Returning to the trillion-dollar level, can Xiaoxiang Supermarket dance with Meituan?

In this recent Hong Kong stock market rally, Meituan has become the bull market rider, with its stock price doubling in the past month, far outperforming other internet stocks. For example, during the same period, Tencent only rose by 30%, Alibaba by 40%, and JD.com by 80%. Meituan's performance in this rally is evidently different from before. Looking back at the three small rallies in the Hong Kong stock market over the past year, Meituan's increase usually does not differ much from Tencent's.

The recent sharp rise can be attributed to what was mentioned in "Meituan successfully defends against Douyin, Pinduoduo's ghost story is just beginning." Both Meituan and Douyin shifted their focus to prioritize monetization in Q2, emphasizing business profit margins. There are expectations of an increase in profit margins this year. Another reason is that there is a significant expectation gap in Meituan's profit potential, although this has not been discussed in detail yet. Combining the recent surge with a look at Meituan's growth potential in the next phase and why foreign capital is placing Meituan in an important position in this round.

I. What is Foreign Capital Looking At?

In this recent surge, Meituan is the most watched internet stock by foreign capital, for a simple reason - there were too many expectation gaps for Meituan before, as well as concerns about the ghost stories, which affected its valuation. Now that the ghost stories of Douyin have faded and macro policies are being implemented, Meituan has experienced a significant valuation correction, and market funds' risk preferences have clearly changed.

In terms of valuation, before this surge, Meituan was valued at around 800 billion, with the market expecting a profit of 60 billion next year, corresponding to a P/E ratio of around 13 times. Currently, Meituan's market value has reached 1 trillion Hong Kong dollars, corresponding to a P/E ratio of around 16-17 times next year, bringing Meituan's valuation back to its high point in the past two years. Similarly, Tencent has returned to nearly 3.8 trillion Hong Kong dollars, with a valuation back to a P/E ratio of 18 times. Can we expect even higher valuations in the future?

The reasons for Meituan's rapid rise are twofold. Firstly, in the macro recovery market where the denominator is rising, all stocks in the market are rising, not driven by EPS profit growth. Initially, it may have pulled up the overall market valuation, for example, Meituan and Tencent both briefly returned to a P/E ratio above 20 times in this market rally. However, as the market rationalizes later on, funds will still prefer to chase core assets with EPS profit growth. For example, Meituan and Tencent have both received large inflows of funds.

Secondly, as mentioned earlier, the positioning of various internet stocks has changed. In the future, Meituan's competitive landscape will be more certain within internet stocks, with relatively less competitive pressure. From the perspective of competitive landscape, foreign capital is eyeing Meituan's profit potential, which is the biggest expectation gap.

The change in the positioning of internet stocks, for example, those inclined towards stable growth will buy Tencent, which has a shareholder direct return rate of approximately 3-5% annually, with large buybacks supporting the stock price, coupled with a conservative estimate of 8-10% performance growth, Tencent is a very stable choice. For investors buying shareholder returns, they would choose Alibaba and JD.com, where the main business is in passive defense, but with a lot of cash on hand for buybacks. The direct return rate for both companies this year exceeds 10%, as long as the main business successfully defends its position, maintaining growth within 0-1% is considered successful And Meituan is still a growing company in the Internet stock sector, so funds that buy growth + high stock price elasticity will choose Meituan.

II. Expectation Gap of Xiaoxiang Supermarket

Returning to Meituan's business, in the second quarter, Meituan and Douyin found the profit margin, with Meituan's in-store business profit margin returning to a high of 35%. This was the main catalyst for the recent rise in stock price. The threat from Douyin to Meituan is not as exaggerated as rumored, as Douyin has abandoned its bet on takeout. Both sides are inclined to make money first and protect profits, which is a good signal.

Another catalyst is the reduction of losses in Meituan's new business.

Meituan's second-quarter revenue from new businesses was 21.6 billion yuan, with a growth rate of 29%, exceeding the market's expected 20.5 billion yuan. This was mainly contributed by the strong growth of Xiaoxiang Supermarket. The new business incurred a loss of only 1.3 billion yuan this quarter, less than the market's expected loss of 2.1 billion yuan. In the first quarter, the new business incurred a loss of 2.8 billion yuan, which was reduced to 1.3 billion yuan in the second quarter. The management's guidance indicates that the full-year loss in new businesses is likely to narrow to around 10 billion yuan, and there is even a chance to challenge a full-year loss of only 6-7 billion yuan. If the reduction in losses goes smoothly in the second half of the year, this will greatly improve Meituan's profit expectations.

It is worth noting that Xiaoxiang Supermarket is currently the most controversial point in the market. If you are optimistic about Xiaoxiang Supermarket, it can give Meituan a higher valuation space. For example, if Xiaoxiang Supermarket's reduction in losses in the second quarter exceeds expectations. If you are not optimistic about Xiaoxiang Supermarket, on the contrary, the new business is still a burden for Meituan, and this part of the business should not be valued.

Under macro improvements, there is no need to be too pessimistic. It might be worth considering what will happen after Xiaoxiang Supermarket?

