Meituan: Wangguo's efficiency is still reliable, but it is no longer a "copper wall and iron wall".

After the Hong Kong stock market closed on March 24th, Meituan released its Q4 2022 financial report. The takeaway is that its delivery and transactional businesses, particularly food delivery, are doing well, but its information distribution business, particularly local lifestyle, is facing increasing competitors. Here are the main points:

1. Logistics is highly reliable: Despite the management's concern at the end of November that they could not see the peak of the infection in urban areas, Meituan still managed to achieve a delivery order growth rate in the low double digits, with the final growth rate reaching 13.6% for a total of 4.83 billion orders in Q4. This indicates that the demand for food delivery and flash purchases has recovered quite rapidly since the peak.

This growth in delivery orders also led to a 32% increase in Meituan's logistics revenue, demonstrating that the company is gradually reducing subsidies for delivery and that the surge in demand during the pandemic when there was a shortage in supply chain logistics was also a logical and experienced response.

In terms of gross profits, the gross loss from delivery was narrowed to RMB2.4 billion, and the gross loss ratio slightly increased to 14.2%, which was far better than the extreme situation of -7.7% in Q2 2022. According to our calculations, the average gross loss per delivery order was around RMB0.5 in this quarter. There is still room for improvement in the delivery gross profit margin, which could be matched or even exceeded. This means that Meituan's delivery and flash purchase UE model still has the potential for profitable growth. Overall, Meituan's core barrier- its performance in instant deliveries- is still highly reliable.

2. However, Meituan's moat in offline services has been breached: Excluding the excellent delivery revenue, the quarter's commission income and advertising revenue reflecting commercial flows have exposed Meituan's cracks in its local lifestyle kingdom. Specifically:

Its commission income, which represents transactional businesses, increased by 13.7% YoY to RMB14.6 billion, which is basically the same as the increase in delivery volume. However, its advertising revenue, which reflects traffic distribution and promotion abilities, mainly from the offline services, has decreased 4.8% YoY to RMB7.74 billion.

Although some blame can be attributed to consumers being unable to go out due to the pandemic, the advertising revenue still grew 1.4% in Q2 when the entire city was stagnant, and its growth is not significantly different from the commission-based revenue growth (approximately 2%) in Q2.

However, this quarter's advertising revenue growth rate, which is more related to traffic distribution, had a huge gap of 18% compared to the commission growth rate. It can be inferred that Douyin, which has a huge traffic advantage, has already given Meituan clear revenue pressure in the advertising promotion of offline merchants. Coupled with the decline in profit margins, it can be verified that the moat of local lifestyle has been breached.

Recently, Kuaishou has also expressed the intention to enter the local lifestyle and offline business. Although the industry as a whole is expected to recover within the next two years, Meituan's competitive pressure is expected to increase compared to last year.

3. New businesses are still reducing losses: Revenue from new businesses (excluding flash purchases and OTA-like homestays and travel expenses) was RMB16.7 billion, with a YoY growth rate slightly slowing down to 33.4% compared to the previous quarter. The growth slowdown was not a concern given the impact of the pandemic and the base effect. Meanwhile, the new business losses have " further narrowed to 6.37 billion," "less than the market's expected loss of 7.3 billion." The effect of reducing losses is positive for Meituan.

"On the whole, the revenue in this quarter was 60.1 billion, a year-on-year increase of 21%, surpassing the market's expected 57.9 billion, but considering that the recovery after the peak of the epidemic in first-tier cities since December was not reflected in the expectations and the actual revenue performance was not much better than expected."

At the gross profit level, the gross profit for this quarter was 16.9 billion yuan, with a gross profit margin of 28.2%, which was slightly higher than the market's expected 28%.

However, the cost control was not excellent, especially the sales cost was as high as 10.8 billion yuan this quarter, significantly higher than the market's expected 8.9 billion yuan.

Compared with the expenditure of 9 billion yuan during the epidemic in the second quarter, it has increased significantly. It can be speculated that the most likely reason for the increase in sales expenses is that Meituan is facing the pressure of competition to provide substantial user subsidies.

In the end, the operating loss of Meituan's main business this quarter was 1.5 billion yuan, which was higher than the 1.1 billion yuan loss in the second quarter, which was also affected by the epidemic.

