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Meituan Dianping (SEHK: 3690) is the operator of a Chinese “super app” accessible via mobile and WeChat. It made its maiden stock debut in Hong Kong last September.
Although it started off as a group-buying site similar to America’s Groupon, Meituan has successfully transformed itself into a super app that offers its users access to everything from food delivery to group buying to hotel services. The company has grown fast due to relentless innovation and a willingness to spend billions to acquire market share through subsidies.
For its efforts, Meituan is the indisputable leader in food delivery and has in recent years quickly expanded into newer sectors such as travel services, ride-hailing and bike-sharing with mixed success. It aims to ultimately be the “Amazon for services”.
After bottoming out at the beginning of this year, Meituan’s stock price performance has been stellar – rising from HK$44 to around HK$96.80 per share (as of the time of writing). Can it continue its rise?
Meituan is the indisputable leader in the large food delivery sector in China. According to research firm iiMedia, the online food delivery market in China amounted to around RMB 240 billion (US$35.8 billion) in 2018, up 18% year-on-year. Of that amount, Meituan had around a 61.3% market share and Alibaba’s Ele.me had 36.5% according to TrustData.
Due to it being a super app, Meituan can easily add new categories by adding new links. This allows it to grow fast without added customer acquisition expense.
Meituan has expanded its services via that method with mixed results. In terms of successes, the company’s efforts in the hotel booking industry have been a great success for the company. Having just started in 2014, Meituan had 45% market share in 2018, or over twice that of former leader Ctrip.com, which has been a mainstay of the travel segment for around 20 years.
In terms of efforts that haven’t paid off yet, Meituan’s newer businesses such as ride-hailing, bike rentals, and the restaurant management system haven’t been profitable yet.
For the three months ended June 30, Meituan posted its quarterly first profit with adjusted net profit of RMB 1.5 billion. Growth was stellar with revenue rising 50.6% year-on-year to RMB 22.7 billion, while the company’s annual transacting users rose 18.4% to over 420 million.
Food delivery remained Meituan’s primary business, accounting for over 56% of sales. The company’s in-store, hotel, and travel division accounted for 23.1% and new and other efforts accounted for the rest.
Meituan’s food delivery segment was profitable and lower delivery costs per order was one reason for the positive operating profit. Narrower losses in the company’s new initiatives also helped.
The company’s number of food delivery orders rose 34.6% year-on-year and sales from the food delivery business rose 44.2% year-on-year.
Since Meituan Dianping is just starting to monetise, it’s hard to judge the company based on profits. In terms of revenue, its sales growth will slow simply due to its larger base. According to Statista, the online food delivery market will grow at a compound annual growth rate (CAGR) of around 9.5% from 2019 to 2023, versus around 18% in 2018.
Given how quickly the industry has developed and how quickly the industry will soon change, how well Meituan incorporates drone delivery, artificial intelligence, and autonomous driving will matter a lot more than current profits. Given user saturation, Meituan’s food delivery business is now transitioning from a focus on user acquisition to increasing the frequency of purchases.
In that aspect, Meituan’s use of AI will be important in spurring more buying and lowering delivery costs. Investors will need to look closely at Meituan’s delivery costs and purchasing frequency trends.
In terms of where the stock might go, I think Meituan has near- and medium-term upside simply due to its growth momentum. There are probably better buys out there in the long term, though. Because it is integrated into WeChat, Meituan Dianping depends on WeChat for a lot of its sales.
While this has been great for growth in the past, it could be problematic in the future if Tencent ever wants to get into the sector. Although Tencent owned around 20% of Meituan Dianping before its IPO, Tencent could charge Meituan more for its integration, or it could compete against it by making it less accessible.
Meituan’s large market cap could make it more of a target for Tencent, which hasn’t grown as fast. The company’s market cap is bigger than Baidu or JD.com’s now, for example.
Meituan Dianping has had great growth due to relentless innovation and spending. It’s now profitable for the first time in its history. Its management will need to do a good job managing artificial intelligence and drone delivery to produce even greater results.
The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Hong Kong contributor Jay Yao doesn’t own shares in any companies mentioned.