Returning to "Little Sweet", is Meituan the real steady stock?

After the Hong Kong stock market closed on August 28th, Meituan released its second-quarter financial report for 2024. Against the backdrop of many peers in the consumer sector making loud noises, Meituan's performance this quarter can be described as outstanding, achieving double beats in terms of revenue and operating income. Specifically:

1. Steady growth in the home delivery business: This mainly reflects the delivery data of the home delivery business (food delivery + instant purchase). This quarter, the total number of orders reached approximately 6.2 billion, a year-on-year increase of 14.2%, which is in line with guidance and market expectations. With the growth rate of order volume as the core, it can be inferred that the growth of the home delivery business this quarter is not outstanding. The year-on-year growth rate of instant delivery revenue this quarter is 13%, without surprises. However, compared to the significant narrowing of the difference in order volume growth rates to only 1.2 percentage points, it can be speculated that the average delivery income is close to stabilizing year-on-year. Dolphin Research believes that this may be due to a reduction in delivery fee waivers and subsidies, or the dilution effect of low-priced "good meal" offerings weakening. Regardless of the reasons, this means that Meituan may have made some improvements in average delivery user experience.

2. Strong growth in offline business, formal reconciliation with Douyin? More reflecting the situation of the offline business in terms of commission and advertising revenue: The year-on-year growth rates of commission and advertising revenue were 19.7% and 20.1% respectively. Compared to market expectations (limited sample size, hence low reference value), these two revenues do not seem to have outperformed. What is the actual situation?

On the one hand, considering that these two revenues include the drag of the slower-growing home delivery business (order volume growth rate of only 14.2%). And the company disclosed that the order volume growth rate of the offline business this quarter reached 60%, even with the impact of average unit price decline, the actual GTV growth rate is likely to be higher than the guided GTV growth rate of 35% to 40%. Dolphin Research believes that the revenue growth rate of the offline business can be confirmed to be higher than the guided 20% (possibly close to 30%), making it one of the heroes of this quarter's revenue exceeding expectations.

Furthermore, it is necessary to consider that the macro consumption situation in the second quarter has weakened significantly, with the growth rate of catering consumption dropping from a mere 11% in the previous quarter to 5%. The cumulative growth rate of service retail sales also decreased from 10% at the end of March to 7.5% at the end of June. In the face of headwinds in the industry, Meituan's offline business still managed to deliver slightly better growth than expected, essentially indicating that the competition between Meituan and Douyin in the offline sector has further eased. A highly probable scenario is that both companies have shifted their focus towards monetization.

3. Accelerated growth in innovative businesses: The revenue of innovative businesses centered around Meituan Select (community group buying) and Xiaoxiang Supermarket (self-operated front warehouse) reached 21.6 billion this quarter, with a growth rate approaching 29%, exceeding market expectations by approximately 1.1 billion. This is the biggest contributor to the revenue exceeding expectations this time. Considering the expectations for detailed income, it is very likely that the strong growth came mainly from the self-operated Xiaoxiang Supermarket, and the handling rules for fully recognizing revenue from self-operated businesses will further amplify the revenue volume

4. New Business Reduces Losses, Core Business Increases Profits: In terms of profitability, while the new business's revenue exceeded expectations, the loss narrowed significantly by half compared to the previous quarter, to only 1.3 billion, significantly less than the expected 2.1 billion. At this pace, the new business's annual loss is highly likely to be significantly less than the guided approximately 10 billion.

In addition to the reduction in losses from innovative businesses, the profit release from the core local commercial sector is also much better than expected, reaching 15.2 billion, significantly higher than the expected 12.3 billion. The operating profit margin is 25.1%, an increase of approximately 3.3 percentage points from the same period last year, reaching a historical high. Combined with the earlier mentioned growth in in-store business exceeding expectations and the stabilization of average delivery income per order, Dolphin Research believes that with the improvement in average delivery income per order (narrowing decline in average order value, maintaining low delivery costs) and a slight easing of in-store competition, the profit level of the local commercial sector has significantly improved. The specific extent of improvement in profit margins for each business warrants further communication with the management in the future.

5. On the cost and expense front, this quarter's gross profit margin reached 41.2%, an increase of 3.8 percentage points compared to last year. It is evident that this profit release is not solely achieved through cost control, but rather through improvements in the competitive landscape and efficiency. On the expense side, the total of the three operating expenses increased by 3% year-on-year, significantly lower than the revenue growth rate. The company remains relatively cautious in expense investment, which also contributes to profit release. Ultimately, attributed to the better-than-expected revenue growth and significant improvement in profit margins, Meituan achieved an operating profit of 11.3 billion this quarter, significantly higher than the expected 8.7 billion, achieving a double beat in revenue and profit.

