Company Reports

After seeing news reports of Meituan launching its overseas food delivery operations, KeeTa, into Riyadh, Saudi Arabia, as its first international foray outside of Hong Kong, we do not believe that Meituan's expansion will be materially incremental to our current valuation given the long-term uncertainty, its market positioning in Saudi Arabia, and the near-term losses it will likely incur. We believe Meituan will not enjoy the advantage it has in China, which has helped it to grow its platform to 700 million users currently, given different market conditions in Saudi Arabia than China. We keep our fair value estimate unchanged at HKD 102.

We maintain our fair value estimate for Meituan at HKD 102 after it reported fourth-quarter revenue of CNY 73.7 billion, representing a 22.6% year-on-year increase driven by a 25% year-on-year surge in on-demand transactions. While we view the revenue growth as positive, we are slightly concerned with its long-term profitability trend as adjusted operating margin was only 0.2%. For its core commerce business, operating margin declined 210 basis points year on year, and we believe that it implies greater competition in both delivery and hotel businesses as highlighted by a 55% year-on-year increase in marketing expenses. For food delivery we estimate operating margin declined to the high single digits from midteens, while margin for the hotel business declined to about 29% from 31%. Meituan expects its on-demand transactions to increase 22%-24% year on year in first-quarter 2024, which is encouraging given the concerns over increasing competition, but we estimate operating margin in 2024 to be 50-100 basis points lower than 2023 after it indicated that average order value will be slightly lower. Management indicated that it has no plans to increase subsidies significantly but also mentioned that it cannot lower the cost structure of the nonincentive side of the delivery business. We view Meituan’s shares as fairly valued and given that execution may be a challenge due to downward trending margins of its core businesses, we believe there are still long-term risks for the firm.

We see some near-term headwinds for no-moat Meituan as its food delivery business, which accounted for 52% of 2023 revenue but is expected to see operating margin pressure in 2024. The company cited impact from COVID-19 lockdown policies but also indicated there is some limited visibility due to the macroeconomic slowdown. We also expect customer acquisition to slow, given that there are about 700 million users on the platform and is approaching saturation in China.

We see some near-term headwinds for no-moat Meituan as its food delivery business, which accounted for 55% of 2021 revenue and remains the immediate revenue driver, sees continued pressure in 2022. The company cited impact from COVID-19 lockdown policies but also indicated there is some limited visibility due to the macroeconomic slowdown. We also expect customer acquisition to slow, given that there are 693 million users on the platform already and the firm only gained 3 million in the first quarter of 2022.

We are lowering our fair value estimate for Meituan to HKD 102 from HKD 145 after its third-quarter operating margin declined by 200 points sequentially. Our lowered valuation reflects our view that margin pressures are likely to linger, compounded by a downward revision of food delivery growth to low to midteen digits from 20% in the medium term. We anticipate a revenue slowdown because management expects consumers to be more cautious and value-oriented. We estimate that food delivery orders increased 21% year on year in the third quarter, but its revenue only increased 16% due to heavy subsidies as well as the lower average order value. Overshadowing Meituan’s revenue slowdown is its reversion to heavy use of subsidies and we believe that it will continue to use incentives to ward off new entrants such as ByteDance. We estimate the operating margin for food delivery this quarter was 13%, but is likely to decline slightly next quarter, reflecting continued pressure. Competition is not only hitting food delivery, but also the in-store hotel segment, where the operating margin declined further to 35% this quarter. Previously, we expected the operating margin in this segment to gradually decline to a steady-state 35% in 2025, but margin degradation is already faster than expected—and we believe that its forecast could be at risk given recent intensifying competition. We would like to see margin stability before becoming more positive in our outlook over the long term.

