On November 29th, after the Hong Kong stock market closed, $MEITUAN(03690.HK) released its Q3 2024 financial report. In the context of many peers in the general consumption sector still experiencing "thunderous" performances, Meituan's significant beat in both revenue and profit this quarter can still be considered remarkable. Specifically:

1. The core metric of the home delivery business -- the total order volume for this quarter was approximately 7.1 billion orders, a year-on-year increase of 14.5%, with the growth rate roughly in line with last quarter, slightly up, and consistent with the company's previous guidance, which is not particularly outstanding. Considering the recent flash purchase and takeaway order volume growth rate of about 3:1, the order volume for the takeaway business should still slightly exceed 10%. After the low base period in the first half of 2023, the growth rate of Meituan's takeaway business has generally stabilized at the mid-term central growth rate.

While the order volume growth rate remained basically flat, the year-on-year growth rate of logistics revenue surged from 13% last quarter to 20.9%. A rough estimate indicates that the average delivery revenue per order has rebounded by 6% year-on-year, and we believe that the significant increase in average delivery revenue, along with the subsequent improvement in delivery unit economics, should be the main contributors to the local lifestyle segment's performance exceeding expectations. The reasons for the improvement in average delivery revenue are discussed in more detail in the main text.

2. The commission and advertising revenue from the integrated in-store and home delivery business this quarter grew year-on-year by 24.3% and 18.1%, respectively, with the former accelerating and the latter slowing down. According to the company's previous guidance, this quarter the GTV growth rate for in-store business should be roughly in line with last quarter, and the slight acceleration in commission revenue reflects Meituan and Douyin shifting their focus towards monetization rather than scale expansion, resulting in Meituan increasing its monetization rate (or reducing commission waivers and subsidies).

However, the growth rate of advertising revenue decreased by about 1.6 percentage points quarter-on-quarter, and the gap in growth rates between commission and advertising businesses widened to 6 percentage points, which inevitably brings to mind the intense competition between Douyin and Meituan from 2022 to early 2023. But the performance of just one quarter is not sufficient to indicate that the competition between Meituan and Douyin for merchant advertising spending has noticeably intensified again; further observation is needed. It is also possible that macroeconomic factors have led to an overall decline in merchants' advertising budgets that do not directly result in conversions, causing revenue slowdown.

3. The innovative business generated revenue of 24.2 billion this quarter, a year-on-year increase of 28.9%, slightly accelerating compared to last quarter, and exceeding market expectations by about 800 million. According to the company's own explanation, this was mainly due to strong growth in retail-type businesses such as Xiaoxiang and Youxuan, and there may also be some contribution from overseas markets.

In addition, the reduction in losses for the innovative business this quarter was better than expected, with actual operating losses of 1.03 billion, significantly better than Bloomberg's expected loss of 1.7 billion. However, the market's actual loss expectations were likely not that high, and a more accurate comparison would be a continued reduction in losses of 300 million compared to last quarter According to the explanation, the main contribution to the reduction of losses also comes from the efficiency improvement of community retail businesses such as Youxuan and Xiaoxiang Supermarket (e.g., improvement in fulfillment UE).

4. In terms of profitability, Meituan Group's overall operating profit for this quarter reached 13.7 billion, setting a new high compared to the previous quarter, and exceeding Bloomberg's consensus expectation by nearly 4 billion, which is quite an exaggerated beat. So where does this come from?

Firstly, the nominal contribution from the reduction of losses in innovative businesses accounted for about 700 million of the unexpected profit, but the actual extent of the unexpected profit is not that large.

The core local lifestyle segment's operating profit was 14.6 billion, showing a slight decline compared to the previous quarter, but this aligns with the seasonal changes of higher delivery costs during the summer, which the company has also guided. Therefore, the actual profit exceeded Bloomberg's sell-side expectations by 1.7 billion. Combining the previous points, the source of the unexpected profit should primarily be from the improvement in delivery UE, supplemented by the increase in commission rates for in-store businesses.

Additionally, at the group level, the unallocated profit for this quarter turned from loss to profit, achieving a positive operating profit of 130 million, contributing about 2 billion of unexpected profit. However, this is mainly due to Meituan confirming an exchange gain of 1.55 billion and an investment income of 570 million this quarter. The unexpected profit brought by these one-time benefits can be disregarded.

Thus, the actual operating profit of Meituan this quarter exceeded expectations by about 2 billion. (We cannot rule out the possibility that the buy-side had higher profit expectations).

