Daily Equities Bottom-Up: Meituan Dianping: Core Business Progress Toward Profitability an Overlooked Story? and more

In this briefing:

1. Meituan Dianping: Core Business Progress Toward Profitability an Overlooked Story?
2. Onward Quits Zozo: Another Dent in Zozo’s Reputation
3. Workman Vs. Decathlon: The Upcoming Battle for Japan’s Sports Market
4. Dr Lal Pathlabs: Pricing Pressure, Lower Earnings Growth Leave Room for Downside
5. Autohome (ATHM): Commission Conflict with Dealers, as Auto Industry Suffers First Decline Since 1990

1. Meituan Dianping: Core Business Progress Toward Profitability an Overlooked Story?

• Our deep-dive segment profitability analysis reveals that Meituan Dianping’s (3690 HK) core business (combined food delivery and in-store, hotel & travel) has made good progress toward profitability.
• The ballooning consolidated operating losses mainly stem from new initiatives (particularly car hailing and Mobike).
• Furthermore, lower S&M expenses to sales ratio plus food delivery’s higher take rate suggests that competition with Ele.me is more manageable than anticipated.
• Our SOTP yields intrinsic value of HK$61.07/share, that represents 37% upside potential. 

2. Onward Quits Zozo: Another Dent in Zozo’s Reputation

ZOZO (3092 JP) has been hit from all sides recently, with a major sell-off by investors disturbed by Zozo’s execution of its private brand launch and the resulting impact on the company’s reputation among merchants and consumers alike.

Last month it launched a new campaign which, on the surface, was all about helping customers give back to society, but which drew an immediate negative response from some merchants.

One of these, Onward Holdings, withdrew all its brands from sale on Zozo. This is another damaging dent in Zozo’s reputation. 

3. Workman Vs. Decathlon: The Upcoming Battle for Japan’s Sports Market

Decathlon is a category killer sans pareil and will finally open its first store in Japan in March. If Decathlon implements its store roll out well, the French sports retailer will cause a major disruption in Japan’s sports market.

Large domestic sports retailers like Xebio Holdings (8281 JP) and Alpen Co Ltd (3028 JP) will be gearing up to compete in some categories but are far behind in private label development and cost performance, and the major sports brands will have to accelerate their plans for retail stores while reviewing pricing (downwards). Sports firms like Mizuno (8022 JP), with relatively low perceived brand value, could face challenges in the newly polarised market that will emerge from Decathlon’s entry.

A major source of competition for Decathlon will come from a more unlikely retailer: the uniforms to outdoor apparel/gear firm, Workman (7564 JP). While still small, Workman is already manoeuvring to hinder Decathlon’s growth in Japan, and looks like having establishment backing to do so – and echoes the growth of Uniqlo after Gap entered the Japanese market in the 1990s and the rise and rise of Nitori (9843 JP) after IKEA’s launch in 2006.

Both Gap and IKEA have relatively small operations in Japan today compared to their early potential. Decathlon will need to expand rapidly if it is to gain sufficient share to stop Workman emerging with a clear lead in its market. 

4. Dr Lal Pathlabs: Pricing Pressure, Lower Earnings Growth Leave Room for Downside

• Dr Lal Pathlabs (DLPL IN) is the largest pathology chain in India and caters to the Rs 600 bn market growing at 15% Cagr. It is strongest in the lucrative NCR and Kolkata markets.
• Management has the best capital allocation track record in the pathology chain space. Network expansion mirrored patient volume growth.
• Patient volume growth has been the strongest among peers.
• However, revenue/patient has been declining as competitive pressure forced them to do away with price hikes for 2 consecutive years (2017-18). Increasing bundling of tests without adequate price hikes leading to sharp decline in revenue/sample.
• Expansion into eastern India with second central reference lab will drive down realizations
• Revenue growth deceleration and Ebitda margin contraction over FY17-18 looks to have stabilized now but are unlikely to revive.
• We expect Revenue and PAT Cagr of 15% and 16% respectively over FY18-21 against 21% and 34% respectively delivered over FY13-16.
• At CMP of Rs 996, Dr Lal trades at 36.1x FY20 EPS. Dr Lal’s steep multiples could see some compression with the lower growth trajectory and once the faster-growing Metropolis lists in the market. Our target price (30x FY20F) is Rs 827 implying 17% downside.

5. Autohome (ATHM): Commission Conflict with Dealers, as Auto Industry Suffers First Decline Since 1990

• China vehicle sales volume declined in 2018, which was the first time since 1990.
• Car dealers are negotiating commission rate with Autohome.
• We believe Autohome has more bargaining power than dealers, but will compromise to some extent.
• Our previous financial assumptions had already integrate the potential weakness in automobile industry.
• The stock price has been fully reflected the impact of the negotiation.