Possible Upside From Meituan’s Q4 Results

We believe there could be some risk to the upside to Meituan’s 03690 fourth-quarter results, due to be released on March 24, should the company be able to show significant profitability improvement, but we retain our long-term view that structural headwinds are likely to linger.

Meituan’s stock has been heavily shorted in recent months due to budding competition in its core businesses from ByteDance’s foray into food delivery and Alibaba’s decision to merge its local consumer services business Koubei into its navigation platform Amap, which would rival the in-store business. However, we believe that if Meituan can show that its losses narrowed significantly, the stock could react similarly to Sea’s. The latter’s shares jumped 20% on March 8 right after it announced its fourth-quarter results, where it showed positive operating margins due to massive reductions in sales and marketing expenses and headcount. This could cause a lot of shorts to be covered—but the offset to this catalyst is that revenue and gross merchandise volume growth would likely slow significantly, similar to trends at Sea and other e-commerce platforms.

This doesn’t change our view that the company has structural long-term headwinds, including impending competition from ByteDance and Alibaba in the core business food delivery and in-store lifestyle. This could cause Meituan to increase subsidies in order to defend its market share, which would lower net monetization and cause margins to shrink. We believe the Meituan platform is quite saturated already with 700 million users, and order growth is decelerating—meaning growth is becoming more correlated with macroeconomic trends. In addition, the new initiatives business is still incurring heavy losses. We think Meituan must either shrink the operations significantly or change the direction of it, given the lack of visibility on profitability.