Meituan operates within the Chinese consumer service industry, which is set to benefit from demographic shifts from the rapid rise of the Chinese middle class and the consumption upgrades that will follow as disposable incomes rise. Between 2009 and 2030, China will add 850 million people to its middle class, according to Organisation for Economic Co-operation and Development projections. This means the Chinese middle class will grow from 12% of the country's population in 2009 to 73% in 2030, boosting consumer consumption.
In 2016, Chinese e-commerce sales grew to $750bn from 460 million online shoppers, according to Goldman Sachs. This market is expected to grow 23% annually to 2020 as rural and lower-tier cities experience logistic and infrastructure upgrades.
China also has the worlds largest number of mobile internet users. According to the China Internet Network Information Center, China’s online user base has increased to 800 million as of August 2018, or double the population of the US, and it still has room to grow, benefiting e-commerce service models like Meituan’s. Urbanisation is still significantly lower in China compared to the US and Europe and as more people move to the cities, Meituan’s services will see higher demand.
According to Internet World Stats, only 54.6% of the Chinese population are online compared with 89% in the US. We expect internet penetration and sector revenues to continue rising in the coming years due to the following factors: 1.
China has a similar proportion of city dwellers as the US did in 1940 with a population approximately five times the US' size, illustrating that there are still decades of above-average growth and urbanisation to come. 2.
According to McKinsey & Company, China’s mobile payments ecosystem is already 11 times larger than the US; as these trends continue to emerge it will be critical for mobile-savvy Chinese consumers to be online, increasing demand for e-commerce services.
According to iResearch consulting group, Meituan had a 59% share of China’s “on demand” food delivery market in the first quarter of this year with Alibaba’s Ele.me food delivery service being their biggest competitor. According to Shenzhen-based data aggregation company Jiguang, however, Alibaba leads the market by app installations. While it is debatable as to whether Alibaba-backed Ele.me or Tencent-backed Meituan lead the market, what is not debatable is the growth potential.
The IPO will provide funds for Meituan to compete within the growing Chinese e-commerce industry, allowing the firm to grow user numbers at the same rapid pace and sustain growth, which is a necessity for Meituan to drive eventual long-term profitabilty through scale as revenue growth will then surpass operating costs.
While there is significant upside potential for Meituan, the industry is highly competitive and does not come without challenges. The growth in the company's annual user base is compelling but the transaction value per user only rose 26% in the last year, indicating that once users are active they do not subsequently increase their spend by any considerable amount. There is also the fact that average transactions per user are only 18.8/year, meaning that the frequency of use is once every 2.7 weeks on average. Given the fast-growing online consumer service industry in China, growth potential certainly exists, but it is likely that this will come with significant marketing costs. Meituan-Dianping key services and participants (click here for full prospectus)