Meituan

HKEX:3690

Earnings Call Transcript 2020-Q1

[Operator]

Good day, and welcome to the Meituan Dianping First Quarter 2020 Earnings Conference Call and Webcast. [Operator Instructions] Please note, this event is being recorded.

I would now like to turn the conference over to Scarlett Xu, Vice President and Head of Capital Markets. Please go ahead, ma'am.

[Scarlett Xu, executive]

Thank you, operator. Good evening, and good morning, everyone. Welcome to our first quarter 2020 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 our first quarter 2020 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 the 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.

[Xing Wang, executive]

Thank you, Scarlett. Hello, everyone, and welcome to Meituan Dianping's First Quarter 2020 Earnings Call. And as we entered 2020, the world is confronted with the challenges of COVID-19 pandemic, which has caused tremendous near-term shocks across industries. Inevitably, the local service industry has also been significantly impacted in many ways. As a consequence, during the first quarter of 2020, we faced the challenges on both the supply side and demand side, significantly dampening our operating results for the period.

During the quarter, total revenue decreased by 20 -- by 12.6% year-over-year to RMB 16.8 billion. Adjusted EBITDA fairly broke even, decreasing by 91% year-over-year. Adjusted net profit turned negative, coming in at a loss of RMB 0.2 billion for the quarter. Annual transacting users on our platform increased to 448.6 million, up by 8.9% year-over-year, while annual active merchants increased to 6.1 million, up by 5.0% year-over-year. Average number of transactions per transacting user increased to 26.2x, up by 5.3% year-over-year.

However, despite the obvious short-term disruptions, I would like to underscore that our long-term strategy and targets have not changed. We have always maintained a long-term perspective when developing our business strategies and investing in our business growth. We remain focused on building a leading e-commerce platform for services in China.

Meanwhile, we have shouldered our service responsibilities as the industry leader. Even in some of the most impacted regions, we did our best to maintain stable business operations and continued to provide value for both consumers and merchants. Moreover, we also ensured the adequate supply of daily necessities to restore consumer consumption and confidence while launching a series of supportive measures to help merchants overcome difficulty. In the long run, we believe that this pandemic will help to better cultivate consumer habits, accelerate online penetration, improve the operational efficiency of merchants and ultimately expedite the digitization process of the entire local service industry.

Now let me give you an overview of our performance in each business segment for the first quarter of 2020. [ A little later ], Shaohui will then talk about our first quarter financial performance in more detail.

Starting with our food delivery business. Due to the impact of COVID-19, the GTV of our food delivery business decreased by 5.4% year-over-year to RMB 71.5 billion, while the daily average number of food delivery transactions decreased by 18.2% year-over-year to 15.1 million in the first quarter. In particular, this segment was hit the hardest from January 20 to February 20 as the strict control measure issued by local governments led to a shortage of service supplies and a dramatic drop in our food delivery order volume.

Shortly after February 20, as work began to resume in an orderly manner across the country, an increasing number of restaurants started to resume their operations, while consumer demand also gradually recovered. Driven by the government's progressive lifting of travel restrictions as well as the steady flow of the people returning to work, the food delivery industry recovered rapidly during March and the daily order volume returning to around 75% of its prepandemic level at the end of the quarter.

In spite of the short-term negative impacts, we strongly believe that the outbreak of COVID-19 will play a positive role in the development of the industry over the long term.

On the consumer side, this pandemic has further accelerated the cultivation of consumption behavior in a positive way, helping to further educate a portion of target users. Under the mandatory home quarantine, our food delivery service has become actually important and convenient, with a substantial number of consumers increasingly realizing that food delivery would become their primary channel to receive daily news. The consistency -- the consistent good experience and diversified supply of our platform sufficiently meet the demands of most people. Especially, average order value increased by 14.4% year-over-year in the quarter. We also saw increasing preference from consumers for more high ticket-sized categories during the pandemic due to the increasing adoption of food delivery for formal meals, further anticipation of high-quality supplies on our platform and the growing demand for branded restaurants as a result of rising hygiene concerns.

In the first quarter, for example, the percentage of snacks fast food orders volume, the total order volume, decreased meaningfully, while the proportions of barbeque local flavor dishes and hot pot order volumes to total order volume, which increased on a year-over-year basis. Moreover, the contribution from delivery orders with distance in excess of 3 kilometers, of which consumers are charged at higher delivery fee, also increased on both quarter-over-quarter and year-over-year basis during the period.