5. From the perspective of costs and expenses, Meituan's gross profit for this quarter reached 36.8 billion, with a gross margin significantly increasing by 4 percentage points to 39.3% compared to the same period last year, which is a larger increase than the 3.8 percentage points rise compared to the previous quarter. Selling expenses increased slightly by 6% compared to last year, although gradually returning to growth, they are still diluted compared to the revenue growth rate of 22%. In cross-industry comparisons, in slow-growing sectors like e-commerce, where expenses are invested at a high speed, Meituan's competitive landscape is clearly better. Management expenses grew by 10%, likely mainly due to the impact of expanding overseas business, while R&D investment saw a year-on-year decline. Overall, the total operating expenses grew by 5% year-on-year, in other words, the expense ratio is still being diluted and declining.**

Dolphin Investment Research Perspective:

Clearly, from both the perspective of expectation differences and the trend of the performance itself, Meituan's financial report for this quarter can still be considered excellent. The home delivery business (especially takeout) has indeed matured in terms of penetration, making it difficult to accelerate single order growth again. However, as a platform, Meituan undoubtedly has considerable room for self-adjustment in pricing regarding logistics, commissions, or advertising, to release growth or profit. Although this adjustment space cannot last forever and "extreme situations will lead to opposite outcomes." Relatively speaking, from a mid-term perspective, Meituan's subsequent delivery of unexpected revenue or profit will not surprise Dolphin Investment Research In terms of in-store business, it currently appears that Meituan and Douyin are still relatively at a standstill, working together in the stage of monetization and profit. Although the slowdown in advertising growth is not a good signal, it is still not enough to make the market significantly worried about intensified competition.

Innovative businesses continue to exceed expectations in reducing losses and increasing revenue, remaining in a good cycle. However, the "easy" space for loss reduction may be gradually coming to an end. With overseas businesses entering an expansion phase, whether the overall entrepreneurial business can achieve stable profitability and allow the market to "seriously" value this part of the business may still not warrant too much expectation for the time being.

All of the above are commendable aspects of Meituan, but Dolphin Investment Research must also mention that since the last quarterly report, Meituan has undoubtedly been one of the most favored Chinese concept stocks by the market recently, with the best stock performance. The market once priced it above HK$200, a quite optimistic price. Fortunately, after the recent weeks of adjustment, we believe the current pricing has fallen back to a relatively optimistic level.

Can Meituan continue to deliver impressive performance in the future? Dolphin Investment Research believes there is a considerable probability of this in at least 1 to 2 quarters. But is the current price cost-effective? We find it difficult to say it is. In other words, while there may still be money to be made from performance beats, "there may also be some distance between your feet and the safety net."

The following is a detailed commentary on the financial report:

1. Average delivery revenue stops falling and turns to growth, a dual contributor to revenue and profit

The core indicator reflecting the performance of the home delivery business (food delivery and flash purchase) -- the total number of delivery orders this season is approximately 7.1 billion, a year-on-year increase of 14.5%, with growth rate roughly in line with the previous season and basically meeting the company's guidance. Considering the recent growth rate of flash purchase orders and the growth rate of food delivery orders at a ratio of about 3:1, the order volume of the food delivery business should still exceed 10%. It can be seen that after the low base period in the first half of 2023, the growth rate of Meituan's food delivery business has returned and is generally stable at the mid-term central growth rate.

From a revenue perspective, compared to the basically flat order volume growth, this season'slogistics revenue year-on-year growth has significantly increased from 13% in the previous season to 20.9%.Theaverage delivery revenue per order this season has rebounded by 6% year-on-year,** which we believe should be one of the main contributors to the local lifestyle sector's performance exceeding expectations this season.

The reasons for the rebound in average delivery revenue are believed to be: 1) Meituan has clearly stated that more merchants are turning to use Meituan delivery (rather than self-delivery or other third parties), which has led to an increase in the proportion of self-operated delivery and a rise in average delivery revenue; 2) The same period last year was precisely the stage when average delivery revenue fell the most severely, resulting in a low base; 3) The proportion of high average order value and high weight flash purchase orders has increased.

The significant rebound in average delivery revenue, but the average delivery cost is unlikely to increase by the same magnitude, which leads to an unexpected improvement and incremental profit for Meituan in average delivery UE. **

II. The gap in commission and advertising revenue growth has widened again, is the "nightmare" reappearing?

In the intertwined commission and advertising revenue metrics for both home delivery and in-store businesses, this quarter the year-on-year growth rates for commission and advertising revenue were 24.3% and 18.1% respectively.

