Earnings Call: Q3 2019

Nov 21, 2019

Earnings release

Good day, and welcome to the Meituan-Dianping third quarter 2019 earnings conference call and webcast. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star, then one on a touch-tone phone. To withdraw your question, please press star then two. Please note this event is being recorded. I would now like to turn the conference over to Ms. Scarlett Xu, Vice President and Head of Capital Markets. Please go ahead. Thank you, operator. Good evening and good morning, everyone. Welcome to our third quarter 2019 earnings conference call. Joining us today are Mr. Xing Wang, Chairman and CEO, and Mr. Shaohui Chen, Senior Vice President and CFO of Meituan-Dianping. For today's call, management will first provide a review of the third quarter 2019 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 is based on our management accounts, which have not been audited or reviewed by our auditor. This presentation also contains unaudited non-IFRS financial measures that should be considered in addition to, and not as a substitute for, measures of the company's 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. Thank you, Scarlett. Hello everyone, and welcome to Meituan-Dianping third quarter 2019 earnings call. In this quarter, we continued to deliver strong results, as GTV increased by 33.6%, and total revenue increased by 44.1% year-over-year. For the 12 months ended September 30, 2019, annual transacting users on our platform reached 435.8 million, up 14% year-over-year. While annual active merchants increased to 5.9 million, up 8.8% year-over-year. During the quarter, we recorded an adjusted net profit of CNY 1.9 billion, thus extending the profitability trajectory from the second quarter of 2019. As we continue implementing our Food + Platform strategy, we further solidified our market leading position as the go-to platform for consumers to search for local services and for merchants to digitize operations and reach targeted consumers. Our strong execution capability have enabled us to sustain our growth momentum, improve our unit economics, and enhance the market position of our core businesses. At the same time, during the quarter, we continued to invest in new initiatives to create more synergies in our ecosystem. We believe that our company is now on the right track to achieve healthy and sustainable long-term growth. Now, I would like to highlight each segment's performance in the third quarter of 2019. Let me start with our food delivery business. In the third quarter of 2019, the number of transactions increased by 38.1% year-over-year to 2.5 billion, while GTV increased by 40% year-over-year to RMB 111.9 billion. This quarter, we continued to strengthen our leading position in all three pillars of the food delivery business, that's consumer base, merchant base, and delivery network. We were pleased to see that the year-over-year growth rate of our order volume accelerated in the third quarter from the first half of 2019, and our unit economics continued to improve on a year-over-year basis. The robust growth of our food delivery business was a result of our strengthened market leadership, enhanced operational capability, and our improved marketing tactics to stimulate consumers' impulse consumption during the summer season. On the consumer side, our food delivery membership program continued to yield encouraging results, which not only further improved our target consumers' order frequency, but also enhanced their stickiness. This quarter shows the average number of monthly membership subscribers, and the total number of orders coming from membership subscribers increased by more than 40% on a sequential basis. Our membership program also effectively boosted impulse consumption during non-meal and off-peak hours. During the quarter, order volume growth for breakfast, afternoon tea, and night snacks continued to outperform that of lunch and dinner. More notably, during the quarter, the order volume of both coffee and salads increased by around 100% year-over-year. But such orders mostly is taking place during the afternoon tea time period. Our research shows that an increasing number of Generation Y consumers prioritize quality and variety in their food consumption, while healthy, light meals and beverages have become a new consumption trend. Another notable trend is the rise of the nighttime economy. Our recent consumer research shows that over 40% of urban white-collar workers conduct the majority of their consumption during the night. Moreover, more than two-thirds of the white-collar workers' nighttime consumption falls within the food category. These new consumption trends suggest that consumers' dietary habits are evolving. Based on prior experience, we believe that we can cultivate new food delivery consumption scenarios, and once these new consumption habits are developed, we can then further boost the order frequency of consumers. Going forward, we will continue to leverage our insights on the evolution of consumer demands to optimize our supply and product offerings. This quarter, on the merchant side, we continued to explore supply-side operations to drive a more sustainable growth for the entire industry and further enhance our long-term competitive advantages. For example, we started to conduct in-depth research on the comparative advantages, popular dishes, cost structures, and consumer reviews for a select group of high-quality restaurants and provide them with constructive advice to help improve their online marketing operations, traffic generation, as well as conversion and retention rates. As a result, the number of food deliveries orders generated by these selected high-quality restaurants improved significantly. Additionally, we continue to improve our marketplace products to provide restaurants with more useful tools to improve their marketing efficiency. For example, we introduced the BanMore, an online marketing design tool with a user-friendly interface that offers a comprehensive photo gallery database and automatic banner design. Our restaurant merchants only need to upload one or more genuine pictures of their dishes. Add a few keywords for the banner, and our BanMore will automatically generate customized banner designs for them. On the delivery side, we continue to explore innovative strategies to further refine our delivery network operation, optimize our cost structure, and improve our delivery efficiency. In addition to economies of scale, during the quarter, we improved the mobilization capacity of our delivery network through the enhanced segmentation of our delivery services, ensuring the user experience under extreme weather conditions and select consumption scenarios in a more cost-effective way. Meanwhile, we continue to make efforts to enhance our delivery riders' sense of fulfillment and corporate belonging. To reward our delivery riders for their dedication and service, we initiated the 717 Rider's Day Festival in 2018. For