Bank of America Securities downgraded Meituan to "Neutral" due to increased competition leading to higher earnings uncertainty

Bank of America Securities published a research report indicating that it has downgraded Meituan (03690.HK) to "Neutral" and lowered the target price from HKD 136 to HKD 105. This reflects a more intense and prolonged competition than expected, leading to a need to readjust the profit recovery timeline. The aforementioned target price is based on a revised 16 times price-to-earnings ratio of the adjusted earnings per share forecast for 2027.

Bank of America Securities stated that although Alibaba (09988.HK)(BABA.US) and JD.com (09618.HK)(JD.US) continue to invest, forcing Meituan to adopt a defensive strategy and putting pressure on recent net margins, it remains confident in the company's solid execution and long-term market leadership. This rating change reflects increased earnings volatility, suggesting a need for a more cautious stance until the competitive landscape stabilizes.

The firm now expects competitive pressure to persist until 2026; the company's recent performance will be severely impacted by the prolonged competition. Due to increased subsidies for riders and consumers, the food delivery business has turned to losses since the second quarter of 2025, and recovery in the short term is difficult. Bank of America Securities estimates that Meituan's core local business operating losses will peak in the third quarter of 2025, gradually stabilizing and recovering to 4% and 14% in 2026 and 2027, respectively. This pressure is compounded by new threats from Alibaba's local lifestyle services and the company's commitments to international expansion, offline retail, and AI investments.

Considering the current environment, Bank of America Securities has revised its adjusted net profit forecasts for Meituan for 2025 to 2027 to negative RMB 9.3 billion, RMB 5.3 billion, and RMB 37 billion, down from RMB 32.3 billion, RMB 47.4 billion, and RMB 65.1 billion, respectively. The firm believes that 2027 will be the next year of profit normalization.

Bank of America Securities expects Meituan to announce its third-quarter results in late November, estimating that total revenue for the third quarter will grow by 5% year-on-year to RMB 98.7 billion, roughly in line with market expectations; it predicts that core local business revenue will remain flat year-on-year at RMB 69.3 billion; and new business revenue is estimated to grow by 22% year-on-year to RMB 29.4 billion. In terms of profit, it estimates a non-International Financial Reporting Standards net loss of RMB 16 billion; estimates a gross margin of 25.1%; estimates a core local business operating loss of RMB 14.4 billion; and estimates a new business operating loss of RMB 2.3 billion