Introducing Meituan
In this article, we introduce Meituan (Chinese: 美团)(HKEX: 3690), one of China's largest food delivery platforms (along with Alibaba's Ele.me, Chinese: 饿了么) that also has a hotel booking platform and a variety of other businesses including community e-commerce (社区团购), on-demand deliveries, ride-sharing, bike-sharing, power-bank-sharing, and micro-lending. The company describes itself as a "tech-driven retail company" with a strategic focus on "retail + technology" as part of a mission to "help people eat better, live better".
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Corporate History
Meituan was founded in 2010 as a group discount website which allowed buyers to group together to purchase discount vouchers from merchants similarly to Groupon in the US.
In 2013, Meituan launched its first food delivery business across multiple cities in China.
In 2015, Meituan merged with Dazhong Dianping (大众点评), a platform for consumer restaurant reviews similar to Yelp, thus becoming Meituan Dianping (美团点评). The same year, the company also launched a hotel booking functionality similar to Ctrip (携程旅行) and Expedia.
In 2018, Meituan Dianping went public on the Hong Kong Stock Exchange (HKEX: 3690).
Meituan Dianping was officially renamed to simply Meituan (美团) in 2020.
Segment Overview
Meituan has three main business segments: (1) Food Delivery and Services, (2) In-Store, Hotel, and Travel, and (3) New Initiatives.
Food Delivery Services
The Food Delivery Services segment includes nationwide food ordering and on-demand delivery services (e.g. grocery and medicine deliveries) offered via Meituan's platform. Revenues are generated from platform and food delivery service fees as well as online marketing service fees for merchants.
In-Store, Hotel, and Travel
This segment refers to the offering of vouchers, coupons, tickets, and accommodation reservations by merchants on the Meituan platform. Revenues are derived from commission fees and online marketing service fees.
New Initiatives and Others
New Initiatives and Others include Meituan Instashopping (美团闪购), community e-commerce program Meituan Select (美团优选), Meituan Grocery (美团买菜), a business-to-business food distribution network (快驴), as well as other services including ride-sharing, bike-sharing, power-bank-sharing, a micro-lending business, and a restaurant management system (RMS) initiative.
Meituan Instashopping (美团闪购) is an on-demand delivery service where consumers can order flowers, medicine, and various items from local supermarkets and convenience stores.
Meituan Select (美团优选) is a community group buy program active in 30 out of China's 34 provincial-level administrative regions as of the end of 2021.
Meituan Grocery (美团买菜) is an on-demand grocery delivery service run in-house by Meituan (i.e. with the company's own warehouse and logistics system) with coverage in China's four tier one cities.
Meituan's business-to-business food distribution service (快驴) allows small businesses to bulk purchase raw food ingredients and other essential restaurant items such as food containers, napkins, and etc. Management does not provide details of the company's additional smaller initiatives.
Segment Restructuring
In April 2022, management changed Meituan's reporting structure to comprise of two segments: Core Local Commerce and New Initiatives. The Core Local Commerce segment includes what was previously the Food Delivery Services and In-Store, Hotel, and Travel segments, as well as Meituan Instashopping. The New Initiatives segment includes all of Meituan's businesses housed under the previous New Initiatives and Others segment except for Meituan Instashopping.
Financial Overview
We next move on to a financial overview of Meituan, starting with company-level financial metrics, followed by a segment analysis and summary of key business statistics.
Company-Level Financials
#1: Meituan's Total Revenue Grew At A CAGR of 39.5% During 2017-2021
Meituan's total revenue grew at a compound annual growth rate (CAGR) of 39.5% from RMB33.9 billion in 2017 to RMB179.1 billion in 2021. Although the company's gross profit increased continually throughout this time period, Meituan's operating profit and net income exhibited greater variability with a particularly large net loss in 2018 driven by significant negative fair value changes of convertible redeemable preferred shares, as well as sizable operating and net losses in 2021 due to higher selling and marketing expenses, relatively low fair value changes of other financial investments at fair value through profit or loss compared with in 2019 and 2020, and recognition of net other losses compared with high net other gains recorded in 2019 and 2020.
