Always striving and refusing to lose, can Meituan still afford this struggle?

After the Hong Kong stock market closed on November 28th, Meituan released its Q3 2023 earnings report. Under the pressure of competition, its core local life business faced the dilemma of increasing revenue but not increasing profit. However, thanks to the company's prior communication, the actual performance was basically in line with expectations. The key points are as follows:

Overall performance is mediocre: In general, the total revenue for this quarter was 76 billion yuan, which is completely in line with market expectations. The overall operating profit was 3.4 billion yuan, slightly higher than the market's expected 3.2 billion yuan. However, such a small beat is considered a reasonable margin of error and is mainly due to the reduction of losses in new businesses and at the group level, which will not have much impact.

Delivery business meets expectations: Let's first look at the core delivery business, which had a total order volume of approximately 6.2 billion orders, with an average of about 67 million orders per day, which is basically in line with the market's expectation of 6.1 billion orders.

However, since Q2, Meituan's delivery revenue growth rate has been lower than the order volume growth rate. In Q3, the delivery revenue growth rate was 14.3%, significantly lower than the order volume growth rate. According to Dolphin Research's calculations, the average delivery revenue per order further decreased by about 2% this quarter. Dolphin Research believes that this is mainly due to the increase in the supply of delivery drivers, which has led to a decrease in the average delivery labor cost. At the same time, Meituan, in order to maintain competitiveness, has passed on most of the cost savings to a decrease in delivery fees.

However, according to the company's disclosure, the proportion of average delivery costs to revenue has still decreased compared to the same period last year. Therefore, this is also positive for the company's own profit.

In-store business: Violent investment brings some growth: Since the fourth quarter of last year, the erosion of Meituan's in-store business (especially advertising revenue) by Douyin has always been one of the most concerned issues in the market and by Dolphin Research. In this quarter, the commission income from the local business segment reached 21 billion yuan, a year-on-year increase of nearly 30%, higher than the market's expected 19.4 billion yuan.

The advertising and marketing revenue was approximately 11.4 billion yuan, also higher than the market's expected 10.7 billion yuan. The advertising revenue growth rate this quarter was 31.6%, finally catching up with the commission growth rate after four consecutive quarters of advertising growth lagging behind. Although considering that a large proportion of commission income comes from the slower-growing delivery business, the commission income growth rate of the in-store business is likely to be slightly higher than that of advertising revenue. However, regardless of the narrowing growth rate gap, it reflects that Meituan has to some extent maintained its growth after increasing investment to fight back, but at the cost of profit decline.

Increased subsidies and rising expenses, revenue growth without profit growth: In terms of expenses, the sales expenses for this quarter increased by 16% MoM to 16.9 billion yuan, significantly higher than the market's expected 14.1 billion yuan. According to management's explanation, the sharp increase in marketing expenses is mainly due to Meituan's increased subsidies to customers. On the one hand, this corresponds to the subsidies given to merchants due to competition in the in-store business. On the other hand, Meituan's efforts in live streaming and short videos will also lead to increased expenses.

Dolphin Research's view:

Overall, the financial report of Meituan this quarter can be considered as a below-average performance as expected. The actual results are in line with the company's previous communication. However, looking at the performance itself, apart from the gap in expectations, the company has achieved record-high revenue in the booming travel and accommodation industry. The previously sluggish growth in advertising revenue has also shown signs of recovery due to increased investment. However, the cost of marketing has far exceeded expectations, resulting in a significant decline in profit margin despite the substantial increase in revenue. This reflects the intense competition between Meituan and Douyin, where Meituan has been aggressively investing but struggling to increase profitability, putting pressure on the company's profits.

If the market has already been aware of the relatively poor performance in 3Q, there are still unexpected bad news in the company's post-performance communication. Firstly, the most crucial takeaway is that the growth rate of food delivery orders in 4Q has actually accelerated compared to the previous quarter, despite rumors of a further decline. Excluding the base effect, the growth rate of 4Q is similar to that of the previous 9 months, which can be considered a normal performance. However, due to the decrease in average order value, the revenue growth rate will be lower than the volume growth rate.

