Meituan Earnings: Recovery Remains Strong but Lower Margin Looming Due to Revival of Heavy Subsidies

We maintain our fair value estimate for Meituan at HKD 145 after the company reported second-quarter revenue of CNY 68 billion that was 3% worse and operating margin of 4.9% that was 10 basis points better than our estimates. Meituan also reported CNY 5.40 billion in transactions for its delivery business, a 32% year-on-year increase due to a strong recovery, and in line with its guidance and our estimate of CNY 5.37 billion. The company reported new initiatives revenue of CNY 16.8 billion, reflecting growth of 18% year on year—but operating losses of CNY 5.2 billion widened by CNY 170 million sequentially and still didn't see improvement in narrowing losses, which remains the main reason for our unenthusiastic outlook for Meituan. Despite the strong revenue recovery, we do not believe Meituan has turned a corner toward greater profitability, as the revenue growth was accompanied by a 62% year-on-year increase in sales and marketing expenses. We believe that heavy use of subsidies to generate greater users and order growth is likely to be unfeasible over the long term, looking at the growth reversals seen before when e-commerce companies reduce their subsidies to refocus on profitability. We caution investors not to overvalue Meituan based on revenue growth but rather cash flow, given the long-standing profitability concerns over heavy cash burn and margin pressure.