With Two of the Three Major Challenges Overcome, Is Meituan's Comeback Imminent?

After the Hong Kong stock market closed on March 22, MEITUAN released its financial report for the fourth quarter of 2023. Overall, although the actual situation did not appear as strong as "operating profit greatly exceeded expectations by 44%", there are still some "small strokes of luck".

1. Overall, this quarter's total revenue was 73.7 billion, slightly higher than the expected 72.8 billion; the overall operating profit was 1.8 billion, although it seems significantly higher than the expected 1.2 billion. However, this quarter confirmed nearly 2.1 billion in non-operating profits (including financial income, government subsidies, tax refunds, etc.), which is 6-8 billion more than the other three quarters of 2023. Therefore, the profit performance is actually largely "in-line".

2. Delivery business without surprises: Looking at the delivery data reflecting the performance of the core home delivery business, in the fourth quarter, the total number of deliveries was approximately 6.1 billion orders, with a daily average of about 65.9 million orders, which is roughly in line with the market's expectation of 6 billion. The two-year compound growth rate is 19.4%, which is basically consistent with the 19.5% in the previous quarter, matching the company's previous guidance on compound growth rate.

In terms of revenue, the trend of delivery revenue growth being lower than the volume growth continues. This quarter, the delivery revenue was approximately 21.9 billion, slightly lower than the market's expectations, and the year-on-year growth rate slowed to 10.9%. According to Dolphin Research, the average delivery revenue per order this quarter decreased by 2.8% compared to the previous quarter, leading to a gradual decline in revenue growth while the volume growth accelerated. However, this is not bad news for the company as it actively benefits consumers by reducing delivery costs in a situation where there are more delivery drivers available.

1. Advertising revenue better than expected, has the competition in-store stabilized? Combining industry data and the performance of hotel and travel companies such as Huazhu and Ctrip, the domestic cultural and tourism consumption sentiment declined compared to the previous quarter. Due to competition from Douyin, the in-store sector was previously the most worrying issue in the market. However, in reality, this quarter's advertising revenue was 10.9 billion, approximately 9% higher than expected, showing better growth than expected.

Moreover, a key indicator - the difference in growth rates between advertising revenue and commission-based revenue has been negative since 2022, but this quarter's advertising growth rate exceeded nearly 8 percentage points, the first time in two years. This reversal signal indicates that the competitive landscape of MEITUAN's in-store business has at least not deteriorated further, and may have marginally improved.

1. Official announcement of new business prioritizing loss reduction, another major issue also resolved? Another major concern of the market - the continuous losses of new businesses also showed improvement signals this quarter. The new business incurred losses of 4.8 billion this quarter, slightly exceeding the market's expected loss of 5.1 billion, indicating progress in reducing losses. More importantly, the company officially stated in the announcement that reducing losses will be the primary goal for new businesses in 2024, putting an end to the rumors of new businesses needing to reduce losses
2. On the expense side, this quarter's sales expense input was an absolute value of 16.7 billion. Despite a nearly 3 billion decrease in revenue scale compared to the previous quarter, sales expenses remained roughly the same, indicating that the company's investment in subsidies or marketing is still significant. Actual expenditure was also about 1.9 billion higher than expected. It can be seen that MEITUAN is adopting a proactive strategy in response to competition.

As for management and research and development expenses, they also saw a slight increase of 100-200 million compared to the previous quarter. In the case of a decrease in revenue scale, this also means that the expense ratio has increased, resulting in an operating profit of only 1.4 billion for MEITUAN's main business this quarter, a significant decrease. The overall profit performance is actually not good.

6. The profit may not seem explosive, but there is still good news: although profits seem to exceed expectations, it is mainly due to non-operating profit contributions. However, according to accounting rules, non-operating profits are recorded in the undistributed section of the group as a whole, and should not have a significant impact on the profits of the two major business segments, local services, and new businesses.

So from a business segment perspective, the operating profit of the local services segment this quarter was 8 billion, slightly higher than the expected 7.6 billion, which is a real beat under the unexpected increase in advertising revenue. As for the continued reduction in losses for new businesses, with the loss rate narrowing to 26%, this is clearly good news.

Dolphin Research's Viewpoint:

Overall, although this quarter's financial report does not show a profit that is nearly 50% higher than expected at first glance. As we have previously summarized:

1) The compound guidance for the growth of takeaway and flash purchase business volume is at least not a bad news of further declining growth, which will not deepen the market's concerns about the takeaway business;

2) Advertising revenue exceeded expectations, and for the first time in 2 years, the growth rate surpassed commission-based revenue, indicating that MEITUAN's competitive landscape in the in-store business has at least not deteriorated, and there may even be a marginal improvement; and the slightly higher-than-expected profit in the local services segment also confirms this situation.

3) The new business losses in the fourth quarter were 300 million less than expected, and the company announced that reducing losses in new businesses in 2024 is a top priority, which also alleviates the market's concerns about the continuous significant losses in MEITUAN's new businesses.

