76.9 1,004 - 11,369 20,866 25,736 Depreciation & amortisation 178 574 844 2,661 215.2 2,778 4.4 3,223 3,522 3,940 Net change in working capital 2,951 3,451 2,512 (9,631) - (7,787) 19.2 1,479 1,334 (421) Other operating 3,386 (153) 15,250 26,399 73.1 2,043 -92.3 2,572 3,073 3,609 Operating cash flow (4,004) (1,918) (310) (14,042) NM (1,962) 86.0 18,644 28,796 32,864 Tangible capital expenditure (329) (347) (734) (2,354) -220.8 (3,910) -66.1 (3,069) (3,939) (4,720) Intangible capital expenditure (2) (3) (8) (16) -96.5 (25) -57.3 (36) (46) (55) Net (acquisitions) / disposals 4,545 44,769 51,117 45,891 -10.2 0 - 0 0 0 Other investing (3,362) (53,976) (65,532) (34,503) - (3,197) - (641) (503) (284) Investing cash flow 853 (9,557) (15,157) 9,017 - (7,133) - (3,745) (4,487) (5,058) Equity dividends paid 0 0 0 0 - 0 - 0 0 0 Share issues / (buybacks) 0 (1,786) (651) 0 - 0 - 0 0 0 Other financing 0 0 196 (21) - (65) -208.64 (40) (40) (40) Change in debt & pref shares 18,506 5,591 25,964 29,270 12.74 0 - 0 0 0 Financing cash flow 18,506 3,805 25,508 29,249 14.7 (65) - (40) (40) (40) Cash flow inc/(dec) in cash 15,354 (7,670) 10,040 24,225 141.3 (9,160) - 14,858 24,268 27,766 FX / non cash items - 242 (8) 0 100.0 0 - 0 0 0 Balance sheet inc/(dec) in cash - (7,428) 10,032 24,225 141.5 (9,160) - 14,858 24,268 27,766 Source: Company accounts, UBS estimates. (UBS) metrics use reported figures which have been adjusted by UBS analysts.

Initiation of Coverage: Meituan Dianping 24 October 2018  40

Meituan Dianping (3690.HK)

Valuation (x) 12/15 12/16 12/17 12/18E 12/19E 12/20E 12/21E 12/22E P/E (local GAAP, diluted) - - - NM NM 27.1 15.1 12.4 P/E (UBS, diluted) - - - (16.7) 80.7 21.1 12.8 10.6 P/CEPS - - - NM 41.9 15.6 10.1 8.5 Equity FCF (UBS) yield % - - - (6.1) (2.2) 5.8 9.3 10.5 Net dividend yield (%) - - - 0.0 0.0 0.0 0.0 0.0 P/BV x - - - NM NM NM NM 10.6 EV/revenues (core) - - - 3.6 2.2 1.5 1.1 0.8 EV/EBITDA (core) - - - -38.7 63.0 13.6 7.3 5.3 EV/EBIT (core) - - - NM NM 16.9 8.4 6.0 EV/OpFCF (core) - - - NM NM 15.1 7.8 5.6 EV/op. invested capital - - - NM NM NM NM NM

Enterprise value (Rmbm) 12/15 12/16 12/17 12/18E 12/19E 12/20E 12/21E 12/22E Market cap. - - - 267,550 267,550 267,550 267,550 267,550 Net debt (cash) (16,804) (13,090) (14,393) (31,521) (39,054) (41,903) (61,466) (87,483) Buy out of minorities 0 47 58 58 58 58 58 58 Pension provisions/other 0 0 0 0 0 0 0 0 Total enterprise value - - - 236,087 228,554 225,705 206,141 180,124 Non core assets (157) (2,385) (1,952) (1,652) (1,652) (1,652) (1,652) (1,652) Core enterprise value - - - 234,434 226,902 224,053 204,489 178,472

Growth (%) 12/15 12/16 12/17 12/18E 12/19E 12/20E 12/21E 12/22E Revenue - NM 161.2 92.4 57.3 42.3 28.4 19.8 EBITDA (UBS) - 31.5 47.5 -103.2 - NM 69.4 21.7 EBIT (UBS) - 26.2 38.8 -128.0 - NM 84.0 23.1 EPS (UBS, diluted) - 33.8 50.6 -60.7 - NM 65.5 20.0 Net DPS ------

