Meituan

HKEX:3690

Earnings Call Transcript 2022-Q2

[Operator]

Hello, and thank you for standing by, and welcome to the Meituan Second Quarter 2022 Earnings Conference Call. [Operator Instructions] I would now like to hand the conference over to Scarlett Xu, Vice President and Head of Capital Markets. Please go ahead.

[Scarlett Xu, executive]

Thank you, operator. Good evening, and good morning, everyone. Welcome to our second quarter earnings conference call. Joining us today are Mr. Xing Wang, Chairman and CEO; and Mr. Shaohui Chen, Senior Vice President and CFO of Meituan.

For today's call, management will first provide a review of our second quarter results and then conduct a Q&A session. Before we start, we would like to remind you that our presentation contains forward-looking statements, which include a number of risks and uncertainties and may differ from actual results in the future. This presentation also contains unaudited non-IFRS financial measures that need to be considered in addition to and not as a substitute for measures of the public financial performance prepared in accordance with IFRS. For a detailed discussion of risk factors and non-IFRS measures, please refer to the disclosure documents in the IR section of our website.

Now I will turn the call over to Mr. Xing Wang. Please go ahead, Xing.

[Xing Wang, executive]

Thank you, Scarlett. Hello, everyone, and welcome to the Meituan Second Quarter 2022 Earnings Call.

Our various businesses delivered a stable operating results in Q2. Our total revenue increased by 16.4% year-over-year to RMB 50.9 billion. Annual transacting users on our platform increased by 8.9% year-over-year to 684.7 million, while the number of annual active merchants increased to RMB 9.2 million.

The average number of transactions per transacting user increased to 38.1 for the [indiscernible] of Q2 2022 compared to 32.8 for the trailing 12 months of Q2 2021.

Adhering to our upgraded company strategy, Retail + Technology, we never cease to provide consumers with diverse and high-quality services and given the fact that we supplied during the COVID experience.

Since April, Omicron spread to more regions in China, impacting the off-line for the service industry and able to daily lines. First of all, I would like to extend my gratitude to all our [indiscernible] partners, including our couriers, merchants, suppliers and our employees working on the front line. They greatly cooperated with each other, responded to the government's calls weekly and worked through these difficult times to help meet people's basic needs during the COVID insurgence.

The supply chain, which is pending for developing our extensive on-demand visibly network and our safe and efficient autonomous delivery technology all played important roles during this difficult time. Meanwhile, we empower the merchants by digitizing their businesses and expanding their sales channels, which enables them to run with the external challenges. As it's recovered since June, we have to efficiently connect consumers with the local merchants with effective strategy and cooperated with the government to help boost consumption demand recovery with various initiatives. This further boosted our brand's mindshare as a result.

And back to financial reporting. We adjusted our segmentation disclosure this quarter. On the previous 3 segments, that is food delivery, in-store hotel and travel and new initiatives and others for the 3 new segments of all local commerce and new initiatives, we think the new segmentation better reflects our business strategies and development status of different businesses that aligns with our resource allocation. Under the new segmentation, Core local commerce now includes food delivery, in-store hotel and travel as well as Meituan Instashopping, that is Meituan Shangou, and alternative accommodations and transportation ticketing.

Through years of operations, food delivery and in-store hotel and travel have both achieved the industry-leading positions, which improve [indiscernible] models. Meituan Instashopping, as a natural extension of our food delivery business, leveraged our large user base and existing on-demand delivery network. We had a clear path to profitability, and similar unit economic models at food delivery had already achieved a respectable scale and industry-leading position.

Alternative accommodations and transportation ticketing are similar to other in-store hotel and travel businesses in Asia, with a material in its models. They were also recently reorganized into the other hotel and travel businesses.

The current segment, second segment, new initiatives in good businesses, such as Meituan Select, [Foreign Language] and also Meituan Grocery, [Foreign Language]. And our B2B food distribution business that's quite weak. And also ride sharing, bike sharing, e-moped sharing, power banks and our restaurant management system and other new initiatives. This is called local commerce. New initiatives still requires more integrations of business models, and need more resources given the development which management will periodically review these initiatives' development and allocate resources and select strategy accordingly.

Now, I would like to provide an overview of our Q2 performance for the 2 new segments. In the second quarter, Core local commerce segment, revenue increased by 9.2% year-over-year, despite COVID impact on B2B. Since April, our food delivery business was negatively impacted by Omicron and related control measures. Shanghai, Shenzhen, Beijing and other high-tier cities, which contributed to a significant percentage of our overall order volume, were directly affected. With spillover effects to other regions, food delivery volumes in April or May were hence materially affected. However, in June, we saw sweet recovery as the COVID was effectively contained in several regions.

Food delivery, as an expansion consumption category dedicated to people's community proved to be resilient despite external challenges to customize and refined our operation strategy for city's active stage of pandemic controls and optimize our marketing incentive while pursuing high-quality growth. High frequency user engagement further improved with larger scale, higher order frequency and higher percentage of overall orders.

