Meituan (MPNGF) CEO Xing Wang on Q3 2021 Results - Earnings Call Transcript

Nov. 26, 2021 2:03 PM ETMeituan (MPNGF), MPNGY
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Meituan (OTCPK:MPNGF) Q3 2021 Earnings Conference Call November 26, 2021 6:00 AM ET

Company Participants

Xu Meituan - Vice President, Head of Capital Markets and Joint Company Secretary

Xing Wang - Co Founder, Chairman and Chief Executive Officer

Shaohui Chen - Chief Financial Officer and Senior Vice President

Conference Call Participants

Ronald Keung - Goldman Sachs

Thomas Chong - Jefferies

Alicia Yap - Citigroup

Tianjiao Chen - Pacific Securities Co Ltd

Jerry Liu - UBS

Kenneth Fong - Credit Suisse


Good day. And thank you for standing by. Welcome to Meituan Third Quarter 2021 Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Ms. Scarlett Xu. Thank you. Please go ahead.

Xu Meituan

Thank you, operator. Good evening, and good morning, everyone. Welcome to our third quarter 2021 earnings conference Call. Joining us today are Mr. Xing Wang, Chairman and CEO; and Mr. Shaohui Chen, Senior Vice President and CFO of Meituan. For today's call, management will first provide a review of our third quarter 2021 results and then conduct a Q&A session. Before we start, we would like to remind you that our presentation contains forward-looking statements, which include a number of risks and uncertainties and may differ from actual results in the future. This presentation is based on our management accounts, which have not been audited or reviewed by our auditor. This presentation also contains unaudited non-IFRS financial measures that should be considered in addition to and not as a substitute for measures of the company's financial performance prepared in accordance with IFRS. For a detailed discussion of risk factors and non-IFRS measures, please refer to the disclosure documents in the IR section of our website.

Now I will turn the call over to Mr. Xing Wang. Please go ahead, Xing.

Xing Wang

Thank you, Scarlett. And hello, everyone. Welcome to Meituan's Third quarter 2021 earnings call. For the third quarter of 2021, our total revenue increased by 37.9% year-over-year to RMB48.8 billion. Adjusted EBITDA and adjusted the net loss were negative RMB4.1 billion and RMB5.5 billion respectively in 2021 Q3. We further enable our small and medium merchants and supply chain partners to improve their digital and online operations while also providing consumers with convenient high quality value for money goods and services. We continue to achieve healthy growth in annual transaction users and annual active merchants between 667.5 and 8.3 million respectively in Q3. Transaction frequency also grew to 34.4x for the past 12 months versus 26.8x during the same period last year.

Moreover, during and after the COVID upsurge we collaborated with authorities to help affected the emergence resumed normal operations and help people in need through our various business lines in addition to helping them resume their businesses, to the extent we could. We hope to generate more social value in the various businesses we do for the greater community abiding by our mission, we have people eat better and get better.

First of all our food delivery. Our business was resilient, despite the spread of the Delta variant and impacts of extreme weather. In Q3, our total food delivery orders grew by around 25% year-over-year while achieving a daily record of over 15 million orders in early August. We are happy to see that our annual active merchant, which is a new highest of 4.1 million in Q3 for our food delivery business. More merchants came to realize the importance of running online and digital operations and we are glad that they consider Meituan their trusted partner to increase online revenues. We designed the multiple ways to improve merchant operational efficiency. For example, our food delivery manager program now operates in over 30 cities and more than 20,000 merchants in areas including store pattern, marketing event organization and operational analysis. These merchants saw a meaningful increase in GTVs post the training for new merchants our platform we provided tailored training and introductory programs to help them adapt to online delivery quicker and better understand their consumers.

In addition, hardware upgrades and digital toolkits were rolled out in August, and help the merchant addressed issues encountered in the ordering process. In Q3, transaction frequency and user stickiness improved as we brought greater diversity and higher quality categories and consumption scenarios to our platform to better address the evolving consumer taste bud and culinary preferences. Late-night snacks were popular during the summer and special promotions from quality merchants are provided to consumers in over 15 cities for this category. An interesting example is that a spicy crayfish dish was so hot that it grows to 300,000 merchants now over this SKU. The new P category also showed explosive growth into autumn. We collaborated with over 40 Milk Tea brands and over 5,000 stores to help them synchronize online and offline marketing to boost the consumption in this category. Alongside our first cup of milk tea in autumn promotions in early August, ready orders for this category alone exceeded to 0.5 million orders on a day setting a new record.

In Q3 overall, afternoon teas and late-night snacks categories both achieved around the 30% and two year CAGR in order volume with a drink sub category alone, achieving over 70% CAGR. On that delivery side, we were focused on providing more support and care for our couriers in Q3. We hosted more than 110 courier feedback panel sessions across the days as of Q3 and improve their welfare with a more rated feedback by different channels and from different directions. In Q3, we experimented changing the estimated delivery time for each order from a specific point of time to extend the time period in complicated situations, such as the lone business orders, or in case of a heavy order volumes managing consumer expectation reasonably while alleviating the time pressure for couriers.