Margins & Profitability (%) 12/15 12/16 12/17 12/18E 12/19E 12/20E 12/21E 12/22E Gross profit margin 69.2 45.7 36.0 26.6 35.6 38.4 40.3 40.6 EBITDA margin NM NM NM NM 3.5 11.3 14.9 15.1 EBIT margin -210.8 -48.2 -11.3 -13.4 0.8 9.1 13.0 13.3 Net earnings (UBS) margin NM NM NM NM 3.6 10.0 13.1 13.4 ROIC (EBIT) - 17.4 7.7 11.6 (1.0) (17.2) (31.4) (39.2) ROIC post tax - 17.4 7.7 11.6 NM NM NM NM ROE (UBS) - 24.7 8.4 18.5 (8.9) (43.4) (170.6) 241.0

Capital structure & Coverage (x) 12/15 12/16 12/17 12/18E 12/19E 12/20E 12/21E 12/22E Net debt / EBITDA 2.0 1.7 6.5 7.2 (9.6) (3.0) (2.6) (3.0) Net debt / total equity % 95.1 36.7 47.9 99.6 85.0 186.4 NM NM Net debt / (net debt + total equity) % 48.7 26.8 32.4 49.9 45.9 65.1 97.0 NM Net debt/EV % - - - (18.6) (15.2) (22.0) (36.0) (56.8) Capex / depreciation % NM 130.3 NM 110.8 172.8 113.0 130.4 137.0 Capex / revenue % 8.2 2.7 2.2 3.6 3.8 2.1 2.1 2.1 EBIT / net interest NM NM NM 45.0 NM NM NM NM Dividend cover (UBS) ------Div. payout ratio (UBS) % ------

Revenues by division (Rmbm) 12/15 12/16 12/17 12/18E 12/19E 12/20E 12/21E 12/22E Others 4,019 12,988 33,928 65,266 102,682 146,121 187,560 224,758 Total 4,019 12,988 33,928 65,266 102,682 146,121 187,560 224,758

EBIT (UBS) by division (Rmbm) 12/15 12/16 12/17 12/18E 12/19E 12/20E 12/21E 12/22E Others (8,474) (6,255) (3,826) (8,722) 823 13,245 24,370 29,991 Total (8,474) (6,255) (3,826) (8,722) 823 13,245 24,370 29,991 Source: Company accounts, UBS estimates. (UBS) metrics use reported figures which have been adjusted by UBS analysts.

Initiation of Coverage: Meituan Dianping 24 October 2018  41

Forecast returns

Forecast price appreciation +36.2%

Forecast dividend yield 0.0%

Forecast stock return +36.2%

Market return assumption 9.8%

Forecast excess return +26.4%

Valuation Method and Risk Statement We derive our price target from a DCF methodology. Key risks include competition and heavy investments. Alibaba could invest more in Ele.me and Koubei for a period of time to gain share in these critical O2O markets, even if their investments are less efficient due to their smaller scale. Meituan Dianping's investments in unprofitable new initiatives could put more pressure on its low margins than we expect. Other risks include: 1) potential growth slowdown if customer spending declines; 2) any unfavourable changes in macroeconomic environment and government regulations; 3) lower subsidies from restaurants; 4) limited benefits from secular industry shift. Upside risks include faster growth in food delivery, as cooking at home is in secular decline, and faster growth in in-store dining, as more merchants return to growth.

Initiation of Coverage: Meituan Dianping 24 October 2018  42

Required Disclosures This report has been prepared by UBS Securities Asia Limited, an affiliate of UBS AG. UBS AG, its subsidiaries, branches and affiliates are referred to herein as UBS. For information on the ways in which UBS manages conflicts and maintains independence of its research product; historical performance information; and certain additional disclosures concerning UBS research recommendations, please visit www.ubs.com/disclosures. The figures contained in performance charts refer to the past; past performance is not a reliable indicator of future results. Additional information will be made available upon request. UBS Securities Co. Limited is licensed to conduct securities investment consultancy businesses by the China Securities Regulatory Commission. UBS acts or may act as principal in the debt securities (or in related derivatives) that may be the subject of this report. This recommendation was finalized on: 23 October 2018 04:48 PM GMT. UBS has designated certain Research department members as Derivatives Research Analysts where those department members publish research principally on the analysis of the price or market for a derivative, and provide information reasonably sufficient upon which to base a decision to enter into a derivatives transaction. Where Derivatives Research Analysts co-author research reports with Equity Research Analysts or Economists, the Derivatives Research Analyst is responsible for the derivatives investment views, forecasts, and/or recommendations. Analyst Certification:Each research analyst primarily responsible for the content of this research report, in whole or in part, certifies that with respect to each security or issuer that the analyst covered in this report: (1) all of the views expressed accurately reflect his or her personal views about those securities or issuers and were prepared in an independent manner, including with respect to UBS, and (2) no part of his or her compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed by that research analyst in the research report. UBS Investment Research: Global Equity Rating Definitions

12-Month Rating Definition Coverage1 IB Services2 Buy FSR is > 6% above the MRA. 48% 24% Neutral FSR is between -6% and 6% of the MRA. 37% 21% Sell FSR is > 6% below the MRA. 15% 12%

Short-Term Rating Definition Coverage3 IB Services4 Stock price expected to rise within three months from the time <1% <1% Buy the rating was assigned because of a specific catalyst or event. Stock price expected to fall within three months from the time <1% <1% Sell the rating was assigned because of a specific catalyst or event.