By leveraging our effective execution and flexible organizational affordability, we launched multiple measures to secure supply and deliver the packaging nationwide in Q2. We did our best to fulfill consumers' daily demands and needs in COVID-affected regions. In Shanghai, during COVID, we took the lead to launch our community group meal to emergency helper services, when fine dining was dependent in Beijing, immediately increased our delivery capacity to ensure the cross-city deliveries.

We also continued to accelerate the digital transformation for traditional off-line restaurants. A greater number of fine dining and high-end restaurants owns the delivery services on a plan. And delivery has become an important revenue driver for these merchants given after the COVID subsided. In Guangzhou, more than half of the city's 5-star hotels started delivery option with us. In Beijing and Shanghai, we launched our Must-Order list for delivery. We need consumers waiting for quality dining at home.

We continue to provide support measures of offering commission discounts to small and medium-sized consumers who have experienced difficulties in business operations due to the pandemic. As of the end of June, we launched 4 patches of supportive measures, helping more than 700,000 merchants so far in total. We also have many small merchants and meet with the food delivery manager program at [indiscernible] who happen to better operate positively in online operations. In addition, we collaborated with a certain restaurant. We leveraged their employees as tourists, ensuring their income while supplementing delivery capacity.

As an extension of the food delivery, Meituan Instashopping continued its fast growth with daily average orders reaching RMB 4.3 million in Q2. User base and transaction frequency both increased in the second quarter. With its annual transaction users, the main growth driver for overall total volume growth increasing meaningfully year-over-year. We continued to expand and deepen these categories with the supermarkets, convenience stores, fellow shops, non-specialty stores and more registered last growth.

A number of newly-onboarded shops, the number of newly-onboarded merchants increased by more than 30% year-over-year this quarter. Outstanding long-standing merchant average app with our strong flexible on-demand delivery network allowed us to better meet consumer demand during the COVID. It was gradually and increasingly, we got on demand retail as a new form of online shopping is actually post COVID-19. Furthermore, we work to better serve the next-generation consumers who demand superior quality and value for money products and more on-demand delivery services.

In Q2, we partnered with more brands, increasing our branded penetration and deepening our collaborations on marketing. We worked with more merchants to help simulate on consumption recovery and lower marketing campaigns around the festivals at Children's Day and Mother's Day. Moreover, we actively foresee and capture emerging consumption trends in new categories. During the Dragon Boat Festival, camping became very topical and drove a demand for outdoor consumption scenarios. The product under the camping category increasing by more than 6% year-over-year. Demand for outdoor activity products such as [indiscernible] equipment and cans sold.

During the quarter, we also brought more Meituan InstaStore, [Foreign Language], which are brand distribution stores curated by merchants themselves. Basically put them into our supply offering for different categories in order to better meet the evolving consumer needs. We also launched a citywide pharmacy delivery services and expanded delivery distances for medicines to help our consumers quickly and conveniently purchase medicines online. Overall, our various initiatives successfully enhanced consumer mindshare as Meituan delivers everything to their homes.

Our in-store hotel and travel business, also including alternative accommodation between transportation typically, were heavily impacted by COVID insurgence in high-tier cities, including Shanghai and Beijing who, under strict COVID-control measures, were unable main. Merchants off-line operations and consumer demand for local services were significantly affected. [ MGTV ] decreased on a year-over-year basis as a result. As the pandemic control measure relaxed since June, we begin to see signs of recovery for our in-store hotel and travel openings.

We also actively assisted the small and medium-sized commercial while supporting the governments in stimulating economic recovery as Beijing, Shanghai and other regions rapidly recovered from the pandemic and people returning to work, we conducted multiple promotional campaigns and distributed consumption vouchers to the local governments to boost the consumption and the service industry recovery. In Shenzhen, Jilin, Chengdu, Wuhan, Wangji and many other locations, we also help the government distribute consumption vouchers and drive the merchants online sales. Or we help accelerate industry's recovery, especially as we recover a wide spectrum of small and medium-sized merchants.

For in-store dining, operating margin operations were significantly affected in Beijing, Shanghai and many other cities. Local consumptions faced COVID headwinds, but we helped further evaluate investor emergence research information and help them recover from off-line effective office. We have the restaurants diversifying their revenue streams through food delivery options and self-pickup services, including most fine-dining restaurants. The offers of discounted advertising services for temporary COVID closed restaurants, and on the various teams of promotion, we beat consumption recovery, while we accelerated the digitization of launching new Chinese stores on our platform, resulting in the continuous growth in the avenue's transaction volumes.

We continue to provide customized services for Chinese restaurants as well where we sign new operations, enhancing client service capabilities and optimizing supply structure on our platform. To better provide a reference with the more comprehensive products and intact additives, we long to the more diversified discounted packages, a membership system that can help them improve consumer retention rates. Meanwhile, we further diversify the consumer scenarios and capital coverage for transaction-based products to capital merchants improved turnover rate.

