MEITUAN: New business controls losses, core business faces adjustments
The following is a summary of MEITUAN's fourth quarter financial report conference call in 2023. For financial report analysis, please refer to " Three mountains have gone, is MEITUAN about to turn around? "
1. Review of Core Financial Information:
2. Detailed Content of the Financial Report Conference Call
2.1. Key Points from Management's Statements:
Local commerce and core business development: a) Leading growth in local commerce industry, with core business segment's annual revenue increasing by 26.8% year-on-year, and operating profit margin reaching 14.5%. b) Instant delivery business growing rapidly, with daily order volume increasing by 73.9% year-on-year, reaching a new peak of over 7.8 million orders. Food delivery business showing steady growth, increasing high-quality user consumption frequency.
Highlights of Insta-shopping and hotel travel business: a) Strong user stickiness in Insta-shopping, with order volume growing by over 40%, expanding rapidly to cover cities and establishing partnerships with many well-known brands. Peak daily order volume exceeded 1.3 million orders on Chinese Valentine's Day. b) Explosive growth in Insta hotel travel business, achieving over 100% growth in GTV, doubling transaction users and active merchants, especially dominating in the high-star hotel sector.
Marketing and user growth strategies: a) Strengthening product promotion and live streaming functions to increase transaction volume, enriching supply of discounted products, attracting transaction users through live programs. b) Optimizing online and offline marketing activities, enhancing brand influence, lowering merchant entry barriers, and adjusting organizational structure to improve synergy.
Diversified business growth and outlook: a) Steady growth in revenue from new departments, driven by the development of commodity retail business, while contracting some non-core businesses to focus on high-quality development. b) Looking ahead, the company will iterate core business strategies, focus on high-quality growth and efficiency improvement, and seize the digital transformation opportunities in the local service industry such as leisure and entertainment. c) GTV of hotel and travel business grew by over 100% year-on-year, domestic hotel GDB grew by over 100% year-on-year, and GTV in the high-star hotel sector exceeded 20%.
User behavior and market feedback: a) Active user numbers and purchase frequency showing healthy growth trends, especially evident in instant delivery, inspiration shopping, and hotel travel businesses. Active user numbers in the fourth quarter grew by over 30% year-on-year, reaching a new high. Annual active merchants grew by nearly 30% year-on-year. b) Adapting to rapidly changing consumer trends by continuously innovating and optimizing product, marketing, and supply chain strategies to meet user demands
Merchant services and digital transformation: a) Helping merchants accumulate digital assets, enhance online operational capabilities, build consumer decision-making based on merchant reputation and transaction data. b) By optimizing themed marketing and self-pickup station network layout, deepening merchant services, accelerating merchant entry and market penetration, especially in lower-tier cities.
Efficiency improvement and cost control: a) Appropriately increasing sales and marketing expenses to stimulate consumption and consolidate competitive advantages, while reducing the research and development expense ratio, reflecting improved operational efficiency. b) Effectively managing cost structure, mitigating the adverse effects of subsidy increases and decreasing average order value (AOV) through economies of scale. c) The sales and marketing expense ratio increased by 4.8 percentage points year-on-year to 22.7%. The research and development expense ratio decreased year-on-year to 7.4%. General and administrative expense ratio remained at 3.7%, unchanged from the same period last year.
Risk management and long-term vision: a) Faced with external challenges and market competition, the company adopts flexible business strategies, including adjusting subsidy policies, strengthening content capabilities, and refining marketing strategies. b) In response to fluctuations in merchant demand, providing necessary incentive measures and support, while expanding the advertiser base to enhance online marketing revenue. c) Persist in implementing the "Retail + Technology" strategy, accelerating industry digital transformation, and striving to create greater value for consumers and merchants.
2.1 Q&A Analyst Q&A
Q: The company recently announced changes in the organizational structure. Can you share more details about this change? What is the specific purpose of this organizational change? How can this organizational change achieve more synergies in the future?
A: The adjustment of the organizational structure mainly involves departments such as demand delivery, hotel and travel installation, MEITUAN platform, and research and development. After the adjustment, the heads of different business segments have changed, clarifying their respective responsibilities. The company's business covers over 2800 cities and counties in China, connecting millions of merchants and over 700 million consumers. The future goal is to cover all local service categories and scenarios, providing a closed-loop solution from demand discovery to service procurement, ensuring high-quality service and comprehensive experience for consumers. After the organizational structure adjustment, better synergy can be achieved between demand delivery, hotel, and travel businesses, closer cooperation to provide better services to merchants, enhance merchant value and operational efficiency. The integration of business teams helps better identify consumer needs, enhance product and pricing competitiveness, improve consumer experience, and strengthen MEITUAN's position as the preferred local service platform in consumers' minds. By integrating mid-end and research and development, improve organizational efficiency, unlock synergistic costs, and enhance user experience. These departments report to specific responsible persons to better support the long-term development of core local businesses in terms of traffic and products.
