Forensic Analyst

Jason Yap, CFA

Forensic Accounting

The State Administration for Market Regulation, China's antitrust regulator, imposed a fine of RMB3.4 billion (USD530 million) on food delivery group <a href="https://www.smartkarma.com/entities/meituan-dianping" target="_blank" data-smartkarma-citation="entities:26970:1" rel="noopener">Meituan (3690 HK)</a> for abusing its market position and ordered the company to rectify its operations.Amongst other required remedial actions, Meituan was ordered to return deposit money to merchants. Merchant had reportedly used deposits, algorithms, and data to ensure that its restaurant merchants remained loyal to the platform, according to an <a href="https://www.ft.com/content/8862b118-75ad-45b1-85df-b3fa09d26ac3" target="_blank" rel="noopener">FT article</a>. This begs the question. Why are merchant deposits required by e-commerce companies like Meituan, <a href="https://www.smartkarma.com/entities/alibaba-group" target="_blank" data-smartkarma-citation="entities:28434:1" rel="noopener">Alibaba Group (9988 HK)</a> and <a href="https://www.smartkarma.com/entities/pinduoduo-inc" target="_blank" data-smartkarma-citation="entities:27250:1" rel="noopener">Pinduoduo (PDD US)</a>? After all, most of the merchant transactions are 3P, which means the platforms do not carry any inventory risk and therefore do not need merchant deposits to offset risks. Could it be to increase switching costs or even to hold merchants ransom as the FT article suggests. In this Insight, we discuss how merchant deposits and merchant payables have been used as a means to pad operating cashflows (even though they are not strictly free cashflows), particularly for fast growing e-commerce platforms.Further, we have seen the "walled gardens" of China's tech giants <a href="https://www.scmp.com/tech/big-tech/article/3148572/big-techs-walled-gardens-start-crack-tencent-vows-follow-beijings" target="_blank" rel="noopener">start to crack</a> - in other words, merchants can freely switch platforms taking away merchant deposits with them, which could potentially affect cashflows.

The State Administration for Market Regulation, China's antitrust regulator, imposed a fine of RMB3.4 billion (USD530 million) on food delivery group Meituan (3690 HK) for abusing its market position and ordered the company to rectify its operations.Amongst other required remedial actions, Meituan was ordered to return deposit money to merchants. Merchant had reportedly used deposits, algorithms, and data to ensure that its restaurant merchants remained loyal to the platform, according to an FT article. This begs the question. Why are merchant deposits required by e-commerce companies like Meituan, Alibaba Group (9988 HK) and Pinduoduo (PDD US)? After all, most of the merchant transactions are 3P, which means the platforms do not carry any inventory risk and therefore do not need merchant deposits to offset risks. Could it be to increase switching costs or even to hold merchants ransom as the FT article suggests. In this Insight, we discuss how merchant deposits and merchant payables have been used as a means to pad operating cashflows (even though they are not strictly free cashflows), particularly for fast growing e-commerce platforms.Further, we have seen the "walled gardens" of China's tech giants start to crack - in other words, merchants can freely switch platforms taking away merchant deposits with them, which could potentially affect cashflows.  

Merchant Deposits and Payables to Pad Cashflows - Who's Culpable?

PDD Holdings

Merchant Deposits and Payables to Pad Cashflows - Who's Culpable?