New Rivalries and Lower Margins May Compound Existing Headwinds for Meituan

We are lowering our fair value estimate for Meituan 03690 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.

Management also indicated that it is preparing for competition in food delivery as well although it dismissed ByteDance as a serious competitor, stating that their order volume is only 10,000 per day. However, Meituan has already indicated that it is making strategic adjustments such as increased spending on traffic acquisition and reducing online management fees for merchants on its platform, which has prompted us to reduce our long-term take rate assumptions to 13.5% from 14%, which also contributes to our valuation change. We are not yet forecasting any direct impact from ByteDance in terms of incremental subsidies for Meituan’s delivery business, but we anticipate the possibility of a price war which would further lower its delivery operating margin. This could resemble intense competition with Ele.me that squeezed operating margin to the single digits in 2018, as sales and marketing expenses were 25%-30% of sales.

We expect greater personnel costs in second-quarter 2022 given the 10,000 incremental headcounts announced. Given the multitude of headwinds and long-term structural issues of its new initiatives that only narrowed its loss margins slightly this quarter, we are cautious with Meituan given the unfavorable risk/reward and possibility of further negative catalysts.