IPOs and Catalysts/Events, Global Equity Research Ltd

Arun George

IPOs and Catalysts/Events

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Global Equity Research Ltd

Global Equity Research was started in 2017 by a group of experienced research professionals. It was founded on a passionate belief in the importance and the need for uncompromised, independent, conflict-free research. We aim to provide differentiated and actionable primary and bottom up fundamental research.

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<p><a href="https://www.smartkarma.com/entities/26970" target="_blank" data-smartkarma-citation="entities:26970:1">Meituan Dianping (MEITUAN CH)</a> is set to kick off its IPO roadshow on 3 September and will be listed on the Hong Kong Exchange on 20 September. According to press reports, Meituan will raise at least $4 billion at a valuation of $50-55 billion, which is down from its earlier rumoured valuation of $60 billion.</p><p>At first glance, Meituan’s financial performance is highly encouraging as its rapid revenue growth is accompanied by narrowing losses and cash burn. The financial trajectory suggests that Meituan is on the cusp of profitability and positive FCF flow. The primary driver behind this performance is the food delivery segment. Food delivery became the largest business segment in 2017 (62% of group revenue) and made its first positive contribution to group gross profit in 2017.</p><p>Meituan’s valuation will be highly dependent on the food delivery segment as it is the main revenue contributor, the fastest growing segment and offers the largest headroom for margin improvement. Overall, we believe that the food delivery segment will struggle to produce the metrics required to justify the $50-55 billion valuation:</p><ol>
<li>The unit economics of food delivery companies vary widely based on their model, market share and market characteristics. According to the Dealroom.co, a market research firm, the gross margin of food delivery platforms with delivery services ranges from 17-62% based on the population density and affluence of the area. Meituan’ food delivery segment gross margin improved from -124% in 2015 to 8% in 2017. The main culprit for the low margin is the substantial delivery costs, which accounted for 95% of cost of sales in 2017.</li>
<li>When Meituan is responsible for delivery, it receives a delivery fee from both merchants and the transacting user. However, the delivery fees do not cover the costs. Meituan subsidies delivery costs to encourage consumer adoption of its platform in a fast-growing but competitive market.</li>
<li>The value of the food delivery segment will be heavily dependent on its long-term margin potential. The accounts detail that in the annual goodwill impairment tests, management’s top-end estimate of the food delivery segment’s gross margin has remained at 25% since 2015. The low gross margin implies at best an EBITDA margin of around 15%. In contrast, Dealroom.co suggests that best-in-class platforms with delivery services can achieve EBITDA margin of around 40%.</li>
</ol><p>Our SoTP valuation for Meituan is $40 billion (table below). This valuation is 20% below the low-end of the rumoured valuation range of $50-55 billion but 33% above the $30 billion valuation reported by the press at the October 2017 fundraising round.</p><div class="content-caption">SoTP valuation for Meituan</div><table class="table table-striped"><tbody>
<tr>
<td>Item</td>
<td style="text-align: right;">Valuation basis</td>
<td style="text-align: right;">Valuation (RMBm)</td>
<td style="text-align: right;">Valuation ($m)</td>
</tr>
<tr>
<td>Food delivery</td>
<td style="text-align: right;">DCF</td>
<td style="text-align: right;">70,022</td>
<td style="text-align: right;">10,192</td>
</tr>
<tr>
<td>In-store, hotel &amp; travel</td>
<td style="text-align: right;">DCF</td>
<td style="text-align: right;">149,653</td>
<td style="text-align: right;">21,784</td>
</tr>
<tr>
<td>New initiatives (ex. Mobike)</td>
<td style="text-align: right;">Median Chinese internet companies' 2018 EV/Sales of 3.3x</td>
<td style="text-align: right;">10,022</td>
<td style="text-align: right;">1,459</td>
</tr>
<tr>
<td>Mobike</td>
<td style="text-align: right;">Acquisition price</td>
<td style="text-align: right;">18,549</td>
<td style="text-align: right;">2,700</td>
</tr>
<tr>
<td>Net cash</td>
<td style="text-align: right;">FY17 balance (ex. Mobike)</td>
<td style="text-align: right;">26,536</td>
<td style="text-align: right;">3,863</td>
</tr>
<tr>
<td><strong>Group</strong></td>
<td style="text-align: right;"></td>
<td style="text-align: right;"></td>
<td style="text-align: right;"><strong>39,997</strong></td>
</tr>
</tbody></table><div class="content-caption">Source: Global Equity Research, Draft prospectus</div><p>We believe that the proposed IPO valuation range already factors in ambitious targets for the food delivery segment regarding market share and margins. As the DCF valuation sensitivity illustrates below, if the food delivery segment can maintain its current gross transaction value (GTV) market share at 60%, its terminal EBIT margin should be at least 10% to justify the rumoured IPO valuation range.</p><div class="content-caption">DCF valuation sensitivity to food delivery segment's terminal EBIT margin and GTV market share</div><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/061/784/original/DCF%20senstivity.png?1535304776" class="editor-image img-responsive" data-smartkarma-image-id="61784"></figure><div class="content-caption">Source: Global Equity Research; Note: Grey highlighted area denotes valuation at or higher than the rumoured IPO valuation range of $50-55 billion. The red highlighted box represents our valuation of Meituan Dianping</div><div class="content-highlight"><p>Meituan is a well-run company that has successfully established a strong foothold in its chosen market segments. However, Meituan is being overzealous with its proposed valuation which leaves little on the table for IPO investors. A reinvigorated competitor along with the structural limitations of its primary business segment makes the proposed IPO valuation range unappetising. </p></div>