this year's celebration, we provided our delivery riders with summertime snacks and beverages, with holiday feasts, and hosted activities such as a celebration ceremony and online lotteries. In addition, we launched China's first charity program to provide financial assistance to delivery riders' children in case of their illness and accidental injuries. Delivery riders serve as a critical bridge between consumers and merchants. Therefore, we view it as crucial to ensure adequate social welfare and emotional support for our delivery riders and their families, and we will continue to help them attain increasing social respect and acceptance. This quarter, we further solidified our distinctive advantages in the food delivery business and achieved a good operation performance. Moreover, what we achieved this quarter rested upon our deep industry insights, long-term strategy, and persistent execution throughout the past few years. For example, in 2015, we anticipated the importance of a self-operated delivery network and started to build our own, as well as an AI-powered order dispatching system. Today, our on-demand delivery network is the largest and most efficient in the world. Another example is that we started to explore and then continuously optimize the ROIs of several marketing programs 2 years ago. Today, we can enjoy more and more benefits from our effective food delivery membership program and other ROI-driven subsidy tactics. As always, we will maintain our customer-centric strategies and invest for the long-term growth of this industry. We believe this will enable us to further build our long-term competitive advantages and capture the growing potential of the food delivery industry. Next, let's turn to our second segment. That's in-store, hotel, and travel, in which revenue continued to grow rapidly during the quarter. As the leading platform in China with unrivaled scale and selection, we have become the go-to platform both for consumers to search for local services and for merchants to market their services offering to attract new consumers. Consumers appreciate that we are the only platform with detailed information and billions of authentic user-generated reviews, covering millions of local service merchants. We continue to improve our location-based algorithms and leverage user-generated local search queries to accurately match user preference with local merchants. Additionally, we continue to diversify our affordable marketing products and tools for merchants. This capability has made us the preferred channel for local service merchants, especially small business owners, to reach their target customers. In the quarter, our in-store business advertising revenue continued to achieve rapid growth despite the weakness in the macro economy. In addition, the year-over-year growth rate of commission revenue from transaction-based products for our in-store hotel and travel businesses accelerated during the quarter. Thanks to our improved operational capabilities and more frequent promotional campaigns that further enhanced our brand awareness and influence among consumers and merchants. Some examples of these promotional campaigns include the Super Brand Food Festival, Chinese Valentine's Day Special, and the Parent-Child Fantasy Day. The Super Brand Food Festival was an event that promoted fast food as well as in-store snacks and drinks from branded restaurants. During the festival, our total online transaction volume reached CNY 153 million, with over 1.3 million ice creams, 1.2 million cups of coffee, 1.2 million burgers, half a million fruit snacks, and 0.3 million desserts sold in total. With the participation of 120 well-known restaurant brands with more than 60,000 stores in 948 cities, the event took full advantage of these chain restaurant brands' popularity, offered online coupons and discounts to consumers, and promoted an online purchase, offline experience of consumption. Another example of such a promotional campaign was our Chinese Valentine's Day special. We organized online sales and marketing initiatives across all categories on our platform, including in-store dining, hotel, travel, beauty, medical aesthetics, leisure and entertainment, and more. During this year's holiday period, the volume of restaurant reservation on our platform increased by more than 300% compared to the prior year. Restaurant features on our Black Pearl Restaurant Guide and 2019 MasterList became highly sought-after venues. At the same time, beauty salons and spas became top pre-holiday shopping categories. Flower bouquet orders grew more rapidly on our platform this year than prior year. Overseas travel, couples photo shoots, night visits to theme parks, and similar entertainment services also became new dating scenes during this year's Chinese Valentine's Day. Our integrated marketing campaign not only assisted merchants in reaching their target consumers with a higher online marketing ROI, but also helped consumers to celebrate a memorable Valentine's Day. on July 11th, we held the 2019 Parent-Child Fantasy Day celebration, a carnival-themed event hosted at the Shanghai World Expo Exhibition and Convention Center. Our Parent-Child Fantasy Day event encompassed four specialty themes, including creativity, inquisitiveness, social intelligence, and imagination. Over 100 renowned parent child brands from 79 categories participated in our event, including entertainment, education, photography, restaurants, toys, and many others. During the event, children could enjoy a variety of hands-on experience, including artistic exploration, American football team building, and bilingual drama appreciation. According to industry research, the size of China's parent-child market exceeded CNY 300 billion in 2018. We aim to stay on the leading edge of the new parent-child consumption trend, and we'll continue to bring consumers better merchant selections, more relevant product recommendations, and increasingly better service experiences through enhanced online/offline interaction and integration. For our hotel booking business, we are delighted to announce that the growth of the domestic room nights on our platform accelerated to 44.4% year-over-year in this quarter. We believe this business still has tremendous potential for sustainable growth and scalable monetization in the mid to long term. Our view is that a key growth driver is the rising growing consumption within many rapidly developing lower tier cities, where we have built our clear market leading position. In addition to our user acquisition cost advantages as a result of our Food + Platform strategy, our deep market insights and massive traffic volume have enabled us to develop mutually beneficial collaborations with more hotels, thus further driving new growth. We will continue to incentivize more of our platform's existing users to try our hotel booking service while developing partnerships with more hotels to maintain the strong growth momentum. Finally, let's look at our new