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This article is written based on public information and is only for information exchange purposes. It does not constitute any investment advice

Recently aboutMeituanA few news:

1. Enter the ladder media market and cooperate with Focus Media to enter the third- and fourth-tier markets;

2. Renew the cooperation with Kuaishou and upgrade the cooperation model and content;

3. Innovate the membership system and connect in-store and home services;

4. Meituan invested in Air Travel.

The market was confused and bewildered for a while when faced with Meituan’s decision-making strategy.

Some people believe that this is a new stage in Wang Xing’s infinite war. The five-year period of “four horizontals and three verticals” has expired, and it is time to blow the horn for the next round of attack. Others believe that this is Meituan’s use of the core logic that the enemy of my enemy is my friend to form alliances to strengthen its defense and resist ByteDance’s aggressive second round of attack.

Today we are going to talk about Meituan, which has been very active recently, and whether it is attacking or defending.

01

Attacker's point of view: The King of Chu aspires to the throne, and many heroes emerge

The first anomaly of Meituan is that its rising performance has not resulted in a further increase in its valuation.

At the beginning of this year, Meituan’s valuation fell below US$50 billion.

Even though it announced financial results that far exceeded growth and profit expectations, and continued to repurchase a large number of shares, Meituan's valuation level still hovered in the platform range of US$92 billion, which is only one-third of its peak three years ago.

Of course, this is the current environment for China's Internet companies. Most Internet companies have entered the flowering and fruiting period, and most businesses have turned losses into profits. Business lines that really don't see the light of day need to be cut or trimmed.

Correspondingly, the top 10 Chinese internet companies listed on the Hong Kong stock market have maintained scale profits (over 100 billion yuan) for four consecutive years, but their revenue growth rate has dropped from an average of around 30% to single digits.

Figure: Revenue growth and profit of Hong Kong-listed Chinese Internet companies, source: Choice Financial Client, compiled by Jinduan

The principle of Internet investment has always been to buy expectations: high valuations are not scary, and investors like companies that are full of imagination. Once the fruits fall, the performance inference will follow the calculation of cold numbers, and the valuation will never be raised.

The average PB of Chinese internet companies listed on the Hong Kong Stock Exchange has dropped from 5.5x five years ago to 2.5x, and there is a large amount of funds lying in the accounts of Internet companies with nowhere to go.

In an era without growth, other people’s stock is my growth.

Following the logic of infinite war, Meituan, as a rare target in Hong Kong stocks with a relatively ideal valuation multiple, naturally carries more expectations for the future.

The attacking side believes that the rising star stocks in the mobile Internet era, such as Pinduoduo, ByteDance, and MiHoYo, have proved one thing to the new generation of mobile Internet: the Internet landscape is not as unbreakable as it seems. Even a strong fortress like Alibaba or Tencent that has spent decades building can still be divided up.

Whether it is the cooperation with Kuaishou and Focus Media, or the inclusion of online drug purchases into the medical insurance system, there is only one goal: to reach the lower-tier markets.

The new kings of mobile Internet (Meituan, Kuaishou, Pinduoduo, and perhaps in the future Bilibili and Xiaohongshu) are joining hands to step into the fields of traditional giants (e-commerce and offline markets), giving people a sense of déjà vu of the King of Chu vying for the throne and many heroes rising up.

Meituan has restructured its membership system, embedded itself into Kuaishou's content pool, and used traditional offline media as a gateway to expand the banner of service trade in the lower-tier markets, thereby increasing its influence. This is an active offensive in the war for the lower-tier markets in the next decade, expanding the unlimited business boundaries of limited traffic value.

Therefore, with the recent frequent organizational structure adjustments, business changes, "the core of distant friendships is nearby attacks" and "the enemy of my enemy is my friend", Meituan has gradually achieved a phased victory in the war provoked by ByteDance, and has withdrawn itself and returned to the right track of infinite war.

02

Defender’s point of view: Build high walls and store up food

Black and white coexist rather than oppose each other.

Naturally, some people would think that Meituan has not yet achieved an absolute victory in the local life war, so these rounds of actions are not targeted counterattacks, but merely consolidating its own barriers.