In terms of profitability, the company stated that the investment intensity in 4Q is still high, and the operating profit of the core local life segment is not expected to grow much compared to the same period last year. The reduction in losses in new businesses, especially the preferred business, is also not expected to make much progress, as efficiency improvement takes time. In other words, besides the uncertainty in long-term growth potential, Meituan's profit growth will be stagnant for two consecutive quarters, which will also damage market expectations for Meituan's future profit growth.

From a valuation perspective, although Meituan's valuation is not high if only the core local life business is considered, it can even be considered undervalued. However, if the innovative businesses with an annualized loss of over 20 billion yuan continue to make little progress in reducing losses, and if the valuation is based on the net profit of the entire group, Meituan's current valuation cannot be considered cheap.

Therefore, in the situation where Meituan's core territory is constantly being attacked by Douyin, Meituan's innovative businesses either need to improve the cost-effectiveness or stop the bleeding in a timely manner, otherwise the stock price will continue to seek a bottom.

The following is a detailed analysis of the earnings report:

How to approach Meituan's earnings report

Starting from the second quarter of 2022, Meituan has once again made significant adjustments to the disclosure of its financial reports. Therefore, let me briefly introduce the latest business classification of Meituan, with the red part being the innovative businesses that have been incorporated into the core local commerce.

The current order volume meets expectations, and future growth is more crucial

As usual, let's first look at the performance of the core on-demand business (including food delivery and flash sales) this quarter. The total order volume for on-demand services in this quarter is about 6.2 billion orders, with a daily average of about 67 million orders, which is basically in line with market expectations. Due to the high base effect of the same period last year, the year-on-year growth rate has dropped to 23%, which is reasonable.

Although the third quarter is the peak season, considering the strong recovery of tourism and in-store consumption during the same period, there may be some crowding out effect on food delivery demand. Therefore, it is commendable that Meituan was able to deliver the expected growth in food delivery volume.

However, what the market is most concerned about is the central point of volume growth in the coming year and beyond, after passing through the disturbance period of the low base effect. This question requires attention to the guidance given by the company in subsequent communications.

On the other hand, the trend of the growth rate of Meituan's on-demand delivery revenue being lower than the volume growth rate has continued since 2Q. In 3Q, the on-demand delivery revenue of Meituan was about 23 billion yuan, with a growth rate of 14.3%. According to my calculations, the average delivery revenue per order has further decreased by about 2% this quarter.

I believe that this is mainly due to the continuous increase in the supply of food delivery riders, which has led to a continuous decrease in the per capita delivery labor cost. At the same time, in order to maintain competitiveness, Meituan has mostly passed on the cost savings to lower delivery fees. According to the company's disclosure, the proportion of average delivery cost to revenue has continued to decrease year-on-year. As we previously expected, the abundant supply of delivery personnel has continued to contribute to the improvement of Meituan's business profitability.

Third, in-store: increasing investment to face challenges and maintain growth

Combining industry data and the performance of companies (Huazhu, Ctrip) that have previously announced their results, it can be seen that the domestic travel and consumption in the third quarter has further increased compared to the previous quarter. Meituan's in-store travel GTV growth rate in the third quarter was 90%, although it decreased from the 120% growth rate in the previous quarter, it was affected by the base effect. According to our calculations, the actual GTV value has grown by double digits compared to the previous quarter.

Similarly, due to the base effect, the year-on-year growth rate of Meituan's local life marketing and commission income seems to have slowed down, but the absolute value of revenue has reached a new high. Specifically:

In this quarter, the commission income reached 21 billion yuan, a year-on-year increase of nearly 30.5%, higher than the market's expectation of about 19.4 billion yuan. The commission income of the delivery and flash purchase businesses is anchored by a 23% increase in order volume. Therefore, the actual growth rate of commission income for in-store and travel businesses will be higher than 30%.

