Earnings Call: Q3 2018

Nov 22, 2018

Earnings release

Welcome to the Meituan-Dianping third quarter 2018 earnings results conference call. All participants will be in 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 your touchtone 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 Scarlett Yu, Vice President of Capital Markets. Scarlett, please go ahead. Thank you, operator. Good evening and good morning, everyone. Welcome to our 2018 third quarter results 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 quarter, then we will conduct our 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 the 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 some unaudited non-IFRS financial measures that should be considered in addition to, but 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 our disclosure documents on 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 our first earnings conference call. Meituan-Dianping is a young public company, and I want to take this opportunity to thank you all for your attention and interest in our business. The mission of our company is to help people eat better and live better. We continue to believe this is a super exciting opportunity, and we are happy to bring it to the public capital market. First, I would like to highlight our performance in the third quarter of this year. During Q3, we achieved strong and healthy growth across all of our major business lines. Our total gross transaction volume grew 40% year-over-year to RMB 146 billion. During China's overall economic transition, we are seeing the service industry becoming more important for the overall economy, driven by urbanization, consumption upgrade, and digitization. In this quarter, we have further strengthened our leadership as the one-stop e-commerce platform for services in China. By Q3, our annual transacting user increased to 380 million from 290 million in the prior year period. The average number of transactions per transacting user increased to 22.7 times from 17.1 times in Q3 of last year. We have built a large and loyal consumer base in the service e-commerce market in China. By Q3, our annual active merchants increased to 5.5 million from 3.8 million. Our platform development is extending from consumer-facing services to cover the broader value chain of the service industry. The traditional service industry in China is fragmented, underdeveloped, and lack of strong brands and infrastructure. Its overall online penetration is still very low, and it is apparent that the demand side and supply side are both embracing the digital trend. In the past, we have seen consumers move from feature phones to smartphones, and now a similar transition is happening on the merchant side. We invested heavily to provide more product offerings for our merchants, from online content to marketing, to order fulfillment, to IT and supply chain services. The initial result from our merchant side investment is very encouraging. For example, we have become the largest restaurant management system provider in China, which help digitize the merchant's operation process to connect to our platforms' diversified offerings more effectively. Our supply chain solution, Kuailv, is also digitizing the fulfillment process of restaurants, making the whole process more convenient and cost-effective. Today, over 10% of our active merchant base chooses to use at least one of our merchant-side services. We are confident that there is much room to grow. The digitization on the supply side will provide a better user experience and complete the closed-loop digital economy. In this quarter, we further solidified our leadership in food delivery and other core service categories. Our average daily transactions of food delivery increased 48% year-over-year to 19.4 million from 13.1 million in Q3 last year. We continue to leverage our platform to help other merchants, such as hotels and travel attractions. Our quarterly domestic room nights increased to 76.1 million from 56.4 million in Q3 last year. You may have noticed that we announced our new organizational structure on October 30. The purpose of this reorg is to better serve our overall strategy, which is summarized as two keywords, Food + Platform. Under this Food + Platform strategy, we provide different services covering different steps in the food value chain, such as food delivery, restaurant review and promotion, and restaurant management systems, and B2B supply chain solutions like Kuailv. Through our investment into these different services, we are able to build a similar capability and that can extend to cover other non-food categories as a platform. For example, our in-store business group is built on our restaurant review and promotion service, and now covers many other location-based merchants, such as beauty and spas, and also a lot of them, including hotels. Our To B home business group is built on our food delivery service. That is tending to cover other non-food delivery categories. For example, our Xiaoxiang Supermarket business will continue to explore opportunities in the fresh grocery retail market. Our Kuailv business remains committed to providing high quality B2B supply chain solution to restaurants. On top of that, our newly established user platform will focus on enhancing the one-stop consumer experience across multiple products and services on our platform. Last but not least, our newly established LBS platform, which means Location-based Service platform, will centralize technical resources for location-based infrastructure. This new organizational structure will allow us to enjoy better synergy across different business capabilities and provide better operational leverage, with a focus on our core competence and internal capability. After the IPO, I have spent more time