We maintain our fair value estimate for Meituan at HKD 145 after the company reported second-quarter revenue of CNY 68 billion that was 3% worse and operating margin of 4.9% that was 10 basis points better than our estimates. Meituan also reported CNY 5.40 billion in transactions for its delivery business, a 32% year-on-year increase due to a strong recovery, and in line with its guidance and our estimate of CNY 5.37 billion. The company reported new initiatives revenue of CNY 16.8 billion, reflecting growth of 18% year on year—but operating losses of CNY 5.2 billion widened by CNY 170 million sequentially and still didn't see improvement in narrowing losses, which remains the main reason for our unenthusiastic outlook for Meituan. Despite the strong revenue recovery, we do not believe Meituan has turned a corner toward greater profitability, as the revenue growth was accompanied by a 62% year-on-year increase in sales and marketing expenses. We believe that heavy use of subsidies to generate greater users and order growth is likely to be unfeasible over the long term, looking at the growth reversals seen before when e-commerce companies reduce their subsidies to refocus on profitability. We caution investors not to overvalue Meituan based on revenue growth but rather cash flow, given the long-standing profitability concerns over heavy cash burn and margin pressure.

On June 29, Meituan acquired an artificial intelligence startup company called Light Year for USD 233.7 million and agreed to assume liabilities of CNY 366.9 million (USD 50.7 million). As of June 29, Light Year had USD 285 million cash on its balance sheet, which implies that Meituan acquired Light Year for less than USD 1 million. While the acquisition does not change the composition of Meituan’s balance sheet much, it symbolizes Meituan’s entrance into the generative AI industry which is Light Year’s main focus.

We maintain our fair value estimate for Meituan at HKD 145 after the company reported first-quarter revenue of CNY 58.6 billion that was 2% better than our CNY 57.5 billion estimate. However, the company provided mixed guidance. While management expects strong recovery in its food delivery business in second quarter 2023, expecting a 30% increase in orders year on year, it also anticipates a significant decline in operating margin to about 30%-35% for its hotel and local services unit. Meituan previously guided for a gradual margin decline to 35% over the next two years, but now expects competition to intensify earlier than expected. Company guidance for the hotel and in-store segment to increase more than 100% in gross transactional volume, or GTV, and 57% in revenue year over year next quarter was very encouraging. However, the lower operating margin should cause operating profit to decline sequentially to CNY 3.5 billion in our estimate. We also believe that user growth has stalled; however, the company no longer gives out user metrics given declines over the past four quarters and once Meituan started to increase monetization to focus on profitability.

We are lowering our fair value estimate for Meituan to HKD 145 after management indicated that it expects intense competition in the near term that will lower its in-store hotel segment’s long-term steady-state margins to 35% from 42%-46%. This significantly affects its valuation given that it accounts for 51% of Meituan’s core operating profits in 2022 in our estimates. Meituan expects a gradual decline to 35% ending in 2025, but indicated that it could recover if its competitors decide to scale their businesses back. This is likely to be a response to Alibaba’s Koubei which merged with its navigation app Amap and could pose a serious threat given the size of the challenger.

We see some near-term headwinds for no-moat Meituan as its food delivery business, which accounted for 55% of 2021 revenue and remains the immediate revenue driver, sees continued pressure in 2022. The company cited impact from COVID-19 lockdown policies but also indicated there is some limited visibility due to the macroeconomic slowdown. We also expect customer acquisition to slow, given that there are 693 million users on the platform already and the firm only gained 3 million in the first quarter of 2022.

We believe there could be some risk to the upside to Meituan’s fourth-quarter results should it be able to show significant profitability improvement, due to be released on March 24, but we retain our long-term view that there are structural headwinds that are likely to linger.

Meituan stock fell by over 6% during trading on Feb. 8, following various media reports that ByteDance’s Douyin platform will soon enter the food delivery and bulk delivery industry. There has been market talk in the past that ByteDance would become a competitor, but we believe that there are plans to come to market within the first half of 2023. We view this as an incremental negative for Meituan and while we expect ByteDance (or other entrants) to require time and resources to build up food delivery operations, we believe that this will lead to greater subsidies being handed out by Meituan and result in lower margins in the long term should Douyin compete for market share. Regardless of the timing and magnitude of impending competition, we believe there is an unfavorable risk/reward ratio even after today’s pullback in Meituan's share price. We maintain our fair value estimate of HKD 165 and could revise our margin forecasts and valuation if competition affects profitability more than we currently expect.