Reflecting the ability of traffic distribution and promotion, the advertising and marketing revenue in this quarter reached about 11.4 billion yuan, also higher than the market's expectation of about 10.7 billion yuan. The growth rate of advertising revenue is 31.6%, which is in line with the commission income.

Although considering the drag on overall commission growth caused by the delivery business, the commission growth rate of the in-store business itself is likely to be slightly higher than the advertising growth rate, the narrowing of the growth rate difference still reflects that Meituan has to some extent maintained its growth after increasing investment to face challenges.

Fourth, the growth of innovative businesses and the decrease in losses are not necessarily a bad thing

As for the innovative businesses, with Meituan Youxuan (community group buying) and Meituan Maicai (self-operated front warehouse) as the core, the revenue in this quarter was 18.8 billion yuan, lower than the expected 19.2 billion yuan.

At the same time, the operating losses of the innovative business segment have also decreased to 5.11 billion yuan compared to the expected 5.19 billion yuan. During the conference call last quarter, Meituan indicated that the revenue growth rate of its innovative businesses this quarter would remain flat MoM, while the losses from its preferred and grocery delivery businesses would expand MoM due to the cold chain distribution demand during the summer. Dolphin Research believes that the annual losses of the innovative businesses still exceed 20 billion yuan, close to half of the total profits of its core local services segment. The market is already quite dissatisfied with the continuous high losses of the innovative businesses. However, the MoM decrease in both the revenue growth and losses of the innovative businesses this quarter may imply that the management is finally starting to consider the investment in new businesses from the perspective of return on investment. If the management does decide to accelerate the pace of reducing losses in the new businesses, it would be a significant positive for Meituan as a whole in terms of profits and valuation.

Fifth, elevated selling expenses due to higher incentives

In terms of overall revenue, this quarter's revenue of 76 billion yuan is completely in line with market expectations. The better-than-expected performance of commission and advertising revenue offset the slightly lower-than-expected performance of delivery and innovative business revenue. As for profitability, the gross profit this quarter reached 27 billion yuan, with a gross profit margin of 35.3%. Although the gross profit margin decreased MoM, it is a normal seasonal fluctuation due to higher delivery costs during the summer. Moreover, the actual performance is significantly better than the market's expected gross profit of 25.3 billion yuan and gross profit margin of 33.5%.

Combining the company's disclosure, the reasons for the YoY improvement in gross profit margin include: 1) improvement in the average gross profit of the delivery business, 2) continued improvement in the gross profit of self-operated retail (mainly grocery delivery) products, and 3) an increase in the proportion of high-margin advertising commission income due to the high prosperity of in-store businesses.

On the expense side, this quarter's sales expenses increased by 16% MoM to 16.9 billion yuan, significantly higher than the market's expected expenditure of 14.1 billion yuan. According to the management's explanation, the significant increase in marketing expenses is mainly due to Meituan's increased subsidies to customers. On one hand, this corresponds to the subsidies provided to merchants by Meituan due to the competition in the in-store business. On the other hand, the company's efforts in live streaming functions are also expected to lead to an increase in expenses. In addition, the proportion of marketing expenses to revenue continued to increase from 21.4% in the previous quarter to 22.1%. From this, it can be inferred that Meituan is facing considerable competitive pressure and must make significant investments in order to maintain growth and market share. However, fortunately, with the expected local life commission and advertising revenue from small supermarkets, Meituan has successfully achieved high growth through high investment, avoiding the worst-case scenario of no growth despite investment.

As for the management expenses and research and development expenses, they were 2.5 billion and 5.3 billion respectively. The management expenses increased by about 400 million MoM, although there was significant growth, the absolute amount is relatively small and has little impact on the overall company.

Sixth, expenses drag down revenue growth without profit growth

In the previous quarter's communication, the company indicated that the operating profit margin of the core local service segment would decrease to 17-18%, with the profit margin of the in-store travel business expected to decrease to between 30% and 35% (compared to over 45% in 1Q).