on building our organizational capability. I understand most investors may want to hear more about business strategies. I believe it's equally important to focus on the fundamentals of your organizational capability, because right now we are facing such a huge opportunity, we have such a good position. We have no lack of opportunity. We have no lack of business opportunity. What really matters is that we can build our organization and build our capability to identify the right things and to grow the team, upgrade the team, and make sure we can capture the opportunity and do everything better than our competitors. That's not related to any single business, but very important capability across the whole organization. It will take a lot of time and a lot of effort to strengthen the fundamentals. I think that's the way to build a long-term viable company. In the past, all internet companies in China can grow very fast. That's because of the macro. Now, I think it will become a real test for companies that can manage better and manage very poor. In the past, it doesn't matter that much. I think in the future it will matter more. That's why I spend more time on building the fundamental organizational capability. This is not the first time we make organizational structural change. It will not be the last time. As a global pioneer for service e-commerce, we hold a very long-term view on our business and are always willing to upgrade ourselves to reflect our latest understanding on customers' needs and our development requirements. China is in a transitional period where consumer want better services, the merchants want to become more efficient, and they want to make more money. Technology is going to play a very critical role during this transition. In the past decade, we have moved restaurants online and generated a lot of orders for them through our delivery. We know this is just the beginning, and the entire value chain of local services will be digitized eventually. The demand side has more or less been digitized. Now everyone has a smartphone, and they are always connected through mobile internet. We believe the supply side is also going to be digitized. The closer we work with those local service merchants, the more opportunity we will find to invest in. We feel very lucky to be in our position today in that we are building a platform to transform how Chinese people eat and how local merchants operate their daily business. We will make sure to continue our investment toward this direction. We are going to build a lot on the supply side. Only when the supply side is also digitized, we can have a closed loop of the whole digital economy. It is not easy to think long-term, particularly when you become a public company. We want to maintain this long-term thinking capability in our business strategy, and we will stick to the same philosophy for our capital market strategy. Under current macro environment, there could be a short-term uncertainty and volatility we need to face. I think this philosophy allows us to always look beyond the short-term obstacles and make the right decision for the long term. We feel that we are following our mission, and we are going to continue using technology to help people eat better, live better. With that, I will turn the call over to Shaohui. Thank you. Thank you, Xing. Hello, everyone. Now I will go through the financial performance in Q3. In this quarter, Meituan-Dianping achieved strong top line growth. Our revenue increased by 97.2% to RMB 19 billion. The driver is GTV and total monetization rate. From GTV perspective, the growth comes from increasing total consumer base and also the stickiness of existing consumers. Particularly, our largest category, food delivery, is still growing at a fast pace, and new initiatives also increasing their contribution. Total monetization rate increased to 13.1%. The increase was driven by steady growth of total monetization rate across all major business segments, as well as the mix change of different segments. Our total gross profit increased to RMB 4.6 billion. We continue to make gross margin improvements in our core categories, including food delivery and in-store, hotel and travel. This is because we have achieved better efficiency and better economy scale. In addition, selling and marketing expenses as a percentage of total revenue decreased to 24.2% from 32.9% in the same period of 2017, thanks to our stronger brand and improved stickiness of our customers. While our investments in new initiative tempered our overall profitability improvement, our adjusted EBITDA and adjusted net loss narrowed on a quarter-over-quarter basis to RMB 1.2 billion and RMB 2.5 billion, respectively. In the third quarter 2018, we continued to improve the profitability of our two core business segments, and also loss of some of our new initiatives, such as car hailing and Mobike, narrow on a quarter-over-quarter basis. Now I would like turn to the segment reporting. Our first segment, food delivery. Food delivery GTV increased by 54.4% to RMB 80 billion. We remain excited for the remarkable growth for food delivery at large scale. Even though we have been investing heavily in the last five years to acquire food delivery consumers and merchants, we still see more potential to increase our penetration in both the top tier and the lower tier cities. For example, even Beijing and Shanghai, as the most mature cities, still achieve a total GTV growth rate of over 50% in Q3. We believe food delivery has been and will continue to play an important role in China's overall food consumption growth. The business is shaping people's lifestyle. Our peak hours now have extended from lunch and dinner to breakfast, afternoon teas, midnight snacks, and weekend gatherings. Our top 10% food delivery