We see some near-term headwinds for no-moat Meituan as its food delivery business, which accounted for 55% of 2021 revenue and remains the immediate revenue driver, sees continued pressure in 2022. The company cited impact from COVID-19 lockdown policies but also indicated there is some limited visibility due to the macroeconomic slowdown. We also expect customer acquisition to slow, given that there are 693 million users on the platform already and the firm only gained 3 million in the first quarter of 2022.

We see some near-term headwinds for no-moat Meituan as its food delivery business, which accounted for 55% of 2021 revenue and remains the immediate revenue driver, sees continued pressure in 2022. The company cited impact from COVID-19 lockdown policies but also indicated there is some limited visibility due to the macroeconomic slowdown. We also expect customer acquisition to slow, given that there are 693 million users on the platform already and the firm only gained 3 million in the first quarter of 2022.

There are still questions about the viability of Meituan's new initiatives business, given the challenges of the community group buying industry as profitability has remained a question for not only Meituan, but also its competitors. Other community group buying companies such as Nice Tuan and Shixianghui, which are backed by Alibaba and Tencent, have already failed. Even if the new initiatives division was to break even, we estimate long-term operating margins for the segment to be only in midsingle digits.

We maintain our fair value estimate at HKD 165 for no-moat Meituan after the company reported mixed results for second-quarter 2022, and we believe that the market is overvaluing Meituan, given the addition of its Instashopping segment to its core business as a long-term viable unit. Better-than-expected revenue of CNY 50.9 billion beat our estimate of CNY 47.6 billion, representing a 16% increase year on year. Losses also narrowed, which was encouraging, and should accelerate Meituan's breakeven date. However, food orders grew by only 5% year on year and the number of customers declined to 685 from 693 sequentially for the first time, which may imply Meituan has reached a saturation point.

On Aug. 16, Reuters reported, citing unnamed sources, that Tencent is planning to divest its 17% equity share in Meituan. Based on Meituan’s market cap as of the Aug. 16 close, Tencent’s stake would be worth HKD 176.8 billion. Meituan’s stock fell 9% and Tencent shares rose 1% on the day the news broke. Our fair value estimates for both companies are unchanged as Meituan is now exactly at our fair value while Tencent remains undervalued. Aside from the headline event, this is not an event that is expected to change the intrinsic value of a business nor its future cash flows.

We retain our HKD 165 fair value estimate for Meituan after first-quarter 2022 revenue beat our estimate by 3%, but the valuation impact was offset by continued heavy losses. Recently, we have seen investors place greater importance on profitability rather than growth for loss-making e-commerce platforms, which the company continues to do. While it reported slightly better-than-expected revenue, we do not believe this changes any visibility in our investment thesis for Meituan, which we are skeptical that it can eventually see profitability in its heavy loss-making new initiatives business. New initiatives' recurring operating loss widened to CNY 9.0 billion this quarter compared with a loss of CNY 8.0 billion in first-quarter 2021 and CNY 10.2 billion loss in the previous quarter—with its community group buying, or CGB, business, Select, losing CNY 6.0 billion compared with CNY 6.6 billion last quarter. Management guided for the segment to lose CNY 8 billion next quarter with CNY 5 billion from Select, and expects growth to decelerate to a 36%-38% increase year over year. This could imply that the original total addressable market outlook may be revised as Meituan tries to seek profitability by curbing unprofitable expansion.

We see some near-term headwinds for no-moat Meituan as its food delivery business, which accounts for 55% of 2021 revenue and remains the immediate revenue driver, should see continued pressure in 2022. The company cited impact from COVID-19 lockdown policies but also indicated there is some limited visibility due to macroeconomic slowdown. We also expect customer acquisition to slow down, given that there are 693 million users on the platform already, and only gained 3 million in the first quarter of 2022.

On May 31, 2022, China’s State Council released a set of official measures aimed at the recovery of the economy following recent lockdowns and headwinds from COVID-19. The specific implementation of these policies is left to be determined by local and regional governments, as well as State Council’s ministries and directly affiliated agencies. While the timing is still unclear, these measures are set to become law in the near term. These measures do not cause any material changes to our fair value estimates for now, but we want to highlight which internet names are included and assess the potential benefits in the long run.