Meituan Q2 Profit Nosedives 97% amid China's Food Delivery War

TMTPOST -- The American depository receipts (ADRs) of Meituan traded on the over-the-counter (OTC) market in the U.S. closed 9.7% lower on Wednesday after the Chinese food delivery giant posted steeper-than-anticipated decline in profit, fueling investors’ concerns over its profitability and ability to maintain market dominance amid harsh price war in homeland market.

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Meituan reported profit of RMB365.3 million ($51 million) for the quarter ended June 30, representing a year-over-year (YoY) fall of 96.8%. That was much worse than analysts estimated profit of RMB70.7 billion polled by LSEG, while the company recorded a YoY 87.3% increase in profit three months ago. Operating profit shed 98% YoY to RMB226.35 million after a gain of 12.2% for the previous quarter. On non-IFRS basis, adjusted net profit slumped 89% YoY to RMB14.93 billion, also missing expected RMB9.85 billion.

Meituan’s top line for the second quarter slowed down. Revenue climbed 11.7% YoY to RMB91.84 billion, falling short of estimated RMB93.6 billion. The January to March period saw the revenue rose 18.1% YoY. Meituan’s cash cow-- Core Local Commerce including food delivery generated RMB65.3 billion with a 7.7% YoY increase, compared with a 17.8% rise for the preceding quarter. Operating profit of the segment plunged 75.6% YoY to RMB3.7 billion, and operating margin dropped 19.4 percentage points YoY to 5.7%, after a 39.1% YoY increase in profit with a margin of 21.0% fo the March quarter.

Meituan’s New Initiatives in part offset its revenue slowdown. Revenue from the segment jumped 22.8% YoY to RMB26.5 billion after a rise of 19.2% for the first quarter. Operating loss for the segment widened 43.1% YoY to RMB1.9 billion, while operating margin improved 3.1% sequentially to negative 7.1%. In comparison, the segment recorded a margin of negative 10.2% and operating loss of RMB2.3 billion, narrowing 17.5% YoY.

The plunge in bottom line highlighted the profit squeeze as the intense price war in China bites. Meituan attributed the deep decline in operating profit to “the irrational competition” in the food delivery sector.

"China’s food delivery sector has entered a full-scale delivery war ... this is a battle Meituan cannot afford to lose," commented ThirdBridge analyst Jamie Chen."Subsidy intensity is expected to ease gradually after the third quarter before platforms shift their focus to unit economic discipline next year."

Meituan CEO Wang Xing at an earnings call acknowledged headwind due to the severe competition while pledging to defend its market leadership. “We firmly oppose the current competitive dynamic, and regulators have made it very clear that they do not want such competition like rat race in the market. However, if competition continues to intensify and become more intense, we will do our utmost to defend our market position,” Wang told analysts.

Wang said the industry “entered a new phase of intense competition” in the second quarter, but no matter what happens in the market or amid the competition, Meituan will “focus on doing the right thing and getting back to the basics, which is providing a better selection, making sure we can offer quick and reliable delivery and prices that are always affordable.”

Meituan, Alibaba Group Holding Ltd., and JD.com Inc. in late July vowed to curb disorderly competition but the price-based rivalry seems not cease at any time soon.

“We expect there will be continued fierce competition in the near term, and that will bring negative impact on our financial results,” said Chief Financial Officer Chen Shaohui on Wednesday. He also said Meituan sees “significant loss” for its Core Local Commerce in the third quarter.