initiatives and others segment, which further narrowed operating losses on a year-over-year basis. During this quarter, for our bike-sharing business, we gradually replaced some of the older version bikes with the new yellow Meituan Bike, which are the new models of bikes painted in the color of Meituan yellow logo with a longer lifespan and user experience improvements. Consumers have to unlock these new bikes through our Meituan app, which helps to enhance our brand image, direct more traffic to our Super App, and create more opportunities for cross-selling other local services. These new bikes have immediately received positive feedback from consumers, and we are glad to see that the average turnover rate for new Meituan Bike is much better than that of our old bikes. Therefore, we plan to continuously launch more new Meituan Bike in the coming quarters to create more synergies with our core businesses. In groceries, we continue to make progress through experiments. For our self-operated Meituan Grocery model, known as Meituan Maicai, we increased warehouse density in the few cities that we currently operate in. For Meituan instant shopping, known as Meituan Shangou, we continue to achieve high GTV growth in the medicine and flowers category on a year-over-year basis. In July, we also started a pilot program in 10 traditional farm markets in Wuhan, helping merchants to digitize their fresh product inventory while providing them with on-demand delivery services, as well as guidance for SKU selection, pricing, and traffic attraction. We will continue to allocate resources towards our exploration of the grocery retail business based on our assessment of its ROI. As for our 2B services, we continue to invest in our RMS, the restaurant management system, and also our Kuailv as B2B food distribution service, as we believe in the strategic value of supply-side digitization. In China, demand-side digitization is near completion, while supply-side digitization is just beginning. We have millions of restaurants on our platform. Many of them have the desire to digitize their operations, menus, table seating arrangement, staff management, and procure processes. While demand-side digitization is relatively straightforward as merchants tend to be far more cost-conscious than consumers, supply-side digitization has a slower pace and takes a longer time. We believe that supply-side digitization is crucial to the digital economy, and we will continue to invest in our 2B businesses. Overall, we are happy with the results we have achieved today. At the same time, I would like to emphasize again that we are just at the beginning of our long journey. Most people tend to estimate what can happen within one or 2 years but underestimate the change that can be made within 5 to 10 years. The good results that we have achieved today have come from our philosophy of operating and investing for the long term, as we said since day one we founded the company. We develop our business strategies and allocate resources with a decade-long perspective which we think enables us to create maximum values for our long-term stakeholders. Therefore, we are determined to keep investing our long-term growth and focusing on business opportunities that will generate value for both consumers and merchants next year, in the long run. That is all. Thank you, Xing. Hello, everyone. I am Shaohui Chen. Now I will go through our third quarter financial results. In the third quarter, total revenue reached RMB 27.5 billion, up by 44.1% year-over-year. Such growth was mainly driven by the robust increase in revenue across all business segments. Our total gross profit for the third quarter increased to RMB 9.6 billion, up by 109.8% year-over-year. Gross profit margin increased to 34.9% from 24% in the prior year period, mainly due to the constant improvement to the gross margin of our food delivery business, and the consistent narrowing of losses for our new businesses. Selling and marketing expenses as a percentage of revenue further decreased to 20.4% in the third quarter of 2019, from 24.2% in the third quarter of 2018, as we further enhanced operating leverage and optimized branding and marketing expenses. The quarter-over-quarter increase of 2.1 percentage points was mainly resulted from more transacting user incentives, promotion and advertising expenses incurred to enhance our brand awareness and support business growth, especially for our food delivery and hotel booking businesses. R&D expenses as a percentage of revenue decreased to 7.8% from 10.5% in the prior year period. G&A expenses as a percentage of revenue also decreased to 3.8% from 6.5%. On a consolidated basis, our adjusted EBITDA and adjusted net profit continued to improve year-over-year, reaching RMB 2.3 billion and RMB 1.9 billion respectively in the third quarter of 2019. Adjusted net margin further increased to positive 7.1%, compared to negative 13% in the third quarter of 2018. Adjusted EBITDA margin further increased to positive 8.3%, compared to negative 6.1% in the third quarter of 2018. The improvements of adjusted net profit and adjusted EBITDA on a year-over-year basis are attributable to the growth of our business scale, which enhanced operating leverage and our ongoing efforts in improving our core businesses' operating margin and streamlining our operating losses for new initiatives. Let us now take a look at our segment reporting, starting with our food delivery segment. This quarter, we continued to solidify our leading position and deliver healthy operating results. The combination of our ROI focused subsidy strategy and the food delivery membership program not only continued to increase the purchase frequency of targeted consumers, but also stimulate their impulse purchase through the summer period. As a result, our year-over-year growth rate for the number of food delivery transactions accelerated on a sequential basis during this quarter. With the average number of daily food delivery transactions increasing by 38.1% year-over-year to 26.8 million. AOV and monetization rate for food delivery remained stable in the third quarter. As a result, food delivery GTV increased by 40% year-over-year to RMB 111.9 billion, while food delivery revenue increased by 39.4% year-over-year to RMB 16.6 billion. The strong growth in transaction volume during the third quarter demonstrates that the consumers' consumption habits could be cultivated, and the demand for food delivery services still has very good potential despite the current imperfections in the supply structure. In particular, food delivery has become a popular way for the younger generation to consume healthy light meals, beverages, refreshments, and nighttime snacks. Overall, we operate our business with a consumer-trigger philosophy, prioritizing long-term growth over short-term profitability. We will continue to allocate more resources to drive growth of our consumers' purchase frequency and cultivate their consumption habits in line