On the merchant side, the pandemic has further accelerated the digitization process, especially for many branded restaurants that provide high-quality supply, and we're traditionally more focused on in-store dining than delivery services. In the first quarter, we witnessed a large number of premium restaurants, highly rated restaurants, chain restaurants, Black Pearl-listed restaurants as well as 5-star hotel restaurants essentially build up their process for food delivery operations for the first time. Some of these high-quality restaurants, which used to ignore online operation, only generated a small portion of revenue from online orders, has started to view food delivery as their primary vehicle for business operations in the midst of the pandemic turmoil. In fact, as of March 31, more than 50% of the restaurants from our master list had opened food delivery operations compared to only 30% in December 2019. The decision to open online food delivery operations not only help these restaurants to navigate through the crisis but also increase our platform's high-quality supply over the long term. For the substantial number of small- and medium-sized independent restaurants, food delivery became close to be their sole source of income during the pandemic. We expect this small- and medium-sized restaurants will continue deepening their cooperation with food delivery platforms and to allocate more resources to online channels going forward.

The restaurant industry in China was very disrupted in the first quarter. During this period, we worked closely with the restaurants, promptly updated our products and operations to assist in their digitization process and help them to recover more quickly, mitigating the negative impact of the pandemic on their business. For example, to help restaurants open their online operations at a faster pace, we introduced the green channels, which effectively created a more efficient provision for the verification and approval process. By March 31, over 100,000 merchants had leveraged our green channel system. In addition, we provided restaurants with a series of replaced subsidies and a great traffic support in order to relieve some of their operational burdens.

At the same time, our continuous innovation on products has boosted the marketing capability and operational efficiencies of merchants. According to our survey, in the last week of March, over 70% of restaurants had achieved a recovery of 60% or more in terms of order volume, while the remaining 30% had achieved recoveries exceeding their prepandemic order volume.

On the delivery front, the pandemic has accelerated the assumption of new delivery models and stimulated technological innovation. As a leader and promoter of on-demand delivery, we pioneered the launches of our contactless delivery service, which received a widespread consent and recognition from consumers, merchants and local governments. The contactless delivery model not only mitigates the hygiene risk for both consumers and delivery riders but also improves our delivery efficiency by creating more opportunities for the exploration of our diversified delivery models.

We are delighted to see that other platforms on both domestic and global brands have followed shoes. As of March 31, the percentage of contactless delivery order volume to the total delivery order volume exceeded 80%, while the percentage of consumers who always operate for contactless delivery to our total consumer group reached 66%.

In addition, we further expanded the adoption of our intelligent [ offer ] to further with the contactless delivery. We also began displaying safety sanitary information on our platform, such as the health status of chefs, packers and delivery riders. This practice provides consumer with [indiscernible] safety information and effectively reduces virus transmissions.

After the pandemic, we expect a percentage of consumers choosing contactless delivery to go down, but we believe that this model has the potential to improve our delivery efficiency over the long term.

We have also continued to increase our investments into the frontier of delivery technology. In the first quarter, for example, we targeted the launch of automated delivery vehicles for the first time in Shunyi District of Beijing. We plan to consistently invest in autonomous delivery technology over the coming years.

In sum, high-quality restaurants increasing adoption of online platform, expansion of food selection on our platform and our continuous refinement of the delivery experience will help to better cultivate consumer habits. At the same time, high-quality traffic improves the marketing projects, and a comprehensive switch of supporting services for merchant will help to create an increasing amount of value for our merchants. In the aftermath of the COVID-19 pandemic, we believe that both consumers and restaurants will view food delivery as an increasingly important channel, which will benefit the industry in the long run.

Next, let me turn to our second segment that's in-store, hotel & travel, in which first quarter revenue was down by 31.1% year-over-year. In comparison to the food delivery segment, this segment was more rigorously challenged during the pandemic. Its pace of recovery is still noticeably lagging behind that of our food delivery segment as the majorities of our in-store services categories are classified under discretionary or entertainment, which usually involve some combination of close contact with others and large crowds. Both supply and demand remained sluggish in the first quarter due to the consumers' hygiene concerns as well as the local government restrictions.

In the first quarter, we launched various supportive measures to directly help small- and medium-sized merchants' short-term liquidity problems and restore their operations. Such measures included commission exemption, retention for subscription-based services period, access to business loan with favorable interest rates and more.

