Expansion Into Saudi Arabia And Partnerships Like MINISO Will Drive Future Consumer Engagement

Key Takeaways

• Expansion in on-demand delivery and retail segments through innovation and partnerships is set to drive consumer engagement and revenue growth.
  
• Focus on international expansion and strategic initiatives in local commerce aims to enhance market share and long-term profitability.
  
• Meituan's growth efforts and international expansion face execution risks, competition, and regulatory challenges, impacting costs, margins, and revenue predictability.

Catalysts

Operates as a technology retail company in the People’s Republic of China.

• Meituan's expansion and innovation in the on-demand delivery segment, including new formats like Pin Hao Fan and Branded Satellite Stores, are expected to drive increased consumer engagement and bolster revenue growth.
  
• The Meituan InstaMarts initiative is penetrating into lower-tier cities and expanding its product categories, positioning the company to capture a larger share of the growing on-demand retail market, which should enhance revenue and net margins.
  
• Strategic partnerships, such as with MINISO in Meituan InstaMarts, are likely to increase product variety and improve consumer experience, potentially boosting earnings through higher transaction volumes and efficiency.
  
• The integration of the Shen Hui Yuan membership program and the focus on cross-selling among its core local commerce businesses are expected to increase user engagement and transaction frequency, supporting revenue growth and profitability.
  
• Meituan's ongoing international expansion, beginning with the launch of Keeta in Saudi Arabia, indicates potential long-term growth opportunities and revenue diversification.

Meituan Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Meituan's revenue will grow by 14.4% annually over the next 3 years.
• Analysts assume that profit margins will increase from 9.9% today to 10.9% in 3 years time.
• Analysts expect earnings to reach CN¥53.0 billion (and earnings per share of CN¥6.35) by about December 2027, up from CN¥31.8 billion today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting CN¥78.8 billion in earnings, and the most bearish expecting CN¥44.2 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 40.2x on those 2027 earnings, up from 28.0x today. This future PE is greater than the current PE for the HK Hospitality industry at 23.6x.
• Analysts expect the number of shares outstanding to grow by 12.07% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.09%, as per the Simply Wall St company report.

Meituan Future Earnings Per Share Growth

Risks

• Meituan's entry into the international market, such as Saudi Arabia, involves significant execution risk and competition, which could impact revenue growth and increase costs.
  
• The increase in competition and the necessity for continuous innovation in the core local commerce and food delivery sectors may lead to increased marketing and operational expenses, affecting net margins.
  
• The potential for regulatory changes or economic volatility in China and international markets poses risks that could influence consumer spending and ultimately impact Meituan's earnings.
  
• The significant investments required for growth initiatives like the Pin Hao Fan and Meituan InstaMarts could pressure cash flow and operating margins if these projects do not meet revenue projections.
  
• The need for expanding support programs and subsidies for merchants, along with changes in consumer spending patterns, may result in variable revenue growth and impact profit margins in the long term.

Valuation

• The analysts have a consensus price target of CN¥202.14 for Meituan based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of CN¥298.98, and the most bearish reporting a price target of just CN¥113.09.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be CN¥483.8 billion, earnings will come to CN¥53.0 billion, and it would be trading on a PE ratio of 40.2x, assuming you use a discount rate of 8.1%.
• Given the current share price of CN¥160.1, the analyst's price target of CN¥202.14 is 20.8% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.