with the latest consumption trends. Gross profit of our food delivery business increased to RMB 3 billion in the third quarter, up by 64.5% year-over-year. Gross margin expanded to 19.5% from 16.6% in the prior year period due to our enhanced delivery network efficiency, resulting from improved economy of scale or refined delivery network operations, and the increased revenue contribution from online marketing services. On a sequential basis, the average delivery cost per order increased as a result of the seasonal incentives paid to riders for working during hot weather conditions. Therefore, the gross margin of our food delivery business decreased on a sequential basis. In terms of operating profit, although this quarter's unit economics were weaker than the previous quarter due to higher delivery cost, we are pleased to see that this quarter's unit economics improved meaningfully on a year-over-year basis, and the adjusted operating profit of our food delivery business continued to be positive. Now turning into our second segment, in-store hotel and travel. Revenue in this segment increased to RMB 6.2 billion, up by 39.3% year-over-year. Such strong revenue growth was mainly driven by the robust growth of advertising revenue generated from our expanding merchant base, the revival of growth for transaction-based services, and the accelerated growth of domestic room nights consumed on our platform. In addition, the strong growth of our food delivery business during the quarter further boosted user traffic and increased cross-selling opportunity incrementally within our in-store hotel and travel segment. Gross profit increased by 36% year-over-year to RMB 5.5 billion. Gross margin remained flat sequentially, while decreasing slightly from 90.6% to 88.6% on a year-over-year basis, mainly due to the increase in depreciation and additional bandwidth and server fees as a result of a database improvement project, and also higher online traffic costs incurred to support the growth of our online marketing revenue. For in-store dining services, growth of commission revenue accelerated in the third quarter as a result of our diversified transaction-based service product, enhanced operational capabilities, and extended coverage of top-branded restaurant accounts on our platform. In addition, online marketing revenue continued to grow rapidly and accounted for around half of the total revenue for in-store dining services during the third quarter. For in-store other local services, commission revenue maintained healthy growth. Moreover, as the leading e-commerce platform for local services in China, we continue to unleash the potential of small and medium local service merchants' unmet marketing needs through an increasingly diversified product portfolio and enhanced advertising algorithm. As a result, our online marketing revenue maintained robust growth. For our hotel booking services, we stepped up our investments during the summer season to further accelerate the growth rate of domestic room nights in the third quarter, resulting in a 44.4% year-over-year increase. The strong operating performance of our hotel booking business over the past few quarters further demonstrates our unique advantage in this business. We are quite optimistic about the potential monetization opportunity for our hotel booking business over the long term. As a result, we plan to continue to invest in this business to reinforce our market-leading position, especially in lower-tier cities and the leisure traveler segment, to further enhance the traffic conversion from our food high-frequency categories to our hotel booking business. Let's now turn to our third segment, new initiatives and others. In this quarter, revenue increased to RMB 5.7 billion, up by 65.4% year over year. The segment recorded the gross profit of RMB 1.1 billion, while gross margin further extended to 18.7% from negative 37.4% in the prior year period. The year-over-year improvement of 56.1 percentage points was mainly due to the narrow losses of our car-hailing services, as we further scale back subsidies of our self-operating model and explore our aggregated model in more cities. The significant margin improvement made to our bike-sharing business as the significant reduction in depreciation because some bikes reached the end of their useful life during this quarter. Now moving on to our cash position. As of September 30, 2019, our cash equivalents, and short-term investment total RMB 61.2 billion. Overall, we achieved good results in this quarter with enhanced operating leverage and steady margin improvement year over year. As Xing mentioned, our philosophy prioritized long-term growth over short-term profitability. Therefore, we may increase investments when we see necessary and the ROI criteria meet our standard to drive sustainable and long-term growth for the company. This concludes our prepared remarks. Operator, please open up the call for questions. Thank you. We will now begin the question and answer session. To ask a question, you may press star then one on your touch-tone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star then two. At this time, we will pause momentarily to assemble our roster. The first question today comes from Eddie Leung of Bank of America. Please go ahead. Hi. Good evening. Thank you for taking my question. I have a question on your strategy to compete. We have seen your competitor focusing on directing traffic from their very big user base of their ecosystem to the food delivery and local services app. Just wondering how we can react or respond to these tactics, given in terms of user base, spending, their ecosystem is quite big. That's my question. Thank you. Thank you, Eddie. We are not that focused on competition. We focus on our own Food + Platform strategy. We have extensive experience and deep insight in operating local services. We are the only platform focusing on local services, and we already capture consumers' mind share as the go-to platform to find local services. I think we are going to continue improve our own robust ecosystem in local services. For food delivery in this quarter, our clear advantage in consumer base, merchant base and delivery network in terms of both scale and quality have been further expanded, which lead to a self-reinforcing network effect and economy of scale. We believe we will continue to win new consumers and enhance consumer stickiness attributable to our large merchant base, largest and most efficient on-demand delivery network, and increasingly customized recommendations. For in-store services, we have even stronger leading position with a massive merchant base and content. We have clear leadership in food delivery and in-store services. We will continue to build our marketplace, improve user experience, further enhance our big data analytics to provide users more tailor-made recommendations to enable the merchant with more diversified services. We will also optimize our marketing tools such as membership