Meituan shows that China’s technology is not yet delivering

Chinese food-delivery giant Meituan is the latest case. Shares of the Hong Kong-listed company lost 18% – or nearly $32 billion in market value – in two trading days after China’s state planner suggested on Friday that online food-delivery platforms should be sent to help struggling restaurants. Fees should be cut. Meituan’s shares have shed more than half from their peak a year ago.

Friday’s policy guidelines from state economic planners and 13 other government bodies are aimed at helping industries that have been badly hit by the pandemic, such as restaurants and retail. The guidelines also include other measures to support the service sector such as tax breaks and subsidies.

China’s retail sales lag behind other drivers of economic growth. Small and medium-sized businesses are performing particularly poorly.

There is no mention of when or for how long the online food-delivery platform should cut fees. Meituan’s take on every dollar spent on food delivery on its platform accounted for about 13.4% in the third quarter of 2021. Morgan Stanley estimates that a one percent drop in that monetization rate would reduce Meituan’s overall food-delivery revenue by 7%. Meituan made more than half of its revenue from food delivery in the third quarter, although its higher-margin hotel and travel segment delivered higher profits.

If this proves to be only a short-term measure to shore up struggling restaurants, the market could overreact. Meituan provided subsidies and discounts to its merchants at the beginning of China’s initial COVID-19 outbreak in 2020, but sales quickly recovered once the epidemic was brought under control.

But it looks like investors are taking a stern message. Other Chinese technology stocks, which really shouldn’t see much of a direct impact from the new guidelines, have also fallen. Alibaba and Tencent are both down about 7% in the past two trading days.

Predicting the long-term growth and profits of consumer-technology companies clearly becomes more difficult if their pursuit clashes with Beijing’s other high-end objectives, such as curbing the market power of a large private conglomerate. Such concerns were, of course, behind the steep fall in Chinese tech stocks last year.

These new guidelines show that the stocks are by no means out of the woods yet. Furthermore, with China clearly with its “zero-Covid” approach still set to be on for some time, it could take a long time before service-sector consumption in general recovers.

China’s tech sector has been relatively resilient this year compared to the carnage in the US. Now investors are realizing they may be too complacent: regulatory risks are clearly not going away.

This story has been published without modification to the text from a wire agency feed