Our thoughts on Chinese regulators fining Meituan $530 million

After the market closed today (8 Oct), China’s antitrust regulators announced the penalties on Meituan for its monopolistic practices. 

The fine imposed, equivalent to US$530 million, is smaller than the US$1 billion that the outside had anticipated. The regulator, State Administration for Market Regulation (SAMR), also ordered Meituan to return about US$200 million worth of deposits to the merchants. 

The offense, for which Meituan was penalised, was to force merchants to work exclusively with Meituan (not its competitors), and the deposits were paid by merchants who had signed up for this arrangement. 

In a statement to investors, Meituan’s founder (and board chairman) Wang Xing said:

“​​The Company will implement a comprehensive and in-depth self-rectification program according to the Decision and the Guidance, and prohibit the “pick-one-from-two” conduct. The Company will also take this lesson to heart, operate in accordance with law, consciously maintain orderly fair competition, earnestly fulfill its responsibility to society, better obey and serve the socioeconomic development, and contribute more towards the high-quality development of the national economics.”

My investors, who are very excited about the arrangement, asked us whether this signals the end of Meituan’s troubles.

Our thoughts: 

1. It is good that the fine (3% of Meituan’s domestic sales) is lighter than the one imposed on Alibaba (4% of domestic sales). We suspect a key reason was that compared to Alibaba, which had forced lots of sellers into the arrangement, Meituan imposed this upon a much smaller cohort of F&B establishments.

2. In addition, Meituan had that arrangement between 2018 and 2020, stopping way before the antitrust investigation. In comparison, Alibaba had it for almost a decade, first targeting JD.com and subsequently on the fast rising Pinduoduo in 2018.

3. Meituan has also been very cooperative in the investigation. After the announcement today, Meituan made its own public announcement to accept and ‘resolutely implement’ the measures. Alibaba said something similar but Jack Ma’s initial attitude must have made some people at the top of the Chinese establishment very unease.

4. The fine has minimal impact on Meituan’s cash flow. The company had about US$11 billion of cash as of 30 June 2021.

5. We have reviewed a number of on the ground studies in various provinces in China, as well as discussed with our community members on the ground in major cities. The general sense is that Meituan is still growing fast, Pinduoduo is slowing down.

6. At the same time, Ele.me has seen a marked and steady decline since Nov 2020, even after Alibaba’s increased commitments in funding, people, and organisational support. We will anyway learn about the actual results of these competing companies in the upcoming Q3 results.

7. We see the regulatory actions here as an important correction on the internet sector. It is important for regulators to set some boundaries to ensure healthy competition. Anyway, we have explained the series of tech crackdowns in China in a series of posts.

8. While the social security for riders issue is yet to be resolved, we remain bullish about the long term prospects of Meituan, and the fact that its (regulated) growth is in line with the ‘common prosperity’ vision of the Chinese government.