Finally let go, can Meituan return to the king's glory?

Since Dolphin Analyst's in-depth analysis on Meituan in October last year, more than a year has passed. Meituan's stock price has also fallen from a low of HK$300 at that time to just over HK$100, and it once returned to above HK$180 with the extensive relaxation of national epidemic prevention policies recently. After a whole year of ups and downs, the development of the domestic epidemic, the preference of the capital market for Chinese concept stocks, or the fundamentals of Meituan itself have been constantly changing. Therefore, Dolphin Analyst believes that it is time to re-examine Meituan's reasonable price in detail.

From a sectional point of view: 1) the company's most important takeaway business, which used to have the goal of one billion orders per day and one yuan per order, now seems to be difficult to achieve. Dolphin Analyst estimates that a daily order volume of about 70 million is more reasonable. However, the long-term goal of one yuan per order has basically been achieved this year. Although there have been disturbances and stimulation from the epidemic, the average profit per order is expected to further increase to two yuan by 2026.

1. The Dine-in business is originally the most mature and stable foundation of Meituan since the "100-group battle". However, under the entry of Douyin, the competition pattern has been continuously deteriorating, and the current ratio of GTV of Douyin and Meituan has approached 2:8. Dolphin Analyst believes that with the flow advantage several times that of Meituan, Douyin is likely to seize a certain share of Meituan's brand promotion and advertising for its Dine-in business. The competition pattern and prospect of Meituan's Dine-in business will probably significantly deteriorate.

2. Among the new businesses that have grown up during the epidemic, the non-food flash purchase has already emerged from the competition and become the first in the industry. It is one of the active forces for the future incremental revenue. It is expected to achieve a daily order volume of 12 million and similar per-order profit to Takeout Delivery by 2026, contributing more than 8 billion yuan in operating profit. In contrast, Meituan Optimal Supply in the community group-purchasing segment has been overtaken by DuoDuo Maicai, and its contribution to the overall valuation of the company is relatively small.

Overall, Dolphin Analyst's change in Meituan's judgment is: In terms of the takeaway sector, although the continuous slowdown in the order growth rate in recent quarters and the growth space of the takeaway estimated by Dolphin Analyst is lower than the company's previous vision, the epidemic has also accelerated the release rhythm of takeaway business profits and raised expectations for future profits. After the quantity decreases and the profits increase offset each other, the takeaway business still contributes the most valuation steadily, ensuring Meituan's belief and valuation lower limit. However, due to Douyin's impact, the competition pattern and prospect of Meituan's Dine-in business are no longer stable. Dolphin Analyst has lowered both profit expectations and valuation of this segment. As for the full-category takeaway business that grew up during the epidemic, it is hoped to become a mainstay in addition to the restaurant takeaway, providing extra upward elasticity.

As for the estimated reasonable valuation of Meituan based on the above assumptions, please see the following text.

If you are interested in the research report of Chinese concept companies, welcome to add WeChat ID "dolphinR123" to join the investment research group, and get Dolphin Analyst's deep research report and talk about investment opportunities with investment research veterans at the first time. Although Meituan once gave clear guidance of "one billion orders per day, one yuan profit per order" (the guidance for one billion orders per day has now begun to loosen), the market has done a lot of research on this. As the star business and the most valuable sector in terms of contributions, the critical issue in evaluating Meituan's valuation is how much scale and profit Meituan takeaway can achieve in a steady state.

From Meituan's recent financial report and communication with management, Dolphin Analyst believes that although the scale of the takeaway business may be far from 100 million orders per day, the potential profit per order is much higher than the company guidance.

Dolphin Analyst believes that there are two simple but effective logic to judge how high the ceiling of the volume or GMV of restaurant takeaway can ultimately reach: 1) estimate how large the potential user group of takeaway is and the steady-state frequency of single users ordering takeaway; 2) the steady-state penetration rate of takeaway in the overall dining and catering consumption of residents.

By estimating the penetration rate of these three clear ceilings of the total population, the frequency of consumption of three meals a day, and the total amount of dining and catering consumption by residents, a reasonable potential scale of takeaway can be judged based on common sense.

