Many Chinese technology stocks have come under pressure over the past few months, with several down 30%, 40%, or even 50% or more. The Chinese Communist Party has been cracking down on the technology sector’s meteoric rise, and is now asserting control over its growing digital economy in a stronger way.
But investors may now think the hate has gone far enough, with shares of many beaten-down tech giants rising to begin this week. One such company was Meituan (OTC:MPNG.Y). Down 50% from all-time highs to start the week, Meituan beat revenue and earnings estimates on its Monday earnings report, with the stock shooting up about 15% since then.
While Meituan is currently in the crosshairs of China’s regulators, its stock is still far below where it once was, yet its advantages in delivery services could allow it to intrude on the turf of several other tech giants. If Meituan succeeds in its new ventures, today’s discounted shares could seem very attractive looking out over the long-term.
Core businesses are growing and profitable
Meituan currently organizes its business into three sections: food delivery, in-store and hotel & travel, and “new initiatives.” Food delivery is self-explanatory, and in-store and hotel & travel is kind of like a combination of Groupon and Booking Holdings. These two main components of Meituan are both growing and profitable. While other U.S.-based food delivery companies have generally struggled to make money, Meituan’s food delivery segment has become profitable as it consolidated the space in China, with about two-thirds of the market.
Last quarter, Meituan’s food delivery segment surged 59%, and operating income grew 95% to RMB2.5 billion, or about $390 million, as margins expanded. In-store and hotel & travel rebounded strongly from the COVID-19 lockdowns, growing 89.3% with operating profits up 93.7% to RMB 3.66 billion, or $570 million. Notice that while Meituan is primarily known as a delivery company, it actually gets a higher proportion of profits from its travel and services platform, due to the 40%-plus operating margin in that segment.
However, Meituan didn’t make an overall operating profit last quarter. That’s because it’s plowing all of these profits, and then some, into the “new initiatives” segment as it seeks to become a big-time competitor to other large Chinese e-commerce companies.
Taking aim at Didi, Pinduoduo, and Alibaba
Meituan spent heavily last quarter, garnering a RMB9.2 billion loss in its new initiatives segment, as it sought to build out its ride-hailing, group-buying, and instashopping segments.
On ride-sharing, Meituan began experimenting in this field about four years ago, but seems ready to scale up. The Chinese ride-sharing industry is currently dominated by Didi Chuxing (NYSE:DIDI), which has run into some trouble with regulators and the public recently. On the conference call, Meituan founder Xing Wang said:
While our self-operated model brings a better user experience by providing a stable and better controlled ride supply, especially during the peak hours, last year we only ran self-operated model in two cities. That’s Shanghai and Nanjing. … we now believe that both our capability and market environment … have reached the point that we can expand our self-operating model in some more cities where we already have operations through aggregated model. And so since July, we further rolled out our self-operated model in more than 30 cities.
Meituan’s large 628 million user base could give it an easy way to market and cross-sell these services, making it perhaps a strong challenger in the growing ride-hailing market.
Wang also highlighted that the largest cost in the new initiatives segment was the buildout of the company’s group-buying e-commerce service. Group-buying, in which a community of members team up to buy in bulk for a discount, has become all the rage in China, especially in rural areas, with the concept pioneered by Pinduoduo (NASDAQ:PDD) six years ago. Now, many China e-commerce companies are rolling out their own group-buying sites.
While Meituan is a late player in this, it does have strong delivery capabilities from its food delivery business it can translate into a high-quality user experience. Since large price subsidies may now be outlawed under new regulations, companies will likely compete on experience, where Meituan may be advantaged. “In short, we believe the TAM [total addressable market] is huge, but penetration will take time,” Wang said.
Adding to community e-commerce, Meituan also continues to build out both its Instashopping (kind of like Instacart for food, drugs, and flowers) and Meituan Grocery services, which offer delivery within 30 minutes. Both services again leverage Meituan’s delivery expertise as an entry into more and more e-commerce, especially in the areas of fast-moving consumer goods. Management reported strong growth for each service last quarter, and if Instashopping and Meituan Grocery take off, it could further eat into the market share of fast-moving e-commerce giants like Alibaba (NYSE:BABA), which is not only a leader in fast-moving consumer goods but also grocery, with its Hema stores.
New regulations can both help and hurt Meituan
Meituan may be subject to near-term fines from regulators, and it will have to make sure it pays its delivery drivers a fair wage. On that front, management unveiled several programs to help delivery riders and their families on the recent call, so it’s a bit unclear what further measures may be coming down the pike beyond that.
Still, new regulations are also preventing e-commerce companies from engaging in unsustainable subsidy price wars, as well as forced exclusivity that large platforms have exercised in the past. That could open up more of the e-commerce space to Meituan’s new initiatives challenge.
Therefore, with its highly profitable travel and services segment and its expertise in delivery efficiency, Meituan could be a net beneficiary of regulations, especially if speedy, high-quality service becomes the main differentiator in Chinese e-commerce. Down nearly 50% from recent highs, Meituan is another beaten-down Chinese tech stock to watch.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.