Meituan: Unique differentiation in in-store competition, will communicate Meituan's value with Naspers (minutes)

The following is a summary of the content of the Meituan Q3 2022 earnings call. For the financial report interpretation, please visit《美团：还是利润爆棚，为何信仰 “变质”？》

1. Management Report

Core Local Business: Continues to focus on high-quality growth of the takeaway business, with peak daily order volume surpassing 60 million in early August.

1) Consumer side: The number of platform trading users continues to steadily grow, and the quarterly consumption frequency hits a historical high.

2) Merchant side: We have onboarded more restaurants in the breakfast, afternoon tea, and late-night snack categories, increasing the number of active merchants on our platform. At the same time, we have iterated on marketing tools to help merchants attract and retain customers. We have also streamlined digital solutions, optimized management mechanisms, enhanced user-friendliness, and improved the recommendation function, bringing merchants a better user experience and higher operational efficiency, further accelerating the digitization transformation of the catering industry.

3) Rider side: In the third quarter, we further optimized the order dispatch system and encouraged restaurants to upload estimated pickup times. Not only have we adjusted the longest delivery distance in the order dispatch system, we have also provided protection, subsidies, and other benefits for riders working in high-temperature conditions.

4) Meituan Flash Purchase: In the third quarter, Meituan Flash Purchase maintained a high growth trend, with categories such as supermarkets, flowers, alcoholic beverages, non-food specialty stores, and pet care continuously growing rapidly.

a) The number of users, purchase frequency, and retention rate all increased year-over-year. The daily order volume reached a new high of 9.7 million on the Qixi Festival in August.

b) The number of active merchants and newly registered merchants increased by 30% year-over-year.

c) There are now 2,000 Meituan Flash Purchase warehouses, and we continue to satisfy the growing demand of users for more SKU.

In-store hotel business: Continued to perform steadily, especially during the summer vacation period, with the number of annual active merchants and quarterly trading users both reaching historical highs.

1) Other in-store services: Other in-store service categories (such as pet care and medical services) maintained steady revenue growth of over 30% this quarter, and camping and other fashion consumption categories also grew rapidly during the summer.

2) Hotel business: In September, some tourist cities such as Sanya and Chengdu were severely affected by the outbreak of the epidemic. However, the demand for local accommodation is relatively resilient, and its performance continues to outperform cross-city tourism business. Utilizing our competitive advantages, we launched distinctive local tourism and accommodation services in selected high-end cities, successfully capturing consumer demand.

Meituan Select: Continues to focus on high-quality growth and upgrades the brand positioning to "next-day supermarket," with the upgraded brand covering nearly 3,000 counties and cities.

1. Continues to improve the supply chain and logistics. We are piloting an intelligent sorting system to further improve delivery efficiency at lower costs. We will continue to optimize cold chain logistics and apply it to a wider range of categories, including meat, poultry, seafood, and frozen foods.
2. We continue to support rural revitalization and agricultural product circulation through a nationwide logistics network. Agricultural products now account for an increasing contribution of 45% to our total revenue.

Meituan Grocery: Our GTV increased by 80% YoY and we effectively seized upon the increased demand during festivals, with over 1 million orders during the Mid-Autumn Festival.

1. While expanding our product breadth and depth, we are also increasing our local and seasonal product supply. We have launched the "Local Specialty" project and work closely with local governments and farmers in the product's origin to ensure these products are effectively delivered to local consumers.

2. We are strengthening our cooperation with local governments, providing practical training to new farmers to help them grow and sell their produce. By providing additional transportation through local delivery projects, we are better able to match farmers with consumers, ensuring delivery within 30 minutes.

II. Analyst Q&A

Q: Compared to July and August, the growth rate of local core business slowed in September. Considering the recent pandemic recovery, can management share the trends for local core business in September and the latest month?

A: Due to the current situation, there are growth fluctuations between different months. Overall, we have been greatly impacted by regulatory measures.

Food delivery: Due to high temperatures in August, food delivery orders increased. However, since the end of August, the pandemic has affected us more in September, with a slowdown in order growth in more regions and situations due to restrictions.

Hotel and travel: The pandemic has had a negative impact on hotel occupancy and intercity travel. It has also had a significant impact on our in-person business. Compared to August, GTV declined significantly in September YoY, mainly because first-tier cities such as Beijing, Shanghai, Guangzhou and Shenzhen are still under regulatory measures. Furthermore, due to pandemic recovery and stricter regulatory policies in more regions, GTV in lower-tier cities overall experienced a strong rebound in August but declined significantly in September.

Meituan Select: Since we expanded our product range, we have been less affected by the pandemic. Our sales volume remained strongly growth in September. Compared to September, many regions have seen a resurgence of COVID-19 outbreaks in October, with increased control measures in high-risk areas. The impacts of these measures will be greater in Q4 than Q3, potentially continuing until the end of the year. However, we believe that these fluctuations will be short-term.

Resilient business: The highest number of daily orders for food delivery and Meituan Select has reached 60 million and 9.7 million respectively. GTV has also achieved a new high for two consecutive months in our in-person business.

Q: The profit margin for local core business increased QoQ in Q3. What drove this increase? What are the prospects for Q4?

Food delivery: Because the pandemic improved in July, we increased marketing incentives to promote sales compared to Q2. Meituan Flash Purchase: The profit margin decreased compared to Q2 because we increased consumer incentives and brand marketing.

In-store wine and travel: There has been significant growth in profit margins. In July and August, we maximized market resources, optimized marketing resources, and reduced unnecessary expenses.