"1. Restaurant takeaway is a high-end consumption, and the user ceiling is relatively limited.

As the basis for analyzing the potential user scale of takeaway, it must first be clear that "restaurant takeaway is an upgraded consumption." From the core demands of multi-speed, good, and economical, except for the early stage when takeaway temporarily satisfied the category of "economical" through large subsidies, "good" and "more" choices were obtained by consumers through additional payment of a delivery fee.

Simply put, it means "spending money to save time." Therefore, logically, the potential users of takeaway services are groups whose average income is higher than the delivery cost they need to pay.

According to the data announced by Meituan itself, nearly 80% of riders' monthly income is in the range of 2,000 to 8,000 yuan, and the weighted average salary of full-time takeaway riders is around 6,000 yuan. Corresponding to the average income of takeaway workers, Dolphin Analyst believes that the user group who can stably and long-term bear the cost of takeaway services (excluding occasional trying) should have an average monthly income of at least around 6,000 yuan, if not higher.

According to the statistical data on income stratification of the population in China through the two channels in the figure below, it can be seen that the proportion of groups that can stably afford takeaways (that is, the average income is above 6,000 yuan) accounts for only 20% of the total population of China. Assuming that 80% of them will frequently order takeaway, the total number of such people is only about 220 million. Even if it is relaxed to include the population who can afford occasional trying of takeaway (assuming that the monthly income is around 4,000 yuan), it is no more than 40% of the total population in China, which is only 560 million people.

Based on the income grouping standards mentioned above, Dolphin Analyst assumes that the core users and "tasting" user groups of online food delivery service are 220 million and 400 million people respectively, and optimistically assumes that these groups can be completely penetrated by Meituan's food delivery service. Under the assumption of Dolphin Analyst's benchmark state equilibrium, the core user group orders twice a week and non-core users order once a month, and the steady-state daily orders of Meituan's food delivery service will be around 7,000. As for achieving the goal of one billion orders per day, it requires that the core user group's monthly ordering frequency reaches 10 times, rather than non-core users ordering once every two weeks.

Although according to the above calculation, the target of one billion daily orders for Meituan's food delivery service is not impossible, the frequency of ordering ten times a month seems not too high for urban white-collar workers. However, it should be noted that such a frequency of ordering requires a full 200 million people to maintain it every month, not just white-collar workers in core cities. Therefore, Dolphin Analyst believes that having 220 million people ordering twice a week is a considerable situation.

Based on the neutral forecast of the total orders of Meituan's food delivery service mentioned above, we verify whether the above expectations are reasonable from the penetration rate of the total amount of food delivery in the social catering market: assuming that the catering retail sales can maintain a CAGR growth rate of around 10% similar to before the epidemic after the relaxation of epidemic policies in the next few years, and the steadystate market share of Meituan's food delivery service can reach 75%, it can be deduced that the penetration rate of food delivery will reach 28% in 2026, which is more than a quarter of the national catering consumption realized through food delivery, compared with a physical online penetration rate of 33% in 2021 after excluding cars. A penetration rate of 28% for food delivery is already considerable.

Although the company's management has stated that the penetration rate of food delivery can match that of physical retail, Dolphin Analyst believes that the online penetration space of food delivery should be lower than that of physical retail.

This is because catering is essentially a combination of goods and services, and food delivery can only provide the physical food and not the dining service, so the ceiling of food delivery's online penetration rate is logically lower than that of pure physical consumption.

In addition, food delivery can only cover low-average-price fast food and dessert snacks, and it is difficult to penetrate high-average-price meals, which also limits the space for food delivery penetration. If we assume the optimistic scenario of 90 million orders per day, food delivery's online penetration rate needs to reach 36%, which means that more than one-third of the national catering consumption is realized through food delivery, which is clearly too optimistic.

However, relying solely on reducing subsidies, the additional profit that food delivery can release is also considerable, according to Dolphin Analyst's calculation, even though the steady-state order volume of Meituan's food delivery is estimated to be difficult to reach the scale of the company's vision. First of all, the company has recently stated in conference calls that the average UE for takeaway orders has reached 1.05 yuan per order in the third quarter of 2022. Although there was disturbance caused by the pandemic, it has been proven that the average unit price can be achieved, and the future steady-state profit will naturally rise.

