Meituan after the sharp rise: Has it truly regained its momentum?

After the Hong Kong stock market closed on June 6th, Meituan released its financial report for the first quarter of 2024. From early February to the present, Meituan's stock price has experienced a "shocking turnaround" with a surge of over 100% in just 3-4 months. As of today, the rally mainly driven by sentiment reversal and valuation recovery is coming to an end. So, after the significant rebound, how did the company perform in its first earnings verification? Let's take a closer look:

1. Overall Performance: This quarter's total revenue was 73.3 billion, seemingly exceeding expectations by over 4 billion. However, this is mainly due to the consensus expectations being too low to be meaningful. The actual revenue should only slightly exceed expectations, mainly attributed to the growth in instant delivery orders; the overall operating profit was 5.2 billion, exceeding expectations by 1.2 billion, with contributions from reducing losses in new businesses and repairing local business profits.

2. Stronger-than-expected Growth in Instant Delivery Orders: The highlight of this performance is undoubtedly the growth rate of instant delivery orders reaching 28%, significantly surpassing the company's previous guidance and research showing growth between 22% and 24%. Even without considering the expectation gap, in the context of a higher base period, the growth in instant delivery orders accelerated by 2.5 percentage points on a quarter-on-quarter basis, undoubtedly a certainty of beating expectations.

Moreover, although the growth rate of delivery revenue is still slower than that of order volume at 24.6%, the gap between the two has clearly narrowed. Calculated as revenue per instant delivery order from a financial perspective, it is 3.9 yuan (likely higher in reality). Although slightly lower than the special environment in 1Q last year, it has reversed the downward trend from 3.8 yuan in 2Q to 4Q last year, providing the platform with more room to improve user experience or cope with the rising social security costs of delivery drivers in the future.

3. Competition is Declining, but Overall Growth is Also Slowing: This quarter, the year-on-year growth rates of commission and advertising revenue were 26.7% and 33.1% respectively, both outperforming the "anchor indicator" of delivery revenue for the To-Home business. At the same time, the growth rate of advertising revenue leading commission by 6.4%, although slightly narrowing compared to the previous quarter, remains in positive territory. These two points indicate that the worst phase of competition between Meituan and Douyin in advertising budgets for offline merchants is over.

However, we also note that unlike the gradual increase in the growth rate of instant delivery orders, even though competition has indeed declined, the growth rates of commission and advertising revenue have been declining or flat in the past three quarters. Therefore, under the drag of the declining overall growth in offline to-home travel consumption, unless Meituan can significantly regain market share from Douyin, this year's growth in offline revenue compared to last year may decrease rather than accelerate.

4. New Business Loss Reduction Exceeds Expectations: After the company explicitly announced that reducing losses in innovative businesses is a top priority, this quarter saw, on one hand, a growth rate increasing to 18.5%, higher than the expected 16%. On the other hand, this quarter's loss in new businesses decreased to 2.76 billion, significantly lower than the consensus expected loss of 3.2 billion.While the growth remains unchanged, the progress in reducing losses is also satisfactory.

5. Local business profits are also recovering: In addition to the reduced losses in new businesses, the operating profit of the local business sector this quarter was 9.7 billion, exceeding expectations by 1.3 billion. Compared to historical performance, the operating profit margin of the local business sector this quarter is 17.8%, significantly higher than the worst fourth quarter, but still lower than the level during the "dividend period" in the first half of 2023, roughly close to the third quarter of last year (0.3 percentage points higher).

In other words, the profit margin of the local business has undoubtedly improved from its lowest point, but there is still a considerable gap from the previous high. The worst competition with Douyin is over, but it still suppresses the profit space of offline businesses.

1. On the expense and profit front, the gross profit margin for this quarter is 35.1%, which is basically consistent with the 35.3% level of the third quarter of last year that we benchmarked against. And the reduction in marketing expenses by nearly 3 billion is undoubtedly the main contribution to profit release. The internal research and development and management expenses have also been reduced by 200-300 million each, making a certain but not significant contribution. Meituan does not seem to intend to rely heavily on internal cost control to release profits.

In summary, the profitability of Meituan's core business has roughly recovered to the level of the third quarter of last year (as evidenced by the gross profit margin), but the main source of incremental profit still relies on external cost reduction. Whether the profitability of the core business itself can return to previous high levels remains to be seen.