Looking at the specifics, the profit of the core local business was 7.2 billion yuan, with an operating profit margin of 17%, which was obviously lower than the 22% and 20% profit margins in the previous two quarters, which also confirms that the profit margin of Meituan's in-store business is deteriorating due to competition.

On the whole, Meituan's overall revenue growth of 21.4% is still quite high in the Chinese e-commerce industry, except for Pinduoduo. Its growth advantage still exists.

However, on the other hand, the negative growth of Meituan's advertising revenue, the unexpected expansion of marketing costs, and the decline in operating profit of the core local living sector all point to the competition from the traffic black hole Douyin, which has already breached Meituan's in-store business.

As competition may further intensify in 2023, there is a possibility of further deterioration in revenue growth and profit of Meituan's in-store business. Therefore, as we predicted in the last quarter, the market's faith in Meituan is further weakening, and it is no longer the undisputed king in the local living field. However, Meituan's stock price fell to HK$120+ at one point, which according to the Dolphin King's calculation, only reflects the valuation of its takeaway business. It can be said that the market has already reflected a considerable part of the pessimistic expectations for Meituan's sentiment and valuation.

Looking ahead, in addition to the competition in the brick-and-mortar business, it is also worth closely tracking the profitability improvement of the home-delivery business (takeaway & flash purchase). When the stock price is low and only reflects the valuation of the takeaway business, swing trading may be a more prudent strategy.

The Dolphin King of Changqiao will share the minutes of the telephone meeting with the users of Changqiao App and Dolphin through the WeChat account "dolphinR123". Interested users are welcome to join the Dolphin King's investment research group. Here is the detailed content:

1. How to Approach Meituan's Financial Report

Since last quarter, Meituan has changed its financial reporting caliber significantly. The Dolphin King will first review the latest classification of Meituan's business, in which the red color has been integrated into the core local commerce.

For more details on Meituan's frequent adjustments to its financial reports, please refer to the Dolphin King's analysis of last quarter "Meituan's Impressive Performance? On-Demand Service Is The Key".

2. Supply Shortage Boosted Meituan's Instant Delivery and Takeout Income

The instant delivery order volume of flash purchase and catering takeaway this quarter was 4.83 billion, equivalent to an average of 53 million orders per day, representing YoY growth of 13.6%.

When the management communicated after the Q3 financial results were released at the end of November 2022, their guidance for the growth rate of takeaway orders in this quarter was only in the high single digits, but the actual performance was much better than the guidance. Given that the business data for October and November were already basically determined, it can be seen that in December, the demand for takeaway and flash purchase rapidly recovered after the epidemic peaked.

Based on the company's guidance on the flash purchase order volume in Q3 multiplied by 1.1 (due to better-than-expected recovery) to estimate the catering takeaway order volume is about 4.3 billion, with YoY growth between 9% and 10%. The performance is worse than that of Q3, but better than that of Q2, which is basically consistent with the extent of the impact of the epidemic.

Corresponding to the unexpected increase in order growth rate, Meituan's 1P instant delivery service revenue reached RMB 19.8 billion this quarter, up 31.9% YoY.

The revenue growth of instant delivery this quarter (18.3%) is still much higher than the growth rate of order volume, and the amplitude has further increased. It can be inferred that Meituan is continuing to increase its charges for delivery and/or reduce logistics subsidies. However, during the winter when temperatures are low and compounded with the pandemic, there is a shortage of delivery drivers and an increase in delivery fees is expected. In fact, during every major outbreak of a pandemic in history, the logistics industry has performed better.

So with a shortage of drivers, has the cost of delivery drivers also increased significantly, eroding the company's profits? In short, the marginal cost has slightly increased.

In the third quarter, Meituan's on-demand service gross profit was negative 2.4 billion yuan, with a gross loss rate slightly higher at 14.2%, though not as extreme as the negative rate of 7.7% during the second quarter under extreme pandemic lockdown. However, compared to a year earlier, the situation has greatly improved at -30%.

