The stock price of Meituan Dianping rose 137%, is it the end of its stock price?

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Meituan Dianping made remarkable achievements in Q3 2019. Not only the total revenue maintained a 44.1% year-on-year growth rate, but also the operating profit for two consecutive quarters was positive. So the possibility of annual profit was further enlarged. At the same time, the capital market also gave a positive evaluation of the company. At present, the stock price of Meituan Dianping rose 137% compared with the beginning of the year.

But on the other hand, Meituan Dianping is still in the market environment surrounded by its competitors. It not only has carried out various kinds of subsidy wars with Alibaba's local life, but also has increased the competition with Ctrip in hotel. Only with the tightening of business, the competition with Didi in takeout and taxi has temporarily come to an end.

In this paper, we will focus on how Meituan Dianping respond to the current competition pattern and whether Meituan Dianping have investment potential.

Shrink the front line and adjust the way of revenue

For market value management and business needs, before the IPO in 2018, Meituan Dianping carried out a series of large-scale expansion activities, such as the purchase of Chinese Mobike by 15.56 billion yuan, entering the taxi business, and doing fresh business. At that time, Meituan Dianping have become widespread in China. The above behavior starts before IPO, which not only provides enough story for enterprise pricing, but more importantly, Meituan Dianping also need to expand the business to realize the transition.

Taking the acquisition of Mobike as an example, although the total target is up to 15.56 billion yuan and the cash expenditure is 9.44 billion yuan, Meituan Dianping also obtained 500 million yuan of user advance payment and 8.12 billion yuan of user deposit. From the perspective of cash flow, this behavior did not increase the burden of cash flow, and won part of capital premium.

Now looking back, the acquisition is quite reasonable.

After 2019, Meituan Dianping contracted its business, the fresh food business began to close. And the taxi platform was changed to the aggregation platform, even Mobike also contracted to launch. After the depreciation period of the original vehicles, the profit problem caused by depreciation was also alleviated.

If Meituan Dianping mainly focused on weight in 2018, it will focus on weight loss in 2019.

In this slimming campaign, there are not only the contraction of business, but also the adjustment of operation ideas. The main representative is to start to focus resources on Meituan app. It not only cancels the independent app of Mobike and other sub businesses, but also reduces the dependence on wechat (for example, Meituan bike does not support wechat code scanning and unlocking). This is worth studying.

In Q1-Q3 of 2019, Meituan Dianping's trading users increased by 26.4%, 18.4% and 14% year-on-year for 12 consecutive months. As of Q3 of 2019, the total number of trading users was 440 million. Because Meituan Dianping's business is mostly concentrated in tier-1, tier-2 and tier-3 cities, it is difficult to cover rural and remote areas. The total number of users seems to be approaching the peak.

This means that Meituan Dianping needs to change it business model from the user snatch operation to the refined operation, and it needs to focus on their advantages.

Looking back, most of the expanded businesses of Meituan Dianping are still concentrated in the first, second and third tier cities, which have a large business intersection with the existing businesses. In the short term, the cooperation between businesses will form a benign ecological stimulus to revenue. However, in the long term, most of the sub businesses have no profits, and it is difficult to support the cash flow. The typical representative is Mobike. After the Ofo deposit run, the user's insecurity has increased, and there is not much room to back feed cash flow by deposit.

The total number of users is close to the peak, and the innovation business is difficult to improve the quality of operation in the medium and long term. So Meituan Dianping takes some measures to alleviate this situation. First, it concentrates the main resources on Meituan app. Second, it Shrinks the innovation business.

As a result, the innovation business contracted, the cash flow pressure dropped sharply, and it helped to make profits. This is also an important reason why Meituan Dianping turned from loss to profit since Q2 2019. In other words, when a series of expansion was carried out in 2018, Meituan Dianping also concealed the profits, and officially unveiled the profits in 2019.

As the above views are confirmed by quite a few people, we will not elaborate, but focus on the adjustment of Meituan Dianping on the choice of profit-making mode.

We collated the data of Meituan Dianping in commission revenue and advertising revenue in recent quarters, as shown in the figure below

It can be seen clearly that in recent quarters, the overall commission rate of Meituan Dianping has remained relatively stable. It mainly benefited from the pressure of competitors (like Ele.me, it still has a certain impact on takeout. And too high commission rate will also affect the choice of businesses.), as well as the overall limitations of the industry. For example, in the market economy, too high commission rate will obviously increase the price of takeout. It’s obviously not conducive to the general direction of downward market growth.

