Meituan should carve up an albatross to create a unicorn

[TAIPEI] It's only been two months since Meituan Dianping's IPO, but it's time to go back to the bankers with another task: a spinoff.

In the first earnings release since September's Hong Kong trading debut, Meituan delivered a set of operating figures that indicate it's finding economies of scale in its core food delivery business.

There are two major reasons for this improvement: the company isn't burning quite so much cash on subsidies, and it has improved driver cost per delivery. Management still needs to tighten these, though, if it's to break even.

Meanwhile "in-store, hotel, and travel" continues to be a cash cow, delivering gross margins above 90 per cent and almost a quarter of sales.

It's the third business unit that needs some help. Meituan's "new and other initiatives" includes three major consumer-facing services: ride-hailing, bike rentals (Mobike) and non-food delivery. It also has two key business services: restaurant management systems, and food supply solutions.

Combined, these offerings posted a gross loss and reduced corporate gross profit by around 22 per cent. What's more, there's little likelihood they'll contribute meaningfully to income anytime soon.

Non-food delivery is merely an adjunct to food delivery, accounting for around 5 per cent of that category's total, and so Meituan may as well keep leveraging its driver network to earn some extra money.

Meanwhile, the company has already said it won't expand ride-hailing, an admission that this is a game it can't win. On Thursday night management said it will cut the Mobike fleet, noting that the business wasn't very well operated before it bought the company in April.

Neither ride-hailing nor bike rental are germane to Meituan's core competence. I predict that management will at some point realise that at least Mobike was a mistake and shut it down.

Those new business services, though, could be a real winner. Helping restaurants improve operations and supply chain management has the potential to be highly profitable and relatively immune to competition once clients sign up. A key value proposition for these services is to help clients boost efficiency and cut costs. As the economy slows, that's the kind of product many restaurants may want.

In Thursday night's investor relations call, management conceded that macroeconomic headwinds are instead forcing it to focus on its strengths and be more cautious about investing in new initiatives.

That's fiscally prudent. Unfortunately, it risks leaving the door open for competitors. Tencent Holdings Ltd, one of Meituan's biggest investors, plans to expand its business offerings, and this is precisely the type of sector it could target.

To deal with the conundrum, Meituan should carve these businesses out into a new unit. From there, it can take outside funding and sign up strategic investors. Doing so would also help the company unburden itself from a division that threatens to drag down the more mature units just as they're ready to hit profitability.

Doubtless Tencent would be eager to invest, as would dozens of venture capitalists looking for the next big thing.

In doing so, Meituan can carve up that albatross to create China's next unicorn.

BLOOMBERG