The actual operating profit of the core local business was 10.1 billion, which is basically in line with expectations, with an actual profit margin of 17.5%, all in line with the previous guidance.

However, this means that despite the significant increase in revenue in the highly prosperous industry, the profit of the core local life segment did not increase but decreased MoM. According to previous guidance from management, the high investment was only in the months of April and May, but the investment intensity was high throughout the entire third quarter. Combined with the significant increase in marketing expenses, it can be seen that Meituan's return on investment (ROI) is less than 1, with incremental marketing investment exceeding the profit it brings, resulting in Meituan also falling into the dilemma of increasing revenue without increasing profit (operating profit only increased by 8.6% YoY, while revenue increased by 24.5%).

Fortunately, the loss from innovative businesses was slightly lower than expected, with a group-level loss to be allocated of 1.63 billion, which is less than the expected 1.75 billion. Therefore, the overall operating profit of the company is 3.4 billion, slightly higher than the market's expected 3.2 billion. In the situation where the profit growth of the core main business is in a predicament, the reduction in losses has achieved some small results.

Dolphin Research's previous research on Meituan:

Earnings Season:

August 24, 2023 conference call "Meituan: The third-quarter in-store prosperity remains high, with a slight slowdown in delivery" (link: Meituan: The third-quarter in-store prosperity remains high, with a slight slowdown in delivery)

August 24, 2023 earnings report review "Another battle with Douyin, Meituan's defense is stronger than Alibaba's" (link: Another battle with Douyin, Meituan's defense is stronger than Alibaba's)

May 25, 2023 Conference Call: "Meituan: Confident in the Consumer Recovery in 2023, Hoping to Soar with the Wind"

May 25, 2023 Earnings Report Review: "Can the Bursting Delivery Riders Help Meituan Stand Tall?"

March 25, 2023 Conference Call: "Meituan: Full of Confidence in the Face of Competition? (4Q22 Conference Call Summary)"

March 24, 2023 Earnings Report Review: "Meituan: Kingdom Efficiency Still Reliable, But No Longer 'Impregnable'"

November 25, 2022: "Meituan: Unique Differentiation in Offline Competition, Will Communicate Meituan's Value with Naspers (Summary)"

November 25, 2022: "Meituan: Profits Still Soaring, Why the 'Degeneration' of Faith?"

August 26, 2022: "Meituan's Dominant Performance? Instant Delivery is the True Soul"

August 26, 2022: "Meituan: Excessive Profits in Instant Retail Driven by the Pandemic, Will Decline in the Third and Fourth Quarters"

June 2, 2022: "Stores Suffered, Hotels Hit Hard, Flash Sales Exploded, Vouchers Effective"

June 2, 2022: "Meituan Just Needs to Avoid Slipping, Rapid Recovery is More Important" On March 25, 2022, "Everything at Home: Is Flash Purchase Meituan's New Frontier? (Summary of Phone Meeting)"

On March 25, 2022, "Meituan 2021 Q4 Performance Conference Call"

In-depth:

On June 2, 2023, "Facing Douyin, Meituan Cannot Repeat Alibaba's Mistakes"

On December 16, 2022, "Finally Released, Can Meituan Make a Comeback as a King?"

On September 22, 2022, "Alibaba, Meituan, JD.com, Pinduoduo Have All Accepted Their Fate? Still Need to Gamble"

On April 22, 2022, "Meituan, JD.com, Why Are They Performing Well in the Stock Battle?"

On April 13, 2022, "As the Cycle "Decays," How Much Value is Left for Alibaba and Tencent?"

On October 22, 2021, "Paying Fines, Joining Social Security, How Much Faith Does Meituan Have Left?"

On September 22, 2021, "Crazy Alibaba, Meituan, and Pinduoduo, Is There a Real Barrier After the E-commerce Traffic Battle?"

Risk disclosure and statement for this article: Dolphin Research Disclaimer and General Disclosure