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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 www.ubs.com/investmentresearch 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.