The core basis of the defender's view is that Meituan's traffic value has not shown a significant increase with the improvement of its performance, and the profit recovery is mainly due to internal factors rather than external factors, and the offensive and defensive trends have not changed.

Let’s first look at Meituan’s financial performance. In the first quarter of 2024, benefiting from the low base caused by special circumstances in the same period last year, Meituan’s overall revenue growth rate reached 25%, and its gross profit growth rate reached 29.7%.

However, on a month-on-month basis, Meituan's revenue growth in Q1 was not so obvious, with revenue down 1% compared to Q4 2023.

In terms of business type, marketing services fell 6% month-on-month, and in the past three quarters, the compound growth rates of delivery and commission were 1% and 3% respectively. Only marketing services showed no significant growth.

Figure: Meituan’s quarterly revenue trends by business, source: Enterprise financial report brocade

In other words, Meituan’s core traffic value (marketing revenue growth) has not matched the growth rate of its business scale. Since ByteDance entered the traffic pool of local services, Meituan’s traffic value has stagnated.

Moreover, in terms of local business profits, the biggest contribution was the drop in marketing expenses by nearly 3 billion after the reduction of C-end subsidies, and a decrease in R&D and management expenses. Cost control was the dominant incentive for increasing the profit margin.

Rather than saying that it joined hands with Kuaishou to layout content and attack the sinking market, it is more accurate to say that after a year of competing around local services, Douyin felt the shortcomings of the value of traditional traffic and failed to effectively complete content upgrades, so it chose to make concessions and join hands.

The cooperation with Focus Media is more like a choice to maintain a rational safety cushion and expand outward cautiously under the premise of market risk aversion: after all, for Meituan, whether it is customers (merchants in third- and fourth-tier cities), ground channel capabilities, or the level of algorithm computing power, it has the ability to act independently, and the main logic of forming alliances is still risk avoidance.

The understanding of this round of actions by Meituan should be a strategic correction. After initially and effectively resisting the offensive of ByteDance's local life, it chose the strategy of building high walls and storing up food.：

From the demand side: connect the membership system, provide C-end users with more convenient and effective access services, highlight the uniqueness of the membership system, and thus maintain higher customer stickiness. After all, current competitors on the market, whether it is Ele.me or Douyin, cannot cover both in-store and home delivery services at the same time.

From the supply side: the traffic value of the sinking market has been exchanged for the lowest cost. The two killer promotion channels of the sinking market are content and community. The former corresponds to Kuaishou and the latter corresponds to Focus Media. Make up for your own shortcomings in the form of profit sharing or cooperation to reduce the cost of trial and error, but the increment of value enhancement may not be ideal.

Meituan launched the border war at the lowest cost. On the surface, it conveyed to the market that it had stepped out of the quagmire of the local life war. In fact, it is still building walls around its original business, and its expansion into lower-tier cities is not radical. Therefore, its essence is still defensive.

03

The significance of offensive and defensive momentum is to clarify the trend

Yizhou was exhausted, and Zhuge Liang's key to solving the internal turmoil was to defend instead of attack. He diverted Cao Wei's attention by continuously marching north. Although he failed to restore the Han Dynasty, he also brought vitality to the severely damaged Shu Kingdom. Bismarck marched into Denmark and invited Austria, his destined enemy, not for unity and friendship, but to find out the enemy's inner situation and true strength.

Momentum is important, but what is more important than momentum is to identify and set the most reasonable goal through the tug-of-war between offense and defense. We believe that Meituan’s actions show that Meituan has fully recognized its own strategic planning and growth layout.

First of all, as to whether Meituan is attacking or defending, the answer may be on the surface of the puzzle. If the main body of the action is replaced by Pinduoduo and ByteDance, will they be willing to choose to make concessions to expand the business market instead of personally fighting? Even if the operation policy is within the scope of its own business, it will be regarded by the market as an attack on traditional Internet giants, just like the automatic price following launched on June 18, which will definitely not be regarded as Pinduoduo's passive defensive strategy.