consumers made 42 orders on average in Q3. Long-term outlook for this sector's growth is clear and promising. Monetization rate for food delivery increased to 14.0% from 11.7% in Q3 last year, and from 13.1% in the second quarter of this year. This is driven by both the increase in delivery charges in our delivery model and the increase in platform charges in our marketplace model. Compared to the overseas peers, the monetization rate of our food delivery business is still low. This is in line with our strategy that we are focusing on growing the volume and encouraging more investment by the merchants. As Xing mentioned, consumers have been using food delivery more and more often, and they require higher quality food and service. They want food to be healthier, more diversified, and cheaper. They want the food production process to be more transparent. This all requires the supply side to invest further to meet consumers' elevated demands. We, as a platform, will make sure to invest and provide better infrastructures. As a result, our food delivery revenue increased by 84.8% year-over-year to RMB 11.2 billion. Our gross profit increasing significantly by 287% to RMB 1.9 billion, and gross margin further expanded to 16.6% from 7.9%, which is primarily driven by better efficiency of our delivery riders and our dispatching system. Despite the steady increase in profitability, also the potential in profitability, we still carefully access our investment strategy on a timely basis to make sure we can still capture the growth of orders and continue to improve the stickiness of consumers on our platform. From second segment, is the hotel and travel. Revenue in this segment increased by 46.8% year-over-year to RMB 4.4 billion, and gross profit increased to RMB 4 billion from RMB 2.7 billion. Gross margin increased to 19.6%. The number of annual active merchants and average revenue per active merchant both increased significantly. This segment's growth demonstrate our platform's capability to provide an effective online marketing and sales channel for diversified location-based merchants. We convert high-frequency traffic from food to lower frequency but higher margin long-tail categories such as parenting, wedding, beauty, karaoke, et cetera. Depending on the nature of the merchant's need, revenue can generate directly from advertisement fee or from transaction-based commission. While GTV grow by 13.9% year-over-year, monetization rate increased to 9% from 7%, attributable to the increasing contribution from online marketing revenues. For example, revenue from our beauty category more than doubled. We also experimented channel-specific programs for some categories such as parenting and children category. In Shanghai, we piloted a membership card that get users free or discounted access to a network of the most popular children play facilities in the city. It is also our second year of hosting Kids Wonderful Day event, where we brought together over 8,000 families and hundreds of merchants in Shanghai. We plan to roll out similar events to more cities in the coming months. On hotel business. Our hotel booking also progressed very well. The maximum room nights booked increased by 34.8% year-over-year to 76.1 million. We established cooperation with more than 50 high-end hotel groups during 2018 and have worked with 90 high-end hotel groups in total. We are very confident about the monetization potential of this segment. Let's move to the third segment, new initiatives and others. GTV from new initiatives and others grow by 83% to RMB 16.4 billion, and revenue increased significantly by 470% to RMB 3.5 billion. New initiative and others business record a gross loss of RMB 1.3 billion. Gross margin decreased to negative 37.4%. This was primarily due to increased investment in some new service offerings and also due to the change of business mix in this segment. As we mentioned before, for new initiatives and others, we focus on exploring and investing to capture future growth opportunities and to strengthen our leadership in core categories. The change in the mix could be fast. From this quarter, we began to focusing more on growing the food-related initiatives. We have taken a very disciplined approach on the investment into these new initiatives, and we're continuing to focus on building long-term competitive advantages by allocating our resources carefully. Regarding new initiatives to serve consumers, we leverage our existing consumer base and on-demand delivery network. We are extending food delivery service to cover non-food categories for local retailers. Currently, non-food delivery orders contribute about 5% of our total delivery orders, but is increasing rapidly. We continue to explore and update the business model for non-food delivery and to further improve the efficiency of our delivery network. On new initiatives to serve merchants, we have invested heavily on restaurant management system and the food supply chain solutions. These two business progress well in the third quarter. Take the food supply chain solution as an example. Our total number of annual active merchants increased to more than 450,000 at the end of Q3, from less than 100,000 six months ago. On new initiatives in transportation, as a result of the efforts to streamline our Mobike and pilot car-hailing businesses, total gross loss of these two business narrowed significantly in the third quarter of 2018 on a quarter-over-quarter basis. Now moving to our cash position. At the end of Q3, total balance of cash and cash equivalents, restricted cash and short-term investments was CNY 64.2 billion. For the third quarter, our cash used in operating activities amounted to CNY 3.5 billion, mainly consists of the negative adjusted EBITDA and changes in working capital. To summarize, we were able to stick to our mission and execute our strategy well in this quarter. Our core business, food delivery and the in-store, hotel and travel, achieved health financial improvement, and further strengthen our leadership. We are making good progress in our new initiatives, and we will continue to make investments into food-related new initiatives. 