We have also been upgrading our order dispatch system to reflect the courier feedback and to ensure a smoother experience for couriers. For both couriers merchants and consumers. For full delivery orders, consumers wish to receive orders in a timely manner. Merchants hope to pass orders to couriers as soon as meals are cooked and couriers hope to pick up orders efficiently along the way. Our upgrades to the order dispatch system focused on meeting these needs. First, we adjusted the pickup process for some piloted restaurant whereby grades are assigned and notified the pickup orders only after meals are ready by the use of a new merchant device called Smart Pitching in order to relieve the pressure on both couriers and restaurants. Also, in times of unexpected situations, couriers can report to their station manager through the app to handle and re-dispatch orders to others.

Most importantly, our system had to prioritize courier safety to ensure they are not tasked with orders that they cannot handle. While we have made progress here, we are mindful of the fact that that order dispatch system is complex. They have many important variables. We will continue to explore and improve the system as people are the most critical considerations of our operations. We will also make the algorithms and the systems more transparent, they are getting feedback from different parties to iterate our process and promote healthy industry development.

Now moving to our second segment, despite the impact on Delta variant macro consumption net environment our in-store, hotel and travel segment anticipated strong growth in Q3. Transaction volumes and GTV and annual active merchants continue to reach new highs for both in-store dining, and other in-store services. In-store dining GTV achieved a two year CAGR of over 30% in Q3, despite a significant growth slowdown in August, as a result of delta variant control. On one hand, accelerated the digital transformation, it's an inevitable challenge on the supply side. And we continue to develop our merchant service capabilities paid in the two different restaurant merchant groups. We provided a more diversified solutions and brought the quality traffic to restaurant merchants in an ever more competitive restaurant market. Merchant penetration also rose as we expanded coverage of a wider merchant base, including chain and upscale restaurant.

On the other hand, as consumer demand evolves, so do our strategies toward different culinary categories. During the holidays, we brought a more light meal restaurant online. And during Chinese Valentine's Day, Qixi, our marketing events were effective in encouraging further consumptions with the GTV and transaction volume, reaching new daily records. Booking restaurant ahead of time on our platform but also being established as a habit for consumers with a higher spending per meal during the holiday.

Transaction frequency and user stickiness improves as we provide better services and more desirable surprise. Other in-store services GTV achieved 38% two year CAGR in Q3 as the merchant and category offerings widened to meet the higher than consumer demands for personalized and quality consumption scenario. We also designed more customized services and products targeting different types of merchants, new consumption trends in healthcare and related services, and parent, child vision and entertainment and more exhibited strong momentum.

In lower tier markets, we increase the coverage and accelerated the supply side because of transformation leading to higher overall merchant base in the play season festival [Indiscernible] innovated products across platform promotions for the job in-store category and GTV increase.

Hotel booking business were the heavily affected by the Delta variant and cross provincial travel restrictions. With that national travel and tourist and tourism revenue in Q3 back then 60% of that same year in 2019 for the whole industry. To our domestic room nights in Q3, grew positively relative to the same period in 2019 and 2020. Growth of local region and short haul travel was stronger than that, of long haul and business travel. Our established strength and consumer mindshare in local hotel booking and services allowed us to remain much above in a challenging environment.

On the high star segment, more high star hotels were on boarded with a more competitive pricing and better customer service. And domestic room night and division grown high star hotels maintain above 16%. And our hotel plus X strategy, we work with a more high star hotel brands. Collaboration with brands such as [Indiscernible] and Disney, by live streaming and working closely with the Universal Studio hotel for its grand opening were just a few examples.

Now let's move to the third segment, new initiative and others, our focus are on the retail business to provide the greater convenience and variety for our consumers in different consumption scenarios. In Q3, for Meituan Select, our community ecommerce business, we comply with the new regulatory guidelines that ensure reasonable product pricing as we continue to pursue quality growth and innovative consumer experience and with our long-term capabilities. In response to consumer needs, we increase SKU varieties and offered a wider array of categories. Our investments in culture and logistic also allowed us to deliver fresh produce and frozen goods on time with a stable quality through careful tailored and targeted strategies at different nodes of the operations. Our operational efficiency increased and our unit economics also improved in the future, we will persistently improve surprise diversities and brought the quality by continuing to explore different venture aided innovative warehousing and logistic solutions.

Moreover, in the spirit of a rural revitalization, it has collaborated with numerous provincial authorities in Q3 to open up green distribution channels for various farmers to sell their produce. In September, we launched an agricultural festive months to assist over 400 agricultural producer enrich those and bring unique local brands. And employments opportunities are created in rural areas throughout the Meituan Select include the new farmer, merchants, rural ecommerce leaders, and group leaders. We rolled it out specific and well rounded training program for online marketing and digital operation to support the development of new talents in rural areas in six provinces already.