For other in-store services, group activities and gathering events were impacted. The new consumption trends and categories emerged dynamically from the pandemic. Outdoor activities were very popular. Demand for events such as fitness and camping have rapidly increased as a result. To meet consumers' evolving demand and mitigate the pandemic impact, we sort of refined the offerings and services on our platform to help consumers efficiently find desired products and services, especially during the pandemic.

During the quarter, revenue from categories such as fitness, dance and lifestyle services maintained a relatively high growth. We believe that there is additional room for these new categories to grow in the long run as demand evolves and higher-quality supplies good. Thanks to our strong brand awareness high-quality user base, optimized operations and unique industry insights, it will result to destination for merchants in these new categories as we seek the business growth.

The pandemic control measures relaxed in June and July, consumption of local services started to recover. We will further improve supply quality while diversifying our categories and services to adapt to both the pandemic and consumer behaviors.

Our hotel and travel business suffered the heaviest impact from COVID over the last few quarters. The 35% year-over-year decrease in domestic hotel room nights in Q2 was mainly due to strict travel controls which capture more consumers in their home cities during April and May. As the pandemic control measures relaxed in June, our domestic hotel room nights recovered. In particular, the next-tier room nights for local and short-distance travel returned to a positive year-over-year growth trajectory in June.

The high-star hotel segments suffered a bigger hit from the dynamic than low-star hotels. But we continue to enhance supply quality, improve digital content display and upgrade packaging used for high-star hotels.

For alternative accommodation booking, the subset of our hotel booking business, we are the leading player in China. During the quarter, we further upgraded our accommodation supply. After Airbnb announced its exit from China in May, we reacted quickly and collaborated with Airbnb to cover their host launch-only fund. We offered this new host through to the services, upgraded their insurance to preserve their benefits and safeguard their properties, and guided them to a smooth transition.

For the long term, we are confident about the growth potential of domestic travels. [indiscernible] to further strengthen the synergies between our hotel booking, travel and transportation ticketing businesses. We are committed to offering high-quality and comprehensive choices to our merchants and consumers.

Now, let's move on to our second segment, new initiatives. Revenue for the second segment grew by 40.7% year-over-year in Q2. In regards to that, that's with dilution, our community e-commerce model continued to pursue high-quality growth and maintain the market leadership also with higher operating efficiency. On supply chain, we made good progress in brand merchants and supply chain management. We also continue to partner with more brands to offer consumers a wider range of high-quality and value for money products. In particular, we have many time-honored local brands on product innovation and launch their products online to better meet consumers' diverse needs.

We also enhanced our direct sourcing capabilities and centralized Meituan market procurement, which improves our supply chain efficiency and further broaden our SKU selection. Early in the summer, we optimized infrastructures and operating systems for cold-chain logistics across our entire supply chain, ensuring more stable and efficient operations for frozen products during the peak season. We also integrated our sourcing solutions through the use of DAS, Digital Assorting System, to our central warehouses and satellite procurement centers. Most importantly, we continue to review our social responsibilities, actively supporting local governments, ensure sufficient supplies of essential necessities for consumers, especially in places affected by COVID and extreme weathers such as Shanghai, Jilin and Guangdong.

And we are also proud of the role Meituan Grocery, [Foreign Language], has played in supplying daily necessities to consumers since COVID. The number of orders and quarterly transacting users also reached new highs. Still in COVID measures in Shanghai, with the guidance of the local governments, Meituan Grocery, we made various ways to ensure the supply of daily necessities by direct sourcing and expanding our supplier network and preempting an advanced stocking of necessary inventory.

When Beijing was under COVID control measures, we rapidly launched the supply chain model with the successful intelligence trend in Shanghai at a stable price by ensuring full compliance with pandemic controls. As the COVID situation improved in Shanghai, we also invest weekend manpower and resources to meet surging consumer demand post the pandemic and support the city's economic recovery.

Looking forward, we will continue to optimize our supply chain and fulfillment capabilities and strive to bring better, new experience to consumers. We will establish a mindset that Meituan Grocery provide comprehensive offerings by expanding our SKU selections, increasing local seasonal product supply and improving our category diversity.

Although the recent COVID would suggest a temporary impact on our businesses, we believe that the pandemic is brought under control. And as consumer confidence recovers, our Core local commerce business will gradually resume its growth trajectory.

Meanwhile, our new initiatives includes retail continue to integrate and serve more consumers, creating greater value for our [indiscernible] . Looking ahead to the second half of the year, we will proactively cooperate with the government to drive recovery of consumer spending and offline businesses. Powered by our innovations -- innovative online marketing tools and extensive delivery network, we will assist to more merchants in their digital transformations and online operations.

Going forward, we will continue to execute our strategy, Retail + Technology, by providing more diverse value for money, goods and services. As a technology empowered retail company in China, we will continue to remember our social responsibilities in terms of supporting the offline industry and generating online job opportunities. We remain highly confident and are fully committed to accelerating the industry digitalization and to creating more value for our society.

With that, I will turn the call over to Shaohui for an update on our latest financial results.

[Shaohui Chen, executive]

Thank you, Xing.

Hello, everyone. I will now go through our second quarter financial results.