To stimulate consumption, we utilized our online capabilities to establish safety programs, such as the Safe QR Code [indiscernible], Safe-Dining [indiscernible] and Safe-Play [indiscernible] to guard the merchants in streamlining, standardizing and digitizing their safety measure.

We also led the establishment of industry safety and sanitation standards in order to help restaurant develop their own measures. As of March 31, over 350,000 restaurants had joined our Safe-Dining program [indiscernible] certified label to be displayed on our platform interface. Totally, the average sales volume for those participating restaurants was significantly higher than for those restaurants that did not participate.

As the leading e-commerce platform for local services, we began to work with local governments in March to launch the Safe-Consumption Festival at [indiscernible] Beijing and issue vouchers to consumers to be used for local services, especially for restaurant dining, which was impacted the most during the pandemic.

In the City of Yinchuan, for example, within only 2 hours of distributing the vouchers online, all vouchers for the day had been registered. And according to 1 restaurant owner, on March 25, which was just the fourth day after the restaurant had resumed its operation, 80% of consumers used vouchers at checkout. In addition, the restaurant's daily sales returned to 50% of its prepandemic level, far exceeding everyone's expectations. Although this is just one example, our observation is that consumers' vouchers can not only stimulate single-time consumptions but also have strong leverage effects that are capable of bolstering the recovery of overall consumption demand in relevant regions and industries.

As a platform that connects 448.6 million annual transaction users and 6.1 million local merchants, we can effectively direct consumers to merchants and service categories, showcasing the ability of our platform to distribute traffic, allocate subsidies and energize consumptions with both accuracy and effectiveness. As of March -- as of May 15, we had successfully launched our Safe-Consumption Festival in more than 50 cities and are currently in the process of working with more local governments to distribute additional consumer vouchers.

Our hotel business also experienced enormous impact from the pandemic, with [ recorded ] domestic room nights decreasing by 45.5% year-over-year. As a result of government-issued travel bans, self-quarantine policies for travelers and a general fear of virus infection, many consumers canceled their travel plans during the period. Even after the peak of the pandemic had subsided, consumers took conservative measures, postponing travel-related activities and expenditures. Nevertheless, in comparison with industry peers, our hotel business has recovered at a faster rate in the first quarter, thanks to our limited exposure to outbound travel and structural advantages in local accommodation consumption scenarios.

While the rebound in demand has come relatively faster, to further support industry recovery, we leveraged our platform capabilities and launched our Safe-Stay Program [indiscernible]. In this program, we partnered with hotels, including well-known hotel groups, such Huazhu, Home Inns and Jin Jiang, to provide consumers with suitable accommodations for quarantine and other processes.

As part of our Safe-Stay Program, we worked with our partner hotels to establish preventative measures and increase hotel service capabilities. Such work included the adoption of strict health precautions for all employees and consumers, close tracking of consumer information, rebooking cancellation and discount for additional nights. So far, we have achieved noteworthy progress, successfully engaging about 100,000 hotels in over 300 cities nationwide to participate in this program.

Although the COVID-19 has severely impacted our in-store, hotel & travel segment in the short term and we estimate that our business will take a while to recover, we are very confident in the long-run opportunities and transformations that this pandemic will bring. We believe that the pandemic will accelerate supply side digitization, encourage merchant to further enhance their online operation in the future.

As a leading local service platform, we are committed to continue diversifying our product and service offerings as well as building and optimizing our digital infrastructure for millions of local merchants, allowing these merchants to reach a vast group of target consumers, improve their online operation and better adapt to digital strategy.

Now let's move to new initiatives. Our investment strategy for the new initiatives segment, which is based on our long-term philosophy, has not changed in light of the pandemic. In the first quarter, revenue from our new initiatives segment increased slightly, growing by 4.9% year-over-year. We are proud that many of our new initiatives are crucial to ensuring people's livelihood during the pandemic. Our grocery retail business, for example, continued to provide a stable supply and efficient delivery of high-quality fresh produce as well as other daily necessities to consumers.

The pandemic has served as an opportunity to educate the consumer regarding the value and convenience of using our on-demand delivery service to purchase many other things besides just news, helping to better cultivate the consumer habits at a relatively low marketing cost. Although we expect the high order volume of our grocery retail business in the first quarter to normalize in the near future, we firmly believe in the massive potential of our grocery retail business as well as our ability to leverage our leading position in the on-demand delivery network to grow this business.