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 telephone keypad. If you're using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then two. For the benefit of all participants on today's call, if you wish to ask your question to management in Chinese, please immediately repeat your question in English. At this time, we'll pause momentarily to assemble our roster. The first question comes from the line of Eddie Leung with Bank of America, Merrill Lynch. Please proceed. Good evening. Hi. It has been a long journey for you guys, so many congratulations. Thank you. I have kind of like two questions related to your food delivery business. Could you comment on the impact you have seen from the macro uncertainty, as well as anything from the competitor after the merger? We have seen a bit of a deterioration in the number of food delivery transactions. I am just wondering whether the macro environment as well as the competitive landscape have anything to do with it. If you have any color to share, that would be helpful. Thank you. Thank you, Eddie. As an e-commerce platform, our business is not immune to the macro slowdowns because we are already quite sizable. For example, some consumers may become more price sensitive or they are going to become more cautious about discretionary spending, such as leisure travel or lifestyle services. In addition, we believe that given we focus on food-related high-frequency and relatively low ticket size services, we are less impacted by short-term macro slowdowns because consumer staples, such as food consumption, generally remain resilient against macro headwinds. I believe that while the macro can be good or not that good, no matter what happens, people still need to eat, and we are here to help people eat better. We are going to provide the most convenient way for people to eat, so they still need that. That is why we are still very optimistic about the long-term economic outlook. Also, we are very optimistic about the business opportunity despite the short-term macro headwinds. I think it is all about short-term and long-term. China will continue its transition to a consumption-driven and service-driven development model, because now export is not growing that quickly. People are going to spend more. Also, the middle class is expected to double to maybe 600 million in the next five years. With higher income and busier lifestyle, these urbanized consumers will increase their spending on food delivery for convenience. Also, I think they are going to explore more lifestyle services to improve the quality of their daily life. When they move to a city, when they make more money, they will want to eat better and live better. Also, at the end of the day, food consumption is the biggest category of consumer spending on services. We have had a continuous structural shift from home cooking to food delivery because most young people do not cook anymore, but they still need to eat. These days, many of the young people do not even have a functional kitchen, but they still need to eat. That is why they are going to order more and more food deliveries. As the largest one-stop platform for local services and also the largest food delivery service provider in China, I think we are well-positioned to capture this growth opportunity. On the demand side, although the average order value growth may be impacted by macro slowdown as some consumers become more price sensitive, we will continue to enhance purchase frequency and expand use cases to drive the growth. On the supply side, we will continue to help merchants digitize their operation to further strengthen our relationship with them, help them mitigate the macro impact. For example, our restaurant management system, the RMS, and our food supply chain solution, Kuailv, they help merchants reduce operation and procurement costs, improve their operating efficiency and profitability. The more quality supply on our platform, the more additional demand we are going to create on our platform. In short, I think we are not totally immune to the macro slowdown. We remain positive, optimistic about the long-term outlook. I will take the second question about competition. I think this is also a point that many investors are interested about. First, I would like to explain how we look at competition in our industry. Food is a big market. As big as that, we do not believe this is a one-player market. It is very natural that such a big market, there will always be competition. Competition has never been new to us. In the past eight, 10 years, Meituan-Dianping has been facing very fierce competition, and we have proved ourselves able to compete effectively. We believe capable competitors in this market actually help us to grow faster and to make us stronger. We also think that this is a big market and still in the very early stage. Multiple players working together in this market actually can drive the market growth faster. It was actually part of the reasons that China food delivery market has been able to grow much better and much faster than any other market. But at the same time, we are very confident, and we have very clear strategy in terms of how we will respond to competition. We will stick to our overall strategy to think long-term and build our competence that can continue to strengthen our leadership. First, we have built a much stronger brand in the service e-commerce market in China. We have very