During the second quarter, our total revenue reached RMB 50.9 billion, increasing by 16.4% year-over-year in the middle of the COVID resurgence and challenging macro environment. The increase was mainly driven by the steady revenue growth of our Core local commerce segment and the strong revenue growth of our new initiatives segment, especially in the goods retail business. Cost of revenue ratio decreased on both the year-over-year and on a quarter-over-quarter basis to 69.4% this quarter, primarily due to the improved gross margin of our food delivery, Meituan Instashopping and the food retailing business as we improve operating efficiency and optimized cost structure.

Selling and marketing expenses ratio also decreased on both a year-over-year and quarter-over-quarter basis to 17.6% this quarter, reflecting our efforts in controlling user incentives and other marketing expenses across various businesses. R&D expenses ratio increased to 10.2%, up 8.9% in the prior year period and decreased from 10.5% in the previous quarter, while G&A expense ratio remained relatively stable on both the quarter-over-quarter and year-over-year basis.

We have achieved meaningful progress in pursuing high-quality growth with higher operating efficiency this quarter. Total segment operating profit came to positive RMB 1.5 billion compared to an operating loss of RMB 3.7 billion in the previous quarter, an operating loss of RMB 2.9 billion in the same period of last year as operating margins improved meaningfully across all business segments. On a consolidated basis, adjusted EBITDA and adjusted net profit were RMB 3.8 billion and RMB 2.1 billion for this quarter, changing from loss position to profit position on both the year-over-year and quarter-over-quarter basis.

Turning to our segment results. We will start with the Core local commerce. Our Core local commerce segment revenue increased by 9.2% year-over-year to RMB 36.8 billion, while operating profit grew 39.7% year-over-year to RMB 8.3 billion. Operating margin for the segment improved on both a year-over-year and a quarter-over-quarter basis to 22.5%. For delivery, we see the external challenges and achieved 4.8% year-over-year growth in order volume this quarter.

Food delivery revenue growth far outperformed order volume growth due to several factors. First, large numbers of small medium-sized merchants temporarily suspended their operations due to the pandemic, while a greater number of premium restaurants with high-digit site launched delivery service on our platform during the quarter. At the same time, our collaboration with many high-quality merchants to launch our Must-Order list and provide city-wide delivery services in a number of cities has also driven the increased contribution of long-distance orders this quarter. The higher portion of high city-side orders drove year-over-year increase in commission and delivery services revenue.

Second, on back of the COVID impact on merchant side and user side, user revenue to order food delivery was suspended, in particular. Demand in non-residential scenarios declined due to traffic restriction and we saw even more significant decline in the demand of users who pursue value for money products and tend to take lower city-side orders. Therefore, we reduced our subsidy spending in response to the pandemic impact, while focusing on promoting the purchase frequency of medium and high-frequency users. As a result, the user incentive that will contract deliver sales revenue increased during this quarter.

Operating profit and operating margin for our food delivery both improved meaningfully on year-over-year and quarter-on-quarter basis, primarily due to the reduction in user incentives and the favorable order mix change. Seasonality also played a role in a sequential increase in operating margin as the rate cost of order during the second quarter was among the lowest of the year.

Turning to Meituan Instashopping. The pandemic overall had a smaller impact on Meituan Instashopping and on food delivery. We're glad to see that Meituan Instashopping continue to achieve strong growth, expanding average order volume in this quarter achieved a new high of RMB 4.3 million. The pandemic has headlined more consumers to rely on on-demand delivery. In particular, given time sensitivity and in line of new control measures, consumers have shown strong demand for stocking up on grocery and the daily necessities and chose to order locally using on-demand delivery network.

In addition, with our Instashopping merchants, especially supermarket and convenience stores, were generally less affected by the pandemic and play a more critical role in meeting people's daily needs. Average ticket size increased substantially as a result of consumers' surging demand to stock up on food pre-lockdown, as well as explosive demand for high ticket-sized items during multiple festivals.

Meituan Instashopping [indiscernible] showed significant improvement over year-year and on a sequential basis. We are very close to breaking this quarter due to an increase in AOB, our tighter control over user incentives and the other marketing expenses during the pandemic. Additionally, the improvement in new economic was also driven by a rapid growth of online marketing revenue, primarily contributed by the expansion of online marketing merchant base when merchants increased halfway. Turning to in-store, hotel and travel, which includes alternative accommodation booking and transportation check in, starting from this quarter. Overall, the impact of COVID-19 has been material, more severe than on to delivery, with in-store, hotel and travel revenue decreasing by 18.6% year-over-year this quarter. In terms of GPV impact, hotel was most heavily affected, followed by other in-store business with a relatively lower impact on in-store buying. Transaction-based commission revenue was down by more than 27% year-over-year during this quarter. However, this late May, as control measures relaxed across major cities, we saw improved in-store GTV, especially in-store dining business GTV, and the max per room night rebound strongly, thanks to pent-up demand from the consumer side, effective promotion campaigns and consumption in vouchers.