Therefore, we will continue to explore and iterate the business models, optimize our operations and improve the quality of our products and services. We will also continue to invest in both our marketplace and self-operated models. Fresh produce will be one of the categories that we most prioritize, owing to its tremendous market size, high-transaction frequency and relevance to our core business strategy.

In particular, under our marketplace model, we have also launched a separated brand known as Caidaquan to enable traditional farm markets to operate online more efficiently. We help local off-line markets to digitize their operations and provide high-quality fresh produce to consumers. For the self-operated model, we will continue to expand geography coverage with supply chain capabilities and enhance operational efficiencies.

This pandemic has disrupted both the demand and supply side of the local service industry in the short term. Looking into the next 3 quarters, we believe there will still be challenges as there are still uncertainties and the potential downside from the ongoing evolution of the COVID-19 situation. Meanwhile, a large number of local service merchants are still struggling for survival. Short-term profitability is never our top priority. For the rest of this year, we will remain focused and allocate a sufficient amount of resources towards helping these merchants resume business, improve their efficiencies and digitize their operations. We will also work to provide consumers with higher-quality products and services and restore consumer confidence.

The outbreak of COVID-19 has brought significant changes to society in terms of production, lifestyle and consumption habits. In order to thrive, companies must be able to simply adapt to these changes, further optimize their business models to capture new opportunities accordingly. The pandemic has encouraged us to be more determined in strengthening our core elements and competitive advantages in the local service space.

Going forward, we will continue to provide better experiences to consumers and enable local merchants to operate online more efficiently through innovative technology and products. We will further improve our marketplace capabilities and better leverage our delivery network to seize more opportunities. While the digitization of the entire industry value chain is still at a very early stage, we will continue to be an important promoter, leader and long-term beneficiary of these underlying trends.

With that, I will turn the call over to Shaohui for an update on our latest financial results.

[Shaohui Chen, executive]

Thank you, Xing. Hello, everyone. I will now go through our first quarter financial results. In the first quarter, total revenue was RMB 16.8 billion, down by 12.6% year-over-year and down 40.5% quarter-over-quarter, primarily driven by the decrease in the number of transactions across all major segments during the pandemic.

Cost of revenue decreased to RMB 11.6 billion in the quarter, which represented a year-over-year decrease of 18.1% and a quarter-over-quarter decrease of 37.3%. Cost of revenue as a percentage of total revenue decreased to 69% from 73.6% in the prior year period, increased from 65.5% in the fourth quarter of 2019. The quarter-over-quarter increase of 3.5 percentage points was mainly due to the increase in fixed costs, including depreciation expenses. The year-over-year decrease of 4.6 percentage points was mainly driven by our food delivery segment improved gross margin, a decrease in depreciation expenses for bike and the change in revenue mix for our new initiatives.

Selling and marketing expenses decreased to RMB 3.2 billion in the quarter from RMB 3.7 billion in the same period of 2019 and from RMB 5.3 billion in the fourth quarter of 2019. The significant decrease on a sequential basis was primarily attributable to less incentives for our food delivery and hotel transacting users, reduced spending on promotional campaigns during the pandemic and the decrease in sales commission, which was in line with the overall decrease in revenue. Selling and marketing expenses as a percentage of revenue remained stable on both year-over-year and quarter-over-quarter basis.

In addition, R&D expenses as a percentage of revenue increased to 13.7% from 10.6% in the prior year period, while G&A expenses as a percentage of revenue increased to 6.4% from 5.3% in the prior year period mainly due to decreasing operating leverage.

Operating loss in the first quarter of 2020 expanded on a year-over-year basis from RMB 1.3 billion to RMB 1.7 billion in the quarter.

Meanwhile, operating margin decreased from negative 6.8% in the previous year period to negative 10.2% in this quarter, which was mainly attributable to the fair value loss on an equity investment during the first quarter 2020, partially offset by the operating margin improvement in our food delivery business and new initiatives and other segments.

On a consolidated basis, our adjusted EBITDA and adjusted net loss were positive RMB 41.3 million and a negative RMB 260.3 million, respectively. Adjusted EBITDA margin decreased to positive 0.2% in the quarter from positive 7.7% in the previous quarter and positive 2.4% in the prior year period.