program or other programs and campaigns to enhance user stickiness. Also, at the same time, we will continue try multiple channels to extend our own user base and leverage our new initiatives to access to a wider range of consumers. For example, our Meituan Bike sharing and other transportation services as well as grocery retail business will increase the touch points with the consumers and the potential for cross-selling. That's why we are going to keep investing in our Meituan Bike, the bike sharing business. Moreover, we are conducting our assessment and plan to increase our brand expenditures and overall platform promotion in the future. We will aggressively invest into these new categories in the coming quarters. Right now, I think we have a more solid financial foundation to invest more into our brand awareness. Both online and offline, we are going to spend a bigger budget on branding. We are also going to invest in more bikes to increase our offline exposure. Overall, we are confident that we could continue to fortify our long-term leadership in local consumer services. Thank you. That makes sense. Thank you. The next question today comes from Ronald Keung of Goldman Sachs. Please go ahead. Thank you. Thank you, Xing, Shaohui, Scarlett, and team, and congratulations on the strong set of results. My question will be on in-store this quarter. With your dominance as, Xing, you've mentioned in in-store dining discovery online services, just want to hear what management view as, for example, potential challenges. There are a few map platforms, particularly a competitor with a map platform. As they provide more and more of these local merchant information and services, how do we see us deal with these upcoming challenges? In the longer term, just how do we strengthen our one-stop moat, I would say, as a Super App in serving these merchants? For example, navigation for users as they find these stores. If I could tag on a third tag into the in-store segment, just how do we see the sustainable growth rates for this segment over the next few years? Thank you. Thank you, Ronald. That is a very good question. To be a successful e-commerce platform for local services, it is very important to establish a relationship with millions of merchants and accumulate sufficient content for consumers to make informed decisions. We believe our large number of experienced local BD staff, around 7 billion user-generated reviews on 14 million merchants, will continue to serve as our unique competitive advantage in this industry. It will take a long time to accumulate all those data. In particular, we differentiate from those maps platform in terms of user experience. First, our location-based algorithm, along with our database on user behaviors, habits and preferences, enable us to generate more intelligent and customized recommendations to our user base. Second, our continuous efforts in enriching our content ecosystem have enabled us to provide the user with sufficient usable content for them to make informed decisions. Moreover, we will continue to fine-tune our level scaling user system in Dianping app and provide benefits such as special coupons and free trials for merchants to those high-quality content creators to stimulate their engagement in generating content. We also launched an in-app recommendation feed in both Meituan app and Dianping app to help consumers discover quality local services based on our customized recommendations. In addition, we provide a closed loop diversified transaction and frequently organize theme-based promotional campaign, and that offer attractive discount to our users. With the above reasons, our brand has the largest mindshare among consumers as the go-to platform for local services. In terms of our own map capability, we continuously made efforts to optimize the accuracy and several fundamental capabilities such as search, positioning, and route planning to cover core functions of the third-party maps for better user experience. As a result, our consumers could just use Meituan or Dianping app to make a routing decision and get accurate site guidance. We hope to make a map service an integrated portion of our overall services to our users. We will gradually invest into map-related infrastructures. Overall, we believe our household brand, unique technology platform, and huge amount of high-quality user-generated content, and incomparable merchant base, and superior offline operating capability could continue to strengthen our leadership in this segment. We believe this segment could continue to have healthy growth rate in future, driven by the expansion of both merchant base and ARPU. Thank you. Thank you very much. It is very useful. The next question comes from Alex Yao of J.P. Morgan. Please go ahead. Hi, good evening. Thank you for taking my question. I have a question regarding the food delivery. We have seen an acceleration of order growth for food delivery business this quarter, and it has become the profit-making business a second quarter in a row. How should we expect the order volume growth rate and the unit economics of a food delivery business in the next couple of quarters? Thank you. Thank you, Alex. I will take this question. For this quarter's growth acceleration, one important reason was our market share expansion. We have continued to invest further in this quarter and drive our market share growth. However, as we are already a majority of the market, the number one player, we all know that it will become more and more difficult to further gain market share, or it will take longer time to gaining extra share. Therefore, the contribution from market share expansion to order volume growth will become smaller in the future. We will more and more rely on the industry growth to grow the overall platform. We don't expect this acceleration to continue. Next quarter, the growth rate should be expected to be slower than this quarter. For unit economics, as we talked before, food delivery business has very strong seasonality. This quarter's unit economics were weaker than Q2 due to higher delivery cost per order and user subsidy in summer season. We expect unit economic in Q4 will continue to be under pressure because of even more seasonal incentives paid to delivery riders in areas under extremely cold weather condition, which will also be unfavorable to deliver efficiency improvement. Seasonality will bring fluctuation in terms of order volume growth and profitability during a year. We continue to advise investor to focus on year-over-year comparison. More importantly, for food delivery business, we always take order volume growth as our top priority in long term. We want to make food delivery service an essential infrastructure for Chinese peoples getting food, and will continue to make investment to drive the industry long-term growth instead of rushing to monetize in the near term. Although, in the last few years, we have seen the monetization rate improve and unit economics improve