It's free training program aimed to help hundreds of 1000s of more farmers' merchants and rural ecommerce leaders in over 160 less developed counties over the next three years. Meituan grocery our self operated on-demand grocery model and completed tier one market coverage achieving for the user growth in Q3. GTV increased by over 160% and possibly transact the users increase by over 100% year- over-year. Operating efficiency improved with our growing scale as we modify the warehouse operations in greater logistical efficiency, with the more emphasis on our AI in our strategies around products, consumers, warehousing and logistics, continue to iterate. Consumer experiences were enhanced, as we further shortened delivery time, and provided the wider SKU selections with a more diverse fresh produce and FMCG offerings.

A key component of our on-demand business as our Instashopping demonstrated a competence momentum in Q3. We believed that the online retail business will evolve from everything-store to everything-now. On-demand retail supplements well in the traditional retail markets. That is a supplying changing consumer needs are also accelerating supply chain innovation and online physical patience. The average in our On-demand delivery network and our comprehensive online booking for merchants, Meituan Instashopping provide consumer boosts across our broader spectrum of broad categories, and areas and consumption scenarios through marketplace model.

In q3, Meituan Instashopping achieved the strong growth on different metrics. With the GDP growing by over 100% year-over-year, we launched the promotions on various holidays and festivals in Q3, such as Chinese Valentine's Day and mid autumn festivals, to effectively cultivate the consumer habits and captured mind share. During Chinese Valentine's Day, other broad categories expanded from flowers to gifts, as the beauty and 3D consumer electronics that take daily orders exceeding 6.5 million. On the merchant side, we allocated more resources and deepen the collaborations with high quality merchants that are at the supermarkets without rating the online transformation of offline retailers. GTV for supermarkets grew by over 140% year-over-year in Q3. In the Meituan vertical, in addition to launching the 24x7 medicine delivery service last few quarter. We also deepen our cooperation with offline pharmacies not only to help them digitize operations, but also worked with several partners in launching the 24x7 pharmacies not only to help them build that operations but also worked with several partners to launch 24x7 smart pharmacies.

We believe Meituan Instashopping will continue to strengthen its consumer mindshare and achieve the rapid growth. We will leverage our marketing, delivery and technological capabilities to serve brands not just holistically, and the users with the merchant while creating more values. We are delighted to see that the above retail businesses achieved a notable progress in Q3. Over the years, we have helped the millions of merchants to digitize their operations and build our own On-demand delivery network, bringing convenient food delivery services to hundreds of millions of consumers. Now we leverage our On-demand delivery network, and digital operational capabilities to deliver more categories of goods to everyone's foot step, by our Meituan Instashopping and Meituan grocery, we also have reorder and pick up a model for next day delivery by Meituan Insta baked. So the mass and tier markets with a diverse quality, and value for money products.

Different region models, Meituan understand and meet the needs of different consumer types and different consumption scenarios. More importantly, we will actively help strengthen different nodes of the value chain and accelerate the retail industry digital transformation. We are committed to the development of our retail businesses. Then we'll continue to leverage technology to accelerate the merchant digital transformation and enhance the efficiency in distribution and logistics.

Finally, we received the final decision on the administrative penalty from the SAMR in October. We sincerely accept the penalty and will strictly ensure compliance practices. We will keep compliance as our priority, operate our business in compliance, actively then contribute to fair competition in the market. To view our social responsibility, and most importantly, contributes to the higher quality development of the national economy and society. The penalty reminds us our responsibility to society, encourages us to be more creative and to foster better social values. We will bear our social responsibility in mind further contributed to the high quality growth of the national economy, do our best to contribute to the development of the greater society and support the objective of a common prosperity and through carrying out our mission to help people eat better, get better.

With that, I will turn the call over to Shaohui who will update on our latest financial results.

Shaohui Chen

Thank you, Xing. Hello, everyone. I will now go through our third quarter financial results. In the third quarter, our total revenue reached RMB48.8 billion increasing by 37.9% year-over-year. Also our food delivery and in-store, hotel and travel business segment achieved resilient growth and in the resurgence COVID cases regional broadening disruptions in macro environment. Our new initiative segment also continued its very fast growing momentum. Our ongoing investment in new initiatives, particularly in our retail business, drove increase in cost of revenue. As a percentage of total revenue, costs of revenue increased on both year-over-year basis and on a sequential basis to 77.9%.

The growth from private quarter was also driven by increased incentives for couriers working under extreme weather conditions and in a pandemic environment. Selling and marketing expenses as a percentage of total revenue was 23.3% in this quarter, up from 16.5% in the prior year period, but down from 24.8% in the previous quarter. The year-over-year increase was primarily due to increased promotions, advertising and user incentives for business expansion and promotional campaigns.

In addition, the increased number of employees owing to our business expansion resulted in an increase in employee benefit expenses. The sequential decline was mainly driven by our improved marketing efficiency, R&D expenses as a percentage of total revenue increased to 9.7%, up from 8.4% in the prior year period, and 8.9% in the previous quarter.

