The growth rate of timely delivery orders will slow for the rest of 2024, offset by reduced subsidies and increased advertising contributions.
The operating profit of the on-site wine tourism business will accelerate as the competitive landscape stabilizes.
Reiterating the “Buy” rating, the SOTP target price was raised to HK$180.00 (the original target price was HK$175.00).
Food takeout & flash sales business: We estimate that food and beverage takeout 1Q24 revenue increased 23% year over year, slightly lower than the 24% growth rate of order volume. Weak consumer spending led to a year-on-year decline in average customer unit price (AOV), partially offset by Meituan cuts in subsidies and increased investment in customer acquisition by merchants to increase advertising revenue. Flash sale 1Q24 orders increased by more than 60% year over year (average daily order volume reached 8.4 million). Profit per order (UE): Due to AOV pressure and rising rider costs (the 1Q23 high base due to the recovery of the pandemic), UE in the 1Q24 food and beverage takeout business declined year-on-year, but we expect both aspects to ease over the next few quarters as the comparison base normalizes. Thanks to the increase in order volume contributions for high-margin projects such as flowers during the Spring Festival, the flash sales business turned a loss into a profit in 1Q24.
We now forecast that food and beverage takeout revenue/order volume will slow to 13%/12% year over year in 2Q24 and 16.2%/14.3% year over year in 2024, respectively. However, as AOV pressure eases, delivery efficiency increases, and advertising contributions increase, we expect 2Q24 food and beverage takeout UE to increase sequentially. We forecast that flash sales 2Q24 revenue/order volume will increase by 32%/33.3% year over year, with an operating loss of 126 million yuan (profit margin of -2%).
In-store, hotel and travel business: According to management, the total transaction volume (GTV) of the 1Q24 sector increased 60% year over year. We anticipate that its operating margin will increase from a high of 20% in 4Q23 to 31%, thanks to stabilizing competition in the industry. Meituan has expanded the scope of on-site wine tourism business to include more light food, snack food and drinks. Although the AOV of these projects was low, they helped the company maintain its market share. In the long run, management is still optimistic that the sector's GTV profit margin will be 2-3%. We now forecast a 21%/22% year-on-year increase in revenue for 2Q24/2024, with operating margin remaining at 31%/31.8% (1.9%/1.8% of GTV before write-off).
New business: losses in the 1Q24 sector narrowed to RMB 2.75 billion. Businesses other than Meituan Preferred turned losses into profits during the quarter, and Meituan Preferred's losses were drastically reduced due to increased AOV, reduced concessions, and closure of loss-making fulfillment centers. We currently forecast sector operating losses of 2.1 billion/9.2 billion yuan for 2Q24/2024, respectively.
Maintaining the “Buy” rating, the SOTP target price was raised to HK$180.00, based on 15 times the 2024 core local commercial profit (unchanged) and 0.8 times the 2024 new business P/GMV (unchanged). We now forecast a 16% year-on-year increase in operating profit for core local businesses in 2024 (up 9% from the previous forecast), mainly due to improved profit prospects for food and beverage takeout, flash sales, and in-store wine travel. Risk warning: Increased competition, weak macroeconomics, and tighter regulations.
valuations
We maintained our “buy” rating and slightly raised our SOTP price target from HK$175.00 to HK$180.00 per share because we raised our valuation of our core business, food and beverage takeout, and in-store wine travel based on improved profit prospects.
In the food and beverage takeout business, we used 15 times the 2024 P/E (unchanged) and obtained a valuation of $57 billion (previously $53 billion). The above multiples have a discount of about 60% compared to Meituan's global takeaway company FactSet's unanimous forecast average (37.5 times 2024 P/E), mainly due to Meituan's smaller accessible market (TAM).
In terms of the retail, hotel, and travel business, we used 15 times the 2024 P/E (unchanged) to obtain a valuation of $38 billion (previously $36 billion). The above valuation multiples have a discount of about 20% compared to the average forecast of Meituan's global travel industry companies (19.2 times 2024 P/E) because Meituan TAM is smaller.
In terms of community e-commerce and retail business in the same city, we used 0.8 times the 2024 P/GMV (unchanged) and obtained a valuation of 51 billion US dollars (unchanged). The above ratio has a 20% discount compared to the valuation multiplier of 1.0 times that of the same company, due to Meituan TAM's smaller size.
Risk warning
Increased competition in the industry may affect market share and profitability: the retail, hotel and travel businesses have always been Meituan's main source of profit. As short video platforms enter the local service market and competition intensifies, we expect Meituan to take a series of measures to defend its market share, including reducing merchant rates and providing preferential rewards to users, so the profitability of this sub-business may be under pressure.
Meanwhile, Meituan's biggest revenue comes from the takeout business. Competition may force Meituan to provide similar or even higher subsidies than its peers, and may eat away at its own profits. If Meituan does not provide similar subsidy benefits, it may be difficult to get new merchants to enter and visit new users, causing the growth rate and revenue to fall short of expectations.
Macroeconomic weakness: Some of Meituan's businesses, such as in-store, hotels, and travel, are optional consumer goods. Lack of consumer confidence and rising inflation may encourage consumers to buy low-priced products, dragging down the revenue growth of these businesses. The slower than expected macroeconomic recovery will also dampen Meituan's revenue and operating margin performance.
Stricter anti-monopoly laws and faster introduction of labor regulations than expected may increase rider costs, making Meituan's profits fall short of expectations. Meituan uses contracts with delivery companies to obtain riders rather than directly hiring riders. If antitrust regulations become stricter, or if industry regulators speed up the introduction of welfare requirements for riders, competition between platforms will increase for riders, and the shortage of riders may prevent Meituan from maintaining the current level of delivery costs, leading to pressure on profits and profit margins.
The slow decline in losses in new businesses is putting pressure on profit margins: Meituan's new businesses, including overseas expansion, are in the early stages of development, and many are still losing money. A potential slowdown in cost reduction and any increase in investment may put more pressure on the company's overall profit margin and lower profits.