Meituan Earnings: Margin Pressures and Revenue Slowdown Likely to Persist; Lower Our Fair Value 30%

We are lowering our fair value estimate for Meituan to HKD 102 from HKD 145 after its third-quarter operating margin declined by 200 points sequentially. Our lowered valuation reflects our view that margin pressures are likely to linger, compounded by a downward revision of food delivery growth to low to midteen digits from 20% in the medium term. We anticipate a revenue slowdown because management expects consumers to be more cautious and value-oriented. We estimate that food delivery orders increased 21% year on year in the third quarter, but its revenue only increased 16% due to heavy subsidies as well as the lower average order value. Overshadowing Meituan’s revenue slowdown is its reversion to heavy use of subsidies and we believe that it will continue to use incentives to ward off new entrants such as ByteDance. We estimate the operating margin for food delivery this quarter was 13%, but is likely to decline slightly next quarter, reflecting continued pressure. Competition is not only hitting food delivery, but also the in-store hotel segment, where the operating margin declined further to 35% this quarter. Previously, we expected the operating margin in this segment to gradually decline to a steady-state 35% in 2025, but margin degradation is already faster than expected—and we believe that its forecast could be at risk given recent intensifying competition. We would like to see margin stability before becoming more positive in our outlook over the long term.