In the face of the epidemic, new economy enterprises show uncompromising calmness and strength. Tencent (00700-HK), BABA (09988-HK) and other industry leaders with a sound ecology of Internet products and services are rising against the trend.
Meituan Dianping-W (03690-HK), which has an 18.12 per cent stake and supports more than half of China's takeout market, is not inferior, with its share price up more than 35 per cent so far this year.
Compared with ofo ofo, who has just been put on file for investigation, LK-US, who vowed to surpass Starbucks Corp but ended up covered with chicken feathers, and a group of unicorn companies struggling in losses, Meituan's comments can be said to be lucky.
When it went public on Sept. 20, 2018, Meituan's share price was 69 Hong Kong dollars. Since its listing, the share price has soared, as shown in the chart below. To a recent high of HK $138.9, it has risen 1.01 times in less than two years. After climbing the top, did Meituan have enough stamina to comment?
Before answering this question, we might as well take a look at Meituan's main business.
The income depends on takeout and the profit depends on the service at the store.
Meituan comments divides the business into three divisions: catering takeout, arrival, hotel and tourism, and new business and others.
Catering takeout
Catering takeout is the main source of income. The segment income in 2019 accounts for 56.23% of Meituan's total income, which is generated through the following ways: 1) the commission of merchants; 2) online marketing services provided to merchants; and 3) the distribution fees charged by merchants for the completion of distribution services. Among them, merchants' commissions accounted for the majority of the income, and the commission income accounted for 90.53% of the income of the catering takeout division in 2019.
It is worth noting that although the income of the business is high, the cost is not low, and the most important expense is the cost of takeout riders. In 2019, the cost of takeout riders reached 41.042 billion yuan (unit RMB, the same below), accounting for 74.8% of the catering takeout business revenue. As a result, the gross profit margin of the catering takeout business is very low, up from 18.7% in 2019. In the first quarter of 2020, operating profit was used to show the performance of the business segment, which actually incurred an operating loss of 70.88 million yuan.
To shops, hotels and tours
The revenue from arrival, hotel and tourism business mainly includes: 1) the commission paid by merchants for selling vouchers, coupons, booking and booking tickets on their platforms, and 2) online marketing services provided to merchants, roughly half of the revenue from the two services.
As the labor costs involved are not high and are mainly fixed expenses, although the revenue scale of this business is not as large as that of takeout, it is the profit pillar of Meituan's review. In 2019, the business segment accounted for 22.84% of revenue, while gross profit accounted for 61.1%. In the first quarter of 2020, the business segment generated an operating profit of 680 million yuan, alleviating the impact of operating losses on catering takeout and new business to a certain extent.
New business and others
Compared with the labor-intensive takeout business and the mature arrival business, this business segment can be said to have the most growth potential, mainly providing consumers with fresh supermarkets, other non-catering takeout services, as well as mobike and online ride-hailing services, as well as supply chain management, cloud ERP system and other services to merchants. However, the business segment generated the highest losses. In the first quarter of 2020, the business segment recorded a revenue of $4.2 billion but an operating loss of $1.4 billion.
In other words, the current catering takeout business and new business provide access to traffic, while profits from arrival, hotel and tourism support the performance of the group as a whole.
Why can Meituan's comments turn losses into profits?
In recent years, the new economic unicorns have one thing in common: burning money for drainage.
So is ofo, so is Rui Xing, so is Pinduoduo (PDD-US), so is Meituan's comment.
Ofo is dead, Lucky is dying, Pinduoduo is still losing money, but Meituan's comments turned losses into profits in 2019, why can it?
Public opinion has been accusing Meituan of being harsh on merchants, using his near-monopoly position to drive merchants to make profits to subsidize takeout riders.
See below, the commission rate of catering takeout business has risen from 11.86% in 2017 to 12.64% in 2019. Meituan's comment is indeed gradually increasing the commission rate of merchants. However, in the first quarter of 2020, in the face of the epidemic, the company sharply reduced the merchant's commission rate to reduce the burden on merchants, which also caused the business division to turn a profit into a loss.
At the same time, with the expansion of the business, the proportion of riders' costs in income is gradually declining.
See the picture below. No matter what the outside world says or what its means are, the scale of the catering takeout business commented by Meituan is indeed expanding, and the realization rate is also gradually increasing, except that it was affected by the epidemic in the first quarter of 2020.
There are many possibilities for Meituan to comment on a larger scale. First of all, because of its platform influence, the revenue scale of the high-margin arrival, hotel and tourism divisions has been expanded, thus improving the overall profitability. New business and other businesses can also expand on this basis.
Second, the expansion of the base makes economies of scale possible. For example, for every yuan invested in sales and marketing expenses, the revenue generated is gradually increasing, as shown in the chart below.