clear mind share for most consumers when they are looking for food delivery or restaurant or other lifestyle services. We think this is very important in current market because consumers are using less and less apps, and a one-stop solution for local services has better stickiness. Also, we believe we have the best efficiency in the market, and we will continue to invest into the technology and our overall system to continue to strengthen our efficiency, including our matching system for consumers and merchants. We have also been able to build a very strong online plus offline capability. Different from most traditional Internet companies, we not only have a very heavy online operating, but also very heavy offline operating. We manage a local salesforce of over 30,000 people across the country, and they have been very effective in working closely with the local merchants to help them doing all kinds of business with us. And we are continuing to invest in that and to continue to increase the productivity of our salesforce. Also, it's important that we stick to our food platform strategy, in that we have been a leader in all kinds of food-related services, provide the most comprehensive offerings to restaurants. And at the same time, we are able to, using a platform strategy to cover multiple categories to increasing the lifetime value of our consumers and also to increasing our overall platform's synergy. So we have been feel quite comfortable in terms of continuing to compete effectively in this market. Thank you very much. The next question comes from the line of Grace Chen with Morgan Stanley. Please proceed. Thank you for taking my question. My question is about the advertisements in the in-store business. We see very strong growth this quarter, but at the same time, we are also seeing other Internet companies suffering from merchants tightening advertisement budgets. Can you let us know why you guys are doing much better? Are you observing similar challenges like other Internet companies from macro headwinds in near future? Thank you. Grace, let me clarify your questions. Your question is regarding our in-store businesses capability. Okay. Yeah, especially the. Yeah, correct. We think that is the advertisement contribution. Okay. Thank you. As we mentioned that we actually feel we have a very clear leadership in our in-store business, in that both Meituan and Dazhong Dianping have been the strongest brands in this market, both from consumer perspective and from merchant perspective. Essentially today, merchants are using Meituan as the ideal online marketing and promotion channel for their local stores. That is why we mentioned that we have seen very solid results on our advertising business, with our marketing revenue growing about 85% year-over-year. We still think this business is at the early stage, because we still see a fast-growing merchant base, as well as a fast increasing ARPU value that exists in merchants. Under this overall economic condition, we agree that no industry will be immune to this situation, and merchants could be more cautious in their advertisement spending. We have been also very carefully monitoring the merchants' behavior on our platforms. However, on the other hand, we noticed that when there is a decline in the overall economy, there could be more difficulty in offline traffic for these local stores. Meituan actually provide a new alternative for their marketing needs. Because we have been able to provide more targeted, effective tools for these local stores, and these tools have been proven to generate better ROI because of technology support. We think that under this economy condition, we actually can benefit from merchants shifting some of their budgets from offline to online. As a leading platform in this space, we think we will be able to capture those opportunities. Thank you. The next question comes from the line of Ronald Keung with Goldman Sachs. Please proceed. Thank you. Thanks, Wang Xing, Shaohui, Scarlett, and Zuhan. I have two questions. The first question is on the monetization rate of our food delivery business, which we see have increased further to 14% in the third quarter. When we looked at the Ele.me take rates, we do see your competitor providing more support to restaurants, and have mentioned about services including financing, supply chain, and the rest. We want to hear your thoughts on just the monetization rate outlook for our food delivery business, mostly for the fourth quarter and next year. How do we see that trend? Are we giving more support to restaurants? Any other further monetization potentials from advertising to other To B initiatives that could apply here as well? My second question is on the hotels that Ctrip has recently commented on stepping up sales and marketing, and they commented a moderation in growth. Can you share with us your strategy on hotels? Have you seen any changes in competitive landscape lately? Whether we will continue to place share gains as a priority or also increasingly focus on profitability for the segment. Thank you. Thanks, Ronald. The first question is on food delivery and the second question on hotel. For food delivery, as you can see from our Q3 results, we have been able to both increase our volume in line with our expectation, but at the same time, we are able to improve our unit economics under a competitive environment. As you mentioned, the other players in the market have been quite aggressive from this summer to invest in this space, trying to catch up with us. We have been able to stick to our own strategy and continue to improve our financial results on the food delivery. Our current take rate is still much lower than our peers, and we believe there is still big room to grow in the long term. However, as you mentioned, for