Mega-merger puts BABA in the box seat
I expect the merger will begin the second wave of consolidations in the industry, which began as restaurant and hotel directory apps. The large range of platforms consolidated into several leading firms, namely Meituan and Dianping.
However, with the adoption of O2O and its explosive growth, the industry has grown rapidly over the past 12 months, meaning that the second wave of consolidation is needed.
This merger will seem very familiar to those who follow the Chinese tech industry. In February, Alibaba-backed Kuaidi and Tencent-backed Didi merged, after both firms were competing with each other by offering large subsidies to both drivers and passengers.
The same has been happening in the O2O industry, as platforms offer significant discounts to users who make purchases. As an example, if I order dinner for RMB30, I will get a RMB7 discount for using WeChat Pay instead of cash, and will get RMB10 off my next order.
Quite frankly, both myself and many other users will simply switch to the platform that offers the largest discounts because all platforms are the same. It’s an unsustainable business model, and this merger should help the industry to mature.
In the most recent conference call, Baidu's CEO Robin Li stated how the firm is committed to investing billions of dollars into building out its O2O platform.
It has since grown in popularity, and will likely continue to do so over the coming months. The merger between Meituan and Dianping should be seen as a direct response to Baidu's spending power.
Alibaba would be a major beneficiary of this merger. Tencent already has a strong presence in the industry via Dianping, which has level 1 access in the WeChat app.
Alibaba's presence on the other hand is somewhat lacking, with its investment in Meituan and the small Koubei platform. The calendar third quarter conference call should shed light on this deal. They key point for investors is that Alibaba finally has a strong position in the O2O business.
Alibaba monthly share chart
Management and risk description
As I stated repeatedly over the past few months, the volatility in US-listed Chinese equities has predominantly been driven by domestic volatility from Chinese A-shares and concerns over the state of the Chinese economy.
This volatility seems to have subsided over the past few weeks, and this should allow for company-specific issues to drive equity returns. However, investors should be aware that Chinese macro concerns never go out of fashion, and it is likely only a matter of time before they begin to drive equity returns again.
Time horizon: Three months
— Edited by Adam Courtenay
Non-independent investment research disclaimer applies. Read more