Meituan shows pragmatism is a dish best served hot

AS LONG as Meituan Dianping is posting operating losses, any revenue figure that beats analyst estimates is irrelevant.

That's what happened late on Monday. Fourth-quarter revenue of 19.8 billion yuan (S$4 billion) surpassed even the highest of expectations, yet operating loss almost tripled to 11.1 billion yuan.

Now that it's a public company, the Chinese provider of food delivery, hotel bookings and restaurant management systems needs to focus on tightening margins and boosting the bottom line.

The decision to close down much of its bike-rental business is precisely the kind of pragmatism investors should be rewarding. I don't expect shareholders to cheer a 1.3 billion yuan impairment of intangibles, nor the one-time 359 million yuan hit for restructuring that business, but if it stems the bleeding across the company, then rewards should follow.

By shuttering the overseas operations of Mobike, Meituan is indirectly admitting that the April transaction was a mistake. I predicted this decision back in November, but didn't expect the company to recognise the need quite so quickly.

Meituan's income statement proves why this is a positive development. The company paid 15.6 billion yuan for Mobike, which held just 2.7 billion yuan in identifiable assets. Since April 4, the bike-rental company contributed a paltry 1.5 billion yuan in revenue to its new owner, yet contributed 4.55 billion yuan in losses. That item alone is the reason why Meituan's operating-loss margin expanded last year, to 17 per cent from 11.3 per cent. Removing both the revenue and loss contributions from Mobike, the company's full-year operating-loss margin would have narrowed to 10.3 per cent.

Similar metrics played out in the fourth quarter, the period in which the company recognised the one-time costs of winding down Mobike's overseas business. General and administrative expenses ballooned to 14.4 per cent of revenue, from 8.7 per cent a year earlier. If not for the restructuring charges, this figure would have fallen to 6.9 per cent. Management seems to know what it did wrong, outlining its 2019 strategy for investors: "We will take a more disciplined approach when allocating capital resources for our new initiatives and be more selective in scaling up new initiatives. We will improve the operational efficiencies and significantly narrow the operating losses of both our car-hailing and bike-sharing businesses."

By cutting its losses, Meituan can now focus on its core battle against ele.me, the delivery service backed by Alibaba Group Holding Ltd.

Other data from fourth-quarter earnings indicate this business is actually improving, not going backwards. Gross margin in food delivery, for example, more than doubled to 13.4 per cent from a year earlier. Not only did transactions and deliveries increase during the period, the average transaction per delivery widened.

So too did the monetisation rate, which measures the amount of revenue Meituan gets to keep from every yuan in orders. A significant drop in marketing costs, to 22.9 per cent of revenue from 32.1 per cent, is one of the biggest reasons for optimism. Provided this lower figure can be sustained, it indicates that Meituan is indeed benefiting from economies of scale and word of mouth. That would mean it doesn't have to keep spending just to buy revenue.

If there's an area of concern for investors it's the company's quarter-on-quarter metrics. Gross margin and monetisation both slipped from the third quarter. Management put this down to higher payments to drivers amid colder winter weather, and the need to boost subsidies because of heightened competition from ele.me. This subsidy battle shouldn't be dismissed, and could become the single biggest risk to Meituan in 2019. Yet the fact that management has already shown its willingness to be pragmatic, even if it means incurring significant one-time costs, might indicate the company knows where to draw the line. BLOOMBERG