Specifically, the growth rate of instant delivery revenue (32%) is greater than the growth rate of instant delivery costs (14.9%), which is greater than the growth rate of orders (13.6%). It can be seen that the average income and cost of delivery have both increased due to the impact of the pandemic, but the increase in income far exceeds the increase in cost, resulting in a net improvement in Meituan's logistics profit.

According to the research of the Dolphin, Meituan's average delivery loss in the fourth quarter was about 0.5 yuan, and we believe that the improvement in delivery user experience will continue in the future, which is not impossible to break even or even profit.

Third, competition on Douyin (TikTok in China) is already reflected in the financial statements.

Including instant delivery and logistics, the overall revenue of the core local business was 43.7 billion yuan, a year-on-year increase of 17.4%, which was 5% higher than the market's expected 41.4 billion yuan. However, the Dolphin noticed that the seller's expectations were basically the same as the management's guidance for the third quarter and did not reflect the recovery from December. Therefore, the Dolphin believes that the actual performance should be roughly consistent or slightly better than the updated and frequent buyer's expectation.

Without the largest proportion of logistics income, how did commission income and advertising income (corresponding to businesses where users obtained core local commercial products such as takeout, flash purchase, in-store, coupon, store consumption through Meituan and OTA services) perform?

In the fourth quarter, commission income was 14.6 billion yuan, a year-on-year increase of 13.7%, which basically matched the growth rate of orders for instant delivery. However, considering that the impact of in-store consumption during the pandemic is much greater than that of home delivery services, the growth of commission income from in-store businesses is expected to be worse. But it also means that commission income from home delivery businesses should be slightly higher than the growth in orders, and the company's time-to-monetization rate, excluding subsidies, has also increased year-on-year.

2) However, the advertising revenue (mainly from in-store businesses) that reflects traffic distribution and promotion capabilities performed quite poorly this quarter, with revenue of 7.74 billion yuan, down 4.8% year-on-year. Although the difficulty of consumers going out during the epidemic period can "take the blame", the advertising revenue in the second quarter, which was also close to the city's "stagnation", still had a 1.4% growth. Moreover, when almost all of China was stationary in the first quarter of 2020, advertising revenue performed even better. Dolphin Jun speculates that pressure from competition may have forced Meituan to offer businesses more favorable advertising prices.

3) Overall, commission-based income, which is more compatible with transaction volume (GTV), did not show a significant decline this quarter (commission and advertising revenue growth both dropped to 1%-2% during the epidemic in the second quarter), but the growth of advertising revenue related to traffic distribution has a huge gap of over 18% compared to commission growth. Therefore, it can be inferred that the competition from TikTok for traffic distribution has already been reflected in the company's financial report.

At the same time, Kuaishou also expressed its intention to enter the local life/in-store business recently. Although the overall probability of the in-store industry reviving within 2023 is high, the competitive pressure faced by Meituan is only increasing compared to last year.

4) New business revenue in the fourth quarter was 16.7 billion yuan, a year-on-year growth rate slightly slower than the previous quarter at 33.4%. Dolphin Jun believes that one reason is the impact of the epidemic and poor performance, and as the base continues to increase, the growth rate will naturally decrease, so there is no big problem with revenue.

The mainly commission-based income should be community group buying. The commission income of new business this quarter was 300 million yuan, and it decreased by 32% year-on-year. It is normal for the impact of the macro environment, the contraction of community group buying, and the gradual replacement of self-operated vegetable shopping in first-tier cities. And the importance of such a scale of revenue can be basically ignored.
Other income (mostly net sales revenue-based vegetable shopping business) contributed the most to revenue, reaching 16.3 billion yuan, a year-on-year growth of 36.1%. As Meituan's second most important new business outside of flash shopping, vegetable shopping still has good growth.
Under the impact of the epidemic, the new business losses further narrowed to 6.37 billion yuan, and the loss rate also decreased to 38%, which was less than the market's expected loss of 7.3 billion yuan. In terms of reducing losses, the progress and effect of Meituan are positive.

However, due to the contraction of customer acquisition business community group buying and the impact of the epidemic, the number of trading users decreased sequentially this quarter, just like in 1Q20 and 2Q22. Dolphin Jun believes that it is mainly due to the epidemic, but in the absence of new business growth, whether the number of Meituan's users has already peaked may need attention.

