(Bloomberg) — After making a turnaround to become one of the best-performing technology stocks in China this year, Meituan may be poised for further gains in reducing competition and improving profitability.
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Analysts see shares of China’s top food delivery platform rising another 17% next year based on forecasts for record profits. Cost cuts are helping Meituan increase margins, while there are high hopes for its overseas expansion plan, after the company replicated its mainland success in Hong Kong.
Domestically, ByteDance Ltd.’s Douyin and Alibaba Group Holdings Ltd. appear to have backed off attempts to steal market share, observers say. Concerns about encroachment by rivals made Meituan the biggest loser on the Hang Seng Tech Index last year.
“There is a reassessment of Meituan’s valuation underway as investor sentiment continues to improve,” said Julia Pan, an analyst at UOB-Kay Hian Holdings Ltd., who upgraded the stock to buy this month. “The rivalry between Meituan and Douyin seems to be more rational than before” as ByteDance does not appear to be spending as much money on the battle this year, she said.
Meituan shares have risen more than 90% since their low in late January. Sell-side experts have increased their price targets for the stock by 24% since March, the highest among all Hang Seng Tech peers. The stock has 58 buy recommendations among analysts tracked by Bloomberg, second only to Tencent Holdings Ltd.
Analysts expect the company to post record profits over the next 12 months after solidly beating estimates for the first quarter. Restructuring, including the closure of some loss-making companies, and the recovery of merchant advertising have improved the company’s results, while competition is having less of an impact.
“Alibaba’s focus on regaining its position in e-commerce in China appears to have temporarily slowed the company’s quest for more food delivery market share through Ele.me, one of Meituan’s main rivals,” said Catherine Lim, analyst at Bloomberg Intelligence. The “more moderate” environment likely helped Meituan shares outperform, she added.
To face slowing growth in China, in addition to the threat from rivals, Meituan has been striving to expand abroad. KeeTa, an offshore version of the company’s flagship service, earlier this year became the second-largest food delivery app in Hong Kong just months after its debut.
Meituan is now working to launch KeeTa in Saudi Arabia’s capital Riyadh, which would mark its first move outside greater China. The company appears to be taking its time with the strategy, implementing it in phases and carefully targeting certain districts.
“Compared to Alibaba and other consumer-centric Internet companies such as PDD Holdings Inc., which also face threats to their overseas expansion plans from local players and regulations, Meituan appears to be less exposed to such uncertainties based on more conservative measures taken by the company in the year to date,” said Lim.
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Profits due Thursday
(Updates to add earnings list for Thursday)
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