Our G&A expenses as a percentage of total revenue increased to 4.9% from 4% in the prior year period and the 4.7% during the previous quarter. Both increases were primarily due to the increased number of employees resulting from our business expansion. Our first two business segments for delivery and in-store, hotel and travel segments achieved solid growth, with growing engagement of our consumers and merchants realizing an aggregate operating profit of RMB4.7 billion, increasing from RMB3.6 billion in the prior year. Nevertheless, we recorded a total operating loss of RMB10.1 billion this quarter, primarily due to the RMB3.4 billion fine imposed pursuant to China's anti monopoly law and the rapid expansion of our new business, particularly our retail businesses.

On a consolidated basis, both adjusted EBITDA and adjusted net loss experienced negative year-over-year growth for this quarter, decreasing to negative RMB4.1 billion and RMB5.5 billion respectively.

Now, let's move on to our segment reporting. Turning to food delivery. Although we face the resurgence of COVID cases, regional flooding disruption and overall slowing down of the catering industry, we see both quarterly transacting users scale and their purchase frequency will further stimulate our intervention in high quality supply for our platform, our optimized operation for delivery different consumption scenarios. And an effective delivery membership program is such the daily average number of food transactions increased by 25% year-over-year even on a very high pace from last year.

Meanwhile, with more restaurant embracing digitization, online marketing demand remains strong for our platform. The extension of our advertising merchant aid and increasing merchant budgets for online marketing jolt the steady growth of online marketing revenue on both year-over-year and sequential basis. Monetization rate was 13.4% this quarter, a slight 0.1 percentage points sequential improvement was mainly due to the higher contribution from advertising revenue, while the decrease of 0.2 percentage points on a year-over-year basis mainly resulted from a higher user incentive ratio and higher portion of incentives not control revenue is quarter.

Total for delivery revenue was RMB26.5 billion in this quarter representing a year-over-year increase of 28%. On the cost side, delivery costs for order was slightly lower if we compare to the same year of last year increased on a sequential basis due to the increased incentive pay to deliver couriers or watching during summer season, the pandemic situation and extreme weather. Operating profit increased by 14% to RMB876 million while our operating margin decreased by 0.4 percentage points to 3.3% from 3.7% on year-over-year basis, mainly due to higher end user incentives and spending on brand marketing. Also a decrease in operating profit and operating margin on a sequential basis will primarily attributable to higher incentives for deliver couriers due to seasonality.

Now turning to our second segment, in-store, hotel and travel. This segment's quarterly revenue grew by 33% year-over-year, despite the negative impacts of the spread of the Delta variant and heavy flooding impacting local consumption, especially consumption of travel and hotel. We have the go to platform for consumers exploring cost effective and diverse services while also serving as an important channel for local service merchants to attract users and increase revenue. Both in-store dining and other local services demonstrated strong resilience evidences by more than 40% year-over-year growth of our in-store GTV and revenue. Meanwhile we further deepen our merchant penetration this quarter. As mentioned, the variety and quality of the supplies on our platform. We are able to set by diverse online and offline operation unit of merchants and further diversifying and customizing transaction based products for different service categories.

In addition, we continue capturing user mindshare to maximize, as result year-over-year growth of our in-store segments and commission based revenue exceeded 40% during this quarter, our advertising revenue also achieved commendable growth driven by higher adoption rate of advertising product by merchants and their increasing budgets allocated for online marketing. In addition, the Mid-autumn Festivals also stimulates merchant demand for marketing. The production rate of our subscription based services further increased during the quarter, with CPC advertising revenue increasing by over 50% year-over-year. With respect to our hotel business, the third quarter is usually the peak season for travel. However, delta variant cases in China during the third quarter were headwind for the domestic travel and hotel bookings industry. Even in the face of these short term challenges, we still achieve positive year-over-year growth of about 5% in domestic room nights.

Over the long term, with we belief that the hotel booking business has a strong potential for sustainable growth and scalable monetization. Operating profit and operating margin for in-store, hotel and travel business increased to RMB3.8 billion and 43.9% respectively during this quarter. Both the sequential and year-over-year increase were mainly attributable to our in-store business, which has a much higher operating margin than our hotel and travel business and contribute a higher portion of these segments with revenue this quarter.

Let's now turn to our third segment, new initiative and others. During the period, revenue in this segment increased by 66.7% year-over-year to RMB13.7 billion driven by the continued development of our new initiative to set by growing consumer needs. The increase in revenue mainly comes from our retail business. Operating loss for this segment ended to negative RMB10.9 billion during the quarter from negative RMB9.2 billion during the previous quarter, while operating margin decreased by about 2.7 percentage points quarter-over-quarter to negative 79.5%.

