To The Moon

$MEITUAN-W(03690)$

China’s consumer internet space has long been defined by bruising competition, subsidy-driven battles, and shifting consumer preferences. But even in such a dynamic environment, the magnitude of Meituan’s latest earnings collapse stunned markets. A 90% plunge in adjusted net profit, far below consensus expectations, reignited investor debate about whether food delivery is destined to remain a low-margin, cash-burning battlefield.

The disappointment also comes just as Alibaba prepares to release its latest quarterly earnings, with many questioning whether the delivery war will spill into its broader e-commerce operations. Meanwhile, Pinduoduo’s (PDD) signals of strategic moderation raise fresh questions about competitive balance in China’s digital economy.

This article unpacks the numbers, explores the underlying drivers of Meituan’s profit dive, assesses Alibaba’s exposure ahead of its results, and considers what all this means for sector valuations.

Meituan’s Stunning Earnings Miss

Profit Collapse in Context

For the second quarter, Meituan reported:

• Adjusted Net Profit: RMB 1.49 billion, down 90% YoY

• Street Consensus: RMB 9.85 billion

• Revenue Growth: Healthy, but overshadowed by collapsing margins

The scale of the miss was alarming, not just because it undershot analyst models, but because it raises structural concerns. Food delivery, once hailed as a reliable cash generator within Meituan’s ecosystem, has turned into a black hole of subsidies and discounts.

While volumes continued to rise, the company’s operating margin contracted sharply, suggesting that aggressive competition—not weaker demand—was the real culprit.

Why Did Profits Collapse?

1. Aggressive Promotions in Lower-Tier Cities Meituan has doubled down on expanding its reach in Tier-3 and Tier-4 cities, where user adoption remains a growth lever. But those markets are notoriously price-sensitive, forcing companies to extend heavy subsidies.

2. Rising Rider Costs Labor expenses have been trending upward as regulatory scrutiny increases, with delivery riders receiving improved pay packages. While positive socially, this is an added cost headwind.

3. Defensive Spending Against Ele.me Despite holding dominant market share, Meituan has been forced to increase promotional intensity to counter Alibaba’s Ele.me. While Ele.me is a smaller player, Alibaba’s scale and financial muscle mean Meituan cannot afford to cede ground.

4. Macro Headwinds China’s consumer spending recovery remains uneven, with youth unemployment high and property sector woes dampening discretionary spending. Consumers may order more frequently, but they demand discounts.

The result: volume growth without profitability—a dangerous formula in a maturing industry.

Alibaba Earnings Loom Large

What the Market Expects

Alibaba reports on August 29, with consensus forecasts pointing to:

• Revenue: RMB 266 billion (+9.4% YoY)

• Adjusted EBITA: RMB 35.3 billion (–21.7% YoY)

The headline revenue growth looks solid, particularly in a sluggish macro environment. But the sharp projected drop in EBITA underscores cost pressures. One area of concern is Ele.me, Alibaba’s food delivery arm, which continues to compete fiercely with Meituan.

Ele.me’s Strategic Role

Unlike Meituan, Ele.me is not Alibaba’s crown jewel—it is a supporting asset within its broader commerce ecosystem. Alibaba views Ele.me less as a standalone profit center and more as a way to retain consumer stickiness within its platforms, driving cross-selling opportunities.

Still, the unit’s losses have historically been substantial. If Meituan is struggling despite its scale advantage, it raises the question of how much financial drag Ele.me might pose to Alibaba’s consolidated results.

Will Food Delivery Hurt Alibaba’s Earnings?

The likely answer: somewhat, but not catastrophically.

• Ele.me’s market share is around 25–30%, far below Meituan’s dominance.

• Alibaba’s earnings are diversified across e-commerce, cloud computing, international retail, and logistics.

• The delivery war hurts margins, but Alibaba’s cash flow machine can absorb it more easily than Meituan.

Still, investors will pay close attention to segment EBITA margins to see whether Ele.me is becoming a larger drag in the current competitive cycle.

Pinduoduo: Risk Contained, For Now

Subsidy Wars and Competitive Balance

For much of the past two years, Pinduoduo (NASDAQ: PDD) has been the biggest existential threat to Alibaba’s China commerce operations. By offering deeply discounted goods and leveraging a group-buying model, PDD forced incumbents to respond with higher promotions, hurting profitability across the board.

However, recent management commentary suggests PDD is moderating its stance, emphasizing long-term margin sustainability rather than all-out market share grabs. This provides some relief for Alibaba ahead of earnings.

Structural Advantage Still Intact

Even if PDD’s aggression slows, its competitive advantages remain formidable:

• Deep penetration in rural and lower-income demographics.

• Strong appeal to value-conscious consumers during macro uncertainty.

• Rapid international expansion via Temu, which is gaining traction globally.

For Alibaba, this means competition isn’t going away—it may just shift from being subsidy-driven to being ecosystem-driven, where price is just one part of the equation.

Meituan Valuation: Can It Rebound?

Current Market Positioning

Despite the earnings debacle, Meituan continues to trade at a forward P/E multiple around 25x, which implies investors still believe in its long-term dominance. The bull case hinges on:

• Meituan’s unrivaled delivery network.

• Network effects that keep users locked into its ecosystem.

• Long-term monetization opportunities beyond delivery, such as in-services, travel, and grocery.

Bear Case: Margin Compression Persists

The bear case is straightforward: the food delivery market has matured, competition is intensifying, and margins may remain permanently thin. If Meituan cannot restore profitability while maintaining growth, its premium valuation will erode.

Price Target Scenarios

• Base Case (Stabilization): Meituan stabilizes margins but does not return to explosive profitability. Target range: HKD 110–125.

• Bull Case (Margin Recovery): Competitive intensity eases, promotions taper off, and profitability normalizes. Target range: HKD 135–145.

• Bear Case (Structural Margin Erosion): Subsidy wars persist and regulatory pressures rise. Target range: HKD 90–100.

At present, the base case feels most realistic.

Key Investor Questions Ahead

1. Will Alibaba’s Ele.me losses widen, or can the unit narrow its deficit?

2. Is Meituan’s 90% profit collapse a one-off, or the start of a longer structural decline?

3. Will PDD resume aggressive subsidies if Alibaba shows resilience, reigniting the price war?

4. How should investors value food delivery platforms when profitability visibility is so low?

Final Verdict

Meituan’s 90% profit plunge isn’t just a quarterly miss—it’s a loud warning that food delivery remains a high-volume, low-margin game, where dominance does not guarantee profitability. For Alibaba, the coming earnings report will be a key moment: investors want proof that its e-commerce empire can weather delivery-related turbulence without deeper margin erosion.

Pinduoduo, meanwhile, remains the wild card. If its moderation is genuine, competitive intensity could ease somewhat, but its structural edge ensures the pressure on Alibaba will remain.

Key Takeaways for Investors

1. Meituan’s earnings shock underscores delivery fragility—growth does not equal profits.

2. Alibaba’s Aug 29 results are pivotal, with EBITA weakness in focus.

3. Ele.me is a strategic but costly asset, whose losses must be closely monitored.

4. Pinduoduo risk is not gone, only contained; Temu expansion keeps pressure high.

5. Meituan PT: HKD 110–125 in base case, with upside capped until profitability improves.

For now, the food delivery war remains a drag on Chinese internet profitability. Long-term investors may find selective entry points, but caution is warranted—the path to sustainable profits looks longer than ever.