Dolphin Research Point of View:

Whether the first performance after the "big rebound" can support the previous nearly 100% highest increase, according to several key issues: 1) At least in the offline business, there are signs of continuation from the fourth quarter of last year, and the competition with Douyin is slowing down rather than intensifying, Meituan is no longer losing market share significantly; 2) In terms of reducing losses in new businesses, it has also made progress in line with market expectations, even slightly faster. In these two aspects, we believe that Meituan has at least delivered as expected, and the growth of food delivery + flash sales is clearly ahead of expectations, with over-delivery.

In other words, we believe that the current performance delivery is sufficient to support the recovery of its previous stock price and valuation. However, the question of whether Meituan can break the high point of this rebound again in the short to medium term, we see that the competition in the offline business is not getting worse but not disappearing, and in the case of a slowdown in overall market growth, there is not much opportunity for profits to increase significantly compared to last year. It can be said that more elasticity, or the expectation difference still depends on whether the strong growth in instant order volume this quarter can continue, and whether UE can improve.

At present, the operating profit of the local business of less than 10 billion this quarter is not enough to significantly raise Dolphin's expectations for the full-year profit of 2024-2025, and stronger guidance is needed in the home business.Here is a detailed analysis of the financial report:

I. Exceeding Growth Expectations in the Last-Mile Delivery Business, End of the "Delivery Rider Dividend"?

Looking at the performance data of the last-mile delivery business (food delivery and flash sales) of the company, the total number of orders in the first quarter was approximately 5.46 billion, with a year-on-year growth rate of 28.1%. Combining the company's guidance and third-party research, the market's performance expectations for the growth rate of food delivery orders were around 18% to 20%, and for flash sales order growth rate expectations were higher at around 30% to 40%. The combined growth rate was expected to be between 22% to 24%, indicating that the growth in order volume significantly exceeded expectations.

Even without considering the expectation gap, from the perspective of past performance trends, although the base number for the same period was increasing, Meituan's last-mile delivery order growth rate increased by 2.5 percentage points compared to the previous period, which was indeed unexpected. The specific reasons that led to the actual growth being significantly higher than the guidance given at the end of March need to be closely examined during the conference call.

At the revenue level, although the growth rate of last-mile delivery revenue has been lower than the order volume growth rate since 2Q23, the revenue growth rate for last-mile delivery is 24.6%, lower than the order volume growth of around 28%, but the growth rate gap has significantly narrowed. Calculated simply as average delivery revenue per order at 3.9 yuan (actually more due to accounting effects), although it is still declining year-on-year, compared to the average order revenue of 3.6 to 3.8 yuan in 2Q to 4Q of last year, it has already turned upward.

Although there are seasonal influences from winter and the Spring Festival, it may also indicate that the rapid decline in average delivery prices has come to an end. While this may not be good news from a user attraction perspective, on the other hand, it provides the company with more room to improve average user experience or delivery rider commissions.

II. Decline in Competitive Intensity Declared, But Overall Growth is Also Slowing Down

In terms of commission and advertising revenue that more marginally reflect the in-store business, this quarter saw year-on-year growth rates of 26.7% and 33.1% for commission and advertising revenue, both outperforming the "anchor indicator" of the company's business— delivery revenue growth rate.

Looking at the key indicator we have been focusing on— the difference in growth rates between commission-based revenue and advertising-based revenue, from 2Q22 to 2Q23, advertising was significantly lagging behind, but starting from 3Q23, advertising growth rate once again surpassed commission growth rate. This quarter, the growth rate of advertising revenue leading commission revenue by 6.4%, slightly narrowing compared to the previous quarter, but still in positive territory.From the above two points, Meituan and Douyin's obvious defeat in the competition for merchant advertising budgets seems to have come to an end.

However, from another perspective, looking at the growth trend, the growth rates of order volume and revenue have generally been increasing in the past 2-3 quarters, while the growth rates of commissions and advertising revenue have indeed been declining or remaining stable. This also indicates that, although the competition has eased to a certain extent, unless Meituan can significantly regain market share from Douyin, assuming that the two maintain roughly equal market shares, due to the drag of the offline-to-store food and travel consumption market growth slowing down, Meituan's in-store revenue this year may actually decrease compared to last year, rather than accelerate again.

III. Better-than-expected Progress in Reducing Losses from Delivery Services

In addition to the core food delivery and in-store business, with Meituan's community group buying (Meituan Optimal) and Meituan Buy Vegetables (self-operated front warehouse) as the core, as well as various innovative businesses such as bikes and ride-hailing, revenue this quarter reached 18.7 billion, with a growth rate of 18.5% in the loss reduction cycle, higher than the expected growth rate of about 16%.

