Elevator Pitch
My investment rating for Meituan (OTCPK:MPNGF) [3690:HK] shares is a Hold. I previously touched on the prospects for China and the company in my write-up published on October 13, 2022.
I upgrade my rating for Meituan from a Sell earlier to a Hold now, on the basis that the company’s Q2 2023 earnings have come in above expectations. But Meituan isn’t deserving of a Buy rating, as the management’s cautious Q3 2023 outlook for the company will limit the potential upside for the stock.
Readers should note that Meituan is listed on both the OTC market and the Hong Kong Stock Exchange. The three-month average daily trading values for Meituan’s OTC shares and Hong Kong-listed shares were approximately $0.2 million and $200 million, respectively as per S&P Capital IQ data. Investors can trade in Meituan’s shares listed in Hong Kong with US stockbrokers offering access to foreign equity markets such as Interactive Brokers.
Meituan Achieved An Earnings Beat For Q2
Meituan revealed the company’s financial performance for the second quarter of 2023 on August 24. MPNGF’s share price rose by +6.6% to close at $17.80 on Thursday, which suggests that the company’s Q2 2023 financial results were good in the eyes of investors.
The Q2 2023 top line for Meituan was RMB67,965 million, and this was largely in line with expectations. Meituan’s actual second quarter sales were +1% higher than the sell-side’s consensus revenue estimate of RMB66,955 million (source: S&P Capital IQ). More significantly, the company’s YoY revenue growth accelerated from +21% in Q4 2022 and +27% in Q1 2023 to +33% for the most recent quarter.
The company’s normalized net income surged by +272% YoY from RMB2,058 million for Q2 2022 to RMB7,660 million in Q2 2023. As per S&P Capital IQ’s consensus data, Meituan had delivered a substantial +68% earnings beat for the second quarter of the current year.
Meituan’s above-expectations bottom line for Q2 2023 was driven by an improvement in the company’s gross profit margin and narrower operating losses for its New Initiatives segment.
Gross margin for Meituan expanded by +680 basis points YoY and +360 basis points QoQ to 37.4% in the second quarter of this year. The strong growth in revenue for the high-margin online marketing services business was the key factor that led to an increase in gross margin for Meituan for the recent quarter. Specifically, online marketing services revenue for Meituan grew by +41% YoY to RMB10.3 billion in Q2 2023, which represented 15% of the company’s recent quarterly top line.
The operating loss for Meituan’s New Initiatives segment narrowed from -RMB6,790 million in the second quarter of 2022 to -RMB5,193 million for Q2 2023. At its Q2 2023 earnings call on August 24, Meituan disclosed that “our bike-sharing business achieved a positive operating profit for the first time in history, and our B2B food distribution operating margin continued to improve.” These were the main reasons for the New Initiatives segment’s relatively smaller operating loss in Q2 2023.
Management Struck A More Cautious Tone For The Third Quarter
Meituan didn’t provide specific financial guidance for the third quarter of 2023. But the company’s management commentary at the recent quarterly results call appeared to suggest that Meituan’s actual Q3 2023 performance might potentially be inferior to that for Q2 2023.
With regard to the company’s near term revenue outlook, Meituan admitted at its second quarter results briefing that it has “seen some short-term headwinds due to macroeconomy and extreme weather conditions so far in Q3.” China’s actual July 2023 retail sales growth rate of +2.5% missed expectations by around 200 basis points. On the other hand, parts of Mainland China have been recently hit by “floods and drought” as reported by NBC News on August 8.
With respect to short term profitability, the company highlighted that it will try to strike a balance between efforts to increase “efficiency and improve our ROI (Return On Investment)” and the need to invest in boosting “user experience and merchant experience” at its Q2 earnings call. It is clear that Meituan has no intention of prioritizing profitability over growth in a big way.
In a nutshell, it is reasonable to assume that Meituan’s third quarter top line expansion and profit margins are unlikely to be as good as what the company achieved in the second quarter. As such, there is a low probability of MPNGF’s positive stock price momentum post-Q2 2023 results release being sustained.
Meituan’s Valuations Are Aligned With Long-Term Earnings Growth Outlook
Looking beyond the company’s Q2 results and its Q3 outlook, Meituan’s current valuations seem to be fairly consistent with its growth prospects for the long run.
The market values Meituan at a consensus forward next twelve months’ normalized P/E of 30.5 times now, according to valuation data taken from S&P Capital IQ. The company’s consensus FY 2023-2027 normalized EPS CAGR forecast is +32.6%.
This means that Meituan is currently trading at 0.94 times price/earnings to growth or PEG, which is close to the 1 times PEG multiple indicative of a fair valuation.
Closing Thoughts
I have a Neutral view of Meituan’s shares. Meituan’s financial performance for Q2 2023 was excellent, but a repeat of that for the current quarter appears to be unlikely based on the management’s comments.
Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.
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