Shulou(Shulou.com)11/24 Report--

Meituan today released its second quarter 2022 earnings report, which showed that the company's second quarter revenue was 50.94 billion yuan, up 16.4% year-on-year. The net loss was 1.12 billion yuan, narrowing by 67% year-on-year; the adjusted net profit was 2.06 billion yuan, and the estimated loss was 2.17 billion yuan. In the first half of 2022, Meituan's revenue was RMB 97.21 billion yuan, with a year-on-year growth of 20%; net loss was RMB 6.82 billion yuan, narrowing by 17% year-on-year.

After the release of the earnings report, Meituan CEO Wang Xing and CFO Chen Shaohui participated in the analyst conference call to interpret the earnings report.

The following is a transcript of the question-and-answer session of the conference call:

Ronald Keung, Goldman Sachs analyst: The company adjusted the second quarter earnings disclosure plate. Could management please explain the reasons and considerations for the adjustment? In addition, the profitability of the company's core local commercial business seems to be higher than expected by the market and has achieved very good year-on-year growth. Can management explain what factors are driving the profit growth of the core local commercial business?

Wang Xing: Regarding your first question, you are right. We adjusted the financial report disclosure sector in the second quarter. At present, the financial report is divided into two sectors: core local business and new business. This realignment reflects our strategy and different stages of business development, and is aligned with our resource allocation.

The core local business, which contributes more than 70% of the company's revenue, has a well-established business model and is a major source of operating profit and operating cash flow, including takeout, in-store services, hotels and tourism, which have achieved market leadership after years of operation and will continue to grow. The takeaway business is the largest source of active users of the company, providing huge traffic and growth opportunities for the company's store-to-store services and hotels. High-quality and high-frequency takeaway business users are also using our store-to-store, hotel and travel services, driving the year-on-year growth of these businesses. In addition, we continue to improve the activity of high-quality merchants on the platform and increase the value of their take-out and store-to-store service operations. For example, some merchants providing store-to-store services have switched to delivery services during the recent outbreak, and our take-out service team has also provided them with the best quality service resources and high value-added services. As an extension of the company's takeout service, Meituan Flash takes full advantage of the user scale of the company's takeout business and instant delivery network. Meituan flash purchase has the same unit economic benefit as take-out business, and can also create similar profit level. At present, its business scale has been considerable and is at the leading level in the industry. Alternative accommodation and transportation bookings are also included in the first segment, and have recently been consolidated into the company's inbound services, hotels and tourism businesses, primarily due to organizational restructuring and similar business nature considerations.

We have been exploring the services and business models involved in the new business segment, several of which include self-operated goods retail, and the operation chain is relatively long, requiring us to spend more time iterating and optimizing its business model. Compared with the core local business, the new business requires more resources and investment from the company. In the future, we will evaluate the development of each new business and make corresponding resource allocation and strategic investment.

Chen Shaohui: With regard to profitability, the profit growth of core local commercial business was mainly driven by the improvement of economic benefits of takeaway and flash purchase business units, while the hotel and tourism business was dragged down to some extent due to repeated epidemics. The takeout business grew both month-on-month and year-on-year, mainly due to our focus on high-quality growth and refined operations in the current macroeconomic and epidemic environment. In addition, the second quarter is usually the season with the best economic benefits for take-out business units. We resumed marketing in the second quarter. Although the order volume from small and medium-sized catering merchants decreased due to the epidemic situation, our order structure is more conducive to the improvement of profitability. In addition, due to the epidemic situation, the average order amount of Meituan flash purchase business also increased, coupled with our effective efforts in cost control, the business also achieved break-even operating profit. We expect that the profitability of takeout and flash shopping businesses will continue to improve in the future.

Jeffery analyst Thomas Chung: How does the company predict operating margin levels for core local businesses in the second half of the year? Could you tell us about the profit margins of takeout, flash shopping, store delivery, hotel and travel business respectively?

Chen Shaohui: As I mentioned just now, due to epidemic situation and other reasons, the operating profit margin level of the company's core local business has been greatly improved, and the distribution cost in the second quarter is relatively low, so seasonal factors are also one reason. For the second half of the year, short-term factors and seasonal factors will not be as strong, so the operating profit margin of core local businesses may decline quarter-on-quarter. However, the company will continue to focus on high-quality growth and operational efficiency improvements, so operating margins in the second half of the year should also show year-on-year growth.