The UE model of takeaway orders is mainly composed of three parts:

1. The delivery income and cost under the 1P model, which has been in a gross loss state due to Meituan's continuous user-side subsidy for delivery fees. According to the financial data for the first quarter of this year, the gross loss per delivery is about 0.85 yuan. However, due to the tight transportation capacity caused by lockdowns in the second and third quarters, the income and cost of delivery have actually been almost balanced.

Looking ahead to the post-pandemic period, even if we do not expect to make money on delivery, it is realistic for the company to gradually reduce the subsidy until gross profit parity is achieved. This can increase the profit of 1P business by 0.8 yuan, multiplied by the percentage of 1P orders, which accounts for about 66% to 67% of the total orders, and can increase the overall profit per order by 0.5 yuan.

1. The second part is the commission and advertising revenue shared by 1P and 3P, which currently has a profit of about 2.6-2.7 yuan per order. The Dolphin Analyst believes that the current conversion rate of 6%-7% has limited room for improvement (further increase may also have policy risks). Therefore, based on the growth of customer unit price and advertising conversion rate, this part can increase the profit by about 0.3 yuan.

2. The third part is the subsidies that Meituan gives users other than delivery fees. According to the Dolphin Analyst's calculation, it is currently about 1.3 yuan per order. Since we have assumed that the company will reduce the subsidy for delivery fees, the reduction in other subsidies will be relatively small, but it can still contribute about 0.4 yuan in profit.

In summary, the average profit per order of Meituan takeaway still has room for further increase, about 1.2 yuan, which means a potential average profit per order of about 2.2-2.3 yuan in the future. However, besides the good news, there is also bad news. The Dolphin Analyst's previous calculation shows that the additional cost caused by the delivery person paying social insurance is about 0.3 yuan per order under neutral expectations. Therefore, the Dolphin Analyst calculates the average profit per order of Meituan takeaway in 2026 to be about 2 yuan.

Secondly, is the delivery of non-food products to home the new "vast ocean" of stars with JD Daojia and Meituan Flash Purchase as representatives and the rapid expansion of the scale of local instant retailing? The prospects and attention of Meituan's non-food commodity delivery naturally extend from the takeaway business.

According to the communication from Meituan's management, the number of orders for Meituan Flash Purchase has reached about 450 million orders in the third quarter, and according to the customer unit price of 65 yuan, the single-season GMV has exceeded 29 billion yuan, and the annualized GMV has exceeded 110 billion yuan. And Meituan's 2022 takeaway GMV is only around 800 billion yuan, so it is clear that non-food flash purchases are the most important incremental driver for Meituan outside of food delivery and in-store business.

So what is the current market competition pattern of Meituan Flash Purchase? To answer this question, we start with a comparison with the largest competitor in the industry, JD Daojia.

1. GMV scale: According to the calculation in the previous text, Meituan Flash Purchase has an annualized scale of hundreds of billions, while the GMV scale of JD Daojia in the 12 months ending in Q3 2022 was 58.9 billion yuan. It can be seen that compared to JD, which cut into local retail from remote physical e-commerce, Meituan, which cut into local retail from local catering, has a significant lead in business scale.

2. Store coverage: Based on store data collected by Dolphin Research at a certain location on Pudong Century Avenue, Shanghai, it can be seen that although JD Daojias covers more stores within 1-5 kilometers, as the statistical scope expands, Meituan's store coverage clearly surpasses JD's. Overall, the number of stores covered by Meituan Flash Purchase is greater than JD Daojia's.

After a closer look, it was found that Meituan has a much higher coverage of non-convenience stores, fruit stores, and some chain vegetable and meat stores, while JD Daojia has more stores in large chain shopping malls, as well as more stores in traditional strong areas such as electrical appliances and shopping malls.

From the above store coverage, it can be seen that one of the advantages of Meituan entering non-food flash purchases is the large number of store resources accumulated from takeaway and in-store business. It also shows that Meituan Flash Purchase caters to more random daily shopping with a wider range of categories and higher frequency (with lower per capita consumption), while JD Daojia caters to scheduled business super purchases and lower frequency electrical appliance shopping.

