Idea of the Week: Meituan - Can China's food delivery giant survive the "Consumption Downgrade"?

In the first nine months of 2024, Meituan’s core local commerce segment (comprising its food delivery and in-store, hotel, and travel services) was the primary revenue driver, accounting for 74% of total revenue. The food delivery segment maintained its industry-leading position, with 7.1 billion instant delivery orders, marking a 14.5% YoY growth.

Table 1: Meituan’s Segment Revenue and Operating Profit

Meituan’s high affordability and convenience have reinforced its role as a daily essential for consumers, strengthening customer loyalty and positioning it as a beneficiary of the consumption downgrade. As shown in Table 1, Meituan’s core local commerce segment and new initiative segment achieved revenue growth of 22% and 26% YoY, respectively. The operating profit margin of the core local commerce segment improved significantly to 21%, driven by the food delivery market's maturation. Platforms are shifting from price wars to a greater focus on efficiency and quality. Leveraging its strong delivery network and user base, Meituan has enhanced the profitability of its core local commerce segment, ensuring steady growth.

A standout feature of Meituan’s core local commerce segment is its “Lightning Warehouses” (small warehouses in cities). These warehouses store consumer goods such as fresh produce and daily necessities, functioning as “instant delivery centers,” managed by merchants or the platform itself. Meituan provides technical support and delivery services, charging fees in return. Currently, there are over 30,000 of these warehouses, and the group expects this number to exceed 100,000 by 2027, further strengthening its competitive advantage in the delivery network and promoting business expansion.

In terms of new initiatives segment, Meituan is gradually narrowing its losses. Quarterly losses have dropped significantly from an average of RMB 5 billion per quarter in 2023 to RMB 1 billion in Q3 2024, with expectations of breaking even next year. Additionally, technological innovation is a key highlight for Meituan’s new initiatives. Its drone delivery service operates in 11 commercial districts in cities like Shenzhen and Shanghai, completing 360,000 orders, making it the third-largest drone delivery operator globally. This provides additional growth momentum for Meituan’s the segment.

Net cash position, minimal overall credit risk

As shown in Table 2, as of the end of September 2024, Meituan held total cash of RMB 43 billion and short-term investments of RMB 92 billion (a combined RMB 135 billion), significantly exceeding its total debt of RMB 36 billion. This places Meituan in a net cash position.

Thanks to its improved profitability and low debt levels, Meituan’s total debt-to-EBITDA ratio stands at only 1.7x, while its interest coverage ratio is as high as 30.0x, reflecting solid credit conditions and low overall credit risk.

Notably, compared to Xiaomi Group, which has a similar credit rating and strong credit quality, Meituan’s bond yields are about 20 basis points higher, indicating Meituan’s attractive investment value.

In addition to profitability improvements, Meituan has started reducing its debt level, with total debt falling by approximately RMB 19  billion during the year. This suggests the group may be entering a "deleveraging" cycle. Given its strong profitability and substantial cash holdings, Meituan is unlikely to increase its debt levels significantly in the future, indicating that its credit risk should remain low.

Meituan's four USD bonds offer yields to maturity of around 5%

Currently, our platform offers four Meituan USD bonds, all rated BBB+ / BBB (S&P/Fitch), classified as investment grade. The bonds have maturities ranging from 1 to 6 years, with yields to maturity between 5.1% and 5.2% (Table 3).

Among them, Meituan’s 2025 bond, "MEITUA 2.125% 28Oct2025 Corp (USD)", is a Bond Express member, allowing investors to purchase this investment-grade bond with a lower minimum investment fee. Additionally, investors can consider the other three Meituan bonds, which offer yields to maturity around  5%, making them suitable for those seeking stable returns.

Table 3: Meituan’s USD bonds

Notably, compared to Xiaomi Group, which has a similar credit rating and strong credit quality, Meituan’s bond yields are about 20 basis points higher, indicating Meituan’s attractive investment value.

Related Risks

Weak economic recovery in China has driven companies to prefer low-cost and discounted products. While Meituan benefits from delivering such goods at low fees, this model’s profit margins are relatively low, potentially limiting further profitability growth.

Despite narrowing losses, Meituan’s new initiatives are not yet profitable. If these segments fail to achieve scale effects and improve operational efficiency as expected, they could drag down overall performance.

Increased government regulation of internet platforms, including data security, competitive behavior, and labor rights, may raise Meituan’s compliance costs and pose challenges to its business model and profit margins.

Conclusion

Meituan has enhanced the profitability of its core local business through its robust delivery network and large user base, making it one of the beneficiaries of the consumption downgrade.

Meituan is in a net cash position, coupled with low debt levels, reflecting minimal overall credit risk.

Currently, Meituan's four USD bonds offer yields to maturity of around 5%, appealing to investors seeking stable returns.