Core commercial profit margins improved, new business losses reduced to drive profit release, and maintained a “buy” rating

Based on the steady volume of instant delivery orders but increased advertising monetization rate and subsidy optimization, in-store business profit margins are expected to continue to improve, and community group buying business losses to be better than expected, we raised the company's 2024-2026 non-IFRS net profit forecast to 39.4/52.1/64.5 billion yuan (previous value: 36.2/45.9/62.1 billion yuan), corresponding to a year-on-year growth rate of 69.5%/32.2%/23.9%, corresponding to the diluted EPS 6.3/8.4/10.3 yuan, current stock price 115.7HKD corresponds to 16.7/12.6/10.2 times PE. Takeout barriers are stable, and the flash shopping business is flexible. Profit margins are expected to rise steadily as a result of the partial weakening of the in-store competition pattern, and the reduction in losses in new businesses will drive overall profit release, and maintain the “buy” rating.

2024Q2 revenue and profit both exceeded expectations, and core commercial profit margins and new business losses were better than expected

2024Q2's revenue was 82.25 billion yuan, up 21% year on year, slightly exceeding Bloomberg's agreed expectations (80.4 billion yuan, YOY +18%), mainly due to new business revenue exceeding expectations; non-IFRS net profit of 13.6 billion yuan, which greatly exceeded Bloomberg's agreed expectations (10.6 billion yuan), core commercial profit margin increased year on year and new business losses were better than expected. (1) Core business: Revenue increased 18.5% year over year, number of instant delivery transactions increased 14.2% year over year, food and beverage takeout benefits from the low price model, and flash sales supply side continued to improve; inbound wine travel orders increased by more than 60% year over year, entertainment/beauty GTV YOY increased by more than 60%/50%/50%; core commercial operating profit margin increased by 25.1%, up 3.3 pct year on year, improved profit margin for delivery UE and store delivery; (2) New business: Xiaoxiang supermarket and fast donkey led to a 28.7% year-on-year increase in revenue and operating profit margin. -6.1%, 8.7pct month-on-month narrowing.

Instant delivery profits are growing faster than revenue, and the monetization rate is expected to pick up in the short term due to partial weakening of in-store competition. (1) Core business: In terms of instant delivery, food and beverage takeout orders are growing steadily, there is still room for flash shopping categories and user penetration, advertising monetization rates continue to increase, and profit growth is expected to be faster than revenue growth under continuous optimization of subsidies. Competition in the in-store industry has weakened partially, and the synergy of door-to-door traffic, increased share of low-frequency high-customer single categories, and optimization of subsidies are expected to drive a narrowing of the gap between revenue and GTV growth and an improvement in profit margins. (2) New business:

Meituan Preferred's loss reduction continues. In the long run, the growth rate of takeout is stable, and in-store profit margins and commission rates are gradually being repaired. Waiting for new businesses such as flash sales and grocery shopping to consolidate user mentality and stabilize market share, it is expected to open up profit margins.

Risk warning: Consumption recovery falls short of expectations, increased competition, regulatory changes, and new business expansion falls short of expectations.