Can supercharged delivery guys help Meituan to re-fly?

After the Hong Kong stock market closed on May 24th, MEITUAN-W released its Q1 2023 financial report. Overall, it continued the trend of steady revenue growth a but with explosive profits. The key points to note are as follows:

1. A surge in delivery guys lead to a significant improvement in delivery gross profit?: In the first quarter, the total number of delivery orders for food delivery and flash purchase reached 4.27 billion, a year-on-year increase of 14.9%. Among them, the flash purchase order volume increased by about 35%, while the food delivery order volume increased by about 13% to around 3.8 billion, which is in line with the company's guidance and market expectations.

However, while the growth rate of delivery orders has been repaired, the growth of the company's self-operated delivery revenue has significantly slowed. This quarter rev. was 16.9 billion yuan, with a year-on-year growth rate of 18.8%, significantly lower than last quarter's 32% and less than the expected 18.3 billion yuan.

Combining the differences in the growth trends of order volume and revenue, and the recent news of a significant increase in the number of delivery personnel in various places, Dolphin Analyst believes that as capacity shifts from scarcity to surplus, the average delivery price should have significantly decreased. At the same time, although the company has stopped disclosing delivery costs this quarter, it can be inferred that the magnitude of the decrease in delivery costs should be more significant. The gross profit margin of the company's delivery services should have improved significantly, and it should continue in the next few quarters.

2. The cake is getting bigger, enough for MEITUAN-W and Douyin to share: In the local life sector, in addition to the lower-than-expected delivery revenue, the repair of commission income is very rapid. Specifically, commission income reached 15.8 billion yuan, significantly higher than the market's expected 14.2 billion yuan, with a year-on-year growth rate of 32.4%, significantly higher than the overall growth of the sector and the growth of delivery orders.

As the growth rate of delivery orders has been anchored, and domestic residents' travel and dining activities have significantly recovered in the first quarter, Dolphin Analyst believes that the significant repair of the hotel and store business and the possible improvement in monetization of food delivery business are the main reasons for the commission income exceeding expectations.

However, on the other hand, the growth rate of advertising and marketing revenue this quarter is still only up 10.6%, with revenue of 7.75 billion yuan, slightly lower than market expectations. Although there has been a significant improvement compared to the negative growth in the previous quarter, the gap between advertising revenue and commission-based revenue growth is still as high as 21%, which is even higher than the 18.5% gap in the previous quarter.

Combined with the significant increase in marketing expenses, it can be seen that the competition between Douyin and MEITUAN-W in the local life business in the first quarter is still quite fierce, but under the significant recovery of overall demand, there is enough room for incremental growth for of both MEITUAN-W and Douyin at the same time. However, this also means that the market's concerns about competition from Douyin have not yet been dispelled.

3. New businesses are steadily reducing losses: The new businesses mainly consisting of MEITUAN-W Maicai and MEITUAN-W Select achieved revenue of 15.7 billion yuan this quarter, slightly lower than the expected 16.1 billion yuan. But at the same time, the losses of new businesses this quarter have further narrowed to only 5 billion yuan, which is lower than the company's guidance and market expectations of 5.7 billion yuan. MEITUAN-W is still concentrating resources steadily, promoting efficiency improvement and loss reduction.

However, reducing costs and increasing efficiency does not mean giving up the new businesses completely. This season's revenue growth still reached 30%, and MEITUAN Maicai's GTV growth increased by 50%. In the area of grocery retail, MEITUAN-W still maintains a high growth rate.

4. Explosive increase in gross profit through performance and in-store assistance: In terms of overall performance, this quarter's total revenue was 58.6 billion yuan, a year-on-year increase of 26.7%, which is basically in line with the company's guidance and market expectations.

However, the gross profit margin is explosive. This quarter achieved a gross profit of 19.8 billion yuan, with a gross profit margin as high as 33.8%, far exceeding the expected 28%. Dolphin Analyst believes that the main reasons for the significant increase in overall gross profit margin are: first, the decrease in delivery costs paid to delivery guys and second, the rapid repair of business such as hotel and travel in-store services, which significantly increased the proportion of high gross profit income.

5. Marketing expenses are still high: There are two points worth noting in terms of expenses. First, the sales expenses reached 10.4 billion yuan this quarter, which is still significantly higher than the market's expected 9 billion yuan. It can be inferred that in order to cope with the competition from Douyin, MEITUAN-W has significantly increased its subsidies to merchants or users.

On the other hand, the management expense ratio this quarter was only 2 billion yuan, which is significantly lower than the expected 2.3 billion yuan and the same period last year. It should be due to some personnel or cost reduction measures taken with the contraction of new businesses and the overall reduction of costs and increase in efficiency.