The operating profit and operating margin of the company's takeout business in the third and fourth quarters are usually lower than in the second quarter, and because of extreme weather, we offer higher subsidies to our delivery staff, so delivery costs will be higher. In the second half of the year, the epidemic situation will be alleviated, and the Company will also adopt more efficient cost control measures. In addition, small and medium-sized catering merchants with lower order amount will resume business, and the proportion of low-amount orders in the total order volume will increase, which will also lower the operating profit margin level, but at the same time, the user activity will also increase, thus promoting the recovery of social activities. The company will continue to focus on high-quality growth, increase marketing activities, assist the government in issuing coupons, and boost the consumption frequency and activity of medium and high-frequency consumers. In addition, more rational competition in the industry will help the company reduce costs. In summary, we believe that the operating profit margin in the second half of the year should also increase year-on-year.

For flash purchase business, we commit to year-on-year growth in investment, drive consumption recovery by optimizing consumption stimulation methods and strategies in key regions, and continue brand building efforts. We believe there is a lot of room for growth in the flash purchase business because it is still in the early stages of development, so it is mainly focused on growth rather than profitability. We will continue to improve operational efficiency and control costs. In terms of in-store service marketing, we will make more use of online channels and optimize offline channels to pursue high quality and sustainable growth. July revenue from the store-to-store business continued to grow, providing more operating leverage for year-on-year growth in operating margins in the second half. In addition, we expect a further recovery in the hotel and travel business in the second half of the year. We will continue to invest and optimize marketing efficiency, hoping that operating profit margin can return to pre-epidemic level, with month-on-month and year-on-year growth.

Gary Yu, Morgan Stanley analyst: I have a question about the recovery trend of the core local business. Could management please comment on the recovery trend of takeout, arrival, hotel and travel business in July? Is there any acceleration in growth in August and September? How to predict the second half of the year?

Chen Shaohui: The epidemic situation in Beijing and Shanghai was brought under control in June, and the take-out, store arrival, hotel and tourism businesses were gradually restored. We also formulated exclusive business recovery plans for different cities at different stages. In cooperation with local governments, we issued consumption vouchers to boost local economic development. Merchants also relied on Meituan to increase sales and resolve external challenges. We continue to deliver traffic to offline merchants and take additional steps to help them recover business growth.

Although the base of the same period last year was relatively high, the order volume growth rate of takeaway business in June still recovered to the year-on-year growth level of 10%, and the average daily order volume of takeaway business in Shenzhen, Guangzhou, Shandong, Hubei, Fujian and other places recovered to the same period last year. On the supply side, businesses suspended in the first quarter gradually resumed business, non-residential places, including office buildings and entertainment venues, also gradually resumed, and by June, the decline in total sales narrowed to single-digit percentages. With the recovery of tourism activities, the number of hotel nights booked in June only dropped by less than 10%, but since July, the epidemic in Chengdu, Xi'an, Hainan and other places has had a certain impact on tourism business. With the normalization and precision of epidemic prevention and control, the order volume of the take-out business of the Company continued to increase month-on-month in July, and accelerated in August, especially the daily order volume peak of take-out business exceeded 60 million, which is another important node for the development of the Company.

In terms of store-to-store business, transaction volume increased by more than 10% year-on-year in July, and accelerated growth also occurred in August, but it was still affected by epidemic control in some regions. Although the hotel and tourism business recovered in July compared with June, it was still affected by the epidemic and showed a year-on-year decline, but recovered year-on-year growth in August. If there is no major outbreak in September, we expect core local commercial business to grow year-on-year in the third quarter. As for the performance of the fourth quarter, it still depends on the epidemic situation and control measures.

Citic Securities analyst Ya Jiang: A question about the company's flash purchase business. Does the inclusion of flash purchases in the core local commercial business mean that the business will be given higher priority? In addition, the company also mentioned progress in Meituan's vegetable buying business. Does this have an impact on the growth of flash buying business?

Wang Xing: I think the online shopping industry should not be dominated by a certain model. Meituan flash shopping, Meituan optimization and Meituan vegetable shopping are all models for us to explore this field. One of the reasons why Meituan flash purchase is classified as a core local commercial business is that flash purchase is a natural extension of take-out distribution business, expanding from food made by distribution restaurants to distribution of more categories of goods. Its business model and unit economic benefits are similar to those of take-out business, and its growth path and profitability are also very clear. However, Meituan Preferred and Meituan Vegetable Buying businesses are still in the early stages of development, requiring warehousing and infrastructure, and operations departments need supply chain capabilities, so they are different from our core local commercial businesses. After rapid development in the past few years, Meituan Flash has upgraded its core capabilities and become the largest instant delivery network in China. We have strong performance capabilities and distribution capabilities to serve the largest and multi-industry merchant groups. On the consumer side, we have a huge user base and a very strong willingness to spend on instant shopping. We can naturally realize the conversion from takeout to flash purchase. In the future, we have the potential to contribute high-amount orders and online marketing revenue to the company, and its unit economic benefits will at least reach the level of takeout business in the future. We believe that the consolidation of flash purchase business into core local commercial business will enhance the synergy between flash purchase business and takeaway business and enhance its long-term value.

