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Fitch: ‘Small’ Meituan fine not the end of regulatory risk

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Sentiment amongst Chinese tech investors has been at its highest level in months after Meituan (the UBER-eats of China) was handed a $US530 million fine from China’s State Administration for Market Regulation.

The fine – the latest in a sweeping crackdown on monopolistic behaviour by China’s tech giants – was viewed by global investors as being at the lower end of what was expected.

Subsequently, Meituan (HKG: 3690) shares surged as much as 8% on Monday and are currently trading up 13% so far this month.

The lower-than-expected fine has also seen other Chinese tech stocks rally in recent days.

Month-to-date, Alibaba (NYSE: BABA) is up around 13%, JD.com (NASDAQ: JD) is up 10%, Baidu (HKG: 9888) 7%, while Tencent (HKG: 0700) has gained 5%.

Regulatory risk not over

Despite the positive recent moves in the Chinese tech sector, Fitch Ratings has cautioned investors against believing the regulatory risk is over.

This is despite Fitch being one of the institutions that had expected Meituan would attract a bigger fine.

“The anti-trust penalty was lower than Fitch Ratings expected, but we believe regulatory pressure remains for the company’s operation,” Fitch said in a note.

“The fine accounts for 3% of Meituan’s revenue from China in 2020 and is half of our forecast of around CNY6.8 billion (US$1 billion).This allows for a higher net cash position at Meituan, but the company still faces regulatory risk, including the delivery rider benefit guideline implementation, which could impair its cash generation ability.

“Food delivery is one of Meituan’s profitable mature businesses, contributing over one third of the operating profit of its profitable businesses in 1H21. Its dominant market position and significant revenue contribution means any change in profitability will have a large corresponding impact on cash generation.

“Fitch expects a food delivery segment operating profit margin of 5% in 2021, but this may fall after the new rule is implemented, depending on the implementation scope and Meituan’s ability to share or pass down incremental costs.”

Fitch said any upgrade to its outlook for Meituan hinges on a 2022 recovery in profitability, particularly EBITDA, and the investment pace in new businesses.

Meituan’s fine was the result of exclusivity requirements it had been placing on businesses who use its platform.

Wang Jian, a member of China’s advisory group of the antimonopoly commission, told state media the punishment would “vigorously” maintain fairness in the online take-away industry.

“It serves as a warning to other platform-based companies and will drive the innovative development of the platform-based economy as a whole,” said Jian.

It is the second high-profile antitrust penalty handed down in China’s big tech crackdown.

Alibaba was fined $2.8 billion for similar exclusivity agreements it formerly placed on businesses that use its shopping platform.

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