HONG KONG (S&P Global Ratings) June 2, 2021--S&P Global Ratings today said that execution risks are rising for Meituan (BBB-/Negative/--) as it continues to incur substantial cash outflow to build up its presence in a promising but unproven business model. China's biggest food delivery firm is accelerating investment in community buying, an emerging retail model involving bulk buying online. The buildout led to a sharp operating loss in the first quarter of 2021, which we anticipate could persist for the next two years until the segment reaches critical mass. Community buying is attracting more competition, forcing early entrants such as Meituan to invest ever larger sums to keep up.
Meituan's financial discipline during this build-out phase and the intensity of its competition will play an important role on our investment-grade ratings on the firm. Meituan's operating loss widened to Chinese renminbi (RMB) 4.8 billion in the first quarter of 2021, from a loss of RMB2.9 billion in the fourth quarter last year. This was largely due to investments in its community buying vehicle, Meituan Select, and was within our expectations.
The firm's losses will likely worsen over 2021. Meituan is on track to record negative EBITDA of RMB15 billion-RMB20 billion in both 2021 and 2022. It should also see free operating cash outflow of RMB23 billion in 2021, and RMB9 billion-RMB14 billion in 2022.
The solid performance of Meituan's food delivery, and in-store hotel and travel segments have been insufficient to offset investment spending associated with community buying. Even without locking merchants in by forcing them to choose just one platform, Meituan saw healthy growth in users and merchants in the past quarter.
The negative outlook on our ratings on Meituan reflects the high execution risk involved in Meituan Select, which could incur larger losses in free operating cash flow over a longer period than we now expect.
Community buying generally involves a network of shoppers working with a leader to find items and take delivery. Meituan charges a price mark-up for offering the platform on which transactions take place and providing warehouse and logistics services.
- Meituan Outlook Revised To Negative On Investment Execution Risk; 'BBB-' Ratings Affirmed, April 1, 2021
- Community Buying: China's Next Big Thing, Or Cash-Draining Fad?, Jan. 18, 2021
This report does not constitute a rating action.
|Primary Credit Analyst:||Aras Poon, Hong Kong (852) 2532-8069;|
|Secondary Contacts:||Ava Chang, Hong Kong (852) 2533-3530;|
|Sandy Lim, CFA, Hong Kong + 852 2533 3578;|
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