significantly. In the next few quarters, our revenue per order, the main upside is the steady improvement from the advertising revenue contribution, rather than the high level overall monetization rate. At the same time, we will maintain our commission rate charged from merchants relatively flat in the near term, particularly when we take into consideration the competitive dynamics and the macro environment as well as our strategic goal to encourage more diversified quality suppliers on our platform. Going forward, we will design our subsidy strategy based on our own pace rather than on competition to grow our business. We believe that demands and habits of consumers could be cultivated, and that we will, as a leading platform, continue to allocate sufficient resources to things like our membership program to stimulate consumptions and increase transaction frequency. On cost and expenses per order, we will continue to benefit from economy of scale and improve the operation efficiency of our delivery network. We will continue to focus on year-over-year improvement for our food delivery business, and should be able to achieve that as a result of our competitive advantages. We are still very confident for the long-term outlook of our food delivery business. Thank you. Thank you. The next question today comes from Grace Chen of Morgan Stanley. Please go ahead. Thank you for taking my questions, and congratulations on the strong results. My question is also about competition. We understand that Meituan has high market share in low-tier cities, but at the same time, we see the competition in low-tier cities is getting more and more intensified with not only e-commerce players, but also content apps directing focus on these areas. Therefore, it would be great if the management can share what measures Meituan has been taking to defend market share in low-tier cities. Thank you. Thank you, Grace. First, I want to clarify that we are leader in not just lower-tier cities, but we are also leader in higher-tier cities. We have a very strong brand in top cities as well, like Beijing. Lower-tier cities in China has a huge population and big potential for the urbanization, and also for consumption upgrade, digitization of commerce and local services. That's why more and more players start to compete for a larger share in this market. We are the first e-commerce platform that brought multiple categories of O2O services to large numbers of lower-tier cities across country. We have covered all cities in China. We have built a nationwide market leadership and brand awareness in lower-tier cities, which is much stronger than our potential competitors. In lower-tier cities, we have clear advantage in consumer base, merchant base, delivery network, on-the-ground sales team, and content ecosystem. With the solid foundation, we continue to solidify our leading position and also made good progress in user acquisitions in lower-tier cities. More and more new users came from lower-tier cities, and we believe these cities are the next frontier of user growth. In Q3, lower-tier cities continued a more than 50% addition of transacting user and order volumes from lower-tier cities accounted for more than 60% of our total orders. In particular, consumers in these cities tend to be a younger cohort, so their purchase frequency is still catching up with mature cohorts in higher-tier cities. It takes time for multiple services and lifestyle changes to further penetrate the users in lower-tier cities, which means a big room for future growth for us. We will continue to leverage our offline and sales team delivery network, the marketing resources in lower-tier cities to attract more consumers and more merchants. In addition, as a unique one-stop platform focused on local services, we will also further enhance cross-selling among different services on our platform. We believe that we will ensure our clear leading position and capture the benefits in this market. Thank you. Thank you. The next question today comes from David Dai of Bernstein. Please go ahead. Thank you, management. Congratulations for another great quarter. I have a specific question around our food business. We know that pork price has gone up sharply over the last few months, and that has brought up prices of other proteins as well. When we spoke to the restaurants, it seems like some of them were facing some pressure and challenges there. Could the management comment on the impact on our food business, if there is any? Thank you, David. Well, this is a very relevant question to a food platform like us. We do notice the continuous CPI increase in last few months. Also in our platform, according to our observation, a lot of small restaurants now operate under increasing cost pressure. Negative impacts on their margins make them struggle to survive unless they raise the prices of their offerings. Therefore, we have proactively made the decision that as a platform, we will not increase our monetization rate in the near term. It's to help the whole industry get through the difficult timing. Food-related services are the foundation of our platform and also is an area that we'll continue to invest and maintain the robustness of our ecosystem. We want to ensure our consumers continue to find affordable quality food on our platform. Also like to help the restaurant merchants get through challenging times without impact on their experience and build a deeper relationship with them. Therefore, we think slowing the pace of monetization in the near term actually could be a good thing for the whole ecosystem. This including both the commission rate and the pricing of advertising will both be slower in the advertising monetization pace to support merchants' healthy operation on our platform. In addition, high-quality traffic and operating efficiency improvement coming from our platform has become more crucial to many small restaurants during tough periods. We are providing more diversified products at affordable prices and even free resources to the restaurants to help them promote their services and manage their customers more efficiently and effectively. For offline restaurants, one very important cost is the renting cost, particularly when the whole China's Real Estate and the renting price is going up. However, the restaurants and other merchants that operate on our platform are able to reach a much broader consumer base without a very expensive physical store. We think we provide an alternative and affordable option for these local merchants. We think under this macro environment, leader like us actually can further leverage our competitive advantages to strengthen our partnership with our restaurant partners. Thank you. Thank you. That's very helpful. Okay. The next question comes from Alicia Yap of Citigroup. Please go ahead. Hi. Good evening, management. Thanks for taking my questions and also congrats on the strong set of results. My question is related to the non-food delivery business, such as the fresh