Our retail business remained a key area for our investment. Our community ecommerce business delivers solid growth in both GTV and data volume on a sequential basis despite heightened regulation. Although, we made investments in further enhancing our supply chain and fulfillment abilities, our operating loss only widened slightly on sequential basis. As a result, operating loss as a percentage of total GTV also narrowed on a sequential basis, implying our continued improvement in operating efficiency.

For Meituan Grocery that we further optimize our fulfillment system and the label efficiency, operating margin remained stable as compared to the previous quarter even the launch of new warehouses. In addition, in this quarter we also increase our R&D spending for advanced technology such as autonomous vehicles, drones and matching technology, which cause our operating loss to expand on a sequential basis.

Now turning to our cash position; as of September 30, 2021, our cash, cash equivalents and short term investments total RMB120.9 billion. Additionally, our net cash flow from operating activities turn into outflow of RMB4 billion during the third quarter of 2021 from an inflow of RMB3.2 billion for a same period of 2020. This was primarily attributable to losses resulting in our continued investment in retail businesses.

For my closing remarks, I would like to highlight three points. The national economy has entered into a new phase in which high quality development will be prioritized in vision and then a prevention measures have been normalized. Against this backdrop, we will continue to promote digitization transformation; we further integrate technology into every aspect of our business segment so that we can leverage technology to power high quality growth. We will continue to grow by firm support for the digitalization transformation. For a digital transformation of merchants, especially the integration of local service industries, online and offline operations, in return, improve with a variety and quality of supply on our platform will help us better meet consumers ever growing demand. We will also sustain our focus on retail business; we will construct the core abilities of our retail business with a long-term perspective, while maintaining a flexible and sustainable investment pace.

We will continue to actually follow regulatory requirements to ensure our healthy, sustainable and compliant growth and development. We remain optimistic for our business. In terms of long-term development, we adhere to the integration of creating both economic and social value and providing better services to our partners in the ecosystem.

With that, we are now open for Q&A.

Question-and-Answer Session


[Operator Instructions]

The first question comes from the line of Ronald Keung from Goldman Sachs.


Thank you, Xing, Shaohui and Scarlett and team. So my question would be on a recent strategy, we noticed that you have recently upgraded strategy from what we used to call food plus platform and we read about it now upgraded to retail plus technology. So could you share with us the rationale and thinking and in addition, how should we understand the significance of your recent organizational restructuring that we read about? Thank you.


Thank you, Ronald. Yes, we recently upgraded our strategy from food plus platform to retail plus technology. First of all, we are extending from food to retail. Many people see retail as it is in a narrow sense, which is selling goods to consumers as 2C concept. However, we see retail as a much broader concept. Actually, that's the, I believe that's the original definition of retail that's to sell goods or services to add the customers. So I think retail can be classified into foods retail and services retail. And the customer can include those consumers and businesses, especially including small and medium sized merchants.

So in this sense, we may have been in the retail business since day one. Look at this way, we started with services retail through the original group purchasing business back in the beginning of 2010. We then gradually expanded into the post retail efforts of providing restaurant food for consumers through On-demand to be our own demand food delivery business. In recent years, we have expanded our categories of goods from just a restaurant food to other categories through different business models. For example, we expanded from restaurant food to flowers, to magazines, to a lot of a lot of goods categories.

And we have made that into shopping. That's a marketplace model. We also have a Meituan Grocery. And that's our first party retailing model. We also have the pre order and self pick up a model for next day delivery via our Meituan Select business. These businesses enable us to satisfy the diverse needs of different consumers in different scenarios across different markets. And retail will be our focus and remain at the main area where we will do our fundamental capabilities in future. So please understand retail in a broader sense as to sell goods or services to end customers.

And second, we have upgraded from platform to technology. When we talked about platform in the past we will usually referring to the mobile internet platform may have started as a company from first launched in website, and then launching the mobile app. Our mission is to help people eat better, sleep better. And we can achieve that through the power of technology. Through technology, we help accelerate surprise that digital transformation is actually for millions of a small to medium sized restaurant and local services merchants. This also led to the increase in users and the retention on our platform. We have developed the world's largest On-demand driven network through persistent investment in technology over the years. We are leveraging On-demand delivery network to deliver almost everything to consumers' doorstep in 30 minutes.

Meanwhile, we have invested heavily in relevant hardware, equipment, and own research and development, particularly around autonomous delivery. Our R&D expenditure increased 58.8% year-over-year in Q3. We have also made equity investments in many related cutting edge technology use. Tech is critical in satisfying consumers' needs and driving company industry growth for the betterment of our greater society. As technology developers, we believe it will encompass the broader concept of automation, robotics, renewable energy, the IoT, and sometimes biotech more. As we expanded from food to retail, we need to invest into technology, deepening boosts distribution, and enabled in digital transformation across a wider range of margins throughout the entire logistic process, especially in less developed markets.

