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Rating Action:

Moody's assigns first-time Baa3 ratings to Meituan; outlook stable

 The document has been translated in other languages

19 Oct 2020

Hong Kong, October 19, 2020 -- Moody's Investors Service has assigned a Baa3 issuer rating to Meituan. In addition, Moody's has assigned a Baa3 senior unsecured rating to the proposed notes to be issued by Meituan.

The outlook on all ratings is stable.

Meituan will use the proceeds from the proposed issuance for general corporate purposes.

RATINGS RATIONALE

"The Baa3 ratings reflect the company's leading market positions in China's food delivery, in-store, hotel and travel services, and the fact that it has been able to leverage its established food delivery business to cross-sell high-margin hotel booking and in-store services, thereby improving its overall consolidated profit margins," says Ying Wang, a Moody's Vice President and Senior Analyst.

"The ratings also consider Meituan's track record of monetizing benefits from Tencent Holdings Limited's strategic investment in the company since 2015, as well as its strong liquidity profile with a net cash position," adds Wang.

At the same time, the ratings are constrained by the intense competition in Meituan's key business segments, particularly in the low-margin food delivery industry, as well as investment and execution risks associated with the company's new business initiatives. The ratings also consider Meituan's short track record of profitable operations, partly mitigated by its growing economies of scale which help to sustain its profitability. It has achieved positive adjusted EBITDA since the first quarter of 2019, which should continue.

Meituan is China's largest food delivery operator and online hotel booking platform by gross transaction volume (GTV) and domestic room nights, accounting for 67%[1] and 49%[2] of addressable markets respectively in 2019.

Meituan operates an integrated consumer services platform that offers a broad range of diverse services, such as other in-store local services, bike sharing and grocery retail services among other offerings. This integrated service model allows the company to offer a wide spectrum of services to its steadily growing food delivery user base, resulting in cost-effective business scope expansion. Growing economies of scale on this integrated platform drives the company's cash flow generation and margin improvement.

Benefiting from this integrated business model, Meituan acquired about 75% of its new hotel booking users from its food delivery and in-store dining service user base in 2019. The company's market share for booking services grew to 49%[3] in 2019 from 31%[4] in 2017, positioning the company as China's largest online travel platform. Meituan's established market leader position and favorable cost structure underpin the steady cash flow growth of its in-store, hotel and travel segment.

Moody's forecasts Meituan's revenue will grow 35%-45% on average per year in the next two years to reach over RMB220 billion in 2022, up from around RMB110 billion in 2020. This growth will be driven primarily by the steady expansion of its food delivery and in-store, hotel and travel segments, which comprised 56% and 23% of Meituan's total revenues in 2019 respectively.

Despite reduced demand for lifestyle products in the first quarter of 2020 due to COVID-19, Meituan's operations have been recovering since the second quarter of 2020. Moody's expects consumption levels in China will return to normal from the second half of 2020. Meituan generates almost all of its revenue from China.

Moody's expects Meituan's adjusted EBITDA margin will improve to around 11%-12% in 2022 from around 7.6% in the 12 months ending 2020, driven by the growth of its in-store, hotel and travel segment which carries a higher gross margin than food delivery services. Moody's expects it to generate RMB15-25 billion in EBITDA per year in the next 12-24 months, which will more than offset the increase in debt and allow Meituan to maintain a healthy leverage -- as measured by debt/EBITDA -- of around 2.2x, a level appropriate for its Baa3 ratings.

Meituan's ratings also consider its operational synergy with Tencent Holdings Limited (A1 stable), which had a 18.0% equity stake in Meituan as of 30 June 2020. The synergy is evidenced by user traffic from Weixin and QQ apps, and access to lower-cost technology infrastructure and digital payment solutions provided by Tencent.

That said, the company faces intense competition from various industry peers in its key operating segments, including food delivery and in-store, hotel and travel services. Moody's expects Meituan to continue investing in products, technology and marketing to maintain its leading market positions.

Meituan also has plans to further expand into new businesses such as grocery retail services, bike-sharing and financial services . Some of the new business operations are incurring losses and thus will hinder Meituan's overall profitability over the next two to three years. But this will be partially mitigated by the company's growing cash flow from its food delivery and in-store, hotel and travel segments, as well as its solid net cash position after including its short-term investments as a cash-like item.

Meituan's liquidity is excellent. It had more than RMB58 billion of cash and short-term investments at 30 June 2020, which, together with its expected operating cash flow, will be more than sufficient to cover its planned capital spending needs. The company has no plans to distribute dividends in the next 2-3 years.

Meituan's issuer rating is not affected by subordination to claims at the operating company level, because the holding company benefits from contractual cash flow upstreamed from its operating companies. In addition, despite the issuer's status as a holding company, Moody's expects the company's diverse operations across different business segments as a meaningful mitigant against structural subordination risk.