When the market valued Meituan before, it usually excluded Xiaoxiang Supermarket, just like how Pinduoduo's valuation does not include Temu. Considering certain risk factors, a conservative valuation method was adopted. However, seeing the second-quarter reports of Meituan and Dingdong Buy, the model of front warehouse has started to work, which is an important signal.

Currently, the market's view is that Xiaoxiang Supermarket may be profitable on the delivery end, after all, delivery is Meituan's core. However, the overall business of Xiaoxiang Supermarket is still losing money.

From a user's perspective, from placing an order at Xiaoxiang Supermarket to delivery, the model is that the delivery guy picks up the goods at the front warehouse and delivers them to the destination. This seems to be no different from food delivery. If it is said that only delivery is profitable, then it should work, otherwise, both delivery and costs will incur losses, and Meituan will not be able to reduce losses so quickly.

The key to the front warehouse model lies in the procurement process. In simpler terms, whether Xiaoxiang Supermarket, Dingdong Buy, etc., can purchase products at prices better than other stores and provide good quality products for users to choose from, which can lead to continuous repurchases by users. This is the key point of the front warehouse, which requires higher user stickiness and average order value, and is not like food delivery, where increasing the number of orders at Xiaoxiang Supermarket can bring down costs. What is more important is to test retail capabilities Because compared with the offline supermarket and front warehouse model, considering the distribution, personnel costs, and warehousing costs of the front warehouse, under the same sales volume, the front warehouse model needs to have a higher customer unit price than the customer unit price of the offline supermarket to be profitable. The number of orders is not as important as the customer unit price.

Otherwise, under the same sales volume, even if the storefront cost of the front warehouse is lower than that of the offline supermarket, considering the same sales volume/low customer unit price/increased distribution costs, the actual front warehouse is not as profitable as the offline supermarket. For example, in 2020, the customer unit price of Dingdong Maicai was approximately between 40-50 yuan, rising to 52 yuan in 2021, and when Dingdong Maicai turned losses into profits on a non-GAAP basis in 2023, the customer unit price rose to 72 yuan.

It proves that the profit model of the front warehouse can only be successful when the customer unit price increases. The main customer base of Dingdong Maicai is users in first and second-tier cities, who are not so sensitive to prices and are willing to pay for groceries to be delivered to their homes.

Due to the underperformance of Meituan Optimal before, and the efficiency is relatively poor, it has not been adjusted for one or two years. Therefore, the market is not optimistic about Meituan's ability to do well in the product selection and cost control of Xiaoxiang Supermarket this time.

The usual view that is not optimistic about Xiaoxiang Supermarket is that similar businesses such as Dingdong Maicai, Hema, and even Sam's Club, Costco, have a higher maturity level than Meituan. Xiaoxiang Supermarket is more like a hybrid in an app, with overlapping businesses between Optimal and Xiaoxiang Supermarket, unlike other apps. In addition, competitors also include local front warehouses in various cities, such as Pinduoduo Supermarket, and even Yonghui Supermarket after the acquisition of Miniso.

It can be said that in the past two years, the competition in front warehouses has been fierce, and how to stand out in this encirclement is a difficult problem.

However, Meituan also has its own strengths despite its temporary shortcomings.

Compared to Dingdong Maicai, Hema, Sam's Club, and the local front warehouse Pinduoduo Supermarket, Meituan's advantage lies in its low customer acquisition cost, and the user stickiness of the Meituan app is strong enough. Just like the competition faced by offline businesses from Douyin, users cannot do without Meituan.

Of course, offline businesses and front warehouse supermarkets cannot be directly compared. Going back to the two key points mentioned above for front warehouses, one is that the procurement of products must be good, for example, the products selected in Xiaoxiang Supermarket may be OEM products found by Meituan from third parties. If the reputation of these products can be established, there is actually room for product premium. The second is high-quality users who can afford high customer unit prices, have strong user stickiness, so that the profit model of the front warehouse can be successful.

More importantly, although the competition in the front warehouse model is fierce, there is not yet a player with a relatively large scale and a large market share. In fact, in the future, there may be a round of mergers and acquisitions in the front warehouse sector. For example, players like the local front warehouse Pinduoduo Supermarket find it difficult to expand nationwide, at most they can operate in individual cities, but expanding nationwide is quite challenging, and the scale is not that large Conclusion

Overall, the market's pessimism towards Xiaoxiang Supermarket is justified, but we should not underestimate Meituan's execution capabilities, especially against the backdrop of foreign capital inflows. As risk preferences change, while the market used to be very strict on valuation, now foreign investors are willing to be more optimistic.

Based on Meituan's delivery advantages, low customer acquisition costs, strong user stickiness, personally, I lean towards Meituan's ability to succeed with Xiaoxiang Supermarket. If Meituan can successfully develop its new businesses such as Xiaoxiang Supermarket, Flash Purchase, and Preferred Selection in the future, these three businesses have significant profit contribution potential. In the medium to long term, Meituan has many areas where profit growth can be improved