Meituan still adopts a rural siege city strategy of high frequency targeting low frequency and daily consumption vs. quality consumption, so Dolphin Analyst believes that Meituan will probably continue to occupy a dominant position and market share in the non-food instant retail market in the future (similar to the 7:3 or 6:4 ratio of takeaway).

So how big is the potential revenue and profit of Meituan's non-food flash purchase in the future? The first logical baseline to be clarified is that compared to food delivery, non-food instant retail belongs to a higher level of "consumption upgrade", and the target group and potential market size (at least in terms of quantity) are inevitably smaller than food delivery. Because non-food instant retail can provide less value in terms of "fast" and "diverse" than food delivery.

First of all, non-food consumption does not need to be limited to meal times; and the standardization of supermarket goods is higher than that of meals, and the diversity of products that delivery range can bring is more limited (which is also why Meituan's coverage of non-supermarket stores is more scarce).

Based on the above logical judgment, Dolphin Analyst assumes that the target group of non-food flash purchases is limited to a population with monthly income higher than 7-8 thousand, with a quantity of about 180 million and a lower order frequency, about twice a month. This calculates that the potential daily order volume of Flash Purchase is about 12 million, which is close to the company's forecast of an average of 10 million orders per day.

However, although the order volume is low, the unit price of non-catering flash purchases is significantly higher than that of catering. Currently, the unit price of Meituan flash purchase is about 60-70 yuan, while the unit price of JD Daojia, which is mainly composed of large supermarkets and electronic products, has reached 160 yuan. Even if the 3C category is excluded, the unit price is also Reached 120 yuan. If it is conservatively assumed that the unit price of Meituan flash purchase increases to 90 yuan, then the GMV scale of Meituan non-catering flash purchase can exceed 400 billion yuan, which is close to half of the 2022 Meituan catering takeaway scale.

Assuming that the average delivery fee charged by flash purchase is the same as that of takeaway, and the platform technology fee is also about 4%, Then the revenue scale of Flash Delivery in 2026 is about 36.5 billion yuan.

As for the single profit margin space of Flash Delivery, although the order density of Flash Delivery is significantly lower than that of takeaway, it is difficult to reach the breakeven point due to the delivery revenue and cost. But the upper limit of the unit price of Flash purchase is more than twice that of takeaway, even if the monetization rate is lower, and the commission income that is almost pure profit per order will be significantly higher than the takeaway business. Therefore, the single order profit potential of flash purchase business is not lower than that of takeaway.

For example, even if it is conservatively assumed that the unit delivery fee will still lose 0.9 yuan in 2026, the commission rate will not increase and the possible advertising revenue will not be considered, and only relying on the increase in unit price and the decrease in subsidies, the single order profit of flash delivery can also reach 1.8 yuan in 2026. At this assumption, the non-catering flash purchase can contribute about 8 billion yuan in operating profit.

As for Meituan's community group buying business, Dolphin Analyst has conducted detailed research on this industry in the previous study of Pinduoduo, so it will not be further elaborated here. Generally speaking, the current situation of the community group buying industry is that Pinduoduo has basically established its leading position in the industry with its extreme low prices and operating strategy of approaching "fake currencies driving out real currencies".

In contrast, Meituan Optimal chooses to pursue higher quality and finer management, resulting in both the scale of single orders and the unit economic benefits lagging behind Pinduoduo: ① The quality of goods is relatively higher, so the unit price is slightly higher. ② Because Meituan App does not have a natural flow of buying groceries and shopping, the sales cost is higher. ③ The three-layer management structure of headquarters, district, and city compared to Pinduoduo’s more extensive management mode, the back-end cost rate of Meituan Optimal in 2022 is as high as 10% of GMV. Looking into the future, we believe that the order volume of Meituan Optimal will be surpassed by Pinduoduo, assuming that Pinduoduo's order volume will be 70% of Meituan's by 2026. In addition, due to higher expenses, the operating profit/GMV will stabilize at 2%, lower than our forecast of 3% for Pinduoduo. Based on these assumptions, Meituan Optimal could bring in approximately 6 billion yuan in profits for the company by 2026, which is not as significant compared to the overall profits of the company as the impact of Flash Purchase.

