For those anticipating how the U.S. might bounce back from coronavirus, investors may wish to look to China. Though COVID-19 first broke out there in the city of Wuhan, the Chinese eventually got the virus under control after severe lockdowns of Wuhan, the surrounding Hubei province, and other major cities.
For those looking for a snapshot of how the Chinese economy is coming back to life, Meituan Dianping (MPNGF 4.69%) may be a name to follow. The company is the largest food delivery service in China. In addition, its online platform sells in-store services, hotel bookings, and travel bookings, along with new initiatives such as bike-sharing, online grocery, and restaurant management software.
Meituan just reported its fourth-quarter 2019 earnings, which came in extremely strong. However, Meituan also offered a more mixed picture of the post-COVID-19 world in China that is slowly getting back on its feet.
Image source: Getty Images.
White-hot growth pre-COVID-19
While many investors have wondered if a food delivery and daily deals website can actually make money, Meituan seemed to relieve that doubt in 2019. Check out these huge growth numbers:
|
Meituan Dianping (MPNGF 4.69%) (billions, RMB) |
2019 |
2018 |
Growth |
|---|---|---|---|
|
Food delivery revenue |
54.8 |
38.1 |
43.8% |
|
Food delivery gross profit |
10.2 |
5.3 |
92.5% |
|
In-store, hotel, and travel revenue |
22.3 |
15.8 |
41.1% |
|
In-store, hotel, and travel gross profits |
19.7 |
14.1 |
39.7% |
|
New initiatives revenue |
20.4 |
11.2 |
82.1% |
|
New initiatives gross profit |
2.3 |
(4.3) |
N/A |
|
Total revenue |
97.5 |
65.2 |
49.5% |
|
Total gross profit |
32.3 |
15.1 |
113.9% |
Data source: Company filings. Chart by author.
These are blockbuster results, owing to Meituan's dominant position as the go-to website for services in China. Most encouraging is the profit expansion in the food delivery business. Many see food delivery as a tough, low-margin, competitive business that makes it hard to make money. However, Meituan's huge 60% market share in food delivery and its profitability this quarter show food delivery can actually be a profitable business with enough scale.
At the same time, the in-store, hotel, and travel business grew impressively, with management saying that it actually accelerated in the second half of the year. The segment is also very high-margin, contributing the most to Meituan's overall gross profits.
Finally, Meituan's new initiatives swung from a gross loss to a gross profit, improving a stunning amount. The company was able to reduce losses in the bike-share segment, while also bringing on more high-quality restaurants for its restaurant management and food distribution software. Finally, Meituan also started up its own grocery delivery business, both directly through its own warehouses as well as delivering for third-party grocers.
But things will go negative in the first half of 2020
Of course, all of these great numbers occurred before the COVID-19 breakout in the country. As such, management predicts much worse numbers in the current quarter. However, it also offered some rays of hope.
The company is forecasting operating profits turning into losses in the first quarter, with negative overall revenue growth. Management also didn't update its full-year outlook, as it was uncertain as to how the recovery would take place.
While some might think food delivery would benefit from the coronavirus quarantines, many restaurants in China were actually closed during this time. Management said that food delivery volumes fell by over half during February, when much of the country was locked down. Most citizens apparently adopted online groceries for food. While Meituan is also going into that business, it's tiny compared with the main restaurant food delivery business.
Meituan did say that it had recently seen a gradual recovery in the food delivery business, and it helped merchants with contact-free delivery and getting their stores back up and running. Hints of recovery encouraged investors, which bid the stock up the next day. However, the in-store and hotel business segments are still at extremely low levels of activity, as one might expect from anything travel-related.
China saw its cases peak back in February and has recently reported no new domestic cases for about the last week – though a double-digit number of "imported" cases roughly every day. However, management still says, "We expect consumers will need more time to build their consumption confidence for local consumption, especially those discretionary consumption scenarios in our in-store business."
Nevertheless, management also predicted the current crisis may accelerate the long-term e-commerce trends that will benefit Meituan:
The pandemic further cultivates the habits of consumers to use online platforms to satisfy their daily needs and makes local merchants realize the value of digital operation. We believe the digitization for both demand side and supply side will be accelerated in the longer term. Our long-term operating philosophy, established competitive advantage, and strong cash balance will enable us to remain undistracted during this short-term market impact and the resulting fluctuations in performance.
It's going to be a while
The U.S. may be six to 10 weeks in quarantine before much of the country is able to begin participating more in the economy -- and that's if we do things mostly correct. As you can see in Meituan's commentary, even when quarantines are lifted, things only gradually start getting back to "normal," with beleaguered sectors like travel and in-store activity still depressed.
Likely, that means investors should keep investing in companies that will benefit from the stay-at-home economy, while avoiding anything related to travel or discretionary purchases. If and when the virus is contained and the quarantines are relaxed, it seems travel and leisure activities will still remain depressed for some time to come.