food and also the grocery delivery. What is Meituan's target in this area? Since there are a lot of players, including large e-commerce platform, the logistic platform, and also the smaller vertical startup also step up their effort in this area. With competitions getting very intense, seems like the current unit economics for this non-food is not that favorable. What is management view about this segment of the business in the short term and long term, and what will be Meituan's strategy on this area? Do you think that the loss-making situation could force some players out of the business soon? Or will there be an even tougher battle given the market share is very fragmented and many players actually have a rich capital to burn? Any thoughts you could share would be appreciated. Thanks. Thank you, Alicia. Let's put it this way. In the long run, that's going to be a very attractive market. That's why there are so many players now. In short term, I think everybody is just trying. Right now, I think nobody knows what's the right way, and we are also trying. We have two new initiatives in this area. We have the marketplace model as Meituan Instant Shopping or Meituan Shangou. On the other hand, we have a self-operated model as Meituan Grocery, Meituan Maicai. We are going to keep trying both. In our marketplace model, non-food delivery business is Meituan Shangou. Since we started it several years ago, it has continued to be challenged by the lower gross margin nature of local goods. It's hard for the local retailers to afford the delivery cost if the ticket size is not big enough. In the past few quarters, we still saw strong growth from some categories with good potential, such as the flowers and medicines. These categories have higher margin, and these categories enjoy a higher ticket size, so making profitability a possibility after deducting the delivery cost. In addition, the timely consumption demand makes our delivery service more valuable to consumers in these categories. That's particularly true for medicine. When you need to buy medicines, you want it delivered under 30 minutes. You don't care about paying several RMB for the convenience. Well, it's a very difficult space. We are committed to invest further in the coming quarters to extend our initiative in this area. On the other hand, there's a tremendous opportunity in grocery. In China, grocery shopping is almost a CNY 5 trillion business, while the online penetration is still very, very low. We think there's a good potential in the digitization transformation of the grocery retail industry, especially in combination with on-demand delivery network, in which we have very clear advantages in terms of both scale and efficiency. As a result, we are actively exploring fresh grocery retail despite a low gross margin nature. Which will be one of the main focus of Meituan-Dianping. We started to enable some traditional farm markets to do business online with our marketplace and delivery network. In addition to providing them with online traffic and online delivery service, we are also enabling the farm markets by offering big data analytic tools and various operational advices such as pricing, SKU selection, and marketing tactics. Currently, our priority is to continue to bring values to the merchant through better product and service offerings, as well as optimize our own operation. In addition to marketplace model, we also have our own self-operated business that's called Meituan Grocery, Meituan Maicai. We aim to further penetrate the food consumption scenario of consumers. Currently, we operate small grocery stores with delivery service in two cities. Actually, right now it's three. Yesterday, we launched Meituan Maicai in Shenzhen. Both Meituan-Dianping and Meituan Grocery are still in very early stage. We'll keep our ROI-oriented resources allocation and continue to iterate our model to capture the potential opportunity. Again, in the long run, that's going to be a very attractive huge market. But in the short term, everyone is trying. We are also trying, and we are going to keep trying. Thank you. Thank you. The next question comes from Natalie Wu of CICC. Please go ahead. Hi. Good evening. Thanks for taking my question, and congratulations for a very solid quarter. My question is regarding the further investment. Given that we see the encouraging improvement across all the segment margins on a year-on-year basis, and you said you would consider add on some investment to the new initiatives in the future. Just wondering how should we expect the losses of the segment for the next few quarters. Among all the new initiatives you currently have, like shared bikes, O&M, groceries, et cetera. Just wondering, which ones would be your top few focuses at the moment in terms of the time or effort spending or the magnitude of investment? It would be great if management can share some colors on that. Thank you. Thank you, Natalie. Before I name the key new initiative segments, I would like to share again our philosophy on new initiatives. Although, we have seen the new initiative segment have very clear operating improvement and the financial improvement. We further narrowed the loss in this quarter and also in the last few quarters. We hope investors do not misunderstood that this means that we will reduce the new initiatives or stop this narrowing loss trend will continue. Actually, the last few quarters improvement and adjustment give us internally better preparation to understand these new opportunities. Also, the key challenges related with these opportunities and also the core capability required to capture those opportunities. So with about one year's adjustment and preparation, we believe we are now much better prepared, and we are ready to invest further. When we allocate resources to these new initiatives, besides assess the financial ROI, we also take into the consideration the synergy this new initiative can bring to our platform. For example, the user and merchant acquisitions, branding effect, user stickiness or merchant relationship, et cetera. We think all these factors could help us further strengthen our ecosystem and very important for us, it's sustainable long-term growth. In addition, as a leading e-commerce platform, we also hope to invest more on cutting-edge technology that could be very relevant for us to further improve our user experience, such as visual image, autonomous delivery technology, green technology. In terms of your questions on the key areas, besides what Xing Wang mentioned in the grocery area, which is a very core category that we are going to continue to invest in, and next year we may expand the scale. We also very believe in the strategic value of the supply side services, the supply side digitization trend. Our restaurant management system and B2B food distribution services could help improve the operation of our restaurant partners. Most of this business, we have been exploring for some time and build a much better know-how