Adjusted net profit increased by 46% YoY to RMB10.9bn, beating market and our expectations, driven by improved operating profit of CLC business while being partially offset by losses from new initiatives. We expect higher margin pressure from JD subsidy, affecting core local commerce earnings growth that would come below order growth. Reiterate BUY with lower TP of HK$168/share.
　　Key Factors for Rating
　　Revenues increased by 18.1% YoY to RMB86.6bn in 1Q25, beating consensus and our expectation, thanks to robust growth in on-demand transactions and reduced incentives benefiting from national membership programme. Of which, core local commerce (CLC) revenue increased by 17.8% YoY to RMB64.3bn with operating profit up 39.1% YoY to RMB13.5bn and hence operating margin improved by 3.2ppts YoY to 21.0%, beating market and our expectation.
　　The subsidy war: Meituan plans to invest RMB100bn over the next three years to drive high-quality growth and mainly support merchants across various categories to boost consumer demand. In response to JD’s RMB10bn subsidy programme in food delivery and on-demand, we believe Meituan’s core capabilities in scaled food delivery and Instashopping sectors would help it retain users, although near term profit is expected to fluctuate due to the massive subsidy programmes from different platforms. Meituan’s management said in the call that they have noted an increasing purchase frequency in beverage segment after the launching of subsidies in Apr and May while other categories remained largely stable YoY. Given the mature food delivery ecosystem, we believe Meituan would benefit from rising purchase frequency driven by subsidies. We expect CLC growth to slow sequentially in 2Q25 compared to 1Q25 and operating profit margin to dip amid fierce competition.
　　Revenues from the new initiatives segment increased by 19.2% YoY to RMB22.2bn in 1Q25, with operating loss for the segment narrowed by 17.5% YoY to RMB2.3bn, and operating margin improved by 4.6ppts YoY to negative 10.2%, slightly missing consensus and our expectation. The sequential increase in operating loss was primarily due to increased investment in overseas markets, with businesses expanded into 9 cities. Given the strong operating know-how and capabilities in expanding into overseas market, we believe tapping into Brazil would mark another high growth in volume. We expect new initiatives to deliver 20% YoY revenue growth in 2Q25 and operating losses to expand to RMB2.5bn.
　　Key Risks for Rating
　　Intensifying competition in food delivery and in-store market that might need incremental marketing expenditure with margin pressure; regulatory risk related to social security expenses associated with new type of employment (riders); softer consumer spending due to macro weakness resulting in lower ticket value.