the overall economic environment, we will focus more on working closely with the merchants to encourage the merchants' investment and shifting their volume online rather than monetize as much as possible. We are also carefully monitoring the overall and competitive environment to make sure we still achieve the best efficiency and also the best ROI in terms of our investments. We are not focused on the short-term profitability, even though we have been proven that we are able to do so to make it continue improvement in our unit economics. We would rather focus on growth and improve the overall user and merchant experience, and to continue to strengthen our leadership in this market. For your question regarding hotel, again, all kinds of services and consumption activity will be impacted by their macro environment, including hotels. As hotel is related to other lifestyle and travel activities. However, we are still very confident on the long-term prospects of their overall consumers' spending power and the hotel business as a whole. In terms of our own strategy, we have been able to build a very differentiated way of growing our hotel volume from traditional OTA players. We leverage our high-frequency food services traffic and cross-sell to hotel booking services, which significantly lower our user acquisition costs and operating costs. We will continue to do so, given we have been able to continue to increase our high-frequency traffic, and also continue to increase our conversion rate from high frequency to low frequency categories. Also, when the macroeconomy slows down, we are seeing that hotels actually are more eager to seek additional resources to attract traffic, particularly in working with platforms like us, because we are able to bring new business, bring new customers that they are not able to get access to from traditional OTA platforms. We are also benefit from that. We provide a comprehensive offering to hotels, not just the room booking. We are working closely with their restaurants business, with their gym and wedding-related services. So in this economic situation, we think we have been a more preferred partner to hotels. Thank you. The next question comes from the line of Alex Yao with JP Morgan. Please proceed. Hi, good evening, Xing and Shaohui. Congratulations on the first quarter after the IPO. It's been a surprisingly breathtaking fun journey in the past 10 years, and I wish it's going to be another breathtakingly fun journey for the next 10 years. I have two questions. The number one is on food delivery. On the back of the current macro and the competition environment, how do you think the unit economics, what's the strategy, and how should we think about the unit economics for food delivery over the next couple of years? Are you seeing any risk to achieve your path to profitability for food delivery business? Secondly, on the new initiative business, given the macro condition and the competition in the food delivery industry, are you guys planning to invest in new areas as aggressively as you planned, or are you reducing the investment to balance the financial outlook? What is your overall investment strategy for this new initiative segment? Thank you. Thank you, Alex. I'm glad you mentioned about a 10-year time frame. Because if we're talking about think long term, I think 10 years is the starting point to think about the question you mentioned. That's exactly the direction we are building for. Even though we're talking a lot about the short-term uncertainty in the environment, but to your questions on food delivery, first, we're still very confident that it's going to be a great business model in that we have been able to build services that connect consumers and merchants, and participate in building lots of infrastructure, particularly the last mile delivery infrastructure, which is very valuable and really solve the problems for consumers and merchants. So we have no concerns on continue to increasing the monetization rate to realize the value we create. Also, this is a business that can enjoy clear economy of scale. When we have higher order density, we will have better efficiency. We will lower the order delivery cost. That's how we can improve the gross margin in the last several quarters. In the longest period of time, it's very clear that food delivery business not only is going to be one of the biggest order-generating categories across all service categories, also is going to be a very profitable business from unit perspective. Having said that, as I mentioned earlier, we still think this is just getting started. Consumers have been educated and lots of the infrastructure investments still required for both the platform and the merchant side. That's why both Xing and myself emphasize a lot about the digitization of the supply side. We will rather than focusing in the short term on the monetization or on the UE, we will look more for investing into those infrastructure to solve the alternatives in some of their demands that could not be satisfied today. This is our view on the food delivery. On new initiative, first, I want to emphasize that although we have been invest a lot onto new initiatives, we have always make sure that our core business always get the best attention and have sufficient resources to establish long-term market leadership under macro slowdown and intense competition. We also take a more longer term view for our investment into these new initiatives. We will be more selective and be more cautious and allocate our resources into our new initiatives under this macro slowdown. Particularly, we will prioritize resources more on the food-related services, such as the restaurant management system and food supply chain solution. Because we believe those not only have great business