On the other hand, the loss from new businesses this quarter has decreased to 2.76 billion, significantly lower than the expected loss of 3.2 billion. The quarterly loss has dropped from the previous level of about 5 billion to below 3 billion, saving 8 billion on an annualized basis. While maintaining growth, the progress in reducing losses is satisfactory.

IV. Reduction in Losses from New Businesses, Profit Increase in Core Business, Still Relies on Cost Control

In addition to the better-than-expected reduction in losses from innovative businesses by nearly 500 million, the operating profit of the core local business segment this quarter was 9.7 billion, exceeding expectations by about 1.3 billion or 15%. Comparing the operating profit margin of the local business this quarter, which is 17.8%, to the worst fourth quarter of the past, 14.5%, it is significantly higher. However, it is still significantly lower than the profit margin of around 22% during the "dividend period" in the first half of 23. Slightly higher than the profit margin in the third quarter of last year by 0.3 percentage points.

In other words, with improvements in average order user experience (based on previous guidance and research), and with the competition in-store easing, the profit level of the local business has improved significantly compared to the lowest point (last year's fourth quarter), but it is still far from the peak.On the front of offline business, the general situation should be that Meituan's market share is not decreasing significantly, both companies are growing, but the existence of competition continues to drive down the profit margin of the offline business format.

However, the unallocated loss at headquarters for this quarter increased by nearly 3 billion compared to the previous quarter, exceeding expectations by nearly 4 billion. This is also an issue that investors will pay attention to, and it remains to be seen if there will be any answers during the conference call.

In terms of expenses and profits, Meituan's gross profit for this quarter was 25.7 billion yuan, with a gross profit margin of 35.1%, which is basically consistent with the gross profit margin of 35.3% in the same period last year.

On the expense side, although compared to the first quarter of last year from a seasonal perspective, a large amount of expenses were not incurred due to special circumstances at that time, resulting in a significant year-on-year increase in expenses this quarter, with little reference significance.

Therefore, using the third quarter of last year as a benchmark, the reduction in marketing expenses by nearly 3 billion is undoubtedly the main source of profit release. In addition, research and development expenses and management expenses have also decreased by 2-3 billion each, making a certain but not significant contribution. This indicates that even under tremendous pressure from the external capital market, Meituan does not seem to intend to release profits significantly by controlling internal expenses. It can be said that there is some perseverance.

Overall, the gross profit margin (mainly reflecting the business's own profitability) has passed the most difficult stage, returning to the level of the third quarter of last year. With a significant reduction in marketing expenses and limited internal cost control, Meituan's operating profit for this quarter reached 5.2 billion, exceeding Bloomberg's consensus expectation by 1.2 billion.

However, excluding non-operating factors such as impairment and exchange rate fluctuations, Meituan's core operating profit has increased by about 3.3 billion compared to the third quarter of last year, which is basically in line with the reduction in the three operating expenses. In other words, the additional profit is basically derived entirely from cost control, and whether the business's own profitability can return to the level of the first half of 2023 remains to be seen.Dolphin Research's Past Research on Meituan

Earnings Season:

March 22, 2024 Conference Call "Meituan: New Business Controls Losses, Core Business Faces Adjustments"

March 22, 2024 Earnings Review "Two of the Three Mountains Have Gone, Is Meituan About to Turn the Tide?"

November 29, 2023 Conference Call "Meituan: Not Giving Up, Will Continue to Invest"

November 29, 2023 Earnings Review "Persisting in the Face of Challenges, 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 Earnings Review "Another Battle Against 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 Earnings Review "Can the Booming Takeout Delivery Help Meituan Stand Tall?"

March 25, 2023 Conference Call "Meituan: Full of Confidence in the Face of Competition? (4Q22 Conference Call Summary)"

March 24, 2023 Earnings Review "Meituan: Kingdom Efficiency Still Reliable But No Longer 'Impregnable'"

In-depth Analysis:

June 2, 2023 "Facing Douyin, Meituan Cannot Repeat Alibaba's Mistakes"

December 16, 2022 "Finally Unleashed, Can Meituan Return as a King?"September 22, 2022 "Alibaba, Meituan, JD, Pinduoduo have all accepted their fate? Still need a broad operation"

April 22, 2022 "Meituan, JD, why are they performing well in the fierce competition?"

April 13, 2022 "As the cycle declines, how much value is left for Alibaba and Tencent?"

October 22, 2021 "Paying fines, contributing to social security, how much faith does Meituan have left?"

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