Dolphin Research Viewpoint:

In the context of earlier e-commerce companies almost entirely disappointing, and the performance of Huazhu and Ctrip reflecting that domestic entertainment consumption is not particularly strong, Meituan's delivery of a performance with impressive revenue and profit is certainly commendable.

Behind the financial numbers, Dolphin Research believes that several real changes in business trends are demonstrated:

1）The at-home business (mainly referring to food delivery, with some room for instant grocery delivery) is approaching maturity in the industry, with limited overall market growth and a relatively stable industry landscape. It is challenging to significantly increase market share, and Meituan is no longer emphasizing growth as actively as before, either voluntarily or involuntarily. Currently, the macro environment has created an advantage of abundant labor supply. As the absolute leader, Meituan has a relatively large operational space to squeeze out a few more profits on food delivery UE through adjustments in subsidies, commissions, or delivery rider revenue sharing. However, without significant technological breakthroughs (such as robot delivery), this improvement is not a story that can be sustained in the long term. After squeezing out the remaining profit space, it should still be seen as a gradually maturing business.

2）The in-store business, which had already shown signs of recovery in the previous quarter, but profits remained under pressure due to competition. This time, it is highly likely that the operating profit margin for in-store business will also return to the level of around 35% as before Combining market research, this reflects a truce period for Meituan and Douyin to jointly enhance monetization and profitability after Douyin's shift from pursuing scale (i.e. GTV) to focusing on profit as the main consideration. While we cannot be certain yet if this implies a permanent truce in offline business, it is enough to adjust the profit expectations for the short to medium term in the offline business.

3）Finally, the revenue growth and reduced losses of this new business exceeding expectations have to some extent dispelled earlier market rumors that the increased investment in Duoduo Maicai might lead to slower progress in Meituan's new business than expected. Of course, based on the communication of Pinduoduo's previous performance, the possibility of Duoduo Maicai choosing to increase investment and re-enter the competition cannot be ruled out. However, this at least indicates that, without external pressure, Meituan has a strong ability to control and optimize the losses of new businesses.

In summary, Meituan's three major businesses are more or less in a sweet spot of marginal improvement in the medium term.

Below is a detailed analysis of the financial report:

I. Steady Growth in the At-Home Segment, Gradually Maturing?

Mainly reflecting the performance of the at-home business (food delivery and flash sales) on delivery data, the total number of orders in the second quarter was about 6.2 billion, a year-on-year increase of 14.2%, which is expected to meet the company's previous guidance and market expectations. It can be preliminarily inferred that the performance of the at-home business in this quarter is not outstanding compared to the high base of last year.

In terms of revenue, Meituan's year-on-year growth rate in instant delivery revenue this quarter is 13%, slightly lower than the order growth rate, but the difference in growth rates has narrowed significantly to only 1.2pct. The year-on-year decline in average delivery revenue per order calculated simply by instant delivery revenue per order has also narrowed to 1pct (please note that this number is influenced by the different delivery revenue recognition methods of different business models). The halt in the decline of average delivery revenue per order has several possible explanations: 1) the company has reduced discounts and subsidies for delivery fees, 2) the dilution effect brought by the scale increase of Pindao Fan has weakened, 3) the proportion of flash sales business or Meituan's self-operated delivery has increased.

Furthermore, the halt in the decline of average delivery revenue per order means that delivery costs are likely to remain relatively low due to labor supply factors, which also implies that Meituan may have made some improvements in UE per order.

II. Strong Rebound in Offline Business, Officially Reconciling with Douyin's Competition?

On indicators that further reflect the situation of the offline business, such as commission and advertising revenue, this quarter's year-on-year growth rates of commission and advertising revenue are 19.7% and 20.1% respectively. The trend of advertising growth significantly outperforming commission in the previous two quarters has ended, and the two are once again in sync. So, how do we evaluate the growth of these two revenues? Based on the company's previous guidance, the expected revenue growth rate of the offline business is approximately slightly higher than 20%, but based on the (limited sample size) market expectations, the actual performance is slightly lower than expected. At first glance, it doesn't seem very good.

However, considering that these two revenues also include the drag of the slower-growing online business (with a growth rate of only 14.2%), and the company disclosed that the offline business's order growth rate is as high as 60%, even with the impact of the average unit price decline, the final GMV growth rate is likely to still be higher than the expected GMV growth rate of 35% to 40%. Therefore, the revenue growth rate of the offline business is expected to be higher than the guidance.