Although there are some complaints about high commission rate of Meituan Dianping from time to time. Obviously, it gave up the way of growth and turned to increase advertising revenue in 2019.

Although the monetization rate of advertising revenue is still at a low point of 3%, Meituan Dianping takes it seriously. That is to say, after Meituan becomes a super app with 440 million annual costumers, its advertising value is bound to increase.

E-commerce upstart Pinduoduo, as an online retail platform, it has 540 million annual costumers in Q3, 2019. Its total advertising revenue is 6.7 billion yuan, 1.5 times that of Meituan.

If Meituan app is regarded as a large advertising platform, its market potential will have greater appreciation space by reference Pinduoduo. Therefore, when considering the growth and the particularity of local life industry, it is expected that the monetization rate of advertising business will be 6% in the short term.

If this figure is realized, on the one hand, it can bring new revenue growth points for Meituan Dianping, especially after the commission rate reaches the peak and the takeout business growth rate enters the low and medium speed range. The monetization of advertising business can help to alleviate this pressure. On the other hand, when facing its opponents, it can improve the competitiveness of the business side by reducing the commission. In this way, it can give its operation a rational and flexible space. 

Next, the advertising of Meituan will be a big focus.

In summary, in order to achieve the strategic goal of strengthening cash flow, stabilizing growth and turning losses, Meituan has carried out slimming transformation. It focuses on "light operation". At the same time, the expansion of Meituan app has also improved the advertising effect of the platform.

So, is it a good time to invest in Meituan?

How to view the market value of Meituan?

The share price rise of Meituan is beyond the judgment of quite a number of professionals in the industry. We inquired about the shareholding of China Capital Internet 50ETF fund of E Fund.

From Q4, 2018 to Q3, 2019, the fund mainly invests China Capital Internet companies. The shareholding of Meituan Dianping is 1,315,300 shares, 1,027,800 shares, 688,700 shares and 1,019,900 shares, respectively.

However, Meituan's stock price soared just after Q2 2019. At this time, the above-mentioned funds reduced their holdings until Q3.

The performance of Meituan in the secondary market has obviously surprised many people in the industry. So how do you think about the growth of Meituan Dianping?

We take the theory of ROE to judge, which is Buffett's favorite (earning rate on shareholders' equity).

First look at the formula: ROE = sales net profit / shareholders' equity = sales profit rate * asset turnover rate * equity multiplier

First look at the profit rate. We assume that the increase of advertising business will be the main means to improve the profit rate. In 2018, the total transaction scale of Meituan Dianping was 515.6 billion yuan. With the purpose of achieving the above transformation in two years, and the annual compound growth rate of 30%, the total transaction scale of the platform will be 871.3 billion yuan by the end of 2020.

Set the monetization rate of advertising at 6%, the revenue of this part will reach the annual revenue scale of 50 billion yuan. It is more than 5 times of the total advertising revenue, which is 9.4 billion yuan in 2018. If other parts remain unchanged, by the end of 2020, the total monetization rate of the platform will reach 17.1%, and the total revenue will be 148.1 billion yuan.

In Q3, 2019, the net profit margin of Meituan Dianping is 4.8%, maintaining the existing business cost and expense limit. Assuming that most of the new advertising business will become the profit, it is set as 80% (in fact, except for the sales expense and server bandwidth, the increase in advertising business will not increase too much extra cost, which is different from takeout). By the end of 2020, the total profit will be around 26 billion yuan, and the algorithm is: 1481 * 4.8 %+(500-8713*3%)*0.8

At that time, the profit margin will be around 17.5%.

Assuming that the total equity is about 100 billion yuan (in Q3, 2019, it is 90.4 billion yuan), the ROE will reach 26%.

What level is this? See the ROE level of Alibaba in recent years, as shown in the figure below

From macrotrends.net

It means that although starting from operation-oriented business, if we control the space of advertising revenue well, after Meituan becomes "lighter", this indicator will be close to Alibaba's level (Alibaba will carry out operation-oriented business transformation during acquisition and expansion, which is just the opposite).

In the above analysis, the profit and growth are judged rationally. It is inevitable to overestimate, but we can expect to conservatively set 20% ROE.

After Alibaba's listing in Hong Kong, the P / E ratio has reached 40 times. If Meituan Dianping get the same P / E ratio with the ROE as a reference, and conservatively get the P / E ratio of about 30 times. At the same time, the net profit of 26 billion yuan will generate 780 billion yuan of market value, which still has some space compared with today.

This is an article from Sohu，translated by Chris Yuan.