Meituan Subsidy War Cools Down, but Inflection Point Unconfirmed; Maintain Neutral

Overview

J.P. Morgan published its 1Q26 earnings review for Meituan, maintaining its "Neutral" rating and HK$85 target price. The core thesis of the report is that this quarter's earnings confirm the existing consensus that the "subsidy war is cooling down," rather than initiating a new trend. Although the Core Local Commerce loss narrowed significantly and Meituan's food delivery competitive advantage remains intact or even expands, the driving force behind the improvement is the reduction in competition-dependent marketing expenses, not a structural gross margin recovery. Whether food delivery unit economics can sustainably turn positive in 2Q-3Q26, and whether the subsidy strategies of major competitors truly rationalize, are the key variables determining the medium-term trend.

Core views

J.P. Morgan characterizes the 1Q26 earnings as "confirmation, not resolution." The quarter confirmed three positive signals: industry subsidy intensity has peaked and fallen, Meituan's food delivery competitive advantage remains intact or even expands (the per-order lead widened from ~RMB1.5 to ~RMB3), and the in-store business profit anchor remains stable. However, the unresolved core issue is the ultimate steady-state level of food delivery unit economics—which depends on how major competitors balance their instant retail scale ambitions with profitability targets. In terms of specific financial performance, 1Q26 revenue was RMB91 billion (+5.6% YoY), and gross margin was ~28.5%. Although improved from 26.2% in 4Q25, it was lower than the market expectation of ~31%. Group operating loss narrowed from RMB16.1 billion in 4Q25 to RMB6.5 billion, and Core Local Commerce operating loss dropped from RMB10 billion to RMB2 billion, but this improvement was almost entirely driven by a 9.2 percentage point QoQ decline in the sales and marketing expense ratio. J.P. Morgan specifically warns that this "rented" improvement (rented, contingent on competitors holding back) is fundamentally different from "owned" structural per-order economic recovery. Regarding food delivery unit economics, it is estimated that the per-order loss in 1Q26 was still ~RMB1, meaning the recovery from the bottom (~-RMB2.4) to the steady state (~+RMB1) is only ~40% complete. Management guided that if competition remains rational, 2Q26 is expected to see significant QoQ improvement, approaching breakeven. However, order volume in the second half of the year may decline slightly YoY due to a high base, and delivery costs face seasonal upward pressure. Order quality is another core perspective emphasized in the report. J.P. Morgan believes the market is overly focused on overall share changes, while what truly determines profitability is the share of high-ticket (>RMB30) orders—estimated per-order cost in this segment is ~RMB6.3, which >RMB30 orders can easily cover, while <RMB30 orders are structurally loss-making. According to channel checks, Meituan's share of high-ticket orders in 1Q26 remained at ~70% (order volume share >50%, GTV share >60%), which is seen as the "most important and most underestimated" data point of the quarter, alleviating previous market concerns about erosion towards 60%.

Analysis framework

J.P. Morgan adopts a "probability-weighted SOTP" as a cross-validation for PE valuation, constructing three steady-state scenarios for food delivery: Scenario Analysis Framework: Based on the uncertainty of competitors' strategies, three scenarios are set: Bull (duopoly resilience, probability ~18%), Base (duopoly equilibrium, probability ~58%), and Bear (fragmented competition, probability ~24%). The base scenario assumes food delivery steady-state operating profit of ~RMB26 billion, corresponding to a food delivery business value of ~HK$48/share; non-food delivery business value is ~HK$45/share, totaling ~HK$92. Probability-weighted SOTP yields a fair value of ~HK$88, corroborating the HK$85 target price derived from 15x 2027E P/E. Key Analytical Perspective Shift: The report deliberately distances itself from the market's "overall share anchoring," proposing an "order quality lens"—focusing on the share of high-ticket orders rather than overall share. The logic behind this perspective shift is: if the lost share is concentrated in structurally loss-making low-price orders, a decline in overall share may actually improve profitability. This counterintuitive conclusion serves as the cornerstone of the entire analytical framework.

Methodology notes

• Valuation MethodologySOTP Valuation

  Probability-weighted SOTP

  The company's business is split into food delivery and non-food delivery parts, setting steady-state profitability under different competitive scenarios for each, and then weighting them by probability to obtain the overall valuation. This method is suitable for companies with complex business structures where a single scenario cannot cover core uncertainties, used here to handle the exogenous variable of competitor strategy.

• Industry Analysis FrameworkVolume and Price Breakdown

  Order Quality Tiered Analysis (High-ticket vs Low-ticket)

  Food delivery orders are tiered by amount, identifying >RMB30 orders as the profit zone and <RMB30 orders as the loss zone, highlighting structural differences. This "volume and price breakdown" method helps analysts break away from the conventional thinking of "share is everything," discovering the counterintuitive phenomenon that a decline in overall share may be accompanied by an improvement in profitability.

