Today's MEITUAN, yesterday's BABA-SWR?

MEITUAN in a Passive Position

In 2023, MEITUAN, despite delivering quarterly earnings reports that meet market expectations, has been facing a challenging environment in the Hong Kong stock market. Additionally, the looming threat of Douyin has made investors increasingly uncertain about MEITUAN's future, resulting in a 55% decline in its stock price over the past year.

Even with its market capitalization hovering around HKD 470 billion, it is difficult to determine the bottom for MEITUAN's stock price. The more it falls, the more hesitant investors become. With a price-to-earnings ratio (PE) of 17 based on this year's median profit, MEITUAN's valuation is not as attractive compared to Tencent, which currently has a PE ratio of around 15. Furthermore, the overall shareholder experience is not satisfactory due to concerns about the potential impact of Douyin. The current neutral profit expectations may also be overly optimistic.

After witnessing Alibaba and JD.com being defeated by Pinduoduo, investors are increasingly wary of MEITUAN's battle against Douyin. They wonder if MEITUAN will become the next Alibaba or JD.com, especially considering Douyin's stronger position compared to Pinduoduo at that time.

According to a report by "LatePost," some insiders at MEITUAN are optimistic and believe that although Douyin has taken away a certain number of merchants from MEITUAN, its impact on MEITUAN's Gross Merchandise Volume (GMV) is lower than market expectations. This has led some MEITUAN personnel to believe that while Douyin has taken a portion of MEITUAN's market share, it is also helping MEITUAN penetrate the lower-tier market. As these users mature, MEITUAN can regain lost customers from the lower-tier market and even achieve further growth.

Interestingly, the internal perspective at MEITUAN is similar to Zhang Yong's view on Pinduoduo in 2018. At that time, when asked if Taobao's special offers were a strategy to compete with Pinduoduo, Alibaba CEO Zhang Yong responded that "special offers" referred to ensuring product quality at a certain level. Low prices should not be equated with low quality, and it is challenging to strike the right balance. Despite losing some users in the short term, Zhang Yong stated that many users eventually migrated to Taobao. If users are dissatisfied with Pinduoduo three times in a row, they will undoubtedly turn to Taobao. In this sense, Pinduoduo is helping Alibaba expand into rural markets and educate users.

Source: YY Hong Kong Stock Circle The outcome of Zhang Yong's statement can now be seen: Pinduoduo not only performs well in the discount market, but also has a higher overall profitability than Alibaba, becoming the largest e-commerce platform in China in terms of market value.

Currently, Meituan has not proposed a strategy to deal with Douyin in the past year. If Douyin is helping Meituan penetrate the lower-tier market, it seems more like a helpless move. Meituan appears to be the passive party, and the final outcome is likely to be determined by Douyin.

Why is this the case?

The reason is that Alibaba initially did not take it seriously and was eventually forced to follow the trend of lower prices. Of course, this is also closely related to consumer downgrading. However, it also proves that when a competitor's model starts to work, if corresponding countermeasures are not taken, the market share is likely to be gradually eroded.

Furthermore, in the face of intensified competition, it may be too optimistic to think that "competitors" will educate the market for you. When users go to the competitors, how can Meituan regain the market? Therefore, Meituan is currently in a more passive position.

2. Will Douyin fight desperately?

Last year, we discussed whether the cooperation between Douyin and Ele.me could challenge Meituan's food delivery business. At that time, it was judged that this would be difficult to achieve because the food delivery business itself is tough. It requires a large investment in personnel to ensure delivery rates and merchant occupancy rates. It is essentially an asset-heavy business model, and the cost-effectiveness for Douyin is not high.

However, over the past two years, Douyin has been cooperating more and more with local businesses, and the battle has shifted to local life.

Douyin has entered the local life business through live streaming, such as offline restaurant, travel packages, air tickets, hotels, etc. Douyin has set a local life GMV target of 150 billion yuan for early 2023. However, according to foreign media statistics, Douyin's revenue in 2023 has exceeded expectations, and this part of the GMV may exceed 150 billion yuan. This is a dangerous signal for Meituan, and it is also the most profitable business for Meituan.