Q: Insights on the competitive landscape of the food delivery market? How to predict the growth of the food delivery business this year? Will the downward trend in advertising spend (AOB) continue in 2024? Will the business be affected by economic conditions? Any changes or new prospects for the long-term growth and profitability of the business?A: For the delivery business, competition has always been the norm. Through intense competition, the company has continuously gained market share over the years, improved efficiency, and achieved its self-set goals. The current industry is more mature, and users have formed a perception of the service quality of brands and platforms. As an industry leader, the company serves nearly 490 million annual transaction users and over 4.6 million annual active merchants. The company has established the world's largest and most efficient on-demand delivery network, with economies of scale, network effects, and strong brand advantages. These advantages constitute high entry barriers, allowing the company to maintain confidence in the movements of other competitors and to maintain its industry-leading position.
Through innovation and diversified product offerings, the company is committed to enhancing user experience and achieving higher fulfillment efficiency. Taking the "Good Food" business as an example, the company focuses on high-quality growth, improving the cost-effectiveness of products and services, and enhancing user experience. The aim is to achieve higher fulfillment efficiency, better matching price-sensitive consumers with merchants who provide high-quality and reasonably priced products. The company continues to iterate on MEITUAN product promotions, such as the "Sharpshooter" activity, to meet consumers' non-entertainment needs. The stickiness of medium and high-frequency users has further increased, providing a solid foundation for the healthy growth of the takeaway business in a complex macro environment. The company continues to iterate on strategies to increase the consumption frequency of low-frequency users. It is expected that the takeaway business volume in 2024 will maintain healthy and steady growth. The synergies between takeaway, to-home, and flash purchase businesses in user-based marketing, promotions, delivery networks, and on-demand retail continue to strengthen, helping the business expand to a wider range of regions and more diverse categories.
In 2024, consumer trends are expected to be affected by the high base effect of last year, with the average order value (AOV) and new economic indicators showing a year-on-year downward trend. The company will focus on high-quality growth and balance growth with profitability in 2024. Refined substantive strategies to improve efficiency, while seeing further growth potential in advertising monetization. On the supply side, the operating profit of the takeaway business is expected to continue to grow healthily.
Q: Can the company provide updated information on the recent performance of its physical store business (especially hotels and tourism business)? Particularly, after investments made last year to address competition and expansion to lower-tier cities starting from the fourth quarter, there has been a noticeable impact on the operating profit margin. How is the return on investment (ROI) of these investments evaluated? Regarding the growth, profitability, prospects, and competitive environment of physical store hotels and tourism business in 2024 and the medium to long term, could you provide specific information or outlook?
A: In the fourth quarter of last year, the direct-operated model was expanded nationwide, replacing the previous agency-operated model in lower-tier cities. These strategic initiatives have enabled the company to more effectively reach merchants and consumer bases and seize the opportunity of digital transformation. Although these investments have affected short-term profitability, the returns on investment will greatly promote the company's long-term business. Expected growth in Gross Transaction Value (GTV) and revenue growth in 2023 will accelerate, consolidating market share in the local service industry and achieving double-digit year-on-year growth in operating profit**The hotel and tourism business continued to set new records during the Spring Festival. The average daily transaction value during the holiday period increased by 36% year-on-year, exceeding 150% compared to 2019. Reunion and travel during the Spring Festival have become important drivers of local consumption in restaurants and other local services. Collaborating with high-quality restaurants and other local service merchants to launch special offers, live broadcasts, and SIM card promotions, these activities have driven rapid growth in local service orders. During the Spring Festival, the volume of group dining set meal orders increased by over 150% year-on-year. Leisure and entertainment orders increased by 190% year-on-year. With more people choosing to travel during the holidays, hotel and tourism transaction values have significantly increased compared to 2019 and 2023.
In 2024, the company will continue to invest to enhance product capabilities and consolidate market share through precise marketing strategies. By increasing content supply, the aim is to strengthen consumer awareness of value-for-money products and increase the online penetration rate of the entire industry. It is expected that the in-store hotel and tourism business will maintain high GTV growth in 2024. In the medium to long term, the entire industry will continue to benefit from the increasing online penetration rate and changing consumer trends. The gap between revenue growth and (certain aspect) growth is expected to narrow. Leveraging business development teams and experience, the company will design more consumer-demand-oriented promotions for merchants and more accurately guide traffic, continuously optimize live broadcasts and special offer zones, and help merchants promote hot-selling products. After organizational restructuring, integrating news resources will unlock more overall synergies. While the entry of other players brings competition, joint investments will drive the long-term prospects of this business. Short-term profit fluctuations are the result of long-term strategic investments, and the company remains confident in the long-term revenue growth potential and profitability of the in-store hotel and tourism business.