Adjusted net margin turned negative in the quarter at 1.3% from positive 8.1% in the previous quarter, improved 4.2 percentage points on a year-over-year basis. The quarter-over-quarter decline in adjusted EBITDA margin and adjusted net margin were attributable to decreased operating margins across all segments. The year-over-year decrease in adjusted EBITDA margin was mainly due to the fact that our in-store, hotel & travel segment revenue contribution and operating margin all significantly decreased compared to the same period last year despite the operating margins of both our food delivery segment and new initiatives and other segment improving on a year-over-year basis. The improvement in adjusted net margin was mainly due to the significant reduction in depreciation expenses for our Meituan Bike, partially offset by the decrease in revenue contribution and operating margin of our in-store, hotel & travel segment for the period.

Before going through our segment reporting, I would like to highlight the changes that we have made to our disclosure for this quarter. From this quarter on, we will present operating profit and loss by segment instead of gross profit and loss by segment as we believe this new presentation can help both management and investors better understand and track each segment's operating results. Meanwhile, we are no longer disclosing GTV for both our in-store, hotel & travel segment and the new initiatives and other segment as we believe that the changes in GTV do not actively reflect the business performance and growth potential of these 2 segments. More specifically, the growth of in-store, hotel & travel revenue is not entirely correlated with the growth in transaction volume due to the increasing contribution from advertising revenue in the segment.

Meanwhile, according to our definition, GTV of our new initiative disclosed in the previous quarters only include the transaction volume of our 2C businesses, consumer-related businesses. And however, our 2B services are contributing an increasing portion of revenue of our new initiatives segment. However, we will continue to disclose the same operational metrics as before for our food delivery business and hotel booking business to ensure that investors are able to track the development of these businesses.

Let's now take a look at our segment reporting, starting with our food delivery segment. Order volume for our food delivery business declined significantly on a quarter-over-quarter basis due to the strict control measures implemented by the government across the country as a result of the pandemic as well as the seasonality of Chinese New Year. In particular, from January 20 to February 20, a severe supply shortage and reduced demand led to extremely low transaction volume. As a result of heightened consent, the ongoing closure of university and school and work-from-home policies, which applied to many of our high-frequency consumers, consumer demand continues to be negatively impacted with our order volume only recovering to around 75% of these prepandemic levels by quarter end. As a result, the order volume of our food delivery business experienced negative year-over-year growth with the daily average number of food delivery transactions decreased by 18.2% year-over-year to 16.1 million. On a positive side, the average order value experienced a visible increase with an uptick in contribution from high ticket-sized orders, especially those orders from branded restaurants, which were partially a result of the more diversified and high-quality supply during the pandemic. As such, food delivery GTV decreased by 5.4% year-over-year to RMB 71.5 billion.

Meanwhile, merchant marketing demand reduced significantly during the pandemic operating holiday season, leading to a 46.9% quarter-over-quarter decrease in online marketing revenue. However, throughout the recovery process, we saw a revival in the online marketing demand of merchants, which partially offset the significant reduction in advertising needs during February, contributing 20.9% year-over-year increase in online marketing revenue in this quarter.

The monetization rate of our food delivery business decreased to 13.3% in the quarter from 14.2% in the same period of 2019 as a result of the adoption and implementation of policies in support of merchants as well as the change in our order mix. As a result, food delivery revenue in the first quarter declined by 11.4% year-over-year to RMB 9.5 billion.

Although delivery capacity was not a bottleneck for our food delivery business during the pandemic, delivery cost per order increased both from a quarter-over-quarter and on a year-over-year basis. This uptick was the result of increased incentives paid to delivery riders both during the Chinese New Year and in the height of the outbreak. Additional costs relate to COVID-19 preventive measures and the decline in order density.

In terms of profitability, our food delivery business experienced an operating loss of RMB 17.9 million in the quarter compared to an operating profit of RMB 482.8 million in the fourth quarter of 2019, while operating margin turned to negative 0.7% in this quarter from positive 3.1% in the fourth quarter of 2019. The sequential decrease was mainly due to the decline in the monetization rate as well as the increase in both delivery costs and operating expenses per order, partially offset by the increase in average order value. However, our food delivery business operating loss narrowed on a year-over-year basis while its operating margin improved by 0.7 percentage points year-over-year. This year-over-year improvement was mainly due to higher average order value, increasing contribution from online marketing revenue and improved marketing efficiency.

