Meituan reported (28 Aug) its 2Q24 results: revenue was RMB82.3bn, up 21.0% YoY, 2% higher than both our estimate and Bloomberg consensus estimate.
　　Adjusted net profit during 2Q24 reached RMB13.6bn, 20%/32% better than our estimate/consensus, due to both better-than-expected operating profit (OP) generated from core local commerce (CLC) business, aided by subsidy optimization for food delivery (FD) business and more benign-than-expected competition for in-store business, and narrower-than-expected loss generated from new business, aided by better-than-expected operating efficiency improvement. Although facing macro headwinds, leveraging the loyal and sticky core user base, Meituan is able to drive more cross-sell opportunities for Instashopping and in-store business, and is able to continuously optimize subsidies to improve profitability, which in our view has enhanced full-year earnings growth outlook. Also, Meituan is enhancing shareholder return: it has repurchased 3.6% of total shares outstanding YTD, and unveiled a new US$1bn share repurchase program, which should provide support for valuation. Our DCF-based TP is unchanged at HK$157.8; maintain BUY.
　　Better core business earnings growth outlook despite macro
　　headwinds. CLC segment revenue/OP was RMB60.7bn/15.2bn in 2Q24, up 19%/37% YoY, 1%/24% better than consensus. Segmental operating margin was also 4.2/4.5ppt better than our forecast/consensus, thanks to: 1) lower delivery related costs as percentage of revenues of food delivery and Meituan Instashopping businesses; 2) a change of revenue mix; and 3) lower transacting user incentives as percentage of revenues. Leveraging the sticky core user base, Meituan is able to create more cross-sell opportunities, and could further optimize user subsidies, which should enhance full-year earnings growth outlook amid macro headwinds. We lift 24E CLC OP forecast by 15% to RMB49.2bn. For 3Q24, we forecast CLC segment to ink revenue/OP of RMB68.7bn/13.7bn, up 19%/36% YoY, which translates into an OPM of 20.0% (3Q23: 17.5%).
　　New initiatives are seeing continuous operating efficiency
　　improvement. Revenue generated from new initiatives was RMB21.6bn in 2Q24, up 29% YoY, driven by robust revenue growth of Xiaoxiang Supermarket and Kuailv, which was 4/5% ahead of our forecast/consensus estimates. Operating loss for the segment was RMB1.3bn, narrower than our/consensus estimates of RMB2.0bn/2.1bn, implying a loss margin of 6.1% (2Q23: loss margin of 31.0%), driven by better-than-expected earnings generation from both retail business and other business (such as bike sharing) on favourable seasonality. Operating loss generated from Meituan Select was RMB2.0bn, narrowed from RMB5.0bn/RMB2.9bn in 2Q23/1Q24, and was better than our estimate at RMB2.1bn. In 3Q24, we forecast Meituan Select to see further loss reduction to RMB1.8bn (3Q23: RMB5.0bn), and other new businesses to sustain a breakeven level in a relatively low season. On a combined basis, we forecast total new businesses’ segmental operating loss of RMB1.8bn (3Q23: RMB5.1bn) in 3Q24E. Although we have accounted for the impact for international expansion of FD business into the Middle East in the coming 4Q, full-year total operating loss of new initiatives of RMB8.1bn will likely be still better than our previous forecast of RMB8.9bn. Our 2024E non-GAAP net profit forecast for Meituan is lifted by 9% to RMB42.1bn.