Meituan: Can growth continue to be strong?

The following is the summary of the Q3 2024 earnings call for $MEITUAN(03690.HK) For the earnings report interpretation, please refer to Meituan: The "heaviest" Chinese concept stock, will ultimately laugh last? ****

I. Core Information Review of the Earnings Report:

II. Detailed Content of the Earnings Call

2.1 Key Information from Executives:

Performance Overview

Revenue and Profit: Total revenue in Q3 increased by 22.4% year-on-year, reaching 93.6 billion RMB. Adjusted net profit grew 124%, to 12.2 billion RMB.

User and Merchant Related Metrics: Annual active merchants, transaction users, and their purchase volume all reached healthy new highs.

Digital Transformation Drive: The potential for digital transformation in China's local business sector is enormous, bringing new challenges and opportunities. Plans to drive industry growth through innovation and strengthening demand, with a commitment to a retail technology strategy that leverages technology and innovation to enhance industry development and improve EBITDA performance.

Own Business and Growth Strategy

- Delivery Business: On August 7, daily order volume exceeded 98 million, continuously optimizing products and supply chains to enhance operational efficiency. The innovative business model is favored by young consumers, with over 100 million valuable users, most of whom are 35 years old and above.

- "Pin Hao Fan" Business: This quarter continued to integrate supply and demand in different economic scenarios to improve efficiency, re-igniting and incentivizing demand for "Pin Hao Fan." Currently, over 5,000 brands are participating, and related projects are gradually becoming sales channels for high-frequency partners, selling products and stimulating demand.

- Brand Satellite Stores: As of the end of November, comprehensive online cooperation has been established with over 200 brand operators, with market demand continuing to expand. A new delivery business format targeting specific restaurants has been launched, opening over 100 stores within 12 weeks, providing value to consumers while ensuring profitability for merchants, becoming a new growth driver for catering merchants.

Merchant Support and Expansion

"Shen Hui Yuan" Upgrade and Support Measures: In September, additional support measures were announced, and in November, the merchant support project "Shen Hui Yuan" was upgraded, providing relevant support to merchants concerned about product environment and business relationships, with a disposal amount reaching 1 billion RMB Instant Retail Business

- Business Growth: Meituan Instant Purchase continues to lead the rapid growth of instant retail, with an average daily order volume exceeding 10 million in the third quarter. The relevant consumption scenarios and spending are also expanding by region, indicating that it not only meets consumption intentions and urgent needs but has also become a new lifestyle.

- In-depth Supply Chain and Cooperation Expansion: Deepening the supply-side life, consumer experience has become a habit, promoting further transformation of the business model. Meituan Flash Purchase and Xiaoxiang Fresh are driving continuous improvements on the supply side, establishing strategic partnerships with relevant parties, and hope to empower more startup brand merchants through Meituan Flash Purchase in the future.

Courier-related and Flexible Employment

The sustainable development of the company's own demand business relies on the efforts of couriers. In the third quarter, sales initiatives were launched and improved to enhance courier productivity. Flexible employment has become an important form of employment, with the average monthly income of highly active couriers nationwide increasing from 5,120 yuan to 10,865 yuan.

In-store Hotel and Tourism Business

- Business Growth Situation: This business achieved steady growth in the third quarter, with order volume increasing by over 50% year-on-year and annual transaction users increasing by over 30% year-on-year, with annual active merchants also reaching a new high.

- Business Initiatives and Effects: Utilizing synergy to enhance competitive advantages, entering a new phase, with the goal of becoming a valuable partner for merchants. Helping merchants enhance brand status and drive growth through operational infrastructure, marketing strategies, and providing relevant value and goal-setting assistance. Optimizing subsidiary strategies, improving traffic conversion efficiency, leveraging economic changes to accelerate penetration into lower-tier markets, and achieving positive growth in in-store business in lower-tier markets. In the hotel business, domestic hotel room nights maintain stable growth, strengthening cooperation with industry partners, and adopting different marketing initiatives for different star-rated hotels to effectively drive demand and expand the business base.

New Business Initiatives and Development

Continuously improving the operational efficiency of grocery, retail, hardware, and other businesses, new initiatives maintain healthy growth and gradually narrow losses, helping to enhance the ecosystem, with the potential to unlock financial value in the future.

International Expansion

On October 9, the business was officially launched in Riyadh, Saudi Arabia, marking an important step in moving from China to global profitability. In the long term, it aims to bring quality services and products to more merchants and consumers worldwide, believing that local businesses have great potential in digital transformation. As an industry leader, it will actively adapt to the new environment, continue to innovate, and promote the digital transformation of the entire industry.

Cash Flow and Cash Reserves

As of September 30, the company maintains a strong net cash position, with cash and cash equivalents and short-term government bond investments totaling 134.2 billion yuan.