Source: UBS. Rating allocations are as of 30 September 2018. 1:Percentage of companies under coverage globally within the 12-month rating category. 2:Percentage of companies within the 12-month rating category for which investment banking (IB) services were provided within the past 12 months. 3:Percentage of companies under coverage globally within the Short-Term rating category. 4:Percentage of companies within the Short-Term rating category for which investment banking (IB) services were provided within the past 12 months. KEY DEFINITIONS:Forecast Stock Return (FSR) is defined as expected percentage price appreciation plus gross dividend yield over the next 12 months. In some cases, this yield may be based on accrued dividends. Market Return Assumption (MRA) is defined as the one-year local market interest rate plus 5% (a proxy for, and not a forecast of, the equity risk premium). Under Review (UR) Stocks may be flagged as UR by the analyst, indicating that the stock's price target and/or rating are subject to possible change in the near term, usually in response to an event that may affect the investment case or valuation. Short-Term Ratings reflect the expected near-term (up to three months) performance of the stock and do not reflect any change in the fundamental view or investment case. Equity Price Targets have an investment horizon of 12 months.

Initiation of Coverage: Meituan Dianping 24 October 2018  43

EXCEPTIONS AND SPECIAL CASES:UK and European Investment Fund ratings and definitions are: Buy: Positive on factors such as structure, management, performance record, discount; Neutral: Neutral on factors such as structure, management, performance record, discount; Sell: Negative on factors such as structure, management, performance record, discount. Core Banding Exceptions (CBE): Exceptions to the standard +/-6% bands may be granted by the Investment Review Committee (IRC). Factors considered by the IRC include the stock's volatility and the credit spread of the respective company's debt. As a result, stocks deemed to be very high or low risk may be subject to higher or lower bands as they relate to the rating. When such exceptions apply, they will be identified in the Company Disclosures table in the relevant research piece. Research analysts contributing to this report who are employed by any non-US affiliate of UBS Securities LLC are not registered/qualified as research analysts with FINRA. Such analysts may not be associated persons of UBS Securities LLC and therefore are not subject to the FINRA restrictions on communications with a subject company, public appearances, and trading securities held by a research analyst account. The name of each affiliate and analyst employed by that affiliate contributing to this report, if any, follows. UBS AG Hong Kong Branch: Jerry Liu; Christine Peng, CFA; Angela Xu, CFA. Company Disclosures Company Name Reuters 12-month rating Short-term rating Price Price date

Meituan Dianping2, 4, 5, 16 3690.HK Not Rated N/A HK$55.05 23 Oct 2018

Source: UBS. All prices as of local market close. Ratings in this table are the most current published ratings prior to this report. They may be more recent than the stock pricing date 2. UBS AG, its affiliates or subsidiaries has acted as manager/co-manager in the underwriting or placement of securities of this company/entity or one of its affiliates within the past 12 months. 4. Within the past 12 months, UBS AG, its affiliates or subsidiaries has received compensation for investment banking services from this company/entity or one of its affiliates. 5. UBS AG, its affiliates or subsidiaries expect to receive or intend to seek compensation for investment banking services from this company/entity within the next three months. 16. UBS Securities (Hong Kong) Limited is a market maker in the HK-listed securities of this company. Unless otherwise indicated, please refer to the Valuation and Risk sections within the body of this report. For a complete set of disclosure statements associated with the companies discussed in this report, including information on valuation and risk, please contact UBS Securities LLC, 1285 Avenue of Americas, New York, NY 10019, USA, Attention: Investment Research. Meituan Dianping (HK$) Price Target (HK$) Stock Price (HK$) 80.0

60.0

40.0

20.0

0 .0 7 8 5 6 5 6 6 6 6 6 7 7 7 7 7 8 8 8 8 5 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 ------t r t t r t r g c g c g g c n b n b n b c c c c p e p e p e u e u u e u e u u u O F J O O F J O F J D A D A D A - - - A - - - A - A - - - A ------1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 No Rating

Date Stock Price (HK$) Price Target (HK$) Rating 2015-07-23 NaN - No Rating Source: UBS; as of 23 Oct 2018

Initiation of Coverage: Meituan Dianping 24 October 2018  44

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Initiation of Coverage: Meituan Dianping 24 October 2018  45

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