For online marketing services, in-store travel business contributed about 89% of the total online marketing revenue for the entire hotel commerce segment overall. Large numbers of local service merchants were impacted by the pandemic and they reduced their marketing expenditure. With the demand of CPT in the display ad decreased in the month. However, we continue to provide service with lower price threshold for more media side merchants, or extend a peers of exiting services during COVID as a merchant support effort.

Subscription-based service revenue continued its revealing growth this quarter on a year-over-year basis. In addition, merchants in some categories with more essential demand and are less impacted by the pandemic show higher marketing demand such as tech care, car and lifestyle services. Online marketing revenue in these categories grew by more than 20% year-over-year this quarter.

Operating profit for in-store hotel and travel decreased on both a year-over-year and quarter-over-quarter basis, and operating margin still show steady improvement on a sequential basis, thanks to our focus on customer expense control as well as operating efficiency enhancement.

Let's now turn to our new initiatives segment. The segment mainly includes Meituan Select, Meituan Grocery, B2B food distribution service and other new initiatives. During the period, revenue in this segment increased by 40.7% year-over-year to RMB 14.2 billion, mainly due to the development of our goods retail business. Operating loss for this segment narrowed significantly on a sequential basis to a negative RMB 6.8 billion during this quarter, while operating margin improved by 21.9 percentage points quarter-over-quarter to negative 48%, primarily attributable to the improved operating efficiency of our goods retail business.

On Meituan Select, both our premium lot and -- bring out as a percentage of GTV continues to narrow sequentially. Our enhancement of supply chain capability and product mix has driven sequential increase in both our price items and the price markup. At the same time, we continue to improve our warehouse and delivery efficiency by optimizing our warehouse sourcing and delivery process. On Meituan Grocery, both operating loss and operating margin improved significantly on a sequential basis. This was primarily due to first, increased AOV and other banks generate a surging demand for food and supply plus hiring during the pandemic period. Second, include operating efficiencies generated by the optimization of user incentive strategy and the upgrade of our warehousing and fulfill manage capabilities. And third, the improvement of our number of scale led to a higher degree of operating leverage.

Now turning to our cash position. As of June 30, 2022, we continue to maintain a strong net cash position with our cash and cash equivalents as well as short-term treasury investments, totaling RMB 107.5 billion. Additionally, our operating cash flow improved to RMB 9.2 billion from negative RMB 11.3 billion in the prior year quarter.

To conclude, I would like to say that the ongoing pandemic has presented continuous challenges to every member of our ecosystem, including ourselves. We responded to these challenges by focusing on high-quality growth and improving our operating efficiency over the past several quarters, which is reflected by our results in this quarter. More importantly, we do not act only in regard to our own means. We reaffirm our commitment to creating more value for consumers, have the merchants maintain their operations and providing our quality with better welfare and the working conditions in the current challenging environment. By collaborating with local government, we make sure the delivery of basic supply is fully fulfilled during the COVID outbreak and to promote local consumption during the post-COVID recovery phase.

No matter how the external environment evolves, the interest of our merchant, consumers in core will always be our top priority. We are still confident that our business will resume normalized growth when pandemic control measures loosen and our long-term business objectives remains unchanged.

With that, we're now open for your questions.

[Operator]

[Operator Instructions] Today's first question comes from Ronald Keung with Goldman Sachs.

[Ronald Keung, analyst]

So we noticed the new segment disclosures this quarter. I just want to hear what is kind of the thinking or the reason behind? And also, we see the profitability of now the Core local commerce segment seems higher than what the market or people were expecting, and achieved very significant year-on-year improvement. So I want to hear within that, the drivers within as well.

[Xing Wang, executive]

Okay. Thank you, Ronald.

And to answer your first question, starting this quarter, we adjusted our segment disclosures and disclose our businesses in 2 segments. The first one is Core local commerce and the second one is new initiatives. And the new segmentation that reflects our business strategy and the development stage for each business, and it also matches our perspectives on resource allocation.

The first segment, Core local commerce, contributed more than 70% of our total revenue, include our proven light asset business models, and it's the main source of our operating profit and operating cash flow. Among them, both food delivery and in-store hotel and travel business, we are market leaders after years of operations. And then just between them, we will continue to grow as well. And food delivery is the main source of our active users and provides meaningful traffic and cross-sell opportunities to support our in-store services and hotel booking. And the transaction frequency of our high-quality food delivery consumers using our in-store hotel and travel services continue to increase every year.

Meanwhile, we provide -- we improved high-quality merchant engagement to our platform by adding more value into their operations in both the tributary and in-store dining services. And for example, when we reached a recovery in resurgence, high-quality restaurant brands from our in-store dining segment, we launched delivery services on our platform to mitigate their offline revenue losses. And our food delivery team also allocated optimal delivery capacity and provided other value-added services for these merchants.

And as an extension of our food delivery business, Meituan Instashopping, Meituan Shangou are leveraging on the large user base and on-demand delivery network from our part of the business. Having a similar unit economic model to food delivery and with a clear path to profitability, Meituan Instashopping had already reached respectable set scale, establishing itself as the industry leader.