The difference between Meituan and Douyin is that Meituan focuses on efficiency. When ordering food delivery, users open the app with a specific purpose for immediate consumption. On the other hand, Douyin focuses on interest-driven consumption while watching short videos, which is delayed consumption. In terms of redemption rate, Meituan's proportion reaches 90%, while Douyin is around 60%.

Prior to this, there were approximately 40 million local businesses in the Chinese local life market, of which 12 million were included in Meituan's reviews, 4 million chose to advertise or participate in promotional activities on Meituan, and nearly 8 million businesses belonged to the lower-tier market and were unwilling to pay.

Douyin's advantage lies in its ability to reach businesses in the lower-tier market through short video traffic. Douyin mainly operates in two modes: one is to give service providers 10%-50% of GTV after verification; the other is to cooperate with official accounts, with 2-30% of GTV as fees for influencer store visits, 0-8% of GTV as advertising fees, and 2-8% of GTV as commission to Douyin platform. And MEITUAN's main model is to provide platform commissions through 1-10% of GTV. Online advertising revenue comes from online advertising services purchased by platform merchants to promote their products or stores, mainly through CPC click ads (pay-per-click). New merchants joining the platform will also pay a certain amount of pit fees, while hotel booking platform merchants will adopt a reserved room system, which means that a certain proportion of rooms will be reserved for merchants joining the platform.

From the perspective of merchants, the most important thing for advertising investment is whether it can bring benefits. Assuming that MEITUAN's advertising expenses are invested, it may not necessarily attract customers to come to the store for consumption. However, if customers come to the store for consumption through Douyin's charging model, Douyin can earn commissions. Therefore, from these two perspectives, Douyin's traffic brings higher cost-effectiveness to merchants, reducing their investment.

Returning to the aforementioned point, there are 40 million merchants in the local Chinese market, but only 4 million merchants are willing to pay for advertising on MEITUAN. This means that paying merchants only account for one-tenth, and the penetration rate of paying merchants is not very high, leaving a lot of room for improvement.

However, most merchants are unwilling to pay in advance. In the trend of consumption downgrading, this provides certain opportunities for models like Douyin.

So, from a profit perspective, will Douyin accelerate the capture of the sinking market through price wars?

From the current perspective, for a rapidly growing giant, the starting point must be profit, and it is not in line with the current economic cycle for both giants to burn money to seize the market. Moreover, it may be difficult for both MEITUAN and Douyin to calculate whether grabbing the sinking market now will generate returns in the future. Especially when the sinking market does not have the habit of advertising investment, this does not align with MEITUAN's internal statement that the sinking market will flow back to MEITUAN.

Therefore, when the profitability of the sinking market is uncertain, it still depends on how Douyin internally defines local life and how much revenue it wants to generate from this business. If attracting merchants through discounts in the future, MEITUAN's days will become even more difficult.

For MEITUAN, since there are 40 million merchants in the local market and the penetration rate is only 10%, there is still time to make changes. If the current payment model is difficult to enter the sinking market, a profit-sharing change can also be made. For example, as mentioned above, everyone eats immediately instead of delaying consumption, and subjectively, MEITUAN still has certain advantages.

From a neutral perspective, the market space is large enough, and if MEITUAN and Douyin both grow without engaging in a price war, it may eventually lead to a decline in profit margins and an increase in revenue. The current profit margin of MEITUAN's in-store business is 35%, and moving towards the sinking market in the future also corresponds to the possibility of a downward space for profit margins, but this is difficult to predict.

Conclusion

One of the reasons why Meituan, with a market value of 470 billion yuan, still doesn't seem cheap is the high level of uncertainty, and the downward trend in the profit margin of its offline business is a highly probable event.

However, there has been support from share buybacks in the past two days, and it seems that the stock price may not drop much further. But in the face of the current awkward situation, we still need to see Meituan's next move to make a decision. Wang Xing definitely has a clearer view than us. If Meituan maintains the status quo, there is no reason for the stock price to be cheap.

Just like when Meituan experienced a major drop in November last year, we pointed out in our Zhitong App that Meituan is still in the stage of being undervalued, and the real opportunity should come when the current downward trend ends. Otherwise, any rebound may just be an opportunity for short selling.