Meituan Earnings: Encouraged by Continued Delivery Growth but Margin Pressure Expected

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.