Meituan's Q2 Profit Slump by 87% Spurs Divergent Views: Market Share Erosion or Long-term Strength?

TradingKey - On August 28th, Meituan (3690.HK) tumbled more than 10% at the opening of the Hong Kong market, closing down 13.07% at HK$101.1, hitting a new low since last September. The primary reason was the Q2 financial report falling significantly short of expectations, with net profit plunging 87% year-on-year to RMB 1.84 billion.

Moreover, Meituan's management forecasts a substantial loss in Q3 for its Core Local Commerce (CLC) segment, which includes food delivery and in-store business, following a profit of RMB 14.6 billion in the same quarter last year. This further undermined investor confidence.

JPMorgan commented that while a weaker-than-expected Q2 performance from Meituan was anticipated, the extent of the decline was unexpected. This is closely tied to Meituan's aggressive subsidy strategy for its core food delivery operations.

In April this year, with internet giant JD.com venturing into the food delivery market, platforms like Meituan and Taobao increased subsidies to vie for market share. Meituan's actual investment in food delivery and flash purchases in Q2 exceeded forecasts by RMB 10 billion, reflecting a level of competition far exceeding expectations.

Amidst all major platforms engaging in "loss-leading strategies," sacrificing profits to gain market share, Meituan might be at a disadvantage, according to JPMorgan, due to its comparatively limited financial resources against rivals like Alibaba.

The investment bank noted that the current competitive landscape in the food delivery market is led by financially robust Alibaba, while Meituan and JD.com are under significant financial strain.

Before the onset of the "food delivery battle," Meituan, as a dominant player, captured the majority of industry profits but now faces the risk of market share erosion. A UBS report indicates that Alibaba's Ele.me saw its market share surge from 13% to 28%, while Meituan's shrank from 74% to 65%, with JD.com holding 7%.

Additionally, JPMorgan believes that ongoing and substantial subsidies not only impact corporate profitability but also have adverse effects on the industry's profit pool. The bank warned that if both the industry's profit pool and Meituan's market share decline, Meituan's stock price will face sustained pressure.

Still, some investment banks maintain a positive long-term outlook for Meituan. Nomura Securities suggests that Meituan, as an industry leader, will ultimately emerge as the "winner" in the food delivery market, maintaining the largest market share.

Goldman Sachs expressed similar views, noting that Meituan's food delivery order growth has accelerated over the past two quarters, with higher order quality (indicating a 10% lower proportion of beverage orders compared to competitors) and a more efficient delivery network, thereby holding a leading position in the market, particularly in gross merchandise volume. Thus, the path to long-term profitability, achieving an EBIT of 1 yuan per order, remains solid.

CITIC International argues that Meituan has a strong likelihood of maintaining its market share due to its leading advantage in merchant and rider operations and dispatching, which is crucial for retaining market share.

Furthermore, the institution remains optimistic about Meituan's profitability prospects, suggesting that selectively closing loss-making regions could release about RMB 3-4 billion in losses, supplementing subsequent food delivery subsidies. Therefore, it believes that even if the subsidy battle continues until the year's end, Meituan still has the potential to break even.

Currently, investment banks such as Nomura Securities, Jefferies, UBS, Goldman Sachs, and Bank of America have issued "buy" ratings, with Nomura Securities even setting a target price of HK$176, offering approximately 74% upside potential from Thursday's closing price of HK$101.1. In contrast, JPMorgan and BOC International have downgraded their ratings.

Some analysts argue that the dramatic drop in Meituan's stock price may reflect overly pessimistic investor sentiment, and if the company can sustain revenue growth and maintain over 60% market share, a stock price rebound may be possible.