And another one, alternative accommodation and transportation ticketing are also included in the first segment, as we recently integrated them with the rest of our in-store hotel and travel businesses or organizational structure with a similar business nature.

And our new initiatives segment focuses on business models which we are still exploring. Several opportunities in this segment involves self-operated good retail operations. It's a relatively long operational chains that need more time for us to integrate and optimize the business model. Compared to our Core local commerce segment, these new initiatives need more resources and investment in the company.

In future, we will evaluate the development of each new initiative with better allocated services and make a strategic assessment.

And Shaohui will take your second question on financial.

[Shaohui Chen, executive]

Yes.

On your question on profitability, the profitability improvement of Core local commerce was mainly driven by an economic improvement for food delivery and Instashopping. It was partially offset by the profit drop of our in-store hotel and travel business due to the outbreak rate. The profitability of our food delivery improved quarter-over-quarter and year-over-year. It was the result of our focus on high-quality growth and operational refinement to cope with the current macro and COVID situation. It's also the seasonality, as we have commented before, that the second quarter is usually the best season for food delivery in economics.

For example, we reduced marketing intensity and order structure was more favorable to profitability, even less others from small and medium-sized restaurants, which suspended operations during COVID control. Second, Meituan Instashopping AOV also increased, driven by consumer demand to stock up given a COVID resurging. Coupled with our effective cost management, Meituan Instashopping operating profit was very close working in this quarter. Therefore, the improvement in profitability in our food delivery and Meituan Instashopping business were mainly from short-term COVID factors and our active cost management.

This is only a demonstration of long-term potential, and should not be deemed as a Meituan benchmark. Thank you.

[Operator]

And our next question today comes from Thomas Chong with Jefferies.

[Thomas Chong, analyst]

How should we think about the operating margin for our Core local commercial segment for the second half of the year? Could you please comment on the margin trend for food delivery, Meituan Instashopping as well as the in-store hotel and travel business separated?

[Shaohui Chen, executive]

Thank you.

As we just mentioned, op margin for Core local commerce segment picked up quite meaningfully because of short-term factors from COVID. Most of the delivery cost per order is usually lower than Q2, but there is some seasonality influence too.

For the second half, I think short-term and seasonality sectors will [indiscernible] . For the first segment, op margin will likely go down quarter-over-quarter. However, we will continue to pursue high-quality growth and efficiency improvement opting profit and OP margin. On a year-over-year basis, it's expected to increase in second half this year.

For food delivery, operating profit and op margin is easily lower in Q3 and Q4 versus Q2. This is due to seasonality reason, as we need to provide higher subsidy for COVID to operate in more extreme weather and enhance higher delivery cost order. Second, as COVID situation and related cost control measures get better, more small and medium restaurants with lower ALV will resumed operation. So these low ALV orders will contribute to a higher percentage of overall orders, and will drag down the OP margin quarter over quarter.

We also increased consumer incentive on a quarter-over-quarter basis to help boost consumption recovery, and we will continue to pursue high-quality growth. We will allocate consumer incentives with different marketing events and distribute government consumption voucher to help further increase transition frequency and engagement of medium and high-frequency users. Furthermore, frequent consumers will maintain a reasonable level of engagement.

Overall, competitive dynamic has become more rational. It will help us further lower incentive in the longer term. So operating profit and the OP margin will increase year-over-year in the second half.

On Meituan Instashopping, we are committed and will improve investment versus same period in 2021. To help with consumption recovery, we will optimize incentive on many regions and key strategies and will further build our brand. We continue to view Meituan Instashopping has a great potential, and now it's still early phase, so we are focused on growth rather than profitability for Meituan Instashopping.

For in-store business, COVID uncertainty remains for the second half of the year. We will continue to improve efficiency and cut costs where necessary. On marketing, we will use more effective online channels and optimize the off-line channels to pursue high-quality and sustainable growth. As revenue growth retained positive in July, we should also have more operating leverage. The OP margin for the second half of the year should go up year-over-year and hotel and travel, increased demand for domestic travel will further recover in the second half, and we will invest with the consumption in the summer and other holiday while optimizing the marketing efficiency. OP margin should further recover towards the pre-pandemic levels, higher on both the year-over-year and quarter-over-quarter basis. Thank you.

[Operator]

And our next question today comes from Gary Yu with Morgan Stanley.

[Gary Yu, analyst]

I have a question regarding the recovery trend of the Core local commerce business. Could you share more on the recovery trend of your food delivery and in-store hotel and travel business in June? Do you see further acceleration in July and August? And how should we think about the growth trajectory for the business in the second half?

[Shaohui Chen, executive]

Thank you, Gary.

This June, COVID situation in higher-tier cities such as Beijing and Shanghai were under control. Food delivery and in-store hotel and travel also recover steadily. We will roll out targeted and tailored recovery plans for different cities at different recovery phase. We became attractive partner at our local government and distributing consumption vouchers to boost recovery. More merchants also trusted us as its partner to increase their sales amid external challenges. We not only provide offline merchants consumer traffic, but also launched the merchant support measures to help them recover.

