Among the Chinese technology giants with a market cap of over a hundred billion U.S. dollars, Tencent has the most stable stock price, while the most volatile belongs to others. $MEITUAN-W(03690.HK)$

$MEITUAN-W(03690.HK)$The highest stock price once reached 460 Hong Kong dollars, with a market cap close to 3 trillion Hong Kong dollars. Yet, it dropped to 61 Hong Kong dollars earlier this year, a decline of over 85%. Since February, with the recovery of Chinese concept stocks, Meituan's stock price has more than doubled, surpassing 200 Hong Kong dollars at one point.

$MEITUAN-W(03690.HK)$The volatility of the stock price is closely related to its performance trends. Meituan has been in a loss-making state for a long time, with valuation greatly affected by market sentiment, thus leading to significant fluctuations in stock price. Now, as Meituan's performance enters a stable profitable state, the correlation between its stock price and performance trends may become closer.

On November 29, Meituan will release its latest earnings. So, how should we interpret Meituan's earnings? We can focus on four key points: fundamentals, growth drivers, profitability, and share buybacks.

1. Fundamental Base: Core Local Businesses

$MEITUAN-W(03690.HK)$In terms of business structure, it is mainly divided into core local business and innovative business. The core local business includes takeout, in-store liquor and travel services, which is not only the main source of revenue for Meituan but also the absolute key contributor to Meituan's profits, undoubtedly the foundation of Meituan.

From the perspective of revenue, the revenue of Meituan's core local business in 2024Q2 is approximately 60.68 billion, accounting for nearly 3/4 of the total income, and the growth is relatively steady. The revenue growth rate in the previous few quarters has been over 20%, however, there is a trend of slowing down, with a year-on-year growth rate slipping to 18.5% in 2024Q2, but it is still a relatively high growth rate.

Meituan's core local business is mainly divided into two parts. The first part includes takeaway, instant shopping, and other home services, mainly relying on delivery services for revenue generation, while the second part includes group buying, hotel services, etc., mainly monetizing through commissions and online marketing services.

Meituan's to-home business revenue is mainly influenced by the number of delivery orders and the average order revenue. From 2022Q2 to now, Meituan's average order revenue initially increased and then decreased, currently basically stable, while its delivery order volume has consecutively exceeded a year-on-year growth rate of over 10% for 8 quarters, hence driving the growth of delivery service revenue.

Meituan's in-store business has been facing competition from the group buying business of Douyin in recent quarters, but still maintains growth resilience, with commissions and online marketing service revenue increasing by approximately 20% year-on-year in 2024Q2, maintaining a good growth rate.

In terms of operating profit, Meituan's core local commerce achieved an operating profit of approximately 15.2 billion in 2024Q2, hitting a historical high, while its operating profit margin reached about 25%, similarly reaching a recent high.

Most of Meituan's operating profit comes from the asset-light model of the in-store business, with profit levels continuously rising, perhaps largely benefiting from the easing of competitive pressure between Meituan and Douyin. The two giants are no longer aggressively expanding to grab market share but are focusing on improving monetization rates. The improvement in competitive pressure may potentially be positive for both Meituan's core local commerce revenue growth and profit margin.

In future performance, we can continue to observe whether Meituan's core local commerce can maintain a good revenue growth rate and sustain a rising operating profit margin level.

2. Growth Points: New Business

If the core local business is the fundamental base, $MEITUAN-W(03690.HK)$then its innovative business is its potential growth point. In the past few years, Meituan was once known for its borderless expansion, leveraging its traffic advantage to try out many new businesses. In the recent two years, Meituan's innovative businesses have gradually focused, mainly on projects such as Meituan Select, Xiaoxiang Supermarket, and Bike Sharing.

In terms of revenue, each quarter Meituan's new business has seen revenue growth of over 10%. It experienced a temporary decline in 2023Q2 but, thanks to the rapid growth of its self-operated business Xiaoxiang Supermarket, the revenue growth rate of the new business saw a significant rebound, reaching approximately 30% in 2024Q2.

What is more concerning to the market is the continuous losses of Meituan's new business in the past few quarters. The new business of Meituan has always been a drag on its overall profit, with losses reaching as high as hundreds of billions in a single quarter, even leading to overall company losses. However, in the recent quarters, the loss rate of Meituan's new business has been decreasing each quarter, with only about 1.3 billion remaining in the latest 2024Q2 fiscal quarter, and the loss rate is also at 6.1%, shrinking for the first time in history to below 10%.