opportunity themselves due to poor infrastructure traditionally, but also has great synergy with our core business and will help strengthen our leadership in the food delivery, restaurant-related services, and also help continue to build our platform. Thank you. The next question comes from the line of Billy Wong with HSBC. Please proceed. Good evening, Wang Xing, Shaohui, Scarlett, and Johan. Congrats on your IPO too, and kick off by reporting a solid quarter. My first question is on the To B services. If we listen carefully to your opening remark, there's increasing focus on digitalization on the supply chain. Can management share more color on Meituan's differentiation in terms of our To B services, say, in terms of your restaurant management system, payment, and your micro loan to that of your peer? Any progress update? How should we look at the penetration and also the addressable market across your different segments of the business, in terms of the To B services side? Lastly is how should you think about the incremental investments that Meituan need to put up with, in terms of the To B services? Then just a follow-up on the hotel and travel business, because we understand it was merged by the in-store business group in the recent org update, as you mentioned. How should we understand the rationale of the strategic realignment? Thank you. Thank you, Billy. Our advantage under To B services, particularly on the local merchant side. I think, first it's important to understand that we have been working with all these local merchants for over a decade. Starting from Dianping's review and then Meituan's deal and coupon-driven transaction. We have been serving local merchants for a long period of time. We have built a profound knowledge and insight, and data into their local merchants, particularly in the restaurant industry. I think this is a knowhow, an asset that no other new player able to accumulate in a short period of time. It's very important because for To B business, you need to understand your potential customers very well, their operating process, their pain point, in order to design the right product and service to them. Second, we have been able to build a very strong online plus offline capability for these restaurants. On online operating, we have able to build the largest platform that can help these merchants connecting to the most valuable local consumers. This is important because all these local merchants want to do work with us because they want more business, and we can help them get access to those consumers. On the offline side, we have also built the largest on-the-ground business development force, which is quite unique compared to other companies. We are continuing invest heavily onto this sales force, not on the quantity, but more in terms of upgrade their skill sets. To have this, the sales force able to sell a different product. This is also a very important differentiator factor. Finally, we have the most integrated solution, most comprehensive offering to those local restaurants. We are working with them on online content, online marketing promotion, and extending to transaction and delivery service. Now we are launching the restaurant management system and food supply chain. As a result of this effort and the capability, what I can share is that we have been making good progress in the merchant side services. As I mentioned, our food supply chain solution has been able to achieve over 450,000 annual active merchants with our customers. Our restaurant management system has been also able to serve over 420,000 annual active merchants. This means that our penetration rate, our existing merchant base is more than 10% for our merchant side services. We think this number still has room to grow, and that is exactly where we are investing our resources on the new initiatives. Questions on the restructuring of combining in-store, hotel and travel. Actually, as you can see in our IPO prospectus, in our quarter report, we have already been combining these two businesses together. Because we believe they are very similar in their business model, and combining together actually provide a better view for investors to understand why we as a platform are able to monetize our high-frequency traffic, convert our food delivery traffic to this relatively lower frequency, but higher margin long-tail categories. Putting them together, I think it is a very natural decision from our understanding of this business. Also putting into under the same business group, we enable more cross-selling capability because the team will be able to working more closely and some capability that could be reused, extend to cover the whole business group. I think that is also exactly why we can differentiate us from traditional OTAs. I think most people still underestimate the value of our in-store, hotel and travel business group. People may be more familiar with the hotel because its business model is easier to be compared with more public competitor companies. The in-store business is a relatively new concept. But to us, they are all similar in that we are providing an online platform to connect local consumers and local merchants on a very effective, intelligent matching system. We are very excited and also very confident on the potential of this in-store, hotel and travel group. Thank you. The next question comes from the line of NRG with China Renaissance Securities. Please proceed. Thank you, and congratulations on strong quarter. My questions are relating to your new initiatives. First of all, could you give us the update of prospectus for the non-food delivery? It has definitely achieved good progress this quarter. What is management's long-term expectation for this business line? My second question is, could you give us an update