The continuous development and application of these technologies will change everyone's lives for the better in many different ways. While importantly, also helping us to better fulfill our mission. And we recently there was a reorganization at Meituan to run our upgrading strategy. Foods retail is an area where we expect to see major development in future. So we established dedicated and senior team as a brain to execute our foods retail strategy and to enhance our organizational capabilities. The adjustment issue encouraging more synergies and integrations of resources across different business alliances, which is critical to build the holistic fundamental retail business capability for the long run.

Last but not least, I would like to emphasize that no matter how our strategy evolves, our mission remains unchanged. We help people eat better and live better, to achieve this it requires continuous effort and commitment. We will abide by our mission and hope to create greater social value for the greater community while generating potential values. Thank you.


The next question comes from the line of Thomas Chong from Jefferies.


Hi, Good evening, friends management for taking my questions. I noticed that for the food delivery business, the food delivery or the volume a year-on-year growth decelerate in Q3 versus the Q2. May I know the reason for that? Has it been impacted by the recent slowdown in the consumption and how should we expect the top line growth rate in coming quarters given the current macro environment. Thank you.


Thank you for the question. Yes, we can see that a food delivery order volume growth decelerate in Q3 versus Q2. And actually if you compare to Q1, it's a further decelerating trend. There are separate reasons on this. The first I think It's easy to understand that due to the pandemic case in control, there have been a rather volatile cases that we are facing from last year. So, in Q3, we have a much higher case given the delivery consumption recovered during Q3 last year. So, on a yearly basis, you will see a much lower growth rate.

And secondly, it was also due to the resurgence of COVID cases that you mentioned. And also we have seen the regional flooding destruction during Q3, intellectualized several regions including Hainan province impacted by flood, which led to a sharp drop in for delivery order volume in those regions. And then in August, the numerous cities had a resurgence of COVID cases. And there have been very strict control under these regions, I think I need to explain because sometimes, intuitively, you may feel that even under a highly controlled environment for delivery should be still growing even people should expect to order more per click and go out. But in reality is that when COVID cases happen, when we have very strong strict control, we have seen some very important delivery consumption areas will be heavily impact, for example, hampers travel areas, even some office areas, in which we may have some regulation that people need to stick home and not go to office, and those are all very, usually very important consumption scenarios for our food delivery. So, food actually could be heavily affected by these pieces. So, we have seen this overall cases have negative impact.

And finally on the macro level, as we mentioned revenue in the year-over-year growth of national catering industry, decelerates also in effect to about 4% in Q3. If we look at the two year CAGR, it's actually a negative 1%. So the deceleration growth of the cater industry also affected the delivery industry. If we looking forward, we expect that the growth of the catering industry could be continued decelerating over the next few quarters on the back of the current macro consumption environment with effective price if consumers, we're likely to have weaker demand for delivery under the environment. Meanwhile, we have also continued to see into fall and into see the COVID cases continue to happen in winter which will likely further dampen the demand for the delivery in temporary travel and other scenarios.

As a result, we expect to see meaningful negative impact on order volumes in Q4 and potentially in the first few quarters of next year. It's worth noting that food delivery order volume accident an analogy were usually fall into Q4 compared Q3and also fall in Q1, Q1 usually a very low season in terms of order volume. Also to fall after year, it's a high base -- was the high base. So, relatively speaking for delivery should be set to see elative low growth rate compared to earlier quarters of this year. However, I will share our long-term view on food delivery. Food delivery business is still I think a very promising business in China. We have also seen continued resilient growth compared to other consumption categories, with order volume growing at 25% year-over-year.

And actually in Q3 we have seen some big numbers such as food delivery daily order peak volume reached 50 million in August, while milk tea subcategory alone reached 12 million orders big volume. We believe that by putting more effort into expanding high quality supplies, optimizing operations for different product categories and different scenarios, and acquiring great insight into consumers needs. We are able to more efficiently meet the diversity by the consumer needs and to improve their transaction frequency and stickiness.

Our average monthly food delivery membership suppliers also hit a new record this quarter, reaching over 60 million. In summary, our long-term view on food delivery remained unchanged. We continue to target 100 million orders a day and continue to see food delivery as long term growth for the company. Thank you.


The next question comes from the line of Alicia Yap from Citigroup.


Hi, good evening, management. Thanks for taking my questions. Could you share with us the impact from the reason SAMR Administrative Guidance on your food delivery business? How are you adjusting your operation to satisfy these requirements? And also how will the impact -- how will this impact your financial performance and also the cash flow? Do you expect a similar anti monopolistic pressure on your other business? Thank you.


Thank you, Alicia. The enforcement and supervision on the food delivery industry from SAMR encourages healthy and orderly industry development. We are fully supportive because we believe we can have better operations in a fair competitive environment. We fully respect merchants' choices from the beginning of this year. We prohibited any exclusive partnerships. In Q2, we rolled out a new tier the pricing mechanism to promote a more transparent pricing and clearer cost structures for merchants. In the past few quarters, we continue to improve our couriers' welfare and benefits.