within that services model. We strongly believe this will help us deepen our relationship with restaurants and provide very important infrastructure for the industry. We will continue to invest in the restaurant management system and the food distribution services, while at the same time, we know these 2B services usually will take a much longer timeframe to grow and to bear fruits. On the other hand, transportation-related services are an integral part of people's daily lives. On bike-sharing business, we expect bike-sharing business be our key CapEx area next year. We have significantly improved our capability on bike operation, bike design, the supply chain management for bike and also the pricing and operation metrics, et cetera. Our new Meituan bikes received quite positive feedback from consumers. Also in our platform yield a very positive turnover ratio than our own bikes. We think it is a very good time window to make additional investment to replace more old bikes with our new bikes in the next few quarters. We believe bike-sharing business not only help us tap into more high-frequency use cases, also could continuously expand our user base and our consumer touchpoints, improve transaction frequency, and the stickiness of our users. Thank you. Very clear. Thank you. The next question today comes from Kenneth Fong of Credit Suisse. Please go ahead. Hi, good evening, management. Thank you for taking my questions and congrats on the very strong results. I have a question on the hotel business. For the remarkable year-on-year growth on the domestic room nights for the hotel business, could management share more details on the drivers? Any specific investment going forward to bolster these future growth prospects? Thank you. Thank you, Kenny. As you can see, in this quarter, the hotel booking room nights growth is very strong. We believe this is much higher than other players and much higher than the industry average. I think the result in this quarter further reinforce our confidence to becoming the clear leader in hotel booking business in China. We are planning to invest much more aggressively than before in the next few quarters. For this quarter, the acceleration, I think partially attributable to our increased investment and also partially thanks to our platforms continue improve the capability in cross-selling from our existing user base. Also, thanks to how we developing mutually beneficial collaboration with more hotels in lower-tier cities. In addition to converting users from our food-related services, continuous efforts of leveraging our offline resources acquire new offline traffic further to drive the growth of our hotel business this quarter. Notably, online penetration among lower-star individual hotels is only around 20% in China. We believe there are still huge growth potential in this market, and we will leverage our current advantage to further solidify our dominant position in terms of business scale at this stage. We will also make efforts to move up to high-star hotel segments gradually. We are using our Hotel + X 2K, and have established collaborations with dozens of high-star hotel chains to stimulate the growth of our high-star hotel booking business. As we know that the hotel business as a whole is not doing very good in China due to lots of reasons, and the digitization rate of their room nights is not very high. So we, as a new platform, a new channel for these high-star hotels to really bring incremental business volume and new customers to our hotel partners. We have a larger user base and a much stronger brand awareness for people's daily lives and can bring people from lower-tier cities and from across different tier cities. So we think we could be more a preferred partner for these high-star hotels. We will focus on reinforcing our market-leading position in both the scale and growth rate in terms of their hotel room nights. We will also invest more aggressively into the high-star hotel. Expect the growth momentum of our hotel business to continue. Got it. Very clear. Thank you very much. The next question today comes from Thomas Chong of Jefferies. Please go ahead. Thanks, management, for taking my questions, and congratulations on a very strong set of results. Compared to the last several quarters, we have noticed one of the highlights for this quarter is the acceleration on GTV growth rate of the in-store hotel and travel segment. Except for the high growth on the hotel booking business, you also mentioned revival of transaction-based products for other in-store business. Could you give more information on this change? Thank you. Yeah. Thank you for noticing that, Thomas. It is quite a milestone for us because after several years' adjustment on our internal team and our product format, we have been able to re-accelerate the transaction growth for our in-store business, including both our in-store dining business and our in-store other local services. Both sectors have achieved accelerated GTV growth in this quarter. We further increase operating efficiency by dividing restaurants into different categories based on our accumulated insights in this industry and providing targeted product solutions. For example, we have strengthened our coverage for chain restaurant meeting our criteria, mobilized a dedicated BD team to provide customized services to them where we have witnessed strong needs for online marketing, consumer acquisition, and product development. Meanwhile, several well-organized theme-based promotional campaigns we just mentioned also yield very good results. For in-store other local services, the robust growth also thanks to the product innovation and operational improvements. Particularly as we mentioned in the earlier quarters, we have seen some verticals such as beauty, parenting, education, they have seen very strong growth momentum. We think this acceleration of GTV and transaction-based revenue growth further demonstrating the power of our unique platform. We provide a comprehensive suite of transaction services and marketing tools to address these merchants' different needs. Different types of service categories might have specific preferences as to which our product offerings are the most beneficial, depending on the nature of their business. We still have enough space and flexibility to continuously develop our products and optimize our operation so that each type of merchants could find a suitable mix of our product on our platform to improve their operating efficiency. Currently, the penetration rates of our products for in-store merchants are still at a relatively low level. We still see high potential for future growth. Thank you. Thank you. This concludes our question and answer session. I would like to turn the conference back over to Scarlett Xu for any closing remarks. Thank you everyone for joining our call. We look forward to speaking with you next quarter. Thanks, everyone. Thank you. Thank you. The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.