on the car hailing and the Mobike business? Is there any progress in terms of reducing the loss for these two business lines? Thank you. For non-food delivery, in theory, we believe it has high potential to further utilize our delivery network and improve efficiency and order density. Right now, it is still very small, contribute about 5% of total delivery orders. The current business model still needs to further refine as the unit economics for the non-food delivery is lagging behind the food delivery. We think because non-food delivery involve more complicated SKUs and more complex system in the local retailers, we are still in the process of refining this business model. We will be very actively explore the best way in increasing their penetration rate. At current stage, it is still at the early stage. For the car hailing and Mobike business, as I mentioned in the financial section that we have been able to streamline the operation. Total loss from these two businesses is able to narrow on a quarter-over-quarter basis. Particularly on car hailing, we are still only test on two cities to refine the business model. We currently have no plan to further expand to other cities. For Mobike, we still feel this business has room to improve its operation efficiency, and the overall market in the past few years is not very well operated. We are still in the process of integrating the Mobike business with our platform. Current integration operation improvement is on track. We plan to further reduce the total fleet number in the street as we think there is excessive supply in the market, and to continue to seek for synergy across Mobike and our main platform. Okay. Excuse me, Miss Elgie, would you like to add something else? No, thank you. That is my question. Thank you, management. The next question comes from the line of Jerry Liu with UBS. Please proceed. Thank you. My first question is on memberships. Xing, you have said in the past that memberships could be a good business model for Meituan. I just wanted to hear a bit more about when and what type of membership we could look at, especially as a competitor is doing something along these lines. If we do this, could we increase the frequency that the users spend among our platforms? Secondarily, just a follow-up from some of the earlier questions. I am wondering, what do the recent food delivery subsidy trends look like? I am thinking both just on the platform side between the two major platforms, but also on the restaurant side, because restaurant subsidies can be a very good driver of additional orders. Thank you. Thank you, Jerry. Of course, membership is a very important project, and that is for the long term. We are in no hurry to rush out a product that is not well thought. I think the most important thing is to realize the importance and to allocate the most valuable resources to this. The most valuable resource is management attention. After the recent reorg, now we have a user platform, this group. We have put Meituan app and Dianping app together. Also now we assigned a very capable leader, Wang Huiwen, to be in charge of the user group. The key was first to integrate the two, Meituan, Dianping app, and other apps. On top of that, we are going to design our membership program. I think a good membership program should involve both the demand side and the supply side. Now, the demand side has mostly become online digitized. We need to bring the supply side online. Only when we can do that, we can have the closed loop, and we can make the membership really work. Otherwise, it has the risk to become another way to just subsidize. I think we are still very focused on this. We are in no hurry to rush out a half-baked project. That is what we are thinking on membership. Also because we have a Mobike, we have our staff operating a high-frequency service. I think we are going to have a very good pillar service for the whole membership program. As Shaohui mentioned, we are still integrating the Mobike, and we are still working on the fundamentals of that. That is for the long term. Thank you. I will take the questions about subsidy. We have observed that the other player in the market has maintained a much higher subsidy level on the food delivery starting from this summer, about 3 times higher than ours. At the same time, the significant investment, mainly in the small portion of their overall consumer behavior, particularly those price-sensitive consumer group, which we are not very concerned about because we have been focused more on the quality growth rather than just using investment subsidy to grow volume. We think this market already came into a stage that pure subsidy is not the most effective way and build your competitive advantages. We have been very careful in evaluating their competitive environment and also invest when we see there is value, when the ROI can meet our requirements. We are open-minded to invest only when we see the invest can generate high-quality consumers groups or high-quality orders on our platform. We have been able to see that our market share can continuously in a very clearly in position even when other players are subsidizing heavily. At the same time, we are able to continue to improve our overall unit economics. Understood. Thank you. Ladies and gentlemen, this is all the time we have for today's call. I'd like to turn the call back over to the company for closing remarks. Thank you, operator. We are now closing the call, so if you would like to see our press release and other financial information, please visit the IR section of our website. The replay of the webcast will be available shortly. Thank you, everyone, and wish you a happy Thanksgiving. Thank you. Thank you, everyone. Thank you. The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.