Cash generated from operating activities significantly increased to 15.2 billion yuan.

2.2 Q&A Analyst Q&A

Q: Regarding the food delivery business, Meituan announced a series of measures to support industry development and help merchants cope with current challenges at the catering conference held in September. Can you elaborate on these measures? Will the company increase investment in the future? Given the current large scale of the takeaway business, how to predict its future growth?

A: Details of the measures: Upgraded support plans for merchants, including measures to promote industry innovation, tap into market demand, and enhance merchant confidence, simplifying marketing tools for merchants to ensure a reasonable and fair traffic distribution mechanism. Providing ecosystem development support, such as offering 6-12 months of commission rebates for brand satellite stores; providing AI site selection services for over 500 brands; jointly launching food safety initiatives with merchants; providing subsidy support to help merchants focused on development and innovation optimize their supply chains, improve service quality, and launch new products; extending the free traffic support period for newly settled small and medium-sized merchants from 7 days to 14 days.

Investment strategy: In the current industry transformation phase, we will continue to work closely with merchants, deciding whether to increase investment based on industry development needs. Recent measures are just the beginning, and future support for the industry will be strengthened, helping merchants cope with challenges and achieve sustainable healthy growth.

Growth expectations: Although the food takeaway business is relatively mature, it still has growth potential. As consumer habits change, takeaway has become a lifestyle choice, and the market size will continue to expand. As an industry-leading platform, Meituan has high-frequency users and will benefit from industry growth, especially with the expansion of the younger consumer demographic. The consumption frequency and ARPU of the mature user group show a good growth trend, while the initial activity and retention rates of new user groups are higher and growing faster, which will drive long-term sustainable growth of the business.

Q: Regarding the core local business, several stimulus policies have been introduced recently. Is there growth momentum in Meituan's business? Looking ahead to next year, how to predict the growth of the core local business and its relationship with profitability?

A: Policy impact and business status: The stimulus policies since the end of September have begun to show results, such as the rebound in hotel and tourism consumption during the National Day holiday, and the average order value of service businesses has seen a narrowing decline year-on-year. Meituan actively adapts to changes in consumption trends, delves into the industry supply chain, and explores new supply models (such as "Pin Hao Fan," brand satellite stores, etc.), enhancing content capabilities, marketing solutions, and pricing competitiveness through platform advantages and promotional activities, while seizing opportunities in lower-tier markets, achieving significant growth in merchants, consumers, and transaction volume.

Growth expectations for next year: The core local business is expected to maintain healthy growth. Although changes in consumption trends pose challenges, the instant retail business will benefit from online digital transformation, and continuous investment on both the supply and demand sides will drive steady growth, with growth rates expected to exceed those of the takeaway business. Meituan will promote cross-selling between takeaway, flash purchase, and e-commerce platforms to increase the purchase frequency of existing users. The in-store business has huge potential in lower-tier markets, and as consumption trends evolve, online penetration accelerates, and opportunities in lower-tier markets increase, the in-store business will continue to grow. At the same time, we will further activate the "Xiao Hui" membership program, exploring more cross-selling methods to enhance the synergy between core local business operations. Balancing Growth and Profitability: Growth remains the top priority, focusing on profitable growth and high-quality growth while paying attention to ecosystem health. Current merchants need more support, so there will be continued investment in the ecosystem, and a healthy ecosystem will enhance long-term competitiveness. In this process, efforts will be made to achieve high-quality growth, meet strategic goals, and ensure sustainable profit growth.

Q: How to assess the market size of instant retail in online retail goods sales? What role will Meituan Instant Delivery play in accelerating the development of the instant retail market? What new categories have not yet penetrated but have good growth potential?

A: Market Size Assessment: The instant retail business has significantly changed people's lifestyles in recent years, driving transformation across the retail industry. Consumers believe that many goods can be delivered within 30 minutes. In the long term, instant retail is expected to occupy an important share of the e-commerce market, with the total transaction value (TTV) of Meituan Instant Delivery (InstaMart) expected to exceed 200 billion RMB by 2027, covering all categories of goods and with more than 100,000 stores.

Role of Meituan Instant Delivery: Meituan Instant Delivery is crucial in the instant retail sector, continuously expanding its supply categories, aligning more closely with consumer demand, and enhancing market demand, especially in lower-tier markets, through upgraded technology and infrastructure and deepening the supply chain. The entry of large retailers like Miniso has improved product variety and quality, with 30% of its products being exclusive to online sales. The participation of more retailers in the future will further enhance the user experience.

New Category Potential: Instant retail has growth opportunities in many low-penetration categories, such as electronics, maternal and infant products, clothing, beauty, and pet supplies. Future plans include introducing more brands and merchants, expanding categories beyond convenience stores, continuing to penetrate lower-tier markets, and enhancing the supply of long-tail products to meet consumers' diverse needs.

