MPNGY - Meituan Deserves More Love Than It Gets

2023-12-27 12:13:49 ET

Summary

• China’s largest delivery platform constantly impresses.
• New competition and macroeconomic headwinds are transient challenges.
• Share price is more than fair for a company of Meituan's scale and moat.

Although no longer a heady startup, Meituan ( MPNGY ) is reaching new highs across business units. Q3 showed growth outpacing expectations as consumption continues to recover, albeit slowly.

The group’s long-term strategy of capturing mindshare for on-demand delivery services is convincing and will help it fend off competitors, existing and fresh ones alike.

The stock, on the other hand, has been falling short, through no fault of its own. Valuation wise, it is costlier than the closest peer’s parent, Ele.me’s Alibaba ( BABA ), but it is a better buy too.

3Q update

Meituan had another positive quarter. (Remember, though, that year-over-year change numbers versus 2022, when China was still under Covid restrictions, do not make for an entirely accurate comparison.) Sequential quarter-over-quarter performance shows progress but also some signs of stress due to pockets of weakness in demand.

Source: Meituan

Revenue increased by 12.7% y-o-y to CN¥76.5b and has been rising on a quarterly basis — from CN¥67.9b in Q2 and CN¥58.6b in Q1.

Adjusted net profit, in contrast, has been advancing a bit more erratically, up 62.4% y-o-y but down 25% compared to the earlier period and up by a small 3.5% from the first quarter of the year.

Much of the top line growth has been driven by more aggressive use of resources in the way of discount pricing and marketing (including, most prominently, livestreaming which is now used ten times more often in over 200 cities).

Source: Meituan

Main food delivery business has naturally picked up since the country opened up (this month, exactly a year ago), with peak daily order volume reaching record 78 million in Q3. Non-food delivery service Meituan Instashopping also grew, adding 30% y-o-y to the numbers of transacting users and active merchants; the business is scaling especially briskly in lower-tier cities.

Revenue for the entire Core Local Commerce segment increased by 24.5% y-o-y in Q3 and operating profit by 8.3%. Operating margin came at 17.5%, down from 21.8% and 22% in the previous two quarters, mostly because of lower results from In-Store, Hotel & Travel business.

Meanwhile, New Initiatives (which include, notably, Meituan Select and Meituan Grocery) is still loss-making, but losses keep shrinking and revenues keep widening. Here too, the strategies of choice are promotional pricing and efficient logistics to get customers to stick around. This has been propping up user indicators like average purchase frequency and average order value.

Economy

Arguably, the much awaited recovery post-Covid did happen but in a more restrained manner. Growth, which this year is expected to exceed 5% , has been largely supported by macroeconomic easing. 2024, however, may see a slight moderation in growth given indications of Beijing’s returning to fiscal discipline and persistently soft global demand.

The resulting weak consumer sentiment and spending will keep Meituan under pressure for some time. The management is forecasting relative underperformance in Q4 caused by a lower outlook for the delivery business.

Stock

Meituan (3690.HK), like the vast majority of Chinese stocks, has taken a beating, down 58% just in the past year and over 70% in the last three. Only those who have held the stock since before the pandemic and the regulatory crackdown would have made positive returns (5Y: 75%).

The dismal stock performance, however, is not fully reflected in the valuation. At 41x P/E, newly profitable Meituan is more expensive than big tech peers which average at low-to-mid teens. Even on the P/S basis, at 1.7x, it is pricier than both Alibaba (9988.HK) (1.5x) and JD.com (9618.HK) (0.3x) which own units with comparable businesses. Historically though, Meituan’s P/S has been on a steep downward trend for the past three years.

The company does not pay dividends but has announced a big buyback program : up to $1b will be spent on share repurchases from December onward.

Conclusion

Meituan has matured nicely. In over two decades since founding it has carved out a position in the top echelons of the Chinese tech sector. A financially sound powerhouse, it is still growing both revenue and earnings at double-digit rates; in three years’ time, return on equity is forecast to increase from 7% at present to 16%.

To be sure, competition is heating up; TikTok’s Chinese counterpart Douyin, owned by ByteDance, is the latest entrant to the delivery space. Meituan definitely feels the pressure, hence the ramping up of marketing efforts and the build-up of low-priced product offerings. Inevitably, margins will suffer but in the short-term only.

The management is confident in competitive pressure normalizing soon enough, and analysts concur. Improving operating efficiency aside, a lot of it has to do with Meituan’s evident success in gaining mindshare with customers. The blending of different services — with on-demand retail being a key selling proposition — to maximize customer lifetime value, of users and merchants alike, should keep the company on top for a long time to come.

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