Third, Meituan's in-store travel business: How big of a blow can TikTok infiltrate?

The aforementioned sectors of Meituan are characterized by a relatively stable competitive landscape that can steadily grow according to current trends. Therefore, the analysis for these sectors focuses on the quantitative assessment of the stable income and space of the entire track.

However, the earliest and nearly monopolistic in-store business of Meituan has seen a deterioration in the competitive landscape due to the penetration of TikTok, a black hole of traffic.

According to the latest expert research, the GTV scale of local life on TikTok has now reached a 2:8 ratio compared to Meituan, and experts predict that this ratio will reach at least 3:7 by 2023. It can be seen that, unconsciously, TikTok is now on par with Meituan in terms of penetration in the local life industry - it is not a distant threat, but a strong enemy right in front of Meituan.

So why did TikTok achieve a trillion-yuan scale in the physical e-commerce sector in just 3-4 years, and become the industry runner-up in the local life sector, which only started large-scale promotion in 2021?

The most straightforward logic is TikTok's black hole-style suction of online traffic and user time. As shown in the table below, at the end of 2017 and the beginning of 2018, TikTok and Meituan had similar daily active users and daily average usage time. However, TikTok's monthly active users and daily average usage time are now respectively eight times and four times that of Meituan, which means TikTok's daily traffic is 30 times that of Meituan.

Therefore, no matter whether it is Taobao or Meituan, TikTok's entry is bound to have the advantage of reducing traffic and face such a huge traffic dividend. Local life merchants naturally tend to settle on TikTok and try to make promotions to attract users and exposure.

In addition, Dolphin Analyst combined the research information and found that the discounts offered by TikTok for in-store purchases are generally higher than those offered by Meituan. Specifically, TikTok's discount coupons can be divided into lightly-discounted ones (with an average discount of around 20% and slightly higher than that of Meituan) that ensure a rich SKU, and deeply discounted ones used for drainage.

However, for the deeply discounted coupons, TikTok's average discount can reach 37%, much higher than the maximum discount of around 30% for Meituan's coupons. Therefore, TikTok has cultivated a more affordable impression in the minds of consumers, encouraging them to compare prices on TikTok and form the habit of consuming local life products on the platform.

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Looking forward to the future, the qualitative judgment of how much market share Douyin can occupy in the local life sector mainly depends on how strong Douyin's traffic advantage is, how wide the corresponding consumer scene and user group and business are:

1. Although Douyin has an overall traffic advantage of more than 30 times that of Meituan, according to market research, the actual proportion of traffic given by Douyin to the local life section is only about 7%, while Meituan has about 25% of the traffic given to in-store business. Considering that the number of merchants that can be displayed in graphic mode is higher than that of short video mode, the current actual traffic advantage of Douyin in the local life sector is 2-3 times that of Meituan. However, the current share of only 7% also means that Douyin's proportion of traffic allocated to local life still has significant room for improvement, and with the habit of users consuming local life on Douyin, the future traffic advantage may further expand.

2. In terms of adapting to consumer scenarios, Douyin's model is more suitable for brand promotion and occasional restaurant promotion. Although its graphic and text search function is also improving, the user experience and store richness are still far behind Meituan, which has been deeply cultivated for many years. Therefore, for users with determined dining or other in-store needs, more will still search through Meituan, which adapts to more in-store consumption scenarios.

3. At the same time, because the user range of local life stores can only reach a few kilometers, the investment in Douyin platform can actually bring limited consumption. Therefore, Douyin with lower ROI has lower appeal to small and medium-sized stores, and is mainly suitable for brand promotion and drainage of large stores or chain stores.

On the whole, the main advantages of Douyin in the local life business are based on traffic-based brand promotion and advertising revenue, but in actual in-store consumption conversion, such as discount coupons, Meituan will still occupy the dominant position. However, the advertising revenue of Meituan's in-store business has historically been consistently higher than the commission revenue generated by trading, and it is the main source of revenue growth, so Douyin's impact on Meituan's local life will still be significant.