Therefore, looking at the slowdown in takeaway growth, competition in in-store business, and new business losses, the core issues of these three market concerns, this financial report at least does not bring bad news for the first one, and even brings marginal good news for the latter two. Therefore, Dolphin Research believes that this performance is at least a validation and support for MEITUAN's rebound since the beginning of the year.

However, from another perspective, the continued growth in expenses and the fact that the company's overall operating profit is not looking good, also indicate that the company is still operating in a fiercely competitive market environment. The future growth rate of the takeaway business and whether the new business, which claims to significantly reduce losses, can deliver on its promises;With other traffic entry points such as Xiaohongshu and Kuaishou also entering the offline business, the mid-term competitive landscape is not truly stable.

Moreover, after this rebound following the New Year, according to our own calculations, MEITUAN's current valuation is no longer undervalued, so whether it can continue to break through will depend on the guidance for the first quarter and the actual delivery situation for the full year of 2024.

Here is a detailed analysis of the financial report:

1. Order volume growth meets expectations, "delivery riders" dividend continues to be released

Looking at the performance of the delivery business reflecting the home business (food delivery and flash sales) in the fourth quarter, the total order volume for delivery is approximately 6.1 billion orders, with a daily average of about 65.9 million orders, which is roughly in line with the market's expectation of 6 billion orders. The company had previously stated that the two-year compound growth rate of this quarter's order volume is roughly consistent with the previous one, with our calculation showing a compound growth rate of 19.4% for this quarter, compared to 19.5% in the previous quarter.

The company's guidance on order volume growth was relatively conservative in previous communications, and in a not very strong macroeconomic environment, the market was quite concerned about the growth prospects of the optional/upgraded consumption food delivery business. The actual performance of delivery order volume growth is completely consistent with the guidance and expectations, which is at least not bad news.

On the revenue side, the trend of delivery revenue growth being lower than order volume growth has continued since 2Q. This quarter, the revenue from delivery is approximately 21.9 billion RMB, slightly lower than market expectations, with a year-on-year growth rate of 10.9%, continuing to slow down compared to the previous quarter. According to Dolphin Research, the average delivery revenue per order has decreased by 2.8% this quarter, leading to a gradual decline in delivery revenue growth while accelerating year-on-year order volume growth.

However, consistent with before, Dolphin Research believes that the main reason is the continuous decrease in average delivery costs due to the abundant supply of delivery riders, which MEITUAN actively passes on the cost savings to consumers to better stimulate demand. The company also explicitly stated in the announcement that the proportion of delivery costs to revenue is declining, so actively reducing delivery prices will not affect MEITUAN's profit in this regard.

1. Advertising revenue better than expected, is MEITUAN regaining momentum?

If the performance of delivery is generally as expected without surprises, this quarter's advertising revenue growth, which is more closely related to the in-store sector, brings some surprises.

Combining industry data and the performance of hotel and travel companies such as Huazhu and Ctrip, the domestic cultural and tourism consumption vitality has declined to a certain extent quarter-on-quarter. Due to competition from Douyin, the in-store sector was one of the market's previous major concerns. However, in reality, this quarter's advertising revenue is around 10.9 billion RMB, approximately 9% higher than expectedThe year-on-year growth rate is 40.8%, which is close to the second quarter's 40.4% buoyancy of cultural and tourism activities. In other words, in terms of in-store advertising, it seems that MEITUAN's competitive landscape has not deteriorated further, and may have even marginally improved.

One indicator we have been focusing on— the difference in growth rates between commission-based income and advertising income— this quarter, the growth rate of advertising has surpassed that of the past 22 years for the first time, a signal worth noting.

As for commission-based income related to both in-store and delivery services, this quarter reached 19.4 billion, approximately 4% higher than expected, although the outperformance was not as significant as in advertising revenue. It should be noted that the stronger growth in in-store business was hindered by the delivery business. Dolphin Research speculates that the increase in the proportion of low-value "group meal" orders in the delivery business, resulting in lower monetization, may have affected the growth of commission income in the delivery sector.

Thirdly, the announcement of new businesses prioritizing loss reduction has resolved a major issue.

With MEITUAN's new core businesses such as MEITUAN Select (community group buying) and MEITUAN Buy Vegetables (self-operated front warehouse), as well as various innovative businesses including bicycles and ride-hailing, this quarter's revenue reached 18.6 billion, which is basically in line with expectations. The year-on-year growth rate has slowed by approximately 3.8 percentage points compared to the previous quarter. However, as we have mentioned before, the new businesses are currently focused on reducing losses, so a slowdown in growth is not necessarily a bad thing.

In reality, the new businesses incurred a loss of 4.8 billion this quarter, slightly better than the market's expectation of a loss of 5.1 billion. Therefore, the progress in loss reduction slightly exceeded expectations. In this announcement, the company also officially stated that in the next 24 years, narrowing losses will be the primary goal, confirming the previous rumors of loss reduction in new businesses.