Our food delivery business maintained industry leading business growth and consumer experience. In the past few months, we actively implemented various compliance requirements that improve our internal control mechanism. We conducted in depth several reviews and proactively rectified any issues to ensure full compliance. We set up a compliance rectification working group headed directly by me to formulate rectification plans, according to the requirements of SAMR, administrative guideline guidance. We have also founded six special teams who oversee antitrust compliance, couriers rise, data compliance, platform governance, EPAC reporting and brand departure development plus activity.

On competition and compliance, we improved our system and control of authorizations, as well as provided more legal and compliance training. We prohibited any use of exclusive partnership and affirmed against it. Going forward, we will pay more attention to service quality and technology innovation. We should also work more closely with the merchants to jointly provide quality services to our consumers for win-win cooperation with the merchants.

With regard to other aspects, such as the food delivery, courier welfare, data security, et cetera, we have improved our internal control mechanism and formulated a series of measures to protect the legitimate rise and interest of our merchants, consumers and couriers in accordance with relevant laws, regulations and policies. We have conducted the checks on antitrust risk for all of our businesses. Going forward, we will continue to conduct inter self inspection according to the administrative directors. All of our new business decisions are required to pass NHS assessment and we will insist on strict antitrust compliance for all of our operations. On the financial impact, total fine by SAMR was RMB3.4 billion and accounted in other losses net this quarter.

We have excluded the financial impact of the fine n our non IFRS disclosure. In addition, we have refunded the exclusive partnership deposit to a merchant which have a limited impact on our balance sheet and does not impact our income statement. That's all. Thank you.


The next question comes from the line of Tianjiao Chen from Pacific.


Thank you. My question is regarding Meituan Instashopping business. What do you think of the long term prospect for this business and how should we expect its profitability level? And also I noticed that other players have recently upgraded a strategy on this vertical and how do we see our competitive advantages and future strategy? Thank you.


Thank you for the question. A few factors throughout the consumers needs for on-demand delivery, such as digitalization, urbanization and the wider reach of on-demand delivery network. Actually, I think the food delivery with its 30 minutes deliver services have educated Chinese consumer of this very efficient and convenient lifestyle. We believe going forward consumption habits may gradually shift towards on-demand retail and the retail trend may evolve from everything insta to everything now, and we hope may find to be everything-now brand. We will develop both the supply and demand sides to help us achieve this goal. On the supply side, given the more moderate offline retail growth, more brands across different categories and more offline retailers start to embrace the on-demand retail distribution.

We also see new brands created dedicated at on-demand network. We hope to have with more and more brands and retailers digitize their business and operate more efficient on our platform. We will launch more projects, for example, assisting 100 brands to realize more than RMB1 billion GTV in the next five years, [Indiscernible] and collaborating with 10,000 supermarkets in Hangzhou in 100 cities to operate better digitally.

On the demand side, we are delighted to see the stronger consumer mindshare for on-demand retail as product category expanded from fresh produce to flower, medicine, snacks, electronic products, health products and more. Consumption scenarios also widened from addressing urgent needs to more regular routine for purchase. As product categories continue to diversify, we think that in the long term, most of the delivery users will be able to convert it into Meituan Instashopping users. Our food delivery business have proved the profitability capability may drive the shopping natural extension of our on-demand delivery services from food to other categories, has the potential to achieve higher AOV, we also think it has good advertising potential for monetization.

Hence, we are very confident about Meituan Instashopping given economic potential in the long term. Similar to our food delivery strategy, we believe quality growth on scale is more important than profitability in the short term on Meituan Insta shopping. We will continue to develop structurally important categories to drive long term industry growth. On competition, we do notice that more players are joining in to the on-demand repaying which we think is a good thing demonstrate the potential of this industry and we think the investment by different players together we are reinforced their long term potential of this market and we are very confident on the price advantages. First, we have one of the largest on-demand food delivery networks. And it established very strong consumer mindshare, for quick on-demand deliver services and we also have the largest merchant and the most diversified category offering developed over several years with a very strong national wide business development capability.

Our merchant base, including not only the large supermarket but also much wider range of partners, including small to medium merchants. And we have been very good know-how and the probability of serving these SMBs. Our services are available nationwide in different tier cities with richer consumer experience and product hire categories. So we are very confident that we will be able to continue to build the mindshare for Meituan as now everything now. Thank you.


The next question comes from the line of Jerry Liu from UBS.


Okay, thank you management. Maybe I'll ask one on the in-store hotel and travel business. There have been some industry wide macro headwinds in the third quarter that we all saw, especially from the ecommerce platforms, and as management mentioned earlier, as well. But first, when I look Meituan in-store business in the third quarter, it still showed pretty good growth, better growth than peers. So the first part of the question is what drove that? And the second part of the question is how do we look at the fourth quarter and beyond? Management did mention, for example, in the food business, there could be some hedging. So how does that look for the in-store business? Thank you.