What distinguishes Meituan's comments from ofo and Lucky is that its arrival and hotel business does not rely on cost subsidies and can rely on the influence of the platform to obtain high-profit income, which offsets the losses of other subsidized businesses. This could lead to a turnaround in 2019.
Why the first quarter performance turned into a loss can trigger Meituan comments of the stock price soared?
In the first quarter of 2020, Meituan Dianping recorded an income of 16.754 billion yuan, down 12.6% from the same period last year, while the net loss increased by 10.2% year-on-year to 1.579 billion yuan. Adjusted EBITDA fell 91% year-on-year to 41.311 million yuan. Excluding salaried expenses, investment fair value gains and losses, sales gains, mobike restructuring and other financial asset impairment, the adjusted net loss decreased by 79.4% year-on-year to 216 million yuan.
The Caihua Society believes that Meituan's performance in the first quarter of 2020 has several positive points, which may be the reason why the market is optimistic about the first line:
1. Reduction in recurrent performance after deducting one-time payments
two。 Affected by the epidemic, Meituan's catering, arrival and other businesses will certainly be hit, but Meituan's business decline is less than market expectations. The revenue of the new business segment has even increased as a result of the importance of several new businesses in ensuring people's livelihood.
3. The market is pinning its hopes on a big rebound in consumption after the epidemic. During the epidemic, Meituan responded very quickly, providing temperature data of merchants and riders to meet the needs of epidemic surveillance, and taking corresponding anti-epidemic and epidemic prevention express delivery and meal safety measures, which is likely to enhance the goodwill of customers. it may also play a role in changing customers' consumption habits imperceptibly, so as to build future demand. On the other hand, after the unsealing of the epidemic, the number of tourists on May Day this year rebounded astonishingly, showing a strong consumer demand after the epidemic. This may mean that Meituan's performance in the second half of the year is likely to pick up significantly.
So high, are over-cold
Back to our previous question, does the stock price commented by Meituan still have the potential to continue to reach its peak?
After a series of gains, Meituan Dianping has become the third largest new economy company by market capitalization in the Hong Kong stock market after BABA and Tencent. Compared with BABA and Tencent, Meituan is still working hard on the road of turning losses into profits. There is no doubt that turning losses into profits itself has provided a very broad imagination space for the capital market. But is this imagination infinite?
See the picture above, compared with BABA and Tencent, whose profit models are more mature, Meituan's valuation is more than four times higher.
But we have analyzed the business model of Meituan Dianping, the biggest source of income, catering takeout, the profitability of the business may be limited, because you can not indefinitely suppress the business, it is difficult to reduce the cost of riders.
New business may be the driving force for future development, but it should be noted that the reason why Meituan was able to turn losses into profits in 2019 is due to the comprehensive replacement of mobike and the decline in depreciation expenses. the new business is still in the stage of huge investment, and it still takes time to bear fruit.
Arrivals, hotels and other businesses may become profit growth drivers, or business segments that buffer losses in the other two business segments and boost overall performance in the future. But it is in a quite mature market, facing competitors including Trip.com, it is difficult to expand the income scale indefinitely.
On the other hand, if the market thinks that the market capitalization / adjusted EBITDA rate of Tencent and BABA is reasonable (22-23 times). When used in Meituan's comments, its present value reflects the market's expectation for its adjusted EBITDA to reach 34.7 billion yuan (Meituan's market capitalization divided by 23 times), and assuming that Meituan's income in the next three quarters from the second quarter will double, driven by a strong recovery in demand, in order to reach this level of adjusted EBITDA, Meituan's adjusted EBITDA profit margin for the whole year will reach more than 22.3%.
But is it possible?
In 2019, Meituan's gross profit margin was 33.1%, sales and marketing expenses accounted for 19.3% of income, and R & D expenditure accounted for 8.7%. In other words, in 2019, when the performance was excellent, Meituan had to save at least R & D expenditure and cut sales and marketing expenses by half in order to get close to this profit target, not to mention other operating cash expenses. But can Meituan, who is in the stage of development, cut operating expenses so much? The author doubts very much.
Meituan's adjusted EBITDA profit margin was 7.4 per cent in 2019 and 0.2 per cent in the first quarter of 2020. By contrast, BABA's adjusted EBITDA margin for the financial year ended March 2020 was 30.93 per cent, Tencent's adjusted EBITDA margin was 39.1 per cent in 2019 and 41.8 per cent in the first quarter of 2020. No matter how you look at it, these two technology giants have mature charm and no less room for growth than Meituan's comments, and their valuations cannot be so far behind or surpassed by Meituan's comments.
Obviously, compared with Tencent and BABA, who are much richer, Meituan's profit margins are really difficult to catch up with, and when the market recognizes this gap, or recognizes the over-optimism of previous valuations, it is likely to be re-corrected. Can the stamina of Meituan's comments keep up?