The adjusted net profit for 3Q24 is predicted to increase by about 14% year over year

Considering the impact that Q3 may have recorded on Meituan's equity investment income and the appreciation of RMB against the US dollar, we estimate that the adjusted Q3 net profit increased by about 14% year over year. Food and beverage consumption is still at an inflection point, but Yum is actively exploring new store models such as Kenyue Coffee's shoulder to shoulder model and Pizza Hut WOW, and continues to upgrade in terms of open source and savings.

Key points of interest

Q3 Food and beverage consumption has yet to reach an inflection point; pay attention to the year-on-year trend of the same stores where the Q4 base declined. According to data from the National Bureau of Statistics, Q3 Social Zero Catering was +3.1% year-on-year, and Q3's year-on-year growth rate decreased by 1.9ppt from Q2. Continued pressure on the brand side of the same store in Q3: We estimate that Haidilao's overall turnover remained flat year on year in July-August, and single-digit percentage decline in September; Taiji (direct sales) /Q3 same store daily sales ratio -18.3%/-32.5% (vs.

(Q2 YoY -18.1%/-36.6%). During the National Day holiday, we observed a slight month-on-month improvement in the same-store trend of some restaurant brands: we estimate that the overall turnover of Haidilao during the National Day holiday was flat; the year-on-year decline in Taier/ Hot Pot's revenue during the National Day holiday may have narrowed month-on-month compared to Q3; Helens's National Day holiday restaurants fell about 20% year on year, and the decline was narrower than 1H24). Looking ahead to Q4, the industry entered a low base (Yum Sheng 1-3Q23 had a recovery rate of about 90% or more compared to '19, and Q4 fell back to about 85%), focusing on the year-on-year trend of the same brand store. In particular, the decline in the base after H2 is expected to narrow the year-on-year decline (taking KFC as an example, we estimate that the average price of a 2H23 unit fell below 40 yuan vs an average price of 1H23 per unit price above 40 yuan).

The company actively explores new models and continues to upgrade open source and save money. Since this year, the company has actively explored and expanded Kenyue Coffee's shoulder to shoulder model, increasing from about 100 in March to nearly 300 in July, breaking through 400 stores by the end of September; the company plans to expand to 500-600 by the end of the year. According to our observations, the increase in the abundance of Kenyue Coffee products is conducive to attracting customers during breakfast and afternoon tea; at the same time, the model works side by side with the parent store, can share employees, and the cost of renovation and equipment is manageable. The company tested the waters of Pizza Hut WOW, positioning it as a casual fast food, and the price was even lower: by the end of July, it had converted more than 100 Pizza Hut stores into WOW stores, and plans to increase the number to about 200 by the end of the year. According to our observations, compared to traditional Pizza Hut stores, Pizza Hut WOW stores offer more snacks other than pizza. Their menu and pricing are more suitable for single diners and younger customers, and the service is more streamlined. Furthermore, since this year, the company has continued to upgrade its efforts to reduce costs and increase efficiency: the company launched the Fresh Eye project on 4Q23, optimized operating efficiency from the perspective of restaurant managers, launched the Red Eye project at the end of 1Q24 to improve supply chain efficiency, and showed certain results in 2Q24 results; the company expects that efforts and results to reduce costs and increase efficiency will continue.

Profit forecasting and valuation

Considering the impact of Q3 on Meituan's equity investment income and RMB appreciation against the US dollar, the 24-year adjusted net profit was raised 4% to 0.913 billion US dollars, maintaining the 25-year profit forecast; corresponding to the 24/25 adjusted operating profit growth rate of 4%/8%. The current stock price corresponds to 18/18 times P/E and 10/9 times EV/EBITDA for 24/25. Maintaining an outperforming industry rating, considering the introduction of the policy to boost market sentiment and the valuation switch to 25 years, raising the target price by 24% to $52, corresponding to 22/21 times P/E and 12/11 times EV/EBITDA in 24/25, with an upward space of 19%.

risks

The recovery in spending power fell short of expectations; the competitive landscape deteriorated; same-store and profit margins fell short of expectations.