• Competition and Strategy FrameworkGame Theory Analysis

  Competitor Behavior Game Theory Analysis

  Meituan's food delivery profitability prospects are modeled as a function of competitors' strategies rather than its own execution, focusing on the tension between competitors' "scale ambitions" and "profitability commitments." This game theory perspective explains why J.P. Morgan shifts the analytical focus from Meituan itself to the degree of rationalization of competitors' subsidies.

• Company Fundamentals and Financial FrameworkEarnings Quality Analysis

  Distinction Between "Rented" vs "Owned" Profit Improvement

  Distinguishes profit improvement brought by a temporarily relaxed competitive environment (decrease in marketing expenses) from improvement brought by structural per-order economic enhancement (gross margin recovery). This distinction helps judge the sustainability of earnings improvement and avoids misjudging cyclical factors as trend inflection points.

Asset mapping & comparison

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

• Meituan (3690.HK)

  Core analysis target; beneficiary of the cooling food delivery subsidy war, but the magnitude and sustainability of improvement depend on competitors' strategies

  Strengths

  Food delivery competitive advantage expands (per-order lead widens to ~RMB3); high-ticket order share is solid (~70%); in-store business profit anchor is stable; ample cash reserves (RMB180 billion); new initiatives losses narrow

  Weaknesses

  Gross margin recovery falls short of expectations; food delivery per-order is still in loss; order volume in H2 may face high base pressure; delivery costs face seasonal increases

  Comparison

  Compared to competitors, Meituan has established a structural advantage in food delivery unit economics, but competitors have larger cash reserves and longer loss tolerance

  Risks

  Competitors re-accelerate subsidies; unit economics inflection point stalls; high-ticket share drops below 60%; gross margin fails to recover as marketing normalizes

Key data

• Current Price / Target PriceHK$78.25 / HK$85.00Target price implies ~8% upside
• 1Q26 RevenueRMB91 billion+5.6% YoY, -1.1% QoQ
• 1Q26 Gross Margin~28.5%Below market expectation of ~31%, improved from 26.2% in 4Q25 but still at a low level
• Core Local Commerce Operating LossRMB2 billionSignificantly narrowed from RMB10 billion in 4Q25, but improvement mainly came from marketing expenses
• Food Delivery Loss Per Order~-RMB1Only ~40% recovery towards the steady-state +RMB1 target
• Food Delivery Per-Order Competitive Advantage~+RMB3Widened from ~+RMB1.5 in 2024
• High-Ticket (>RMB30) Order Share~70%Alleviates market concerns about erosion towards 60%, seen as the most critical data point
• Cash and Short-term InvestmentsRMB180 billionProvides downside protection
• Valuation Multiple15x 2027E P/EIn line with Tencent's 2027E P/E, the average for China internet sub-sector leaders (excluding e-commerce)
• Probability-Weighted SOTP Fair Value~HK$88As a cross-validation for PE valuation

Impact & implications

J.P. Morgan believes that the cooling of the subsidy war is a marginal positive for Meituan, but this positive has been fully priced in by the market. The food delivery business value implied by the current share price (~HK$28-30) is lower than the HK$48 in the base scenario, indicating that the market has underpriced the recovery strength; however, the gross margin missing expectations and the profitability path not being fully confirmed constitute reverse constraints. The report suggests that the true investment window depends on two conditions: first, 2Q-3Q26 confirms that the unit economics inflection point is sustainable (food delivery per-order profit sustainably turns positive, high-ticket share remains high, and competitors do not re-escalate subsidies during the mid-year promotion season); second, the share price pulls back to the HK$60-65 range, providing a more asymmetric entry opportunity. Conversely, if the above conditions are not met, the weighting towards the bear scenario needs to be reassessed.

Risks

• Consumer environment deteriorates more than expected
• Core Local Commerce loss narrows slower than expected
• Intensified competition in the in-store business
• Competitors re-accelerate per-order subsidies during the mid-year promotion season (including disguised subsidies in the form of "technology adoption")
• Unit economics inflection point stalls or reverses
• High-ticket order share falls back below 60%
• Gross margin fails to recover as marketing normalizes, indicating per-order damage is structural rather than cyclical

What to watch

• Whether the unit economics inflection point sustains in 2Q26 and 3Q26 (whether food delivery per-order profit can sustainably turn positive)
• Whether high-ticket (>RMB30) order share can be maintained above the high-60% level
• Competitors' subsidy trends during the mid-year promotion season
• Competitors' 2Q26 earnings and subsidy strategy guidance
• Whether the share price pulls back to the HK$60-65 range for potential entry opportunities