Meituan Earnings: Strong Recovery Prospects Offset by Margin Decline and Intensifying Competition

We maintain our fair value estimate for Meituan 03690 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.

The company also does not expect much material improvement in losses for its new initiatives business, guiding to a CNY 5.2 billion operating loss next quarter, increasing from CNY 5.0 billion sequentially. The expected greater loss reflects the historic lack of progress toward profitability for the new initiatives businesses. Its operation remains a secular structural issue and a solution does not appear imminent. Despite some improvements in operating margin, losses continue to mount, and the unit is still far from material profitability with no visibility on breakeven. We maintain our view that new initiatives remains a key value-destructive component in Meituan’s valuation and do not believe the business can contribute to material valuation in the long term.