My Investment Rating for Meituan’s (OTCPK:MPNGF) [3690:HK] Shares is a sale. This is an update of my previous article for Meituan published on January 18, 2022 which touched on the company’s partnerships.
youngest Insider selling by a key non-executive director has prompted me to revisit the investment case for Meituan. After evaluating the company’s near-term financial prospects, the competitive landscape for food delivery, and the risks related to regulations and policies, I decide to give Meituan a sell rating.
Meituan non-executive director Shen Nan Peng sold approximately 6.5 million shares of Meituan between July 21, 2022 and July 25, 2022, reducing his stake in the company from 2.81% to 2.69% % as a result of this series of transactions.
The company’s annual report for fiscal 2021 described Shen Nan Peng’s role on the board as “advising on investment and business strategies, financial discipline” for Meituan. He is the founder of the private equity firm Sequoia Capital China and has been a director at Meituan since October 2015.
Although there can be several reasons why a person decides to sell shares in a publicly traded company, it is still a certain negative signal. Also, it’s worth revisiting Meituan’s outlook in light of these recent developments.
Q2 2022 Preview
Meituan is expected to report the company’s second quarter 2022 financial results in late August based on an analysis of the timing of its previous earnings releases.
Q2 2022 should be a tough quarter for Meituan. Financial projections have been adopted in line with sell-side consensus S&P Capital IQMeituan revenue growth is estimated to +11.7% yoy in Q2 2022 from +30.6% yoy in Q4 2021 and +25.0% yoy in Q1 2022. The expected weak revenue growth for Meituan in the second quarter of the current year is mainly due to COVID-19 lockdowns in China, which will have had a strong negative impact on the company’s performance, particularly that of its In-Store, Hotel & Travel segment.
On the positive side, the sell-side analysts see a reduction in Meituan’s operating loss from -RMB -5,584 million in Q1 2022 to -RMB 3,220 million in the second quarter of this year. At Meituan’s first-quarter 2022 earnings briefing on June 2, 2022, the company mentioned that greater economies of scale for its core grocery delivery business and “improved operating efficiencies” helped the company post lower operating losses in the first quarter compared to a year ago. It’s likely these are the same drivers that will help Meituan post a smaller operating loss for the second quarter of 2022.
Still, Meituan is expected to remain loss-making at operating profit levels for the remainder of 2022, according to sell-side consensus numbers. Meituan suffered a substantial operating loss of RMB 9 billion for its New Initiatives & Others business segment in the first quarter of 2022, and this segment is expected to continue to severely impact the company’s overall profitability for the remainder of the year.
Potential competition in the food delivery market
Meituan is the dominant player in China’s grocery delivery market, with a share of about 67%. However, the company’s dominance is being challenged by the potential entry of new competitors.
A June 16, 2022 Bloomberg The article highlighted that JD.com (JD) is “exploring a possible foray into grocery delivery” on the basis that its “logistics subsidiary Dada Nexus Ltd. Separately, South China tomorrow post published an article on July 17, 2022 stating that “Douyin by ByteDance (BDNCE), the Chinese version of TikTok” is venturing into the food delivery segment by allowing certain companies to “have an option on their Douyin channels for users to order food with delivery.”
It’s not a complete surprise that many Chinese internet companies are looking for new growth drivers like food delivery as their existing core markets are mature and saturated while the COVID-19 lockdowns hurt China’s economy. Worst-case scenario, Meituan could either lose market share to new entrants or be forced to offer more incentives to consumers, which would weaken the profitability of its core grocery delivery business.
Be aware of National Service and regulatory risks
Investors should also be aware of “national service” and regulatory risks associated with leading Chinese companies like Meituan.
To illustrate, Meituan announced in early March 2022 that it would be “lowering merchant fees” to align with “new government guidelines” that “required food delivery platforms to lower fees for restaurants in pandemic-hit regions,” as reported on March 2 means 2022 Bloomberg Report. It is clear that national interests and the well-being of ordinary people in the country take precedence over everything else.
As such, there is a risk that Meituan could potentially offer more concessions to small businesses and consumers in the future if the Chinese economy continues to weaken. Specifically, Meituan emphasized in its Q1 2022 investor call that it “will continue to support small and medium-sized traders” as “corporate social responsibility is at the core of what we do.”
On the other hand, Chinese regulators do not appear to be relentless in their efforts to combat anti-monopoly practices in the country.
on July 11, 2022, I’m looking for alpha news reported that Alibaba (NYSE:BABA) and Tencent Holdings (OTCPK:TCEHY) were among companies fined by “China’s State Administration for Market Regulation” for “failing to properly report details of some of their past acquisitions.” “. Earlier on June 28, 2022, a Reuters The article mentioned that the State Administration for Market Regulation, or SAMR, had submitted “draft rules and regulations to improve its ability to regulate antitrust behavior” in China.
Considering Meituan’s absolute market leadership in China’s food delivery market (which, as mentioned, accounts for two-thirds of the market), the company is considered one of the most vulnerable to any new antimonopoly regulations or policies issued by the Chinese authorities in the future .
Meituan is rated as a Sell. In the near term, the company’s financial outlook is weak due to the COVID-19 lockdowns. In the medium to long term, Meituan is expected to face intensified competition in its core grocery delivery business, while regulatory headwinds do not appear to have eased yet.