In the final analysis, it is still Meituan's Mao, which makes you feel a little dull, and combined with the market reaction and valuation level, specific cooperation model, and planned goals, at least in our opinion, Meituan's actions,It's more like attacking instead of defending, and the meaning of defense is greater than attacking:

• From the perspective of valuation performance and market reaction:As mentioned in the previous article, the average PB of Chinese internet companies listed on the Hong Kong stock market is 2.5x. Looking closely at the data, Meituan is the Internet company with the highest PB multiple. That is to say, the market actually gives it a higher valuation coefficient and is more optimistic about its future development. Of course, it also recognizes its logic of infinite war.

For Meituan, to maintain a higher valuation level, on the one hand, it is necessary to maintain the sustainability of profit growth as much as possible. After all, Internet investors have long lost trust in the logic of exchanging losses for growth; on the other hand, it is also necessary to find ways to pursue a wider business territory to maintain revenue growth.

Therefore, choosing to form alliances is the best solution, but in essence, maintaining profit levels is still the first priority.

• From the perspective of Meituan’s own capabilities:Bad review”In an article about the world of power banks written a few days ago, Meituan's field sales staff directly told merchants that they would give priority to traffic support if they displayed Meituan's power bank devices. No small and medium-sized merchants can resist the temptation of local traffic, which also shows Meituan's terrifying suppressive power on small and medium-sized merchants.

Image: Meituan Power Bank Business Promotional Image, Source: Internet Image

Most of Meituan’s service revenue also comes from merchants, so it needs to demonstrate the value of its traffic to merchants.

Therefore, the cooperation upgrades content supply (compared to the current Meituan digital live broadcast, short video promotion is obviously more effective), and cooperates to enter the third- and fourth-tier offline media markets (to more directly reach marginal and elderly community consumers). The former is to increase conversion rates, and the latter is to increase the absolute number of users, both of which are to consolidate their own core traffic value.

• From the perspective of business objectives:Whether it is a local life business that relies on content to enter the sinking market, or a media business that relies on channels to enter the sinking market, the targets are not "direct" competitors in the traditional sense.

As for the former, Meituan is already a giant in the local life market. Supply + content is just a counterattack against ByteDance's attack. It is difficult to launch an attack on a certain opponent's existing market. Just imagine that even without Kuaishou, Meituan would not have a stronger competitor in third- and fourth-tier cities.

As for the latter, what they are currently aiming for is the market share released after the fall of Chinese-language media. The traditional offline media market has never been the core competition for Internet companies. Even the strong combination of Wang Xing and Jiang Nanchun has made it difficult for Meituan to find direct competitors, let alone attack.

Secondly, it is not to say that the defensive strategy is bad. We are very optimistic about Meituan's decision-making reforms on business lines. At least Meituan has recognized its core advantage: small and medium-sized merchants. Focusing on the needs of small and medium-sized merchants, whether it is increasing users or increasing traffic value to solve the conversion rate for merchants, is the value of Meituan in the mobile Internet.

Looking back at Meituan’s endless war business lines over the past five years or even longer, many businesses have come to nothing, and failed attempts often stem from being separated from the core supply circle of small and medium-sized businesses. The most typical example is the taxi business. Independent of small and medium-sized businesses, Meituan’s ground promotion capabilities do not seem so magical, and relying on simple subsidies and promotions has failed to leverage the driver supply.

Whether it is content cooperation, entering the ladder media, or opening up the membership system, investing in air travel, the essence is the external expansion around the two strengths of small and medium-sized business supply and hotel and tourism supply. Obviously, the decision is more reasonable.

We can also see "ambition" from young mobile Internet companies like Meituan. In the future, they may be able to subvert the situation by forming alliances, which is a more effective method than fighting alone.

Most importantly, we can see from Meituan the missing core of traditional Internet giants: a clearer growth strategy.

Whether it is attacking or defending, Meituan has drawn a vertical and horizontal growth curve: going global and sinking, which are also the two incremental markets with the most room for operation. As for Meituan's advantages, disadvantages and potential problems in the overseas and sinking markets, we will discuss them in the next article due to space limitations.

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