Finally, the overall operating profit this quarter reached 3.6 billion yuan, while the market expected only 200 million yuan. Specifically, the operating profit of the core local business reached 9.5 billion yuan, significantly higher than the expected 7.7 billion yuan. At the same time, new businesses also reduced losses beyond expectations, and the undistributed expenses at the group level also decreased significantly from 1.6 billion yuan to 800 million yuan on a month-on-month basis. The trend of the company's overall cost reduction and efficiency improvement is still clear.

Dolphin Analyst's point of view:

Overall, the feeling of MEITUAN-W's results this quarter is positive.

Although the stories of stable revenue and soaring profits is nothing new for Chinese Internet companies. Under the current economic environment, the significant increase in the supply of takeaway deliverymen has given MEITUAN-W room to lower delivery costs, which is conducive to the company's further improvement of the average unit profit of takeaway business. And this benefit is likely to continue for a period of time in the future.

On the other hand, with the recovery of domestic travel and offline consumption, although the pressure from Douyin's competition has not yet shown signs of easing, MEITUAN-W benefits from the overall recovery of the industry. Compared with the e-commerce sector, after the market loses its growth, it can only be a zero-sum game of internal competition. In-store business still has relative advantages.

From a fundamental perspective, there are no major issues with MEITUAN-W's financial report this quarter. As one of the few companies that have not yet achieved annual profitability, the unexpectedly high profits this quarter will help increase market visibility and confidence in the company's future profitability.

However, from a trading perspective, the recent trend of Chinese stocks has been largely influenced by macro factors. Moreover, the market's focus on whether the recovery can continue in the second half of the year is higher than on the first quarter performance, so the company's guidance for the second quarter performance and recent macro events may have a greater impact on the company's recent stock price trend.

II. Capacity explosion, delivery gross profit improvement should be significantly improved

First, let's take a look at MEITUAN-W's most important takeaway business. In the first quarter, the total number of takeaway orders, including restaurant takeaway and flash purchase, reached 4.27 billion, a year-on-year increase of 14.9%, which is basically in line with the company's previous guidance. The quarter-on-quarter growth rate of 13.6% also showed a slight acceleration.

Although the quarter-on-quarter growth rate does not seem to be significant, due to the early dates of this year's Spring Festival and the early return of residents to their hometowns, coupled with the impact of the epidemic, there was a certain negative impact on takeaway demand in January and February. However, it is reported that there has been a significant increase in takeaway orders since March, and attention can be paid to the company's guidance for the second quarter.

According to the company's disclosure, the growth rate of flash purchase business in the first quarter was about 35%, and the number of takeaway orders was about 3.8 billion, with a year-on-year growth rate of about 13%, which is also in line with the company's previous guidance.

However, a major focus of this financial report is that despite the increase in the number of takeaway orders, the growth of the company's self-operated delivery income has significantly slowed down. This quarter, MEITUAN-W's delivery income was 16.9 billion yuan, a year-on-year growth rate of 18.8%, significantly less than the market's expected 18.3 billion. Over the past few quarters, the company's delivery revenue growth rate has generally exceeded the single volume growth rate by more than 10pct, but this quarter it was less than 4pct. Dolphin Analyst believes that, firstly, due to the complete lifting of control, the efficiency of existing capacity has been improved, and secondly, a large number of reports on the surge in the number of takeaway delivery drivers in various places have provided a large amount of new capacity. The shortage of capacity has turned into an oversupply, resulting in a significant drop in delivery prices. Assuming that the proportion of 1P single volume remains unchanged, the average delivery price per order in the first quarter decreased by 3% compared to the previous quarter.

At the same time, MEITUAN-W did not disclose delivery-related costs this quarter. Dolphin Analyst reasonably guesses that the decrease in delivery costs paid to takeaway drivers should be higher than the decrease in revenue. That is, the company's gross profit margin in fulfilling contracts should have improved significantly, and it should continue in the following quarters.

Third, competition remains, but the cake is big enough for everyone to share

Including instant delivery logistics, the overall core local business revenue this quarter was 42.9 billion yuan, a year-on-year increase of 25.5%, slightly higher than the market's expected 41.6 billion yuan. In addition to the low delivery revenue, another focus is the rapid recovery of commission income this quarter. Specifically:

Commission income reached 15.8 billion yuan, a year-on-year growth rate of 32.4%, significantly higher than the market's expected 14.2 billion yuan, and the growth rate far exceeded the overall growth of the sector and the increase in instant delivery volume. The commission income of the takeaway business is anchored to the single volume, and the growth should be limited. However, during the first quarter of this year, after residents were free to travel, the repair of travel, dining, entertainment, and other in-store businesses was quite considerable. Therefore, the main reason driving revenue exceeding expectations should be the hotel and travel and in-store businesses. Among them, the company disclosed that the overnight booking volume during the Spring Festival period increased by as much as 50%, and the repair was particularly outstanding.