#2: Meituan's Profit Margins Are Still Unstable and Declining or Negative
Meituan's profit margins are still relatively unstable with a gross profit margin that declined over the past three consecutive years from a level of 33.1% in 2019 to 23.7% in 2021. The company's operating profit margin is negative and fluctuated in the -11% to -17% range in all years except for 2019 and 2020, which had positive margins as a result of high fair value changes of other financial investments at fair value through profit or loss and recorded net other gains. Considering only the core operating expenses (i.e. selling and marketing, research and development, and general and administrative expenses), Meituan would have a negative operating income and operating profit margin in all years except 2019, during which gross profit exceeded these expenses by a small margin
(Note: Meituan's net other gains/losses are driven by investments, subsidies, and the company's foreign exchange positions)
#3: Meituan's Revenues Are Largely Driven By Commission Fees
Management provides a breakdown of the company's revenue by revenue type, comprising of Commission, Online Marketing Services, and Other Services and Sales. Commission is generated via technical service fees charged to users of Meituan's platforms, while Online Marketing Services refer to marketing fees charged to merchants in return for fulfilling various marketing services on Meituan's platforms. Other Services and Sales include the sales of goods through Meituan's business-to-business food distribution services (快驴) and Meituan Grocery (美团买菜), other services such as community e-commerce program Meituan Select (美团优选) and services housed under the New Initiatives and Others category, in addition to interest income.
In 2021, Meituan implemented a new fee structure which splits the previous fee charged to merchants into a technology service (i.e. commission) fee and a food delivery services fee. In line with this new fee structure, the same year, management also adopted a more granular breakdown approach for revenue type which adds Food Delivery Services as a revenue type. Food Delivery Services as a revenue type refers to fees charged in relation to on-demand food delivery services fulfilled by Meituan.
Using the 2021 breakdown approach, 30.3% of Meituan's revenues are generated in the form of Food Delivery Services fees, 29.5% are generated by Commission fees, 16.2% arise through Online Marketing Services, while the remaining 24.0% are generated through Other Services and Sales. As a whole, the share of Commission-based revenue is declining while the revenue contribution from Other Services and Sales is rising.
#4: Meituan's Cash Flows Have Yet To Stabilize
Meituan's cash flows reflect that of a relatively young and growing company with unstable net operating cash flows and significant net investing outflows due to high capital expenditure for expansion.
Segment Analysis
In our segment analysis, we use Meituan's pre-2022 operating segment structure, which comprises of (1) Food Delivery Services, (2) In-Store, Hotel, and Travel, and (3) New Initiatives and Others.
#1: Food Delivery Services Account For More Than Half of Meituan's Revenues, While New Initiatives Contribute A Growing Share
Breaking down Meituan's total revenue by segment, we see that Food Delivery Services account for over 50% of Meituan's total revenue in each year, although the segment's share of total revenue declined from 2017 to 2021 due to the rapid increase in revenue contribution from New Initiatives and Others, which rose from 6% to 28% of total revenue over the same time period. The relative contribution of the In-Store, Hotel, and Travel segment also declined from 32% to 18% during this time.
In 2021, Food Delivery Services comprised 53.8% of Meituan's total revenue, the In-Store, Hotel, and Travel segment contributed to 18.1% of total revenue, while New Initiatives and Others accounted for 28.1% of total revenue.
#2: In-Store, Hotel, And Travel Contributes The Least To Revenue But Is The Most Profitable Segment Due To A Higher Operating Profit Margin
Although In-Store, Hotel, and Travel contributed the least to Meituan's total revenue in 2020 and 2021, the segment contributed the most to operating profit over the past three years (management only started releasing a breakdown of operating profit by segment starting in 2019).
Note: Unallocated Items include share-based compensation expenses, the amortization of intangible assets resulting from acquisitions, fair value changes in other financial investments at fair value through profit/loss, and net other gains/losses.
Comparing the operating profit margin of all three segments, we see that In-Store, Hotel, and Travel has significantly higher margins in the 37.7% to 43.3% range, while Food Delivery Services, which contributes the most to revenue each year, only has an operating margin ranging from 2.6% to 6.4%, and New Initiatives and Others, which contributes a substantially growing proportion of revenue each year, reached an all time low negative margin of -76.5% in 2021.
