Meituan's on-demand business losses are narrowing faster than expected; maintain Overweight and HK$120 target price

Overview

This report is Morgan Stanley's company research meeting notes/key update on Meituan. The core conclusion is that Meituan's on-demand business losses are narrowing faster than expected, and food delivery unit economics have improved significantly, supporting its maintained Overweight rating and HK$120 target price. The report also points out that short-term earnings still face uncertainty, especially from Douyin's competition in in-store dining, investments in instant retail, and losses from new businesses. Over the long term, Morgan Stanley still believes Meituan has a strong moat.

Core views

The core views include: first, core local commerce is expected to return to operating profitability in 2Q26, with on-demand losses narrowing better than expected; second, food delivery UE may already have been profitable in April and May, while June performance depends on the 618 promotion; third, the in-store, hotel and travel business is currently stable, but Douyin competition may pressure margins; fourth, short-term losses in new businesses are affected by investment in Xiaoxiang Supermarket and Keeta, and losses may widen QoQ; fifth, valuation continues to use DCF, with the target price unchanged, as higher longer-term earnings assumptions offset near-term downward revisions.

Analysis framework

Based on the 1Q26 earnings beat and 2Q26 segment forecasts, the report evaluates revenue, operating profit, margins, and unit economics for core local commerce, in-store hotel and travel, and new businesses, and provides target price and risk-reward judgments through DCF and scenario analysis.

Methodology notes

• Valuation methodsDiscounted Cash Flow (DCF)

  Target price is based on base-case DCF

  Morgan Stanley continues to use DCF as its primary valuation method, assuming 12% WACC and 3% terminal growth rate; the HK$120 target price corresponds to 18x 2027e P/E.

• Forecast basisMorgan Stanley ModelWare

  Segment revenue, profit, and UE forecasts

  Unless otherwise specified, the report's metrics are based on the Morgan Stanley ModelWare framework, with some consensus data sourced from Refinitiv Estimates.

• Risk-rewardScenario Analysis

  Comparison of bull, base, and bear scenarios

  Through assumptions on revenue CAGR, 2027 adjusted EBITDA margin, food delivery share, and investment in new businesses, the report assesses Meituan's upside and downside potential.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• Meituan (03690.HK)

  Core covered name

  Strengths

  Leading scale and market share in food delivery, faster-than-expected narrowing of on-demand business losses, stable margins in in-store/hotel/travel, and a still-strong long-term platform moat.

  Weaknesses

  New businesses are still loss-making, and investment in Xiaoxiang Supermarket and Keeta is raising short-term costs; competition in food delivery and instant retail may compress profits.

  Comparison

  The report believes Meituan's risk-reward is attractive, but relatively prefers BABA; the UE gap in food delivery versus Alibaba widened to about Rmb3/order in 1Q26.

  Risks

  Intensifying competition from Douyin in in-store dining, escalating competition in food delivery and instant retail, low visibility on new business losses, antitrust regulation, and weak macro consumption.

• Alibaba Group Holding (BABA.N)

  Comparison / relatively preferred name

  Strengths

  The report mentions a relative preference for BABA and lists upside drivers in its risk-reward reference such as e-commerce monetization, cloud revenue, and AI demand.

  Weaknesses

  It also faces risks from competition, reinvestment costs, weak consumption recovery, slower enterprise digitization, and internet platform regulation.

  Comparison

  Relative to Meituan, BABA is used in the report as the more preferred China internet comp.

  Risks

  Intensifying competition, higher-than-expected reinvestment, weaker consumption recovery, and cloud and enterprise digitization progressing below expectations.

Key data

• Rating and target priceOverweight; HK$120Target price unchanged, based on the DCF base-case scenario.
• 2Q26 core local commerce revenueYoY +6%The report expects CLC revenue to grow 6% in 2Q26.
• 2Q26 core local commerce operating profitRmb3bnIncluding membership investment, with loss narrowing better than expected.
• 2Q26 on-demand business lossAbout Rmb437mnFood delivery profit of Rmb313mn and Instashopping loss of Rmb750mn.
• Food delivery competitive position~70% order share for AOV Rmb30+; ~60% overall GTV shareThe report believes competition is stabilizing in phases, and Meituan's share of high-ticket orders remains stable.
• 2Q26 in-store, hotel and travelGTV +11%; revenue +9%; OP Rmb4.3bn; OPM 25%Margins are expected to remain stable QoQ, but in-store dining is still affected by Douyin competition.
• 2Q26 new business operating lossRmb2.4bnSlightly wider than Rmb2.1bn in 1Q26, mainly due to Xiaoxiang Supermarket expansion and investment in Keeta.
• 1Q26 adjusted EBITDALoss of Rmb3bnBetter than Morgan Stanley's previous forecast of a Rmb5.8bn loss.
• Valuation assumptionsWACC 12%; terminal growth rate 3%; 2027e P/E 18xUsed for the HK$120 target price base-case scenario.

Impact & implications

The investment implication is that confidence in Meituan's short-term earnings improvement has increased versus before, especially as improving food delivery UE and the recovery in CLC operating profit help support valuation; however, the competitive landscape is not yet fully clear, and investments by Douyin, Alibaba, and other players in in-store services, food delivery, and instant retail may limit margin expansion. The report therefore maintains a positive rating, but emphasizes that near-term earnings still carry uncertainty and highlights a relative preference for BABA.

Risks

• Intensifying competition from Douyin in in-store dining could bring downside risk to margins in the in-store business.
• Intensifying competition in food delivery and instant retail could cause Meituan's food delivery market share to decline from 70%-75% to above the 65% range.
• Visibility on new business losses and heavy-asset investment is relatively low, and investment in Xiaoxiang Supermarket and Keeta may continue to drag on profits.
• Antitrust regulation and additional regulatory scrutiny of internet platforms may affect business expansion and monetization.
• Weak macro consumption recovery may affect local services, in-store business, and advertising monetization.

What to watch

• Whether food delivery UE in 2Q26 truly reaches or approaches break-even, especially performance after the June 618 promotion.
• Whether core local commerce operating profit reaches the Rmb3bn forecast, and the impact of membership investment on profit.
• Whether 2H26 margins in the in-store, hotel and travel business can remain stable under Douyin competition.
• The sustainability of Keeta Hong Kong profitability, the pace of Saudi UE improvement, and whether break-even can be achieved in 2026.
• Losses and investment intensity after Xiaoxiang Supermarket expands to 55 cities.
• Potential operating and capital allocation clues from Meituan's annual shareholder meeting on June 9, 2026.