Q: Regarding the in-store hotel and tourism business, can you share the latest progress of the "Shen Hui Yuan" program and its situation in lower-tier markets? How has the competitive landscape changed? What are the expectations for operating profit margins next year? Will the competitive landscape stabilize in the long term?

A: Progress of the "Shen Hui Yuan" Program: In July, Meituan expanded the "Shen Hui Yuan" program to key categories of core local businesses and promoted it nationwide. In the in-store hotel and tourism business, the number of participating merchants has exceeded 50%, and the proportion of orders using this program has increased. Comprehensive marketing solutions and services have enhanced consumer awareness of the cost-effectiveness of "Shen Hui Yuan," helping to direct takeaway users to in-store hotel and tourism services, effectively acquiring new users, activating inactive users, and increasing transaction frequency. In the future, Meituan will continue to expand the coverage of "Shen Hui Yuan" categories, optimize product services, improve business conversion rates, and help merchants acquire traffic, increase transaction volume, and enhance interaction between users, merchants, and the platform.

Situation in Lower-Tier Markets: The in-store business has enormous potential for digital transformation in lower-tier markets. Meituan supports merchants' rapid expansion through platform traffic and online operational tools, especially for catering and entertainment merchants Diversified services allow local consumers to enjoy online discounts and convenience while capturing new opportunities in cultural tourism, driving high growth in store business in lower-tier markets.

Competitive landscape and profit margin expectations: Meituan's business model, operational strategy, category mix, merchant types and scales, and marketing efficiency differ from competitors in the local business sector, holding a strong market share in core categories. Current industry competition is becoming more rational and efficiency-oriented, and Meituan's easy-to-use and high-return marketing tools, along with comprehensive services across the entire business cycle, scenarios, and models, will consolidate its advantages on the supply side, providing merchants with more cross-business traffic and integrated services. Although brand operation profit margins are influenced by various factors, with the expansion of market size, continuous business growth, stable competition, and enhanced e-commerce synergy, it is expected that the operational efficiency of in-store hotel and tourism businesses will steadily improve. In the long run, the competitive landscape is expected to stabilize.

Q: Regarding overseas expansion, what is Meituan's progress in technological expansion in Saudi Arabia? Will the expansion to areas outside Saudi Arabia be gradual or rapid? How to assess the advantages and disadvantages in the Middle Eastern market? What are the overseas investment plans?

A: Progress in the Saudi Arabian market: On October 9, Meituan's "Kuailu" officially launched in Riyadh, the capital of Saudi Arabia, after a pilot in nearby small cities in early September. The operational time is still short, but encouraging progress has been made, receiving positive feedback from consumers, local merchants, and delivery partners. Meituan's value proposition in the Saudi market is clear, namely to provide fast delivery services, leveraging the technology and experience accumulated in China to organize efficient delivery and meet consumer demand for speed.

Overseas expansion plans: The Saudi Arabian market has huge potential, with rapid population growth in Riyadh. Meituan is currently focused on expanding in the Saudi market. In the long term, Meituan is committed to becoming a global company, promoting products and services to a global audience, but the pace of overseas expansion will be cautious and steady, fully respecting local culture, ecosystems, and regulatory requirements, ensuring decisions are based on sufficient information, avoiding blind market entry, and focusing on making delivery services a daily habit for consumers rather than an occasional choice for specific groups, achieving sustainable development. Currently, there will not be a rapid expansion outside Saudi Arabia, and decisions will be made based on actual conditions.

Q: Given the recent issuance of $2.5 billion in senior unsecured notes and strong free cash flow generation, what does management consider the optimal ratio for future annual shareholder returns (expressed as a percentage of free cash flow or profits)? Will the company be more inclined towards a certain type of return in the future?

A: In September, Meituan issued $2.5 billion in senior unsecured notes after a credit rating upgrade, with the proceeds mainly used to repay maturing debt, and the remaining portion will support overseas business development and future shareholder return plans. From early September until the end of the lock-up period, Meituan repurchased over $600 million worth of shares, having repurchased about 4.2% of the total shares this year, exceeding the total internal grants from 2021 to 2023, effectively reducing the number of circulating shares Repurchase Method: Meituan aims to enhance shareholder returns through business growth opportunities and balanced capital allocation. At this stage, share repurchase remains the primary method, which will offset equity dilution and seek to further reduce the number of circulating shares. In the future, Meituan will flexibly assess capital allocation strategies and shareholder returns, determining the proportion of cash usage based on business development needs, offshore cash reserves, and stock performance, but currently cannot commit to a fixed annual shareholder return ratio.

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