2023-11-13 06:00:00 ET
Summary
- Douyin doesn't seem to have posed as big of a threat to Meituan as what was feared by the market initially.
- Meituan's financial performance for the short term is likely to be negatively affected by the unfavorable economic environment in China.
- I still have a Hold rating for MPNGF, as my view of Meituan's prospects is mixed.
Elevator Pitch
Meituan ( MPNGF ) [3690:HK] stock is still rated as a Hold.
Earlier, my August 25, 2023 update was focused on the review of Meituan's financial results for the second quarter and the evaluation of the company's Q3 prospects.
I turn my attention to the competition between Meituan and Douyin, and the impact of the weak macroeconomic environment on MPNGF in this latest article. I am encouraged by indicators implying that Douyin isn't that big of a competitive threat, but I am still worried about how Chinese economic weakness and youth unemployment could be a drag on Meituan's future revenue. As such, I stick with a Hold rating for Meituan.
Investors should be aware that Meituan's shares are traded both in Hong Kong and on the Over-The-Counter market. Meituan's Hong Kong-listed shares with a mean three-month daily trading value of over $300 million (source: S&P Capital IQ ) can be traded utilizing US brokerages like Interactive Brokers. The company's OTC shares with the MPNGF ticker symbol also have reasonably decent liquidity with its average three-month daily trading value exceeding $300,000.
Competitive Threat From Douyin Might Not Be As Substantial As Feared
In my prior August 1, 2022 write-up , I highlighted that Douyin, the short-form video business arm of ByteDance ( BDNCE ) which operates in Mainland China, is entering into direct competition with Meituan in the domestic commerce market. I noted in that article that Meituan might potentially be hurt by "market share loss to new entrants."
MPNGF's shares have fallen by -39% (source: Seeking Alpha price data) since the publication of my August 2022 article. During this time frame, the stock's consensus forward Enterprise Value-to-Revenue valuation multiple de-rated from 3.89 times to 1.89 times, which is just slightly above its three-year historical trough EV/S multiple of 1.80 times as per S&P Capital IQ data. This implies that the market has previously determined that Douyin poses a serious threat to Meituan, and this is reflected in Meituan's stock price performance and valuations.
However, there are signs which suggest that Douyin's competitive threat isn't as bad as what the market had initially expected.
Chinese financial portal AAStocks issued an article on November 2, 2023, citing research from UBS ( UBS ) noting that "competition in the market from Douyin has stabilized." Separately, Futu Holdings ( FUTU ) published a post on October 30 which highlighted Mainland Chinese brokerage TianFeng Securities' view that Meituan has an edge over Douyin in attracting merchants, thanks to the consumer "reviews it has accumulated over decades."
Separately, Chinese stockbroker Haitong International Securities recently published a report (not publicly available) titled "Meituan Gradually Outshines" detailing takeaways from its "field research in Shanghai" which are detailed below.
Firstly, Haitong's research finds that restaurant operators in China are mostly using Douyin's short-form videos to advertise and promote specific "hit products", while the majority of Chinese restaurants are still relying on Meituan's DianPing app for sustainable marketing and long-term brand-building.
Secondly, Douyin isn't as compelling as Meituan in the eyes of merchants from a cost competitiveness perspective. As per research conducted by Haitong , the average commission rate for Chinese businesses using Meituan is roughly 4%, while Douyin's all-in rate, including video production fees, can go up to as high as 10%-15%.
Thirdly, Meituan has responded well to the threat from Douyin by strengthening its relationships with key merchants. Based on Haitong's survey of MPNGF's merchants, Meituan has temporarily exempted certain merchants from the payment of annual fees and also offered some form of discounts to specific merchants since the early part of this year.
South China Morning Post also reported earlier on July 17 this year that MPNGF has started including "video features" for its platform as part of efforts to deal with competition coming from China's leading short-form video platform operator Douyin.
Economic Uncertainty Weighs On Meituan's Food Delivery Business
The market become more optimistic about Meituan's ability to fend off competition from Douyin as highlighted in the prior section. However, it is noteworthy that Meituan's consensus FY 2024 and FY 2025 revenue projections were still lowered by -2% and -3%, respectively in the past six months. The downward revision in MPNGF's top line forecasts might be linked to the negative effects of China's economic weakness as detailed in this section.
Meituan's CEO had previously acknowledged that challenging economic conditions in China "will impact demand for food delivery to a certain extent, especially for some price-sensitive consumers in certain discretionary consumption scenarios." A recent November 9, 2023, Seeking Alpha News article noted that "consumer prices" in the Mainland Chinese market declined by -0.2% YoY last month due to "sluggish retail spending." It would be pretty reasonable to assume that Meituan's food delivery business will be under pressure from macroeconomic weakness in its home market.
It doesn't help that the younger Chinese consumers are the segment of the population driving food delivery growth in China. According to Chinese market research firm Daxue Consulting's November 2023 China food delivery industry report , 85% of Chinese food delivery consumers fall in the 18-40 age range, and roughly a fifth of the growth in China's food delivery market for 2021 was attributable to young Chinese consumers born after 2000. With China making the decision to stop disclosing data relating to unemployment for youths in August this year, it isn't difficult to imagine how bad the youth unemployment situation in the country has become.
Concluding Thoughts
I continue to have a mixed opinion of Meituan, which means that the stock deserves a Hold rating. The tough economic conditions in China will still be a headwind for Meituan, even though the competition posed by Douyin isn't as serious as what one would have initially expected.
For further details see:
Meituan: Competitive Threat And Economic Weakness In The Limelight