Meituan (03690) announced that it will cut commission fees for its food delivery business, a move believed to be an answer to the Chinese government’s call for common prosperity.
The company announced a range of measures, include reducing commission fees and capping rates for businesses operating in areas exposed to “medium- and high risk to COVID-19”, to be in place until one month after the lockdown is lifted. These measures primarily target small and medium-sized merchants who sell on Meituan’s platform.
Rival Ele.me, backed by Alibaba Group (09988) made a similar move to refund commission fees collected from its restaurant partners in select districts and counties.
These fee waivers were given after a joint statement by 14 regulatory bodies in China in mid-February. The 10-page policy, roughly translated as “Several Policies to Boost the Recovery of Difficulty-Ridden Sectors in Service-Related Fields (Chinese only)”, was released after the Lunar New Year vacation, just as the market was starting to recover from the regulatory storm in 2021.
The National Development and Reform Commission, together with the Ministry of Finance, the State Administration of Supervision and other departments, proposed to lower the service fees charged by food delivery platforms.
Real Impacts
Kai Wang, senior equity analyst at Morningstar, believes that the premise of the rules was to aid the hard-hit catering industry by lowering the operating costs. From an equity investment angle, Wang believes that a trim in fee income will affect Meituan more than Alibaba Group. According to Wang, food delivery accounted for less than 5% of Alibaba’s revenue in fiscal first-half 2022. Food delivery service is a core business segment of Meituan, accounting for 54% of its revenue so far in 2021.
“These measures are pandemic-related and the information on hand shows that they will only apply in 2022. However, long-term implications could be greater should they become extended indefinitely,” adds Wang. From a broader market view, this also spells continued potential policy risks in China.
New Business Pressure
Other than margin compression, no-moat Meituan faces immense pressure from developing its new business initiatives in community group purchases, which Wang notes is cash-burning activities for the near term.
“Part of the reason that a small drop in take rates has such an impact on Meituan’s valuation is that the new businesses, including community group buying, are extremely loss-making, and the viability of the company is being propped up by its core food delivery business right now.”
In order to attract new growth, Wang says Meituan will have to expand its new business into more rural areas, a strategy taken by several contenders in the e-commerce space. Meituan trades a 12% discount to its fair value estimate of HK$ 200.
Benefitting Restaurant Chains
On the other side, fee rebate and waiver, which is designed to help restaurants, may turn into a tailwind for Yum China (09987, YUMC).
Ivan Su, our senior analyst, comments: “We think this could be an incremental positive for Yum China, where 35% of revenue comes from food delivery due to the reduction in costs.”
As a part of effort paving the way to recovery and development of the service industry, the government also proposed other general measures like tax-reduction benefits to small and micro enterprises and preferential rates for insurances, and credit support. Additionally, measures such as subsidies for COVID-19 testing costs and value-added tax deductions, will also lift cost pressure of Yum, which operates 10,000 eateries on the mainland under the brands like Pizza Hut and KFC. Shares in wide-moat Yum China trade a deep discount of 37% to its fair value estimate of HK$ 670.
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