#3: Meituan's Operating Segments Are Driven By Different Revenue Drivers
Management also provides a breakdown of each segment's revenue by revenue type. In 2021, 56.3% of the Food Delivery Services segment's revenue is generated by fees charged for Food Delivery Services, 29.6% of the segment's revenue are generated via Commission fees, 11.9% is by Online Marketing Services, while the remaining 2.2% are generated through Other Services and Sales. In contrast, revenue for the In-Store, Hotel, and Travel segment is split roughly half-half between Commission fees and fees from Online Marketing Services, with the former contributing a slightly higher share in preceding years. Lastly, as the name suggests, revenue from the New Initiatives and Others segment is largely dominated by Other Services and Sales.
Business Statistics
Lastly, we turn to look at some of Meituan's key business statistics.
#1: Meituan Had 690.5 Million Transacting Users and 8.8 Million Active Merchants In 2021
Meituan's transacting user base and number of active merchants doubled over the past five years, with a particularly large increase in the number of transacting users in 2021. Management explains that the majority of Meituan's new users in recent years are from lower tier cities, which we think could be attributable to the company's expansion of community e-commerce program Meituan Select (美团优选).
In 2021, there were 690.5 million transacting users and 8.8 million active merchants across Meituan's platforms.
#2: The Average Annual Transacting User Made 35.8 Transactions In 2021
The average number of transactions per annual transacting user on Meituan's platforms nearly doubled over the past five years from 18.8 transactions in 2017 to 35.8 transactions in 2021.
#3: 14.4 Billion Food Delivery and 477 Million Hotel Room Nights Were Transacted On Meituan's Platforms In 2021
The number of food delivery transactions transacted via Meituan's food delivery platform increased 3.5-fold from 4.1 billion transactions in 2017 to 14.4 billion transactions in 2021. In contrast, the number of domestic hotel room nights booked via Meituan's hotel booking platform slightly more than doubled from 205 million nights booked in 2017 to 476.9 million nights booked in 2021. Management does not touch on international hotel bookings, which presumably constitute an insubstantial proportion of Meituan's total bookings.
#4: RMB702.1 Billion Worth Of Food Delivery Was Transacted On Meituan's Food Delivery Platform In 2021
The gross transaction volume of food delivery transacted via Meituan's food delivery platform quadrupled from RMB171.1 billion in 2017 to RMB702.1 billion in 2021.
#5: Meituan's Food Delivery Monetization Rate Is In The 12% To 14% Range
Management defines Meituan's monetization rate as total revenue divided by the gross transaction value (GTV). Since a GTV figure is provided only for food delivery, we compute Meituan's monetization rate specifically for the Food Delivery Services segment. As shown below, Meituan's Food Delivery Services monetization rate ranges from 12% to 14%.
The Future of Meituan
In this section, we discuss management's overaching strategies for Meituan as well as key factors affecting the company's future.
#1: Broadening The Company's Business Portfolio
In 2021, management modified Meituan's official corporate strategy from "Food + Platform" to "Retail + Technology" , reflecting an attempt to expand the company's scope of services particularly through the growth of community group buy program Meituan Select (美团优选), on-demand delivery service Meituan Instashopping (美团闪购), and on-demand grocery delivery service Meituan Grocery (美团买菜). The increased emphasis on these growth points is also evidenced by the higher revenue proportion generated by New Initiatives and Others during the 2021 fiscal year. Management states that they intend to continue growing the abovementioned initiatives going forward, in addition to broadening the scope of products and services offered under Meituan's core businesses.
#2: Expanding To Lower Tier Cities
Similarly to other Chinese retail companies (e.g. e-commerce incumbents JD, Alibaba, and Pinduoduo), Meituan is expending a significant amount of effort expanding to the country's lower tier cities. This expansion takes the form of both food delivery and community group buying, requiring significant capital expenditure as part of the expansion process. A question that remains to be answered for Meituan as well as other competitors (e.g. Pinduoduo is a key competitor in the community group buying space) is whether or not these efforts will pay off, especially given the lower purchasing power in smaller cities and rural areas which could result in downwards pressure on company profit margins.
#3: Controlling Expenses And Achieving Greater Economies of Scale
As discussed above, Meituan's operating income and operating profit margin have predominantly been in the negative range, especially when non-core gains such as fair value changes of other financial investments at fair value through profit or loss and other gains are eliminated. Although management has mentioned cost reduction efforts during the company's earnings calls, we think it would be difficult for Meituan to significantly improve cost efficiency and achieve better economies of scale in the short to medium run given its capital intensive (and cash-bleeding) future expansion plans.
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