Among MEITUAN's current major concerns (in-store competition, slowing growth in delivery, losses in new businesses), at least the last one seems to be clearly addressed.

On the profit side, while the profits may not seem as explosive, there is still good news.

This quarter achieved a gross profit of 25 billion, with a gross profit margin of 33.9%, both slightly higher than market expectationsOn the cost side, the absolute value of sales expenses for this quarter is 16.7 billion, while the revenue scale has decreased by nearly 3 billion compared to the previous quarter. Sales expenses have remained relatively stable, indicating that the company's investment in subsidies or marketing is still significant. Actual expenditures are also about 1.9 billion higher than expected. Management also indicated that this increase is due to user incentives, promotions, or advertising expenses. In other words, MEITUAN continues to adopt a proactive strategy in the face of competition.

As for management and research and development expenses, they have also increased slightly by 0.1 to 0.2 billion compared to the previous quarter. Due to the decrease in revenue scale, this implies that the expense ratio will increase. However, due to minimal changes in absolute volume and the company's current investments in new directions such as live streaming and overseas delivery businesses, the impact on the company is limited and falls within an acceptable range.

However, with revenue and gross profit margins both declining, the three operating expenses have all increased compared to the previous quarter, resulting in MEITUAN's main operating profit for this quarter being only 1.4 billion, a significant decrease. Therefore, the overall profit performance is not considered good.

The overall operating profit is 1.8 billion, which seems significantly higher than the market's expected 1.2 billion beat. This is mainly because nearly 2.1 billion in non-operating profits were confirmed this quarter (including financial income, government subsidies, tax refunds, etc.), which is 6-8 billion more than the other three quarters of the year. Therefore, if we exclude the non-operating profits, the profit is just in line with or slightly below expectations.

However, according to accounting rules, non-operating profits are recorded in the undistributed section of the group as a whole, and should not have a significant impact on the profits of the local services and new business segments.

Specifically, the local services segment's operating profit for this quarter is 8 billion, slightly higher than the expected 7.6 billion. The operating profit margin is 15%, continuing to decline from the previous quarter's 18%. However, Dolphin Research believes that the decline in profit margin is reasonable given the decrease in average order value in food delivery and the expected decrease in travel prices in the fourth quarter. The actual profit exceeded expectations, matching the unexpected increase in advertising revenueAs for the continuation of the new business mentioned earlier, the loss reduction continues, with the loss rate narrowing to 26%, lower than the expected 27%, which is another clear piece of good news.

Previous research on MEITUAN by Dolphin Research

Financial Reports:

• November 29, 2023 Conference Call "MEITUAN: Not Giving Up, Will Continue to Invest"
• November 29, 2023 Financial Report Review "Persisting in Innovation, Can MEITUAN Afford It?"
• August 24, 2023 Conference Call "MEITUAN: Store Visits Still Strong in the Third Quarter, Slight Slowdown in Takeout"
• August 24, 2023 Financial Report Review "Another Battle with Douyin, MEITUAN's Defense Stronger than Alibaba's"
• May 25, 2023 Conference Call "MEITUAN: Confident in Consumer Recovery in 2023, Hoping to Soar with the Wind"
• May 25, 2023 Financial Report Review "Can the Booming Takeout Delivery Help MEITUAN Stand Firm?"
• March 25, 2023 Conference Call "MEITUAN: Full of Confidence in the Face of Competition? (4Q22 Conference Call Summary)"
• March 24, 2023 Financial Report Review "MEITUAN: Kingdom Efficiency Still Reliable But No Longer 'Impregnable'"
• November 25, 2022 "MEITUAN: Unique Differentiation in Store Competition, Will Communicate MEITUAN's Value with Naspers (Summary)"
• November 25, 2022 "MEITUAN: Still Profitable, Why the 'Degradation of Faith'?"

End of Content2022 年 8 月 26 日《 MEITUAN: Is the domineering performance over? It's all about the instant delivery 》

2022 年 8 月 26 日《 MEITUAN: Excessive profits from instant retail driven by the epidemic, will decline in the third and fourth quarters 》

In-depth:

2023 年 6 月 2 日《 Facing TikTok, MEITUAN can't make the same mistakes as Alibaba 》

2022 年 12 月 16 日《 Finally unleashed, can MEITUAN make a comeback as the king? 》

2022 年 9 月 22 日《 Alibaba, MEITUAN, JD, Pinduoduo have all resigned themselves? Still need a broad strategy 》

2022 年 4 月 22 日《 Why do MEITUAN and JD excel in the stock battle instead of struggling?》

2022 年 4 月 13 日《 As the cycle "decays", how much value is left for Alibaba and Tencent?》

2021 年 10 月 22 日《 Paying fines, contributing to social security, how much faith does MEITUAN have left?》

2021 年 9 月 22 日《 Alibaba, MEITUAN, and Pinduoduo going crazy, is there a real barrier after the e-commerce traffic melee?》

Risk disclosure and statement of this article: Dolphin Research Disclaimer and General Disclosure