With regard to Meituan Lightning Warehouse, we hope to meet the huge demand for instant retail, which not only requires effective selection of goods by merchants, but also provides high-quality products with price advantage. We adopt innovative lightning warehouse mode to provide consumers with fast-selling goods and pet products. These lightning warehouses are created by merchants and operated online by merchants. We provide instant delivery service for them. Compared with traditional stores, Meituan Lightning Warehouse has a richer variety of goods, more efficient performance capability, and online operations can also help us better understand consumer needs so as to formulate SKU strategies more effectively. We help merchants open stores and leverage our digital operations systems to run those stores more efficiently. As of June this year, Meituan Lightning Warehouse Project has been distributed in more than 100 cities, and the number of stores has exceeded 1000. Meituan Lightning Warehouse is more suitable for younger generation consumers and network users. With its flexible goods selection mode, it can meet the long-tail demand of consumers, and the Retention rate of users is higher than that of offline stores, effectively matching demand and supply and promoting the growth of online retail. In the future, the company will continue to explore innovative supply mode to meet the consumption demand of younger generation. As users pay more attention to the timeliness of shopping, Meituan Flash Shopping will continue to take advantage of the momentum to increase consumer purchase frequency, improve the penetration of high-quality consumers, increase cross-sales, promote the digitalization of more traditional offline stores, and enable Flash Shopping to meet the daily shopping needs of more consumers.

Eddie Leung, analyst at Bank of America Merrill Lynch: I remember management previously introduced some long-term targets, including daily order volume and normal profit margin levels for each major business in the long run, and considering the re-division of the earnings section, does the company set targets for order volume and profit margin levels for its core local commercial business?

Chen Shaohui: Yes, we have previously adopted long-term profit margin targets for takeaway and in-store businesses. Our core local commercial businesses mainly include takeaway, in-store services, hotels and tourism businesses. We are confident in the long-term growth and profitability of these businesses. The long-term goal of takeout business remains unchanged, still 100 million orders per day. We see more Chinese people choosing takeout instead of cooking at home to solve the problem of eating. The digitalization of the industry and the decline of average unit price make it easier to meet these needs, and takeout has gradually become the normal choice of consumers. We will continue to cultivate the habit of users to consume takeout, create more consumption scenarios, and continue to meet the marketing needs of merchants, provide consumers with greater incentives, we will see faster revenue growth and order volume growth.

In terms of flash purchases, we believe there is a potential market of at least RMB 1 trillion in China, which needs to be better developed in terms of digitalization. Flash purchase takes advantage of Meituan's real-time delivery network, and the take-out business delivers traffic for it. We are confident that the daily order volume of flash purchase business will reach 10 million units in the next few years, and its order volume and revenue growth rate will exceed that of take-out business. For the store, hotel and travel business, the digital trend of the industry is still driving the growth of local services in China. In terms of merchant recommendations and reviews, Meituan has always been the first choice for users, and we maintain our previous revenue target for this business. In terms of margins, operating margins improved significantly during the quarter and we expect to return to normal for some time to come. As we continue to improve marketing efficiency, there is room for improvement in profit margins across our businesses.

Yang Bai, analyst of CICC: I have a question about reducing losses. The company's new business seems to be losing money better than expected. Why? Can losses continue to narrow in the second half of the year?

Chen Shaohui: The company continues to improve the operation capability and efficiency of new businesses. We have improved the supply chain management capability, warehousing capacity and performance efficiency of Meituan Preferred, Meituan Vegetable Buying and Meituan Fast Donkey. We continue to optimize user subsidies and marketing expenses. For Meituan Preferred, we optimized the pricing strategy in the first half of the year and improved the economic efficiency of the unit; We have greatly improved the operational efficiency of Meituan's vegetable buying business; We also continue to optimize the operation of other new businesses. As many new businesses are still in a loss state and the epidemic situation repeats, we controlled the scale of these businesses in the second quarter, so the operating loss was lower than expected, and we will continue to focus on high-quality growth and efficiency optimization. As the epidemic eases, the order density and average order amount of Meituan buying vegetables may decline; the size of other new businesses will expand and losses will increase. The company will continue to invest in Meituan Preferred and Meituan Vegetable Buying businesses to promote revenue growth and cultivate consumption habits. The company will also continue to improve the operational efficiency of each new business line and maintain the balance between growth and loss reduction. It should be emphasized that we have sufficient cash balance to support the development of new businesses, we are confident in the long-term development of these businesses, and will also dynamically adjust relevant business strategies and resource allocation according to the epidemic situation and macro situation.

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