Now turning to our second segment, in-store, hotel & travel. The pandemic has already caused a severe disruption to both the demand and supply side of this segment. As a result, revenue in the segment decreased by 31.1% year-over-year to RMB 3.1 billion. Due to the strict pandemic containment measures and hygiene concerns, consumer demand for [ consumption ], especially for those categories of discretionary consumption, which normally only occur in social or in statement scenarios, declined significantly as a substantial portion of local merchants suspended their operation during the outbreak.

Meanwhile, our hotel business was severely affected in the first quarter due to the dramatic decrease in tourism and lesser demand for the entire month of February. As such, domestic room nights in this quarter decreased by 45.5% year-over-year and by 61% quarter-on-quarter to 42.8 million, while the average daily rate per room night experienced a year-over-year decline in the quarter. Although local accommodation and business travel activities have started to gradually rebound at a quicker pace, especially in lower-tier cities, the recovery of leisure and business travel between cities in China is expected to take a longer time. Consumers still prefer to avoid travel for entire work or vacation purposes until the pandemic has run its course. The combination of these negative factors caused in-store, hotel & travel transaction-based commission revenue to decline dramatically, decreasing by 50.6% year-over-year and 62.6% quarter-over-quarter.

Moreover, in-store merchant demand for online marketing solutions was significantly impacted by the pandemic. In particular, it created headwinds for CPC product sales, which accounted for the majority of our installed online marketing revenue in 2019. In comparison, subscription-based online marketing revenue was much less affected and made up the majority of our online marketing revenue for this segment in this quarter. As a result, online marketing revenue for this segment declined by 8.2% year-over-year and by 39.8% quarter-over-quarter.

Operating profit for our in-store, hotel & travel business decreased by 57.3% year-over-year and by 70.8% quarter-over-quarter to positive RMB 680 million in this quarter, while operating margin decreased by 13.5 percentage points year-over-year and by 14.7 percentage points quarter-over-quarter to 22% in this quarter. Both the year-over-year and the quarter-over-quarter decrease in operating margin was due to the decrease in both commission revenue and online marketing revenue as a result of the pandemic impact, partially offset by decrease in expenses, which occurred as a result of less incentive for transacting users as well as less promotion and advertising expenses.

Let's now turn to our third segment, new initiatives and others. In the first quarter, revenue in the segment increased to RMB 4.2 billion, up by 4.9% year-over-year mainly due to the increase in revenue from Meituan Instashopping and our micro loan business, partially offset by the decrease in the revenue from car-hailing services and the B2B food distribution services, all of which were affected by the pandemic.

Operating loss from new initiatives and other segment expanded by 3.4% to RMB 1.4 billion in the quarter from RMB 1.3 billion in the fourth quarter of 2019, remaining relative stable on a sequential basis. The quarter-over-quarter decrease was primarily attributable to the decrease in most of our new initiatives' operating margin, which occurred as a result of the pandemic's negative impact as well as the change in revenue mix.

Operating margin decreased to negative 32.7% in the first quarter of 2020 from negative 21.7% in fourth quarter of 2019.

Operating loss from the new initiatives and others segment narrowed on a year-over-year basis, while operating margin improved by 32.3 percentage points. The year-over-year improvement was primarily attributable to the significant decline in depreciation expenses as well as the segment change in revenue mix.

Now moving on to our cash position. As of March 31, 2020, our cash, cash equivalent and short-term investments totaled RMB 56.5 billion, decreasing from RMB 62.8 billion as of December 31, 2019. Our operating cash flow turned negative in the first quarter at RMB 5 billion from positive RMB 3.1 billion in the fourth quarter of 2019. The sequential decrease in operating cash flow was primarily due to the RMB 5.5 billion in net working capital changes on the balance sheet date and the net changes in profit/loss before income tax.

Due to seasonality and the pandemic, the number of transacting -- transactions across all the segments declined dramatically, leading to significant decline in GTV and not a decrease in the backlist of payables to merchants and advance from transacting users. Meanwhile, the payment for annual bonus caused a decline on the payables and accruals. The combination of these factors accounted for most of the changes in working capital during this quarter.