Q: Can the management share some strategic ideas for the new initiatives in 2024? How to enhance profitability or reduce losses, especially in the MEITUAN Select business? How large is the expected loss? Will the consideration of closing this business be taken into account?
A: Over the past few years, the company has made good progress in several new initiatives. For example, investments in restaurant management systems and restaurant sauce business since 2016 have achieved positive cash flow last year and have become market leaders. More and more restaurants are using the company's SaaS system for overall operations. Another example is the B2B full-service distribution business, which started in 2015, also achieved cash flow balance last year, leading market share, and good business growth. All new initiatives (including meta SETF) are expected to collectively achieve breakeven in 2024. As the company continues to improve efficiency, profitability is expected to further strengthen. meta SETF is an important part of the new initiatives field. Its growth slowed in 2023, mainly due to the relatively stable year-on-year scale of the community e-commerce market and the overall industry growth slowdown. Reasons for the slowdown include macro headwinds (economic adverse factors) and consumers returning to offline channels.
The company faces challenges in reopening post-COVID, despite improved efficiency, MEITUAN Select suffered significant losses in 2023, with a high operating loss rate. The scale growth was slower than expected, making it difficult to effectively reduce unit procurement costsThe market competition is fierce, making it difficult to raise prices and gross margins, and reduce subsidies. The company has been investing in the matrix business for nearly four years (since the beginning of July 2020). Despite investing a large amount of resources, the business performance has not met expectations. The company plans to make strategic adjustments, optimize the business model, prioritize building core capabilities and enhancing user experience, rather than simply pursuing scale growth or market share. The company plans to increase price gross margins, reduce subsidies, focus more on natural retention rates and user base growth. Operating losses in the first quarter have significantly narrowed, and the trend for the remaining year is viewed optimistically. Despite recognizing the difficulty of online groceries, even more challenging than expected, the company still believes this is an important market area and intends to continue deepening its development. To achieve success in online groceries, various methods are being simultaneously attempted, with some methods already achieving higher customer satisfaction and better market competitiveness.
Q: In the recent organizational restructuring, it was mentioned that the drone business and overseas business will report directly to the CEO. What can be expected in terms of future development plans for global technological expansion? What are the company's standards or criteria when it comes to global expansion?
A: The company started relatively late in overseas business but has launched a food business under the "Kita" brand in Hong Kong, which has performed well and grown as expected. Food delivery has become a global phenomenon in the past 10 to 15 years, performing well in almost every country, whether developed or developing. Currently, there are over 10 listed companies engaged in food delivery globally, distributed in the US, China, the UK, Europe, India, Southeast Asia, and even Central Asia, North Africa, and Saudi Arabia. Among these companies, our company is the largest in scale and has accumulated expertise in technology and operations. The company is confident in new markets and believes it can find suitable ways to enter them. The company is evaluating other markets but has not made a final decision yet.
The company's cash reserves and free cash flow generated from its main business will support its overseas expansion. The company places great emphasis on return on investment (ROI) when evaluating investments to avoid blind expansion. The company's full-chain business construction in the Chinese market has been a long-term and fruitful process spanning over 10 years. It is expected that the company will gradually gain significant presence in overseas markets over the next 10 years. New technologies such as drones and autonomous delivery vehicles will directly support the company's overseas expansion strategy in the future. Autonomous delivery technology will play a key role in increasing the penetration rate of online food and grocery delivery. The company has been investing in drones and autonomous vehicles for many years, believing these technologies will become part of future urban infrastructure, although this requires decades of continuous experimentation and investment. Given the uncertainty, the CEO chooses to directly lead these projects to be able to make adjustments more flexibly.
Q: After the planned RMB 1 billion share repurchase amount is used up, does the company have plans to further expand the share repurchase for this quarter? How should the company consider its future shareholder return plan?A: In terms of internal business development, the company prioritizes allocating capital to areas that meet high-quality investment return requirements and enhance competitive advantages, while focusing on generating significant free cash flow growth through these investments. Externally, the company selectively evaluates investment opportunities that can bring meaningful strategic value to core businesses or help capture growth opportunities within the ecosystem. If the company believes there are no good investment opportunities in the near term and has sufficient liquidity, it will periodically assess the option of returning capital to shareholders. Currently, share repurchases are the preferred way to increase shareholder returns. The company believes that the current stock price is undervalued, and share repurchases help offset the dilution effect of employee stock options. The company initiated share repurchases in January and purchased shares worth over $4 billion before the "blackout period," all of which have been cancelled. The company plans to continue executing its existing share repurchase plan and may expand the repurchase size in the future as needed.
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