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Why Alibaba’s Big Success in Hong Kong is Bad News for Meituan Dianping

Meituan Dianping (SEHK:3690) has been a great-performing stock. Shares have soared from from under HK$50 at the beginning of the year to over HK$100 now due to the company’s strong growth numbers.

While Meituan has done very well in 2019, its shares might face a challenge ahead in Alibaba Group (NYSE:BABA) (SEHK: 9988). After several months of trying, Alibaba “came home” by debuting in Hong Kong in November.

Shares soared 10% in a few days thereafter, lifting both Alibaba’s valuation in Hong Kong and in New York. More importantly, Alibaba raised more than US$11 billion in its debut that it can put to use later.

Alibaba plans to use some of the money to compete against Meituan. Alibaba stated in a filing that it will use some of the capital raised

“to expand and promote our consumer service offering through our on-demand delivery and local services platform, Ele.me, and online travel platform, Fliggy.”

More competition

With the money raised, Alibaba can spend more on its Ele.me division, which has been in an all-out war with Meituan for market share in China’s local services/food delivery market. Alibaba bought full control of Ele.me last year.

If the e-commerce giant spends more on Ele.me, Meituan’s margins could suffer as a result. Given it is trading at a high valuation, investors are looking for a lot of growth ahead.

If Alibaba’s Ele.me’s division gains market share at the expense of Meituan then the latter’s growth could slow and its high valuation could correct.

Not all bad news

It’s not all bad news. Alibaba is fighting a multi-front war. It’s fighting Tencent (SEHK: 700) in the cloud and Pinduoduo (NASDAQ: PDD) and JD.com (NASDAQ: JD) in e-commerce. The company is also fighting traditional retailers with its “New Retail” effort.

Because it’s fighting a multi-front war, Alibaba might not invest that much into Ele.me with the new funds it raised. Food delivery isn’t a high-margin business like the cloud or artificial intelligence could be.

Alibaba could have better use of the capital raised, and management could decide to invest in other areas.

Meituan’s travel hedge

Fortunately for Meituan, the company is also mostly fighting Alibaba in local services/food delivery. Alibaba’s travel business isn’t as strong as its rival’s, and as a result, it might not invest much in that area to compete against Meituan.

In travel, Meituan has basically hit a home run. Due to its large user base and the ease of ordering in one single app, the tech firm’s travel business has skyrocketed in the past few years.

Having begun in 2014, Meituan now has more market share in travel than previous industry leader Trip.com (NASDAQ: TCOM). The travel business could also be more lucrative as it moves more into China’s richer, more affluent areas.

Macro winds still behind Meituan’s back

Although China’s economy is weak and the protests in Hong Kong remain ongoing, there is potential for a rally in the Hong Kong market.

Hong Kong stocks are undervalued by as much as 8-10% versus their historical 10-year averages. The trade tensions, meanwhile, between China and the US look like they’re improving rather than getting worse.

Over the past year, MSCI has also increased China’s percentage of the MSCI Emerging Markets Index, with domestic Chinese equities now making up around 4.1% of the index that many passive institutions must follow. If Hong Kong stocks rally hard, Meituan, as one of the leaders, will likely do well.

Key takeaway

Alibaba raising billions in Hong Kong means more competition for Meituan. For investors, the e-commerce firm’s future plans on how they’re going to spend the billions raised will be important.

If Alibaba is planning to spend billions fighting against Meituan, then growth for the latter could slow. A slowing growth stock could send the stock price lower.

In the long run, though, Meituan has many structural winds favouring it that means even Alibaba’s additional competition may not matter that much if management executes well.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Hong Kong contributor Jay Yao doesn’t own shares in any companies mentioned.