2) ** The growth rate of advertising and marketing revenue, which reflects the ability to distribute traffic and promote, was only 10.6% this quarter, with revenue of 7.75 billion yuan, slightly lower than the market's expected. ** Although there has been a significant improvement compared to the negative growth in the previous quarter, the gap between advertising revenue and commission-based revenue growth rate this quarter is still as high as 21pct, even higher than the 18.5% gap in the previous quarter.

It can be seen that MEITUAN-W's barrier based on contract-based transactional business is obviously stronger than that based on information distribution advertising business. The competitive pressure of the latter is clearly visible.

Combined with the fact that marketing expenses this quarter are higher than expected, Dolphin Analyst believes that the scenario that can be depicted is that the competition between Douyin and MEITUAN-W in the in-store business in the first quarter is still quite fierce. Under the rapid repair of the industry as a whole, there is enough incremental space to meet the growth of both MEITUAN-W and Douyin at the same time. Fourth, New Business Steadily Reduces Losses

As for the new business mainly focused on MEITUAN-W grocery shopping and selection, the first quarter achieved revenue of 15.7 billion yuan, a year-on-year increase of 30%, slightly lower than the expected 16.1 billion yuan. However, under the logic of reducing costs and increasing efficiency, lower revenue also means less loss. Moreover, a growth rate of 30% can be considered high growth in the current market environment.

The company also disclosed that MEITUAN-W grocery shopping's GTV growth rate this quarter reached as high as 50%, even considering the situation where some cities have selected retreats and grocery shopping entries. This shows that MEITUAN-W has not given up on the fresh retail business and is still steadily growing.

Correspondingly, the loss of the new business this quarter further narrowed to only 5 billion yuan, lower than the company's guidance and market expectations of 5.7 billion yuan, indicating that MEITUAN-W is still steadily reducing losses by shrinking resources in new businesses and has not slackened due to the improvement of the macro situation.

In addition, after the decrease in the number of active travel transaction users in the previous quarter, the company no longer discloses the number of active transaction users this quarter. It can be inferred that user growth is currently not the company's focus, and the performance may not be satisfactory.

Fifth, Steady Revenue, Exploding Profits Set New Historical Highs

In terms of overall performance, the total revenue this quarter was 58.6 billion yuan, a year-on-year increase of 26.7%, basically in line with the company's guidance and market expectations. The revenue performance can only be described as steady as expected.

However, the performance on the profit level can be described as explosive. This quarter achieved a gross profit of 19.8 billion yuan, with a gross profit margin as high as 33.8%, far exceeding the expected 28%. Due to the impact of the Spring Festival, the first quarter, which was originally a seasonal off-season for profits, reached a historically high level of gross profit margin, with a considerable increase.

Dolphin Analyst believes that the reason for the significant increase in the overall gross profit margin is that the cost of delivery by takeaway deliverymen has decreased, and the rapid repair of businesses such as hotel and travel to store has increased the proportion of high gross profit income.

There are two key points regarding expenses. Firstly, the sales expenses this quarter reached 10.4 billion, significantly higher than the market expectation of 9 billion and a 14.5% increase compared to the same period last year. This indicates that MEITUAN-W has indeed increased subsidies to merchants or users in response to competition from Douyin.

On the other hand, the management expense ratio this quarter was only 2 billion, significantly lower than the expected and same period last year's 2.3 billion. As the revenue scale expands, the management expense ratio has decreased significantly from 5% last year to 3.4%.

Research and development expenses remained basically the same as last year and were close to expectations, with little change. However, expenses are also passively declining under the scale effect.

In the end, although marketing expenses were nearly 1 billion higher than expected, the huge gross profit increase after the repair of delivery and in-store business still allowed MEITUAN-W to achieve a profit of 2.34 billion from its main business, more than three times the highest profit in the past.

In addition to non-operating businesses such as interest and investment, the overall operating profit this quarter reached 3.6 billion, far exceeding the market expectation of 200 million.

Looking at the details, the operating profit of the core local business reached nearly 9.5 billion, almost reaching 10 billion, and achieving 22% of the highest point last year during the off-season. At the same time, new businesses also reduced losses beyond expectations, and the undistributed expenses at the group level also decreased significantly from 1.6 billion to 800 million on a month-on-month basis. The trend of the company's overall cost reduction and efficiency improvement is still clear.