Meituan's ratings take into consideration the following environmental, governance and social (ESG) factors.

In terms of social risk, Moody's has considered operational and financial risks due to noncompliance with regulations regarding food safety and staff safety with regards to the company's delivery team. This risk is partially mitigated by the presence of internal controls and the company's track record of regulatory compliance.

Moody's regards the coronavirus outbreak as a social risk under its ESG framework, given the substantial implications for public health and safety. Meituan's ratings factor in the fact that the company's operations have been recovering since 2Q 2020, and that the breadth and severity of the shock impacting consumption has been partially offset by its solid market position, prudent financial management and liquidity buffer.

In terms of governance risk, Moody's has considered the high concentration of ownership and voting rights in the company's co-founders Wang Xing, Mu Rongjun and Wang Huiwen. This risk is partially mitigated by Meituan's status as a listed entity, and its adherence to stringent disclosure requirements. Moody's also notes that one board member is from Tencent Holdings Limited out of a total of eight members as of 31 December 2019.

Meituan's new business initiatives require ongoing investments but Moody's expects Meituan to exercise prudence in managing the pace of investment regarding its new business initiatives.

FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS

The stable outlook reflects Moody's expectation that Meituan will (1) maintain its strong market position in the food delivery, in-store and online travel services industries in China; (2) grow its revenue scale while maintaining its profitability; (3) pursue a prudent financial policy in capital spending, new business investments and shareholder distributions; and (4) maintain its strong liquidity, all on a sustained basis.

Upward rating pressure could emerge over the medium to long term if Meituan achieves its growth targets while maintaining a strong financial profile, overcoming the execution risks associated with its new business initiatives and intense competition.

Specifically, Moody's could upgrade the ratings if the company significantly expands its business scale and scope while maintaining a strong financial profile, including keeping its adjusted debt/EBITDA consistently below 2.0x -- 2.5x, and solid net cash position after including the short-term investments as a cash-like item.

The company will also need to maintain a consistent free cash flow generation and record positive contribution from its new business operations, on a sustained basis, in order to be considered for an upgrade.

Downward rating pressure could arise if (1) the company fails to fend off competition and its food delivery or travel service business is substantially disrupted, weakening its revenue growth and cash flow generation for a prolonged period; (2) it deviates from its prudent financial policy and grows its user base, or business scope at the expense of its currently strong financial profile; or (3) it engages in aggressive acquisitions that strain its balance-sheet liquidity or weaken its overall risk profile.

Specifically, Moody's could downgrade the issuer rating if (1) its adjusted debt/EBITDA rises above 3.5x and it loses its net cash position, and (2) its cash flow coverage of debt declines, all on a sustained basis.

Any weakening of strategic partnership with Tencent, such as disposal of substantial shareholding interests would also be credit negative.

Adverse developments in China's regulatory regime that affect Meituan's operations or business model would also be credit negative.

The principal methodology used in these ratings was Business and Consumer Service Industry published in October 2016 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1037985. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

Meituan is a leading one-stop lifestyle platform for locally produced consumer products and retail services, including entertainment, dining, delivery, travel and other services. The company was founded in Beijing, China, in 2010, and listed on the Hong Kong Stock Exchange in 2018.

REGULATORY DISCLOSURES

For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.

These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.

Moody's considers a rated entity or its agent(s) to be participating when it maintains an overall relationship with Moody's. Unless noted in the Regulatory Disclosures as a Non-Participating Entity, the rated entity is participating and the rated entity or its agent(s) generally provides Moody's with information for the purposes of its ratings process. Please refer to www.moodys.com for the Regulatory Disclosures for each credit rating action under the ratings tab on the issuer/entity page and for details of Moody's Policy for Designating Non-Participating Rated Entities.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1133569.

At least one ESG consideration was material to the credit rating action(s) announced and described above.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.

REFERENCES/CITATIONS

[1] Trustdata Report (August 2020)

[2] Trustdata Report (March 2020)

[3] Trustdata Report (March 2020)

[4] iResearch Report (June 2018) as referenced in Meituan's IPO Prospectus (September 2018)

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

The first name below is the lead rating analyst for this Credit Rating and the last name below is the person primarily responsible for approving this Credit Rating.

Ying Wang
Vice President - Senior Analyst
Corporate Finance Group
Moody's Investors Service Hong Kong Ltd.
24/F One Pacific Place
88 Queensway
Hong Kong
China (Hong Kong S.A.R.)
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077

Clement Cheuk Yiu Wong
Associate Managing Director
Corporate Finance Group
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077

Releasing Office:
Moody's Investors Service Hong Kong Ltd.
24/F One Pacific Place
88 Queensway
Hong Kong
China (Hong Kong S.A.R.)
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077

No Related Data.
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