Furthermore, it is necessary to consider that the macro consumption situation in the second quarter has weakened significantly, with the growth rate of catering consumption falling from just 11% in the previous quarter to 5%. The cumulative growth rate of service retail sales also dropped from 10% at the end of March to 7.5% at the end of June. Since the industry's overall growth is not strong, Meituan's offline business can still deliver slightly better growth than expected, clearly indicating that the competition between Meituan and Douyin in the offline sector is further easing. A very likely scenario is that the two companies have shifted their focus to monetization rather than grabbing market share.

III. Innovative business revenue exceeds expectations

In addition to the core online and offline businesses, with Meituan Select (community group buying) and Xiaoxiang Supermarket (self-operated front warehouse) as the core, as well as a variety of innovative businesses such as bikes and ride-hailing, the revenue of innovative businesses this quarter reached 21.6 billion, with a growth rate of nearly 29%, exceeding the market's expectations by about 1.1 billion, making it the biggest contributor to revenue beat.

Taking into account the expectations for detailed revenue items, we believe that the strong growth is mainly driven by the self-operated Xiaoxiang Supermarket, and the rule of recognizing full revenue for self-operated businesses will further amplify the revenue volume.

IV. Reduced losses in new businesses, increased profits in core businesses, what more can be asked for?

In terms of profitability, this quarter, while the revenue of new businesses exceeded expectations, the losses were significantly reduced compared to the previous quarter, amounting to only 1.3 billion, significantly less than the expected 2.1 billion. At this rate, the full-year loss of new businesses is likely to be significantly less than the guidance of about 10 billion.

In addition to the reduced losses in innovative businesses, the profit release of the core local business segment is much better than expected, reaching 15.2 billion, significantly higher than the expected 12.3 billion. The operating profit margin of the local business reached 25.1%, an increase of approximately 3.3 percentage points compared to the same period last year, reaching a historical high.

Combining the earlier-than-expected growth of the offline business and the stabilization of average delivery income per order, Dolphin Research believes that with the improvement in average delivery user experience (narrowing decline in average order value, maintaining low delivery costs) and the easing competition in the offline sector, the profit level of the local business has significantly improved, contributing to the better-than-expected profits The contribution of which sector is greater, how much is the actual improvement in profit margin, we need to pay attention to the subsequent communication of the management.

From the perspective of costs and expenses, this quarter Meituan's gross profit reached 33.9 billion yuan, with a gross profit margin of 41.2%, an increase of 3.8 percentage points year-on-year. It can be seen that this profit release is not achieved by controlling expenses, but more by the real improvement in the competitive landscape and efficiency enhancement.

On the expense side, compared to last year, marketing expenses increased slightly by 2%, while research and development expenses continued to shrink year-on-year. Administrative expenses showed a significant increase, rising by 26% year-on-year, possibly mainly due to the impact of expanding overseas business. Overall, the three operating expenses combined increased by 3% year-on-year, significantly lower than the revenue growth rate. The company still maintains a cautious attitude towards expense investment, which also contributes to profit release to a certain extent.

In the end, it is mainly attributed to the business itself's better-than-expected growth and significant improvement in profit margin. Meituan achieved an operating profit of 11.3 billion this quarter, significantly higher than the expected 8.7 billion. It achieved a double beat in both revenue and profit.

Dolphin Research's previous research on Meituan

Financial Report Season:

June 6, 2024 conference call "What has changed for Meituan after the restructuring"

June 6, 2024 financial report review "Has Meituan, after the big rise, truly regained its dominance?" 2024 年 3 月 22 日电话会《 Meituan: New business controls losses, core business faces adjustments》

2024 年 3 月 22 日财报点评《 Two of the three major challenges have been overcome, is Meituan about to turn the tide?》

2023 年 11 月 29 日电话会《 Meituan: Refusing to admit defeat, will continue to invest》

2023 年 11 月 29 日财报点评《 Persisting without admitting defeat, can Meituan afford it?》

2023 年 8 月 24 日电话会《 Meituan: In-store business remains strong in the third quarter, while food delivery slightly slows down》

2023 年 8 月 24 日财报点评《 Another fierce battle with Douyin, Meituan's defense stronger than Alibaba's》

2023 年 5 月 25 日电话会《 Meituan: Confident in the consumption recovery in 2023, hoping to soar with the wind》

2023 年 5 月 25 日财报点评《 Can the booming food delivery industry help Meituan stand firm?》

2023 年 3 月 25 日电话会《 Meituan: Full of confidence in facing competition? (4Q22 conference call summary)》

2023 年 3 月 24 日财报点评《 Meituan: Kingdom efficiency still reliable but no longer "impregnable fortress"》

In-depth:

2023 年 6 月 2 日《 Facing Douyin, Meituan cannot repeat Alibaba's mistakes 》

2022 年 12 月 16 日《 Finally unleashed, can Meituan return as the 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