Meituan Dianping (MEITUAN CH) is set to kick off its IPO roadshow on 3 September and will be listed on the Hong Kong Exchange on 20 September. According to press reports, Meituan will raise at least $4 billion at a valuation of $50-55 billion, which is down from its earlier rumoured valuation of $60 billion.At first glance, Meituan’s financial performance is highly encouraging as its rapid revenue growth is accompanied by narrowing losses and cash burn. The financial trajectory suggests that Meituan is on the cusp of profitability and positive FCF flow. The primary driver behind this performance is the food delivery segment. Food delivery became the largest business segment in 2017 (62% of group revenue) and made its first positive contribution to group gross profit in 2017.Meituan’s valuation will be highly dependent on the food delivery segment as it is the main revenue contributor, the fastest growing segment and offers the largest headroom for margin improvement. Overall, we believe that the food delivery segment will struggle to produce the metrics required to justify the $50-55 billion valuation:
The unit economics of food delivery companies vary widely based on their model, market share and market characteristics. According to the Dealroom.co, a market research firm, the gross margin of food delivery platforms with delivery services ranges from 17-62% based on the population density and affluence of the area. Meituan’ food delivery segment gross margin improved from -124% in 2015 to 8% in 2017. The main culprit for the low margin is the substantial delivery costs, which accounted for 95% of cost of sales in 2017.
When Meituan is responsible for delivery, it receives a delivery fee from both merchants and the transacting user. However, the delivery fees do not cover the costs. Meituan subsidies delivery costs to encourage consumer adoption of its platform in a fast-growing but competitive market.
The value of the food delivery segment will be heavily dependent on its long-term margin potential. The accounts detail that in the annual goodwill impairment tests, management’s top-end estimate of the food delivery segment’s gross margin has remained at 25% since 2015. The low gross margin implies at best an EBITDA margin of around 15%. In contrast, Dealroom.co suggests that best-in-class platforms with delivery services can achieve EBITDA margin of around 40%.
Our SoTP valuation for Meituan is $40 billion (table below). This valuation is 20% below the low-end of the rumoured valuation range of $50-55 billion but 33% above the $30 billion valuation reported by the press at the October 2017 fundraising round.SoTP valuation for Meituan

Item
Valuation basis
Valuation (RMBm)
Valuation ($m)


Food delivery
DCF
70,022
10,192


In-store, hotel &amp; travel
DCF
149,653
21,784


New initiatives (ex. Mobike)
Median Chinese internet companies' 2018 EV/Sales of 3.3x
10,022
1,459


Mobike
Acquisition price
18,549
2,700


Net cash
FY17 balance (ex. Mobike)
26,536
3,863


Group


39,997

Source: Global Equity Research, Draft prospectusWe believe that the proposed IPO valuation range already factors in ambitious targets for the food delivery segment regarding market share and margins. As the DCF valuation sensitivity illustrates below, if the food delivery segment can maintain its current gross transaction value (GTV) market share at 60%, its terminal EBIT margin should be at least 10% to justify the rumoured IPO valuation range.DCF valuation sensitivity to food delivery segment's terminal EBIT margin and GTV market shareSource: Global Equity Research; Note: Grey highlighted area denotes valuation at or higher than the rumoured IPO valuation range of $50-55 billion. The red highlighted box represents our valuation of Meituan DianpingMeituan is a well-run company that has successfully established a strong foothold in its chosen market segments. However, Meituan is being overzealous with its proposed valuation which leaves little on the table for IPO investors. A reinvigorated competitor along with the structural limitations of its primary business segment makes the proposed IPO valuation range unappetising. 

Meituan Dianping IPO Preview: Unpalatable Valuation Due to Structural Limitations

Technical Analyst, Vermilion Research

Joe Jasper

Technical Analyst

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<p>Developed international equities (MSCI EAFE) have been underperforming relative to global equities (MSCI ACWI). However, within EAFE, SMID-caps tell a different story and are a great source of investment ideas within the EAFE region. In today’s report we use a bottom-up approach to highlight actionable charts, sorted by market cap (all buys at current levels).</p>

Developed international equities (MSCI EAFE) have been underperforming relative to global equities (MSCI ACWI). However, within EAFE, SMID-caps tell a different story and are a great source of investment ideas within the EAFE region. In today’s report we use a bottom-up approach to highlight actionable charts, sorted by market cap (all buys at current levels).

United Kingdom

Just Eat PLC provides online marketplace for restaurant delivery. The Company offers online takeaway ordering services that allows consumers to search for and order in real-time from their local takeaway restaurants. Just Eat operates worldwide.

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Just Eat (JE/ LN)

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