Meituan reported (22 Mar) its 4Q23 results: revenue was RMB73.7bn, up 23% YoY, 1% higher than Bloomberg consensus estimate. Adjusted net profit during 4Q23 reached RMB4.4bn, better than consensus at RMB2.9bn, due to both better-than-expected operating profit (OP) generated from core local commerce (CLC) business, and narrower-than-expected loss generated from new business. Management highlighted that it will make strategic changes and refine business model of Meituan Select in 2024, aiming to significantly reduce the operating loss, which we believe should drive c.49% YoY non-IFRS net profit growth in 2024E. Although competition in local consumer services market has not seen a structural improvement yet, and Meituan is likely to stay vigilant in business operation, the strategic move to focus more on paid GMV share should help drive business development in a more efficient way, in our view. We trim our DCF-based TP by 4% to HK$155.2 (was HK$161.5), translating into 24.9x 2024E P/E (non-IFRS); maintain BUY.

Focusing more on paid GMV share should drive more efficient in-store business growth. CLC segment revenue/OP was RMB55.1bn/8.0bn in 4Q23, up 27%/11% YoY, 2%/5% better than consensus. Segmental operating margin was also 0.5ppt better than consensus, which we attribute to narrower-than-expected loss generated from Meituan Instashopping, aided by better-than-expected sales and marketing cost savings. Development of both food delivery and in-store business was broadly in line with our previous expectation. For 1Q24, the impact from converting business operating model for in-store business in some of the lower-tier cities from the third-party model to the first-party model to gain better business operation control is likely to remain a drag on in-store operating margin, while the strategic shift to focus more on paid GMV share should drive more efficient in-store business growth over the medium term, in our view. For food delivery business, although it faces a high base in unit economics in 1Q24, the move to drive subsidy optimization, as well as increased ads monetization should partly offset the headwinds, in our view. We forecast CLC segment revenue/OP of RMB52.1bn/8.4bn in 1Q24.

Overall new business to see significant loss reduction. Revenue generated from new initiatives was RMB18.6bn in 4Q23, up 11% YoY, 1% ahead of consensus estimates. Operating loss for the segment was RMB4.8bn, 4% narrower than consensus, implying a loss margin of 26% (4Q22: loss margin of 38%), driven by both narrower-than-expected loss generated from Meituan Select and other new businesses. Operating loss generated from Meituan Select was RMB4.4bn, narrower both YoY and QoQ. Management highlighted that it is set to achieve significant loss reduction for Meituan Select in 2024, and will target to achieve breakeven for other new business on a combined basis in 2024. In 1Q24, we forecast total new businesses' segmental operating loss of RMB3.2bn (1Q23: RMB5.0bn), among which we expect Meituan Select to generate a loss of RMB3.1bn (1Q23: RMB4.5bn). The loss reduction for new businesses along the way in 2024 should in our view improve market sentiment for Meituan.