Meituan Earnings: Fair Value Estimate Up 20% as Our Outlook Is More Positive, but Risks Still Loom
We raise our fair value estimate for Meituan by 20%, to HKD 127 per share from HKD 106, after the company reported second-quarter revenue of CNY 82.2 billion, 1% better than our estimates, and adjusted operating margin expanded 850 basis points to 13.4%, an all-time high. Our valuation upgrade reflects not only significant profitability improvement, but also our changing view that Meituan can now raise monetization rates and lower customer incentives on a recurring basis, marked by a 17% increase year on year for on-demand revenue despite plateauing at 700 million users for the last four quarters, by our estimate. We believe the company’s ability to do so is due to its strategy of offering curated meals at lower price points, which is currently appealing in the Chinese consumption downgrade. By promoting transactions with lower average order values, Meituan does not have to offer as much in subsidies, given a more affordable option for consumers, while generating greater order volume and still charging a fixed delivery fee per order. We think this strategy can be maintained even if China’s macro woes turn around, given its appeal to lower-end users, who are less saturated and have lower transaction frequencies. Our higher valuation also reflects operating margin stability from Meituan’s in-store and hotel segment, which has benefited from China’s resiliency and demand for travel services. We still believe that the new initiatives business is immaterial to our valuation and likely to be challenging in the long term, but it has narrowed its losses to the point where we see it as less value-destructive, as Meituan continues to improve efficiency and limit its losses. We believe there are ample competitive risks, especially to its in-store and hotel businesses. However, given our view that Meituan should be able to scale its volume and generate greater profitability, we believe that a pullback in the share price could present an attractive entry point.
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