On food delivery, other volume growth in June recovered to 10% year-over-year despite a high base last year. Average daily order volume in June in places like Shenzhen, Guangzhou, Shandong, [indiscernible] , Fujian, recovered to a level seen end of last year. Our high peer market gradually recover as well.

On the supply side, merchants suspended in Q1 resumed operations. Non-residential [ sales ] like office, entertainment venues also recover accordingly. For stock, the year-over-year GTV decline in June is narrowed to mid-single digits. At such travel restriction relax, travel industry is also recovering nicely. So next [indiscernible] in June only dropped less than 10% year-over-year.

Since July, North region saw COVID resurgence, such as Chengdu, Xian and Hainan, impacting our business recovery. Overall COVID controls are becoming more and more regular, and regional focus to deliver order volume growth continued to increase in July versus June reaching into summer. And we further accelerate in August. Especially repeat order of food delivery reached more than RMB 60 million in August, another milestone for us.

Demand for in-store services of a strong summer with, income GTV strategy reaching year-over-year growth in July. Growth also further picked up in August. In-store buying saw sharper rebound in other in-store services, as some gathering, traveling and non-essential consumption is still suspended given COVID control.

For hotel and travel, domestic room night growth was still negative in July, it's better than in June, became positive in August. If there is no widespread COVID resurgence in September, we expect Core local commerce to record healthy year-over-year growth.

It's hard to predict for Q4, depends on how COVID situation unfolds and other control measures. In that way, we will some more focus on high-quality growth and efficiency improvements for our business. In addition, our in-store business has a broad category coverage, most of our consumers' demand for food delivery is in [indiscernible] and our platform overall provides much lower ticket size services. Therefore, we will be more resilient to deal with weaker macro environment compared to other consumption-related platforms.

I'm confident of the long-term growth potential for both food delivery and the in-store business. Thank you.

[Operator]

And our next question today comes from Ya Zheng with CITIC Securities.

[Unknown Analyst]

Congratulations on a very strong quarter.

And my question is regarding Meituan Instashopping business. And it is now including in the Core local commerce segment. Does this imply Meituan Instashopping is a higher priority among your grocery shop business? And you just mentioned that you made some progress in the Meituan InstaStore as well? Could you share more details on how this will help grow the Meituan Instashopping business?

[Xing Wang, executive]

Thank you.

And as I mentioned, in the online grocery market will not be dominated by a single business model. On Meituan Instashopping, Meituan Select and Meituan Grocery, are all involved as we extend into online grocery. Given Meituan Instashopping's business model and the design for the stage, we decided to improve in our Core local commerce segment.

First, Meituan Instashopping is a natural expansion of our on-demand food delivery, expanding from restaurant food to more categories. Its business model and unit economics are similar to those of the food delivery, with a clear path for growth and profitability. However, Meituan Select and Meituan Grocery are at an earlier growing and rating stage. They both need warehousing infrastructures, and operations need to build supply chain capability. It's quite different for our Core local commerce segment.

And at the right development over the past few years, Meituan Instashopping lived out its core competence and became the largest on-demand retail player in China. It averages on our nationwide on-demand delivery network with efficient fulfillment. So we have a strong advantage on the delivery side. We also empower the merchants through operation, utilization and off-line business development. We have accumulated the largest merchant base and a diverse range of suppliers across categories.

On the consumer side, we have a large high-quality user base from food delivery and strong on-demand retail brand awareness. It help us -- we believe we convert fully to consumers through Meituan Instashopping region. Meituan Instashopping has the potential to achieve high AOV and online marketing revenue in future, and its long-term unit economic potential to be at least similar to that of food delivery. And we believe the inclusion of Meituan Instashopping in our Core local commerce segment better reflects the synergies between Meituan Instashopping and food delivery, and as well as its long-term value.

And regarding the Meituan InstaStore, when we explored and try to deliver everything now, we noticed that the current offline supplies do not fully meet the demand of large online user base. This is not only for the few selections, also the price and quality of those fees. So we export the innovative Meituan InstaStore for FMCG main categories, impact price and more. The Meituan InstaStore that [indiscernible] are built by merchants. We help merchants operate the store online and offer them our on-demand marketable service. Compared to traditional stores, Meituan InstaStore, we have wider selection and more efficient procurement capabilities.

Meanwhile, the online business operation model also allow us to quickly gather the consumer insights and SKU strategies from one store to others. We also help the merchants start business and operate efficiently through our digital operating system. End of June 2022, the Meituan InstaStore project expanded to over 100 cities with more than 1,000 stores in total. Our Meituan InstaStore drive a more suitable for the younger generations and online users, and are able to meet their long-tail lease to flexible directions. The user retention rate is also higher than offline stores, to efficiently match supply and demand, to create more growth momentum in on-demand retail.

Looking forward, we will continue to explore innovative supply models to better meet and stimulate the consumption needs of younger generations. And with the younger users' faster pace of life, cost of time has become an even more important consideration. Consumers are more dependent on the reliability and timeliness of on-demand retail, and our Instashopping will continue to benefit from the tailwind of everything now. With the continuous expansion of users and transaction frequency, we will penetrate into more high-quality food delivery users and increased transaction frequency in more cross-selling. More products and services will be available online over time as the traditional offline offering comes online. The role of on-demand retail will also evolve while addressing immediately securing more regular and routine purchases. Thank you.

