Meituan Q4, Double beat cannot stop holders selling

$Meituan(03690)$ announced Q4 and full-year earning reports. Double beat as usual, investors should pay more attention to business segments. Margin increased again, scale effect in delivery helped a lot. However, Tencent’s dividends make it under selling pressure.

Overview of Q4

Revenuee 60.13 billion yuan, a year-on-year increase of 21.4%. It is one of the few Internet companies that maintains double-digit growth, which is higher than the market expectation of 57.92 billion yuan.

• In terms of business, the overall core local business revenue was 43.47 billion yuan, a year-on-year increase of 17.4%, higher than the market expectation of 41.44 billion yuan; new business revenue was 16.7 billion yuan, a year-on-year increase, and is expected to be 16.44 billion yuan.
• In terms of nature, distribution service revenue was 19.77 billion yuan, a year-on-year increase of 31.9%; commissions were 14.93 billion yuan, a year-on-year increase of 12.1%, online marketing services were 7.77 billion yuan, a year-on-year decrease of 5%, and other services and sales were 17.65 billion yuan, a year-on-year increase of 35.4% .
• In terms of operational data, the number of active transaction users was 678 million, a year-on-year decrease of 1.8%, and the number of active merchants was 9.3 million, a year-on-year increase of 5.1%. The number of instant delivery transactions was 4.83 billion, a year-on-year increase of 13.6%.

Cost side:

• COGS 43.20 billion yuan, higher than the market expectation of 41.70 billion yuan, an increase of 15% year-on-year; among them, distribution-related costs were 22.20 billion yuan, a year-on-year increase of 15.0%.
• Sales expenses were 10.77 billion yuan, slightly exceeding market expectations of 10.53 billion yuan, and the sales expense rate was 17.9%, slightly higher than the 17.4% in the previous quarter, but it was down from 22.7% last year.
• Administrative expenses were 2.45 billion yuan, a year-on-year increase, and the proportion fell from 4.9% in the same period last year to 4.1%. R&D expenditure was 5.24 billion, and the R&D rate was 8.7%, which was lower than 9.3% in the same period last year.

On the whole, the three major rates have slightly increased compared with the proportion of Q3, but they have dropped a lot compared with the same period last year, and the cost reduction and efficiency increase have basically been completed.

Profit:

• Gross profit margin was 28.16%, higher than the market expectation of 27.76%, an increase of 396bps over the same period last year;
• Adjusted pre-tax profit was -732 million yuan, which was better than -5 billion yuan in the same period last year;
• Adjusted EBITDA was 2.96 billion yuan, turning losses into profits year-on-year, higher than market expectations of 2.73 billion yuan;
• Adjusted net profit was 829 million yuan, higher than market expectations of 528 million yuan.

Investment Highlights

Since Meituan revised its business classification again in Q2 of 2022, food delivery and in-store hotel travel are both classified as local core businesses, so the individual businesses are a bit of a "hodgepodge".

For the core business, Q4 still has certain peculiarities. Since it is the last quarter of the epidemic, the takeaway and flash sale business is still performing exceptionally well. Among them, the takeaway business was 19.8 billion yuan, 4.5% higher than expected, and the commission was 9.1% higher than market expectations, mainly due to the scale effect of the increase in transaction volume and the increase in the unit price of customers. Correspondingly, however, in-store and hotel travel businesses are still affected by the epidemic. On the one hand, the marketing activities of merchants have weakened, and on the other hand, the hotel business has been sluggish.

What needs to be taken care of in store business is that in addition to the impact of seasonality and the epidemic, we must also pay attention to industry competition, such as Douyin. Douyin's in-store service focuses on brand promotion and planting grass, while Meituan focuses more on confirming dining and massive user evaluation data. The former is "recommendation" and the latter is "shopping", which can provide users and merchants with different values. It is estimated that by the end of 2023, the market share of Douyin and Meituan can be divided by three to seven. In terms of revenue, the core commercial online marketing service revenue in Q4 fell by 4.8%, which was also worse than market expectations.

Since Meituan’s profits come from core commerce, the drop in distribution costs contributed a lot to the profit margin in this quarter. Meituan also charges delivery service fees from users and merchants. In Q4, the logistics and distribution subsidies were further reduced, which was significantly better than the environment under the epidemic in Q2. Similar to JD.com, Meituan has also further demonstrated economies of scale in logistics services. This is why the operating profit of the entire core commercial business can still grow by 41%, exceeding market expectations, even though the revenue from online marketing services with high gross profit margins has declined year-on-year and is lower than expected.

Meituan’s flash shopping is for daily random shopping with wider categories and higher frequency. Compared with JD Daojia, it is more flexible and belongs to the subdivided real warehouse. However, Meituan’s community group buying business is still under the pressure of Pinduoduo. For Meituan, Q4 loss reduction is also an important part of cost reduction. Q4 new business revenue increased by 33%, but the loss increased from 9.4 billion in the same period last year. narrowed to only 6.4 billion.

In other aspects of cost reduction and efficiency increase, the three major rates have fallen sharply year-on-year. From a quarter-on-quarter perspective, it is basically coming to an end, and the future operating rate will remain at this level.

The profit margin of Meituan often fluctuates up and down. In addition to the impact of some other income, the fluctuation of its own business profit margin is also obvious. If you don’t consider the loss of new business, but only look at the profit margin of the core local business, Q4 rose from 13.8% in the same period last year to 16.6%. Although it is not as close to 20% (seasonal) in Q3, it is still rising. This is a better signal.

Estimate and Valuations

Meituan still applies the valuation method of growth companies, that is, the profit level after the profit rate is expected to stabilize in the next few years is discounted back to the current valuation. For example,

Not considering new businesses (losses), the core business revenue in 2025 can reach 290 billion yuan. With a profit margin of 15%, the profit will be close to 43.5 billion yuan. Calculated at 25 times the price-earnings ratio, the valuation 1.25 trillion Hong Kong dollars. Even with a higher discount rate of 22% WACC, there will be HK$134.7 per share in 2023. That's still too late without considering the revenue from the new business.

Therefore, Meituan's current price of HK$140 is obviously low. The market is unwilling to give a higher valuation. There are two reasons. In addition to the uncertainties faced by the business (large changes in profit margins), there is also potential market selling pressure.

After Tencent distributes Meituan shares, both retail investors and major shareholder Prosus have demand to sell them. This will become the biggest cloud of Meituan's share price in the next few months or even a year.

Therefore, despite the strong recovery expectations in 2023, Meituan's stock price is still under struggle.