Q4 Outlook: The pandemic still affects the core local business, and the impact in Q4 is greater than in Q3. Our expectations for operating profit and operating profit margins continue to increase.

a) For the takeaway catering business, we will pursue high-quality growth, maintain a reasonable level, and remain rational in the competition.

b) In terms of Meituan Flash Purchase, we will strengthen user share and investment in core category resources. For Meituan Flash Purchase, growth is the top priority, and we will also benefit from the economy of scale brought by growth.

c) In terms of in-store wine and travel, we expect to continue to be greatly affected by the pandemic. We will focus on improving efficiency and reducing unnecessary expenses.

Q: Regarding in-store business, competitors have started to offer local service business. What actions do we plan to take? How do we maintain a competitive advantage in terms of product content and merchants?

Regarding competition, while short video platforms have made gains in local service business, their GTV and our GTV are not the same concept. We can better meet consumers' needs for finding shops and discounts. Merchants also need better online marketing and stable daily operations.

On the other hand, short video platforms stimulate consumer demand with larger discounts, and their marketing is carried out in a short period of time, such as promoting activities to a larger user group, such as during new store opening. Both methods can speed up the development process of local service industry, directly promoting the development of local service industry, and benefiting our merchants and consumers.

Last quarter, due to the recovery of the pandemic, shops lacked customer traffic or user demand, which created opportunities for other players who are good at centralized marketing. Overall, I believe that the in-store industry is still in a very early stage and will enjoy rapid growth. The online penetration rate of in-store catering is only high single digits, and other in-store services are only low single digits. We are confident about the future development of the industry. We welcome other players to join.

For merchants, our category coverage plus our advanced LBS-based algorithm can better guide consumer preferences for merchants, providing merchants with user conversion and retention rates. Among all products, we effectively meet the diversified marketing needs of merchants. So we are confident that we are still the first choice for merchants' online operations.

In the future, we will increase more marketing and category operations based on adding more superior quality, providing merchants with differentiated and unique value. In addition, we will diversify recommendations, better meet consumer needs, and provide more choices.

We have also expanded traffic channels and used online and offline activities to expand our coverage area, achieving our medium and long-term goals for in-store business. Q: Our new businesses are still losing money. When can we achieve a balance between revenue and expenses?

1. We have been reducing losses in our new business since the second quarter due to the company's pursuit of high-quality development. At the same time, our profits have also been increasing quarter by quarter, and the losses in new businesses have also been narrowing.

2. In the third quarter, due to our refined operations and the continuous good performance of new businesses such as Meituan Optimal and Meituan Grocery, the losses in new businesses have been steadily decreasing. For example, the volume of Meituan Grocery orders has been steadily increasing, and we are continuously improving our service delivery and user experience in order to retain users, while also being more rational in terms of user subsidies and marketing.

3. We continue to strengthen our market leadership position in our B2B business, and have achieved a balance between revenue and expenses in some cities. We will continue to optimize our business operations and narrow our operating losses while maintaining healthy growth.

4. At the same time, we are constantly observing the development progress of new businesses, and making dynamic adjustments to our support for them. We will continue to make reasonable investments to reduce costs and increase efficiency in those areas where our abilities are lacking. We will strive to achieve a balance between long-term development and short-term loss reduction. Even in the face of current macroeconomic pressures, we hope to maintain positive operating cash flow.

Q: Do we have investment plans in Hong Kong? What are the specific investment amounts for expanding into Hong Kong, and will this become a new engine of growth for the company?

China is a huge market with a population of 1.4 billion, and we believe that there is still a lot of room for our business to grow, and that we are still in the early stages of development. While expanding our business in mainland China, we also want to provide services to consumers overseas. This will greatly expand our potential market.

As a special administrative region of China, Hong Kong has many similarities with foreign internet architecture, as well as being a multicultural and multilingual region. However, Hong Kong also shares a similar cultural background and eating habits with the mainland, so we believe that Hong Kong is a good testing ground for our globalization plan. We will explore how to apply our operating experience in the mainland to Hong Kong and then promote it to the world.

We will continue to acquire new operational capabilities and gain a deep understanding of Hong Kong's business model, but our current exploration is still in the relatively early stages. We will remain cautious, so our overall budget will be guided by ROI. We expect the impact on the company's profit and loss statement to be very limited.

Q: What is your evaluation of Tencent selling Meituan stocks? How will the future business cooperation between Meituan and Tencent develop? Some news reports say that some Tencent shareholders will sell Meituan stocks, what is your view on this?

Tencent is a long-term shareholder, and we hope to maintain cooperation and synergy with Tencent in areas such as payments, advertising and cloud computing. Tencent helped us expand our user base in the early stages of our development, but whether for financing or business purposes, we are now at a stage where we are self-sufficient. Of course, we will continue to work with Tencent on strategy and operations to serve more consumers and merchants.

Our existing agreement with Tencent will expire at the end of 2023, and we will also discuss the renewal issue with Tencent. We are confident that renewing our agreement will be a win-win decision. **

Many Tencent shareholders are now our shareholders as well, and we look forward to their continued support and participation in our future business growth. Of course, this will also bring us some new shareholders, and we welcome them wholeheartedly. Our local business has a relatively healthy profit situation, and our cost-cutting measures have been effective. We are confident that we can provide more value to our shareholders.

We have noticed that there have been news reports that Naspers will sell shares after receiving them. We will communicate with them and help them understand our short-term achievements and long-term goals. We understand that they want to seek clearer benefits for their shareholders.

On the one hand, our stock has strong liquidity and a stable shareholder base; on the other hand, we believe that the value we continue to create will be recognized by more shareholders, and we will continue to create more value for society and shareholders.

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