Thank you, Jerry, for the question. Thank you for noting that our in-store business revenue growing by 53% year-over-year, we're also very happy for this result, I think on high level within the in-store business as a percentage of total local services in China, the penetration rate is still very, very low. I think that's the most important reason and driver for our continued very fast growth. And although both in-store and food delivery have been affected by their COVID cases, we have seen that when the government able to really have very effective control, the offline service consumption recover fast in our in-store business able to benefit from its very faster recovery.

Meanwhile, consumption activity during holidays such as the Mid-autumn Festival and consumption before National Day holiday remain more local service driven such as dining, leisure and entertainment and parent child activities versus long haul travels. As you know, those travels were discouraged and the Meituan is the go-to- destination for local services, anything from such time. We also think a very diversified offering of different categories, different products on our platform is to provide a very strong foundation for us to achieve a resilient growth on the different macro environment. And particularly, the number of active subscribing merchants maintain very steady growth, when they trying to recover and able to really getting more business from online when their offline business is growing much slower.

The resilient growth of second segment also partially attributed to this very strong advertising revenue growth. Recently, there was a wider spread of COVID cases, which have impacted our second segment since the end of October. And I expect to have meaningful impact on our revenue growth in Q4 and maybe Q1 this year, however I believe that the COVID can show will become more effective and more routine and the impact may not last alone. Still, we believe the second segment still has very long term growth potential given its very low amount penetration ratio and current macro environment we think actually consumer could be more price sensitive and we provide a very diversified offerings for continuing to buy coupons and extra deals. And to enjoy the local consumption, so these could actually be also an important driver for consumers who are looking for good deals to come to our platform.

So we remain positive on their continued growth of the insta business, and also on the profit margin, we also have the confidence that it will remain stable, and a few more sentences on hotel booking, hotel and travel business are more heavily affected. We continue to leverage our competitive advantage in lower tier markets and lowest hotels to drive the steady domestic roadmap growth. We have also continued to collaborate with more high star hotels, occupied high star hotel supplier and improve service experience by driving growth high star hotels as well.

In addition, we will explore more diversify products such as cooperation with popular theme parks, as well as package deals across our platform to further strengthen our cross-selling capability. Thank you.


The next question comes from the line of Kenneth Fong from Credit Suisse.


Hi, good evening, Xing, Shaohui, Scarlett and team. And thanks for taking my question and congrats on solid set of results. I have a question on a Meituan Select. Could you please give us some updates on the Meituan Select business especially given that you have operated a community group ecommerce business over a year now? Have you done any sort of like a business review? If so, what aspects that is consistent with your original expectations? And which ones are not? How should we see the Meituan Select potential regarding like user categories, order volumes and the ultimate time for proper turnaround. And lastly, with our regulations and the change in the competitive landscape, how will you implement your strategies in the future? Thank you.


Thank you, Kenny. Yes, you are right. It had to be more than one year now since we started the Meituan Select in last July. And really, Meituan Select already operates nationwide and continues to provide a convenient, diverse and value for money products to consumers. The regulatory environment has evolved since Q3; we treated compliance as a top priority optimizing pricing strategy and focusing on user experience and our own long-term capability developments. We put more focus on high quality growth, improving operating efficiency while maintaining industry leading business scale.

We actively optimize various operating strategies and strengthen our capabilities. On a broader front, we continue to increase food diversity and optimize category structure, improving the quality of our fresh produce. On the user front, we optimized operating strategy toward both regular and new users to further capture consumer mindshare. On the logistic side, we further refined the management of the entire logistical chain and optimize the warehouse layout, improving our operating efficiency while ensuring high product quality and timely delivery. We can then back ongoing review of Meituan Select and continue to iterate operations. We remain patient and confident on its long-term penetration and skill potential. I think competition has and will become more rational under the new regulation environment while the pace of its growth might be lower than our initial judgment on where market expected.

We believe it has a constructive for the healthy industry development, after iterating our business model for over one year now; we will maintain our industry position in the first year and focus more on high quality growth rather than the speed of ramp up in the short term. I would like to stress that Meituan is a very complicated business. We need to refine operations for different nodes of the retail value chain which requires continuous enhancement of our long-term capability, especially to further strengthen our surprising capability, iterate logistic solutions and refine operations.

We are delighted that our operating efficiency improved as we grow at healthy and steady pace with the goal of achieving high quality growth in mind, we will continue to allocate resources more efficiently by refining our operation, improving product diversity and quality and ensuring stable fulfillment. With this we are improving user satisfaction, fitness and transaction frequency, which will in turn, more stable volume growth, a gavel optimizing our operations, efficiency. We expect the unit economics to improve over the long run as well. Thank you.


Thank you. I'd like now to hand the conference back to our speakers today for any closing remarks. Please go ahead. Thank you.

Xu Meituan

Okay, thank you for joining our call. We look forward to speaking with everyone next quarter.


Thank you. This concludes our conference for today. Thank you for your participation. You may all disconnect your lines now. Thank you.

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