5. Overall revenue and profit delivered a stable performance, but are no longer surprising

Let's focus on the overall business performance: In this quarter, the overall revenue was 60.1 billion, a year-on-year increase of 21%, exceeding the market's expected 57.9 billion. However, considering that the first-tier cities gradually reached their peak in December due to the pandemic, the actual performance was slightly better than expected, but not by much.

As mentioned above, delivery is the main reason for the revenue exceeding expectations this time. The revenue from advertising is actually deteriorating under competition, and Meituan's core barrier has now retreated to its proprietary delivery team and delivery algorithm, forming a "logistics capability".

2) This quarter's gross profit was 16.9 billion, with a gross profit margin of 28.2%, slightly higher than the market's expected 28%. As mentioned above, the increase in gross profit from delivery is still the main driver of overall improvement, and the gross profit of non-delivery revenue has actually fallen to 48% quarterly, which is the same as in the second quarter.

3) Sales expenses are expanding, is competition on the rise?

In this quarter, the gross profit margin has slightly improved, but the expense control did not perform well, especially the sales expenses, which reached 10.8 billion, significantly higher than the market's expected 8.9 billion. Comparing quarter-on-quarter, the company's sales expenses during the pandemic in the second quarter was only 9.0 billion. From the fact that the revenue growth of the delivery business exceeded expectations and the gross profit increased, it can be speculated that Meituan did not provide much subsidy or discount in its takeaway business. Therefore, the most likely reason for the increase in sales expenses is that Meituan is spending more money to buy volume and provide subsidies to face competition.

As for research and development and management expenses, they are quite stable, at 5.2 billion and 2.5 billion, respectively, and they are basically stable compared to the same period last year.

4) Profits are no longer stunning

Overall, although the revenue and profit of the delivery business improved beyond expectations, due to competition in the at-home business, Meituan's marketing expenses began to expand, and the company's core business profit not only did not improve this quarter, but instead deteriorated.

Specifically, in the fourth quarter, the company's core business suffered a loss of RMB 1.5 billion, with a loss rate not only higher than the RMB 300 million loss in the previous quarter, but also higher than the RMB 1.1 billion loss in the same period last year when the COVID-19 pandemic was at its peak. Although the loss decreased to RMB 730 million when investment income and fair value change were taken into account, thus appearing less than expected, in reality, Meituan's profit performance this quarter was poor.

Looking at the details, the RMB 730 million operating loss is attributed to the profit of RMB 7.2 billion in the core local business, with an operating profit margin of 17%, which has obviously declined compared to 22% and 20% in the previous two quarters, respectively. This shows that the profit margin of Meituan’s in-store business has worsened significantly due to fierce competition.

Quarterly Reports:

On June 2, 2022, "Zero negative revenue in stores, hotels suffer the most, flash sale outbreak, and valid consumption vouchers" was published.

On June 2, 2022, "Meituan is good if it doesn't make mistakes. It's more important to recover quickly" was published.

On March 25, 2022, "Wanwudaojia: Flash sales are Meituan's new galaxy? (Telephone meeting summary)" was published.

On March 25, 2022, "Meituan's 2021 Q4 Performance Conference Call" was published.

Depth:

On December 16, 2022, "Finally unleashed, can Meituan return to its reign as king?" was published.

On September 22, 2022, "Ali, Meituan, JD, and Pinduoduo have come to accept their fate? You still need to be optimistic" was published.

On April 22, 2022, "Meituan, JD, why are they doing so well in the stock battle?" was published.

On April 13, 2022, "As the cycle declines, how much value do Alibaba and Tencent have left?" was published.

On October 25, 2021, "Meituan Select: Meituan's next 'outstanding curve'?" was published.

On October 22, 2021, "Pay the fine and contribute to social security, how much faith does Meituan have left?" was published. On September 22, 2021, "Is there really a solid defense after the crazy battle for traffic in e-commerce by Alibaba, Meituan, and Pinduoduo?" (https://longbridgeapp.com/topics/1159514?invite-code=032064) was published.

Risk disclosure and statement for this article: Dolphin Investment Research disclaimer and general disclosure (https://support.longbridge.global/topics/misc/dolphin-disclaimer)