In terms of quantitative prediction of revenue, due to the relatively low actual penetration rate of local life consumption, the total amount is also difficult to accurately estimate. Therefore, Dolphin Analyst adopts the logic of predicting the growth trend of Meituan's in-store business revenue based on the almost monopolistic trend in the past, and predicts the total growth in the distribution of Douyin, and the remaining growth space is Meituan's own.

Overall, under the good news of offline recovery in 2023, Meituan's revenue from in-store business can also usher in a rebound, but then as the competition from Douyin becomes more obvious, the growth rate will rapidly decline, as detailed in the following prediction:

Four, Valuation Calculation

Finally, based on the Dolphin Analyst's revenue and profit forecasts for each major segment of Meituan as mentioned above, we expect the core operating profit of Meituan to reach approximately RMB 72 billion by 2025 (without considering the impact of previous new businesses), among which the delivery business is expected to contribute around 60% of profits and still being the most crucial business to determine overall company performance.

On valuation, Dolphin Analyst first adopted a divisional valuation method, aggregating the steady-state after-tax profits of each segment multiplied by the corresponding valuation multiples. Specifically, because the catering delivery and flash purchase are essentially different segments of the same business, and the competition pattern is stable with Meituan sitting firmly in the first place, relatively high valuations are given to these two segments as industry leaders.

As for offline businesses, due to the uncertain prospects of Douyin's competition and our prediction that the profit growth rate will rapidly decline to below 20% YoY after 2023, a valuation of 15x PE that matches future profit growth rate is given. Although Meituan Optimal is not the number one player in the industry, it will still maintain a high growth rate by 2026, resulting in a relatively high valuation multiple.

Finally, discounting back to the end of 2023 with a discount rate of 11%, the estimated value of Meituan is HKD 208 per share. The main factor affecting the company's valuation is still the speed and space of the growth of per capita profits of the delivery and flash purchase businesses.

If a longer-term cash flow DCF model is used to predict, because under the current assumption, Meituan's business segments will just reach steady-state profits in 2025-26, and the cash flow afterwards can still grow at a relatively high speed, so the estimated value of Meituan under the DCF model is higher, which can reach HKD 227 per share.

End of Main Content

Dolphin Analyst's Previous Research on Meituan

Financial Report Review:

November 25, 2022 "Meituan: There are unique differentiation in offline competition, and will communicate the value of Meituan with Naspers (summary)"

November 25, 2022 "Meituan: the profit is still booming, why does faith become "derailed"?" 2022年8月26日《 Is Instant Delivery the Real Soul of Meituan? 》

2022年8月26日《 Meituan: Excessive Profit in Instant Retail Is Stimulated by Epidemic, and Will Decrease in the Third and Fourth Quarter 》

June 2, 2022, "Failed to Get to the Store, Hotels Struggled, Flash Sales Exploded, and Coupons Worked"

June 2, 2022, "Meituan Should Only Focus on Defense and Rapid Recovery"

March 25, 2022, "Meituan is Exploring New Territories with Flash Sales (Summary of Telephone Meeting)"

November 26, 2021, "Meituan's Goal is Retail, But It Still Has a Lot to Do (Summary of Telephone Meeting)"

November 26, 2021, "Is Meituan Brave or Unreliable About Losing Over 10 Billion Yuan in a Single Quarter?"

August 30, 2021, "Despite a Significant Valuation Decline, Meituan Remains Committed"

August 30, 2021, "Wang Xing is Confident About the Prospects of Meituan Retail (Summary of Telephone Meeting)"

In-depth:

April 22, 2022, [ "Why are Meituan and JD.com Outshining Their Rivals Despite Their Large Market Shares?"](https://longbridgeapp.com/topics/2388210? invite-code=032064)》

On April 13, 2022, "Decay Cycle: How Much Value Is Left for Alibaba and Tencent?"

On October 25, 2021, "Meituan Select: Meituan's Next 'Impressive Curve'?"

On October 22, 2021, "Fined and Insured: 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 Analyst Disclaimer and General Disclosure