Meituan Stock: Challenging Times (OTCMKTS:MPNGF)

Elevator Pitch

I rate Meituan’s (OTCPK:MPNGF) [3690:HK] stock as a Sell.

In my prior August 1, 2022 update for Meituan, I downgraded my investment rating for the stock from a Hold to a Sell. I took into account insider selling activity and regulatory headwinds for Meituan in making that decision. Meituan’s shares listed on the OTC market with the MPNGF ticker have dropped by -17% since my earlier article was published, while its Hong Kong-listed shares with the 3690:HK ticker also fell by -16% in the same period.

I retain my Sell rating for Meituan. The strong likelihood of China continuing with its COVID-zero policy in the near term and expectations of weak economic growth for the country are the key reasons for my bearish views with respect to Meituan.

Meituan Is A Proxy For China

Meituan is one of the largest companies listed on the Hong Kong Stock Exchange, as it boasted a market capitalization of HK$931 billion as of October 12, 2022 based on S&P Capital IQ data. This implies that only a couple of Chinese companies, namely Alibaba (BABA), Tencent (OTCPK:TCEHY) (OTCPK:TCTZF), China Mobile (OTCPK:CHLKF), Industrial and Commercial Bank of China (OTCPK:IDCBY) (OTCPK:IDCBF), and China Construction Bank (OTCPK:CICHY) (OTCPK:CICHF) are larger than Meituan in terms of market capitalization.

Therefore, it is safe to say that Meituan is one of the key proxy stocks for the Chinese market and economy. In other words, a meaningful re-rating of Meituan’s shares in a positive manner will only happen, if investors regain confidence in China. Recent news flow and events suggest that this might take a longer than expected time, as discussed in the subsequent sections.

China’s COVID-Zero Policy

Most countries around the world have chosen to relax COVID-19 restrictions and reopen their respective economies. In comparison, China’s decision to carry on with its COVID-zero stance hasn’t found favor with the investment community.

Recent articles published by the country’s state media publications suggest that China will very likely maintain its current COVID-zero policy for the foreseeable future.

The People’s Daily published two articles recently in October 2022 with the titles “Strengthen Confidence And Patience In Current Pandemic Prevention And Control Policies” and “COVID Zero Is Sustainable And Must Continue” (translated using Google Translate). The titles of the two articles clearly indicate that there won’t be a major shift in China’s approach towards the pandemic any time soon.

On October 13, 2022, China Daily came out with an article showcasing certain cartoons highlighting that “those claiming ‘the pandemic is over’ are being irresponsible” and cautioning that “the omicron variant can still be deadly.” The recent China Daily piece is aptly titled “Don’t Lie Flat! The Pandemic Is Not Over!”

Meituan’s revenue growth slowed from +31% YoY and +25% YoY for Q4 2021 and Q1 2022, respectively to +16% YoY in the recent Q2 2022 period. At the company’s Q2 2022 earnings call in late-August, Meituan acknowledged that “the ongoing pandemic has presented continuous challenges to every member of our ecosystem, including ourselves.” In response to a question on the company’s future outlook at the recent quarterly briefing, Meituan stressed that a lot “depends on how COVID situation unfolds and other control measures.”

In other words, there is a low probability of China making significant changes to the country’s pandemic policies in the months ahead, and this translates into downside risks for Meituan’s future financial performance.

China’s Economic Growth Expectations

Another key issue affecting China and Meituan is the country’s economic growth. Although China’s COVID-zero policy will hurt its economy, there are investors who harbor hopes the country might introduce stimulus measures to offset the negative impact of pandemic restrictions. However, there are signs suggesting that China is prepared to live with a moderate pace of growth for the Chinese economy.

An October 12, 2022 Bloomberg report highlighted that China could possibly “drop ‘Development First’ slogan”, something that “was used at every Communist Party congress since 2002”, which “would signal more tolerance for slower growth.”

In a Bloomberg television interview conducted in mid-September, World Bank’s president noted that China is “less eager to really stimulate this time” as compared to prior economic downturns when the country “cut interest rates” or “increase their government spending” to a larger extent. Research from the Official Monetary and Financial Institutions Forum or OMFIF also points to the fact that “China’s current stimulus” in 2022 year-to-date is “significantly below 2020 levels.”

In conclusion, economic growth appears to be less of a priority for China now. As such, those who expect China to roll out substantial stimulus measures to boost the economy like what it did in the past might be disappointed. Meituan will have a hard time delivering good financial results, when the Chinese economy isn’t going to grow as fast as hoped for.

Meituan’s Financial Outlook

The outlook for Meituan isn’t very encouraging based on sell-side consensus figures taken from S&P Capital IQ.

In local currency or RMB terms, analysts see Meituan’s revenue growing by +26% for both the third quarter and the fourth quarter of this year. This will represent an improvement from the company’s +16% top line increase for the second quarter. This isn’t surprising, as Q2 2022 was an exceptionally poor quarter for Meituan as it represented the peak of COVID-19 lockdowns in China. Instead, the key concern is how Meituan will perform in 2023, as most investors are looking beyond the company’s 2H 2022 financial performance.

The market consensus thinks that Meituan’s YoY revenue expansion (in RMB terms) will slow to +6% in Q1 2023 and the company is expected to post negative revenue growth rates of -4% and -16% for Q2 2023 and Q3 2023, respectively. It is clear that the sell-side also takes the view that China’s COVID-zero stance and the potential lack of significant stimulus measures will hurt the country’s economy and Meituan’s top line in 2023.

Bottom Line

I still have a Sell investment rating assigned to Meituan’s shares. It is far too early to turn positive on the stock, given that China hasn’t yet to tweak its pandemic policies in a meaningful way and significant stimulus measures also seem unlikely.