[Operator]

And our next question comes from Eddie Leung with Bank of America Merrill Lynch.

[Eddie Leung, analyst]

I remember in the past, you guys provided some color on the long-term scale, for example, the daily order side as well as the long-term normalized margin of your different key segments. So we have the new Core segment right now. Could you also give us some color on the longer-term outlook of the scale, order size or the margin of these blended segment?

[Shaohui Chen, executive]

Thank you, Eddie, for the question.

Yes, we have communicated about the longer-term profitability for food delivery, and it's not separate before. And now, you see our Core local commerce segment mainly consist our food delivery, Meituan Instashopping shopping and in-store hotel and travel. Each segment, we have very strong confidence in its long-term growth and also its long-term profitability.

On food delivery, we remain committed to our order volume target in the long run, which is 100 million transactions a day. The urban population in China has been increasing the food-delivery services, opting more for food away from home versus just home cooked meal. The continued industry digitization and the lower [ EBIT ] supply model in future will make it even more affordable to everyone. We expect the delivery to become a more regular and essential choice for consumers over time. We continue to cultivate consumer habits in order input deliveries for more consumption scenarios. We expect gradual revenue contribution from merchant marketing demand and optimize the consumer incentives. So we will see faster growth in revenue than in order volume.

For Meituan Instashopping, we believe that the TAM for on-demand retail on China is at least RMB 1 trillion market. This market is still under developed and under-penetrated in terms of digitization. Meituan Instashopping leverage our on-demand delivery network and the consumer traffic from food delivery. We believe that Meituan Instashopping can reach 10 million orders a day in several years. This business will realize up growth in both order volume and revenue than our food delivery business.

While in-store hotel and travel business, we believe that local service industry in China begin to enjoy a tailwind from the continued industry digital transformation. As the go-to partner, we have strong consumer market share when searching for merchant recommendations and deals. We maintain our goal of 5-year revenue CAGR for the in-store hotel and travel business.

On margins, operating margins largely improved due to the short-term COVID factors in this quarter and will likely normalize in the next few quarters as seasonality and short-term active space. However, we will optimize marketing incentives and increase efficiency and trend. This quarter's operating margin is a good penetration of the long-term profitability potential for this Core local commerce segment.

Finally, I want to interject that as a leading player in local commerce makes [indiscernible] to create greater value for more merchants, consumers and our society. Commitment to growing Core Local Commerce efficiently will be more important to us than short-term profitability. We will dynamically invest our operational strategy based on our external environment and policy situation depending growth and profitability. Thank you.

[Operator]

And our next question today comes from Yang Bai with CICC.

[Yang Bai, analyst]

My question is about loss reduction. The loss for new initiatives seem to be better than expected. What are the drivers behind? Is its churn sustainable? And should we expect even bigger loss reduction in the second half this year?

[Shaohui Chen, executive]

Thank you.

Yes. We continue to enhance our capability and operating efficiency for our new initiatives. For Meituan Select, Meituan Grocery and B2B food distribution service, we improved our supply chain management capability and warehousing and fulfillment efficiency. We continue to optimize user incentives and market expenses.

On Meituan Select, we improved pricing and price markup ratio in the first half of this year, which helped to improve the unit economics. On Meituan Grocery, demand surge in regions with strict control in Q2 were went up meaningfully and operating efficiency from Meituan Grocery improved significantly as a result. Other new initiatives, we also further refine our operations. But given quite a few new initiatives are still loss-making on order basis, the restricted business scale in Q2 due to COVID resurgence also led to lower operating loss than expected.

I think our focus on cost efficiency and high-quality growth will continue to show results. At the same time, if the COVID situation became better, order density and AIV for Meituan Grocery may drop. The business scale of other new initiatives will continue to recover by COVID better control, which may lead to higher operating losses from certain new initiatives. We will continue investing into our new business, including a translated Meituan Grocery to maintain good growth trajectory and improve user habit. Meanwhile, we will continue to improve operating efficiency in all operational trends for our new initiatives. We will well balance our goal of growth and loss reductions.

Important to note, we have sufficient cash balance to support our new initiatives. We remain optimistic about their long-term growth potential and the competitive dynamics of our new initiatives. We will dynamically adjust our business development strategy and reallocate our resources based on COVID development, macro environment and operating cash flow of our Core local commerce segment and the development phase of our various new initiatives. Thank you.

[Operator]

And ladies and gentlemen, this concludes our question-and-answer session. I'd like to turn the conference back over to the company for any closing remarks.

[Scarlett Xu, executive]

Okay. Thank you for joining our call. We look forward to speaking with everyone next quarter. Thank you for your support.

[Operator]

Thank you. This concludes today's conference call. We thank you all for attending today's presentation. You may now disconnect your lines, and have a wonderful day.