Waiting Patiently Amid The Resurgence Of The Pandemic

Meituan plummeted by 9% following the move by Tencent to divest of its stakes in JD, sparking concerns among investors that Meituan’s and other investees’ stakes could be the next target. The resurgence of the pandemic and lockdown measures will certainly add further uncertainty to the company’s near-term growth prospects, which resulted in us cutting our target price to HK$190.00 (from HK$256.00). We maintain HOLD on Meituan given the lack of catalyst in the near term.

WHAT’S NEW

4Q21 results preview. We expect Meituan’s 4Q21 revenue to grow at 29% yoy due to the slower growth in food delivery transaction volume (estimated +12.5% yoy in 4Q21 vs 4Q20: 33%; 3Q21: 25%), weaker average revenue per users (ARPU) from the in-store business and the impact from lockdown measures which will affect the travelling and hotel segment.

a) Food delivery: Management had previously guided customers are getting more price sensitive. This came with the expectation of weak performance of food consumption at tourism sites. In addition, the company saw order volume decline since end-October due to lockdown of campuses and communities in high-risk regions. Meituan expects food delivery order volume growth to slow to mid-teens at 15-17% yoy in 4Q21 with revenue guided to increase at 18-20% yoy. The company is expected to shift its focus towards high quality growth rather than relying on user subsidy to maintain sustainable growth and margin profile. 4Q21 operating margin (OPM) is expected to reach 5.5-6%. We estimate Meituan Waimai food delivery GTV to grow at 22% yoy to Rmb190b. During 4Q21, food delivery volume for Meituan is expected to decline less compared with Ele.me (-2.3% vs – 6.3%) due to the strict lockdown measures. Both companies’ food delivery ASP is expected to hold up quite well with resulting GTV growth for Meituan Waimai and Ele.me at -1.5%/- 3.1% respectively in 4Q21. Given the resurgence in several areas including Xi’an and Tianjin in Dec 21 and Jan 22, we remain cautious for 1Q22 food delivery revenue growth despite the fact that food ordering during staycations should partially offset the impact.

b) ISHT: We think the in-store, hotel and travelling (ISHT) segment will continue to be resilient as the price sensitive consumers switch to more local consumption to avoid the high delivery fees amid COVID-19 restrictions. Meitaun guided its ISHT revenue to grow at 31- 32% yoy in 4Q21 vs 4Q20: +12%; 3Q21: +33%. We expect the in-store segment to see a 12% yoy decline in merchants’ ARPU driven by the weaker macro environment (monthly catering sales +2%/-2.7% in Oct and Nov 21) as well as merchants’ reduction of online marketing spending budget amid tightening regulatory measures. Whereas for the hotel and travelling segment, we continue to see sluggish performances within the travelling industry ie weak New Year travelling data (tourists -18.2% yoy). Meituan expects its ISHT OPM in 4Q21 to reach 40% (vs 4Q20: 39.5%; 3Q21:43.9%). Moving forward, we believe the lockdown measures will be stricter in the upcoming months as the Winter Olympics approaches.

c) New initiatives: We expect the new initiative segment revenue growth to slow down to +59% yoy in 4Q21 vs 3Q21: 67%, tracking the overall sluggish performance from the China online physical goods sales. Currently, Meituan Select is still the leader in the community group purchase (CGP) sector with key competitive advantage in offering value-for-money quality products as well as its own logistic services. Management expects Meituan Select’s operating loss to narrow to <Rmb7b in 4Q21 (3Q21: Rmb7.9b
loss) due to the improvement in operating efficiency. The overall new initiatives segment’s operating loss was guided to widen to Rmb11.5b from Rmb10.9b in 3Q21. For 4Q21, we expect Meituan Select to continue its leading position in China’s CGP sector with estimated GMV of Rmb23b, 4% higher than DuoDuo Grocery. This should translate to an estimated market share of 21% within the China CGP market (estimated market size of Rmb400b) vs DuoDuo Grocery’s 20%.

STOCK IMPACT

Expecting weak catering sales in 4Q21. October/November catering sales recorded +2%/- 2.7% yoy at Rmb446b/484.3b respectively (vs Oct/Nov 19’s +2.8%/-3.3%). We believe the 4Q21 catering sales will be weaker than 3Q21 in terms of growth. Assuming China is able to achieve Rmb495b (similar to what was reported during Dec 20), the 4Q21 catering sales growth would be -0.3% (or -0.1% vs 4Q19). We expect the weak macro environment to have more significant impact towards the in-store business while maintaining our long-term view on food delivery business growth driven by: a) continued collaboration between merchants and internet platform operators, b) support from the government in digitalisation (ie ensuring fairness and prohibiting the 2-choose-1 practice), as well as c) continued innovative solutions offered by platform operators (ie food delivery pick-up kiosk, live-streaming sales).

Potential divestment to weigh on investors’ sentiment. The stakes are high for Meituan given the potential divestment by Tencent to shrug off the latter’s power of influence in the China internet sector. Investors are worried that Meituan may lose the synergies with Tencent. However, we would like to highlight that Meituan had a Marketing and Promotion Services Framework Agreement (renewed in Sep 20, to expire in Dec 23) with Tencent where the latter will provide marketing & promotional services, provision of links/miniprogramme and traffic services to Meituan. The contract will continue to be in force even in the event of divestment. According to Meituan’s 2020 annual report, it had contributed Rmb340m to Tencent (0.4% of Tencent’s online advertising revenue).

EARNINGS REVISION/RISK

 We lower our 4Q21/2021 revenue estimates by 1%/-0.3% as we expect the prolonged lockdown measures to dampen ISHT growth in the near term. We expect Meituan to incur non-GAAP net loss of Rmb6.3b in 4Q21 due to the weaker top-line performance.

Risks: a) Intensifying food delivery competition with Ele.me, b) entry of new competitors in various verticals, c) inability to achieve profitability in new business initiatives, and d) tightening of anti-trust/community group purchase regulations.

VALUATION/RECOMMENDATION

Maintain HOLD with a lower target price of HK$190.00. Our target price implies 3.8x 2022F forward EV/sales, below its three-year historical mean of 5x.

SHARE PRICE CATALYST

 a) Continued market share expansion in the food delivery segment and increase in penetration rate in the fresh groceries segment, and b) increase in synergies with core businesses and new initiatives.