For future performance of the new business, we can continue to observe whether Meituan's new business can maintain the current high growth rate, thereby driving overall company revenue growth, while further narrowing the loss rate, ultimately reaching a turning point of profitability.

3. Overall Profitability

Three years ago, $MEITUAN-W(03690.HK)$It used to be a company that sustained losses year after year. Even if there were occasional quarterly profits, they were quickly reversed. However, starting from 2022Q2, Meituan began to achieve continuous profitability. Although the net profit amount fluctuated in each quarter, it was overall on an upward trend. The adjusted net profit reached 13.61 billion in 2024Q2, setting a new historical record.

Generally, the improvement in a company's profitability is mainly reflected in two aspects, one is the increase in gross margin, and the other is the improvement in cost rates. Meituan can be said to have both aspects covered.

In terms of gross margin, since 2022Q2, Meituan's gross margin has been increasing year over year every quarter, showing a clear upward trend. It reached about 41.2% in 2024Q2, setting a new historical high, a significant increase of 19 percentage points from 2022Q2.

Looking at the cost rates, Meituan's sales expense ratio, management expense ratio, and research and development expense ratio have all been decreasing overall, leading to a significant decrease in the overall cost rate. From 2022Q2 to the present, most quarters of Meituan have been optimizing the overall cost rate, which was around 27.8% in 2024Q2, also hitting a new historical low.

With the rise in gross margin and the decline in cost rates, Meituan's profitability level has naturally seen a substantial increase, with its adjusted net profit margin increasing from 4.2% in 2022Q2 to 16.5% in 2024Q2, setting a new historical high.

For the future quarters, we can continue to observe whether Meituan's gross margin can continue to increase, if its cost ratio can be further optimized, thus driving the continuous improvement of the overall profit margin level.

4. Share Buyback

$MEITUAN-W(03690.HK)$In the past two years, the revenue growth has been fairly good, with the core local business continuously releasing profits, new business drastically turning losses around, also driving the overall profit to a historic high. However, in stark contrast, Meituan's stock price has been rising all the way from a historical high of 460 Hong Kong dollars to a low of over 60 Hong Kong dollars.

When the stock price falls, if management believes the company's stock is undervalued, they may initiate a buyback. At the same time, a buyback in silver and gold is also the best way for management to express optimism about the company's prospects.

Of course, the premise of conducting a stock buyback is having enough cash on hand to support it. Meituan's cash reserves once exceeded one hundred billion, enough to support large-scale repurchases.

At the end of November last year, when Meituan's stock price first fell below $100, Meituan announced its first share buyback plan in history, with a scale of $1 billion, and executed the buyback for the first time in January this year. By June this year, Meituan once again increased, announcing an additional $2 billion buyback plan.

Looking at the actual implementation, Meituan's buyback progress has been very rapid. The first $1 billion buyback scale has been completed in the first five months, and in June to July, they quickly used up all the bullets for the additional $2 billion buyback plan, with a total buyback amount of $23.3 billion Hong Kong dollars.

However, Meituan's buyback plan is not over. By the end of August this year, after announcing its second-quarter report, Meituan once again announced an additional $1 billion buyback plan to replenish ammunition for new repurchases.

Meituan's stock price, from over 60 Hong Kong dollars in January this year, has risen to over 200 Hong Kong dollars, rebounding more than twice from the bottom. Although benefiting to a large extent from the overall rise of Chinese concept stocks, Meituan's ability to become one of the leading bullish stocks in it is perhaps also inseparable from its large-scale continuous actions.

In future earnings reports, we can continue to observe the progress of Meituan's existing buyback plan and whether the management will continue to increase share buybacks.

Seeing this, you may have some new insights on how to interpret Meituan's performance. It is worth mentioning that every time a prominent company announces its earnings, it may present a rare trading opportunity for different types of investors.

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Conversely, if investors believe that the latest performance of a certain company will not be optimistic and will bring pressure on the short-term stock price, investors may consider short selling, which can be done by considering margin selling or buying put options.

Of course, if investors think that the bullish and bearish direction of a company's performance is unclear, but the stock price may experience significant fluctuations after the performance release, then investors may consider the straddle strategy of buying call and put options to capture potential opportunities.