According to the company's previous guidance, the GTV growth for in-store business this quarter should be roughly consistent with the previous quarter, and the growth rate of takeaway orders has also remained relatively stable. Therefore, the slight acceleration in commission income should reflect Meituan and Douyin's shift in focus towards monetization rather than market share expansion, improving the monetization rate (or reducing commission waivers and subsidies).

However, the growth rate of advertising revenue, which is "mutually reinforcing," has decreased by about 1.6 percentage points quarter-on-quarter, widening the gap between commission and advertising business growth rates to 6 percentage points. This inevitably reminds one of the intense competition between Douyin and Meituan in the in-store business from 2022 to early 2023. We believe that the performance of a single quarter is still insufficient to indicate that the competition between Meituan and Douyin for merchants' advertising spending has noticeably intensified again, and further observation is needed. It is also possible that macroeconomic factors have led to a general decrease in merchants' budget proportions for non-direct conversion advertising.

III. Innovative business revenue and loss reduction both exceeded expectations

Apart from the core home delivery and in-store businesses, the innovative businesses centered around Meituan Youxuan (community group buying) and Xiaoxiang Supermarket (self-operated front warehouse), as well as bike-sharing and overseas businesses, generated revenue of 24.2 billion this quarter, a year-on-year increase of 28.9%, slightly accelerating compared to the previous quarter, and exceeding market expectations by about 800 million, also performing well. According to the company's explanation in the announcement, this was mainly due to strong growth in retail businesses like Xiaoxiang and Youxuan, with some contribution from incremental growth in overseas markets.

In addition to exceeding growth expectations, the loss reduction in innovative businesses this quarter was also better than expected, with actual operating losses of 1.03 billion, significantly better than Bloomberg's expected loss of 1.7 billion. However, the market's actual expectations for the losses in entrepreneurial businesses were not that high, and comparing directly with the previous quarter's loss of 1.3 billion may be a more reasonable measure of the extent of the surprise. Similarly, the main contribution to the loss reduction also came from the efficiency improvements in community retail businesses like Youxuan and Xiaoxiang Supermarket (e.g., fulfillment UE).

IV. "Explosive" profits, who is the hero?

In terms of profitability, this quarter, Meituan Group's overall operating profit reached 13.7 billion, setting a new high compared to the previous quarter, and exceeding Bloomberg's consensus expectation by nearly 4 billion, which can be considered a strong performance Specifically, who are the unexpected contributors?

First, as mentioned above, the reduction in losses from innovative businesses (nominally) contributed about 700 million in unexpected profits, but the actual extent of the outperformance is not that significant.

The core local lifestyle segment's operating profit was 14.6 billion, although there was a slight decline compared to the previous quarter, this is in line with the seasonal changes of higher delivery costs during the summer. The company has also provided guidance on this. Compared to Bloomberg's sell-side expectations, it still exceeded by 1.7 billion. Combining the previously mentioned strong delivery revenue and the sequential increase in commission income, we believe that the main reason for the local lifestyle segment's profit exceeding expectations is primarily due to the improvement in delivery user experience, supplemented by the increase in commission rates for in-store business.

In addition, at the group level, the unallocated profit turned positive this quarter, achieving a positive operating profit of 130 million, which widened the unexpected profit by about 2 billion compared to Bloomberg's expectations, making it the largest single contribution. However, this is mainly because Meituan confirmed a foreign exchange gain of 1.55 billion and an investment income of 570 million this quarter. The unexpected profits brought by these one-time benefits should be disregarded.

Therefore, the actual operating profit of Meituan this quarter exceeded expectations by about 2 billion. (We cannot rule out the possibility that the buy-side's actual profit expectations were higher, thus resulting in a smaller outperformance.)

From the perspective of costs and expenses, Meituan's gross profit reached 36.8 billion this quarter, with a gross margin significantly increasing by 4 percentage points to 39.3%, which is a larger increase than the 3.8 percentage points year-on-year increase from the previous quarter.

In terms of expenses, marketing expenses increased slightly by 6% compared to last year, although gradually returning to growth, they are still diluted compared to the revenue growth rate of 22%. In cross-industry comparisons, industries like e-commerce that experience slow growth but high expenditure on marketing show that Meituan's competitive landscape is clearly better. Management expenses grew by 10%, likely due to the impact of expanding overseas business, while R&D investment declined year-on-year. Overall, the three operating expenses combined grew by 5% year-on-year, significantly lower than the revenue growth rate.

The significant improvement in gross margin and the dilution of expense spending by revenue scale are the reasons for squeezing out unexpected profits.