Meituan reported (26 May) its 1Q25 results: revenue was RMB86.6bn, up 18% YoY, 1% higher than both our forecast and Bloomberg consensus estimate, while adj. NP reached RMB10.9bn, up 46% YoY, and was 12/13% higher than our forecast/consensus estimates. The RMB13.5bn OP for the core local commerce (CLC) segment was 10% better than consensus, mainly attributable to the beat in OP of food delivery (FD) business aided by optimization in user subsidy, in our view. Since competition is gearing up for the food delivery business, and industry players are deploying more resources to accelerate the development of instant retail business, Meituan is proactively responding and trading off short-term profitability to enhance user stickiness, to ride on the tide of accelerated industry penetration. Meanwhile, Meituan remains committed to invest in international expansion to drive long-term revenue and earnings growth. We remain positive on Meituan’s competitive edge in the FD industry, and believe industry competition should return to rationality in due course, but there will be a lack of visibility in the short term. We lower our 2025-2027E revenue/adj. NP forecasts by 1-2%/11-21% to account for the additional investment in the FD business, and incremental investment to support overseas expansion of the FD business. Our DCF-based TP was cut by 9% to HK$181.6 (previous: HK$200.20), translating into 25x 2025E adjusted PE. Maintain BUY.
　　Proactively respond to competition and target to maintain market share. CLC segment rev/OP was RMB64.3bn/13.5bn in 1Q25, up 18%/39% YoY, 2%/10% better than consensus, thanks to better-than-expected UE expansion of FD aided by optimization in user subsidy. However, with increasing industry competition, we expect Meituan to respond actively and maintain market share in both FD and instant retail markets in the short term. That said, we expect solid revenue and earnings growth for the in- store hotel & travel (ISHT) segment to buffer some of the investment impacts in the short term. We forecast CLC to ink revenue/OP of RMB66.7bn/13.6bn, implying YoY growth of 10%/-11% in 2Q25E.
　　New initiatives: 1Q loss in line with expectation, determined to drive for overseas expansion. Revenue generated from new initiatives was RMB22.2bn in 1Q25, up 19% YoY, driven by grocery retail businesses and the development of overseas business. Operating loss was RMB2.3bn, narrowed from RMB2.8bn loss in 1Q24, mainly driven by improving operating efficiency and marketing efficiency in grocery retail businesses. We estimate that operating loss generated from Meituan Select was RMB1.6bn, narrowed from RMB2.9bn in 1Q24 and also delivered slight improvement QoQ. For 2Q25, we are estimating 21.5% YoY revenue growth for new initiatives, driven by solid growth in the grocery retail business, and ramp-up in revenue generation in the FD business in the overseas market. We are looking for a sequential flat operating loss for Meituan Select business, and slightly widening loss for overseas FD business driven by the mixed impact from rapid business expansion and improving unit economics. On a combined basis, we are forecasting RMB2.6bn operating loss for the new initiatives segment (2Q24: loss of RMB1.3bn).