The Motley Fool

1 Big Bullish Sign for Meituan Dianping Shares

Meituan Dianping (SEHK: 3690) has reached a level of self-sustainability.

According to Reuters, Meituan Dianping made RMB0.786 per share in 2019, and it’s expected to be profitable again by around RMB0.584 per share in 2020 – despite the coronavirus outbreak.

In the future, the market expects Meituan’s earnings per share (EPS) to increase further as the company gains more scale and implements various technologies to improve efficiency.

Recently, Meituan is reportedly planning to do something else that reflects self-sustainability. Here’s more on what investors need to know.

A sign of confidence in the future

According to the South China Morning Post, Meituan is reportedly planning to invest in an electric vehicle (EV) maker, Li Auto, in a concurrent funding round to Li Auto’s IPO.

In terms of its IPO, Li Auto is reportedly planning to raise as much as US$950 million in New York to further R&D and to help fund its capital expenditures.

Li Auto produces electric SUVs in China. Meituan investing in an EV maker signals investor confidence.

Although many EV maker stocks have rallied recently, EV makers aren’t without risk. Because they are in their growth stages, many EV makers aren’t self-sustainable yet.

So, investing in EV makers is fairly risky compared to investing in a high-quality corporate bond, for instance.

That Meituan is confident enough to invest in others is a bullish sign of management’s confidence in future profitability.

Meituan management would only consider investing in an EV maker if they were confident they didn’t need the capital invested to expand.

Why self-sustainability is important

Being self-sustaining/profitable is very important. By being self-sustaining, Meituan doesn’t have to issue more equity to fund itself.

By being profitable, Meituan could use the money to further growth. It could invest more in new markets; it could invest more in technology such as drone development or AI to improve efficiency.

Meituan could also use the money to further incentivise the build-out of its ecosystem by promoting the production of more mini-programmes.

If it chooses the traditional capital return route, the tech giant could also one day use profits to buy back stock or to pay dividends.

Future synergies?

Although internal combustion cars dominate today and hydrogen-fuelled vehicles could become compelling in terms of long-distance travel in the future, many analysts think that EVs will be a big part of the everyday transportation equation in the future.

Given that Meituan depends heavily on transportation, there could be future synergies if Li Auto gains enough scale, improves technology, and builds other models.

Currently, Li Auto is targeting the higher end of the market with models going for between RMB150,000 to as much as RMB500,000.

If the right conditions fall into place, however, Li Auto could be more focused on the “mass market” and Meituan could one day use its vehicles for delivery.

Foolish conclusion

According to the South China Morning Post, Meituan is reportedly investing in Li Auto. This is a bullish sign as it indicates management’s conference in its own future profitability.

In the long run, Meituan will need Li Auto to do well for its investment to pay off, however.

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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.