Meituan Dianping Q1 20 – Fast forward

Meituan invests to accelerate adoption.

• Meituan Dianping reported good results as revenue fell less than expected and has picked up quickly following the re-opening of the Chinese economy.
• However, the company swung back to a loss as it is investing heavily to accelerate the adoption of its platform more widely than its current remit.
• Q1 20 revenues / EBIT were RMB16.8bn / LOSS RMB1.7bn compared to estimates at RMB15.5bn / LOSS RMB1.4bn.
• During initial phases of the pandemic, Meituan suffered from both supply and demand disruptions but as the economy gradually re-opened, users started using services more than before.
• For example, while the number of average transactions per day fell 15% during Q1 20, the average order value increased by 14% as larger meals were ordered from higher-priced and branded restaurants as a result of increased concerns with hygiene.
• This has been further bolstered by restaurants that have typically relied on dine-in being forced to cater to the takeaway trend in order to replace revenues lost from social distancing.
• This was aided by Meituan’s decision to support restaurants with a series of rebates and subsidies which has driven uptake but depressed profitability in the immediate term.
• Meituan’s travel business has been much harder hit with hotels down 46% YoY and its broader travel unit by 31% YoY.
• Meituan has moved to adjust its user experience to incorporate features that allow users to check safety features such as disinfection, occupancy and social distancing before booking their stays.
• Despite these actions, Meituan expects that the travel-related segment of its business will take a long time to recover.
• This fits with RFM research which has concluded that a full-recovery of this sector necessitates wide-availability of a highly effective vaccine.
• The silver lining of the pandemic for Meituan is that users locked at home were very willing to try using the platform for the delivery of other items which has set the scene for the breadth of its offering to increase.
• Locked-down users tried ordering other items such as groceries and daily necessities on the platform and have continued to do so despite general re-opening.
• This will help the food delivery business to offset the ongoing weakness in travel, but it will not be enough to mitigate the impact for the rest of the year.
• As such Meituan expects that the rest of 2020 is going to be impacted by the limitations that social distancing places on economic activity and consumer expenditure.
• Furthermore, the priority has shifted to growing market share by helping merchants to stay afloat through the crisis in the hope that their loyalty drives long term revenue growth
• Meituan moved into a dominant position in Chinese food delivery in 2019 and consequently broke even (see here),
• This proved the validity of its business model meaning that sacrificing a return to profitability should pay dividends in the long run.
• However, much of this is already priced into the shares which have hit all-time highs following these results and are already trading on 6.2x 2020 EV / Sales.
• I have liked the shares since the IPO, but the valuation is starting to look a little rich for my blood.