One of the bigger Chinese companies I've missed out on is Meituan-Dianping (OTC:MPNGF). Though food delivery companies like Meituan have generally struggled to make money around the world, Meituan has defied conventional wisdom as the dominant platform in China. And besides, Meituan is so much more than just a food delivery app.

Meituan's full breadth of offerings and ambitions were on full display in its recent second-quarter earnings report last week, where the company also made some tantalizing comments about its future ambitions.

A delivery man seen from the neck down carrying groceries and holding out a sealed paper bag.

Image source: Getty Images.

A recovery from the pandemic

Meituan's second-quarter earnings in and of themselves might not have seemed like the high-octane growth story it is, but considering the tech and logistics company was recovering from the COVID-19 pandemic, investors cheered the results, sending shares up nearly 7% on Friday, August 21.

Metric

Q2 Revenue Growth (YOY)

Q2 Operating Profit Growth (YOY)

Food delivery

13.2%

65.7%

In-store, hotel, and travel

(13.4%)

(11.9%)

New initiatives and others

22.1%

11.3%

Total (adjusted)

8.9%

34%

Data source: Meituan-Dianping Q2 2020 release. YOY= year-over-year.

Two things really stuck out in Meituan's earnings report. The first is the improving profitability of the company's food delivery segment, which only had marginal year-over-year revenue growth, as restaurants are just getting back to opening in China. The second is the emergence of Meituan's "new initiatives," which include its e-bike sharing platform, as well as a new online grocery delivery service that has been booming in the wake of COVID-19.

Actually making money from food delivery

In an age where so many food delivery companies around the world aren't profitable, it was somewhat incredible to see Meituan's food delivery profits surge so much more than its revenue.

Management noted three big factors behind the food delivery profits. First, China experienced good weather during the second quarter, and labor supply was plentiful in the wake of COVID-19 layoffs in other parts of the country. Meituan was thus able to hire delivery drivers with fewer extra incentives, which the company usually does to compensate drivers in times of bad weather.

The second factor was the continuing improvement of Meituan's AI-powered delivery algorithm, which more efficiently dispatches drivers to where deliveries are needed in a shorter amount of time. This scale-based tech advantage is going to be key for Meituan, and management still thinks there is still room for improving driver efficiency.

Finally, people ordered bigger meals during the quarter while stuck at home, with the average order size increasing by 9.4%. The bigger the meal, the more revenue per delivery, thus increasing profits.

MPNGF Year to Date Total Returns (Daily) Chart

Data source: YCharts.

New initiatives could be big

It should be noted that the new initiatives segment is still loss-making, but the operating margin on this business improved 9.8 percentage points compared with the prior-year quarter, from a 35.7% loss to a 25.9% deficit.

Most notable is Meituan's grocery delivery business, which, given the company's leading expertise in restaurant delivery and 3 million-plus delivery workforce, could be a winner even up against intense competition from other leading internet players.

Meituan has several different grocery delivery formats, including a marketplace model that connects consumers with grocery stores; Caidaquan, which connects consumers with over 300 wet markets; Meituan Grocery, a service in which Meituan takes possession of inventory itself in its own warehouses; and a new group-buying service called Meituan Selected, which offers a curated selection of fresh produce at discounted prices for communities of people who come together and buy in bulk via WeChat groups.

And... autonomous electric vehicles?

Over the long term, Meituan could become massively profitable if it can figure out how to use autonomous vehicles to deliver goods, since its drivers are such a huge expense.

On that subject, the company recently invested about $500 million for a 14.5% stake in electric-vehicle upstart Li Auto (NASDAQ:LI) just before its initial public offering in late July, when it became the second Chinese EV-maker to go public in the U.S., after Chinese EV leader NIO.

closeup of an electric vehicle being charged. by a plug.

Image source: Getty Images.

Of the investment, which has already tripled in value, Meituan CEO Xing Wang said it was done not just because he thinks highly of the Li ONE product, which he drives, as does Li's founder and CEO, Li Xang, but also because it could be good for Meituan's delivery ambitions over the next decade or so:

Li Auto is working on autonomous driving and they are also mapping technology. And also they are working on novel human vehicle interaction, including voice recognition and many others. So all these efforts are expected to have synergies with Meituan in the future. Not now, not next quarter; probably not even next year. But they are going to have synergies with us in the long-term future. And also mobility. So remember that the mission of Meituan is to help people eat better, be better. So we are very focused on helping people eat better. Actually, we don't grow food. We don't cook food. We don't prepare food. What we do is to deliver food. So essentially Meituan is a mobility company. So that's what we do. So we deliver something. So vehicle is important for us.

Look out for Meituan

Don't look now, but Meituan-Dianping has almost reached $200 billion in market cap, as the company is proving the food delivery business is not just large but can also be profitable. And if the company can eventually bring together autonomous EVs into the mix to replace drivers, massive profitability could be down the road, should investors hold long enough to see that vision come to fruition.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.