Thanks to the government's effective containment of the pandemic, the Chinese economy has started to reopen. Local service consumption has begun to pick up, and our business has continued to gradually recover since March. However, we are taking a more cautious view for the remainder of 2020. This view takes into account ongoing pandemic precautions, the insufficient consumption confidence of consumers in certain local service category and the potential risks of merchant closures, which could have a negative impact on our core business in the remainder of 2020. Nevertheless, across both food delivery and in-store, hotel & travel segments, we remain committed to working closely with our merchants, supporting them along the path to recovery, further optimizing our product and improving our operational capability to create more long-term value for their continuing success.

Despite the negative impact that these supporting initiatives may have on our short-term financial performance, we will remain committed to our social responsibilities. We believe that the pandemic will help to accelerate the digitization for both the demand and supply side. And at the same time, we remain optimistic about the industry's growth trajectory and potential in the long term.

With that, we are now open for Q&A.

[Operator]

[Operator Instructions] Your first question comes from the line of Eddie Leung of Bank of America Merrill Lynch.

[Eddie Leung, analyst]

I have a question on your food delivery business, which performed quite well in the first quarter despite the epidemic. So just wondering, what's the trend we have seen in the second quarter? In particular, are we seeing a decline in the average order value of people returning to work? And when do we expect the business to return to a kind of like more normal growth path and margin profile? Any factors for the recovery?

[Shaohui Chen, executive]

Thank you, Eddie, for the question on food delivery. For the order volume in Q1, the result was better than our original expectation. First, we had a healthy growth momentum in the first 20 days of January, with more than 30% GTV and revenue growth year-over-year. Secondly, thanks to the effective containment in China, the scale of food delivery business recovered quickly in March. Order volume on 20th February was less than 30% of the pre-pandemic level, and we reached around 75% at the end of March.

On the supply side, the number of active food delivery merchants was more than 90% of its pre-pandemic level at the end of March. And as of late April, we have seen the number of active food delivery merchants fully recovered, including the newly acquired merchants. Especially, the number of branded and high-quality restaurants on our platform continued to increase, enabling us to further expand our high-ticket size selections, which support a recovery in the past few months. And there are still a certain number of merchants who haven't resumed operation so far, especially some independent and small restaurants.

On the demand side, the food delivery daily order volume continued to recover gradually in Q2. We are seeing the demand for hotpot, bakery and other categories that consumers generally cannot cook at home recover at a fast pace. The consumption recovery for lunch and afternoon tea outpaced the recovery for dinner and night snacks, while workplace orders continued to recover faster than weekend orders. In general, consumption recovery in lower-tier cities is ahead of higher-tier cities.

In the week of May 11, the daily order volume recovered around 90% of their pre-pandemic level. However, the further healthy recovery of food delivery order volume to any further relaxation of the control of many residential communities in Northern China, reopen of [ temper ] and the further recovery of mid- to low-ticket size supplies for food delivery demand for late dinner and night snacks with less hygiene concerns among consumers. If market restrictions could be lifted in June, we expect the order volume growth of food delivery business will turn positive year-over-year in Q2.

In terms of your questions on profitability, we expect pressure on operating margin remains in 2020. Positive factors such as higher AOV during pandemic may normalize. Monetization rate will continue to be impacted by merchant-supporting initiatives. User subsidies already picked up again to further drive the consumption confidence. Therefore, we are still conceptive in terms of short-term profitability of food delivery business, although it may slightly recover along with the recovery of business scale and order density. Again, further driving the order volume recovery and providing necessary support to our merchants will be our top priority in 2020 for food delivery business rather than short-term profitability. Thank you.

[Operator]

Your next question comes from the line of Ronald Keung of Goldman Sachs.

[Ronald Keung, analyst]

So also on food delivery. As we look longer term, with COVID transforming some of the styles and structural changes to industries, can you update us on any change or any things that you think about your -- the view on longer-term market size for food delivery, sustainable growth rates and kind of profit per order longer term? I'm thinking about the RMB 1 of operating profit per order. Any timetable for that? And the update to reaching the 100 million orders per day as Xing, you had commented 1.5 years ago.

[Xing Wang, executive]

Thank you, Ronald. So in the short to midterm, there are still quite a lot of uncertainty regarding COVID-19 for the next few quarters such as its evolvement in other countries and potential negative impact on global economy. And we all know food delivery and other novel services in China are closely related to spending power and confidence. So they are not going to be completely immune to the global -- or potential global recession.

In the long term, in general, we think COVID-19 pandemic will bring positive structural changes to our food delivery industry. And we have elaborated on the supply side more and more branded and chain restaurants accelerated their migration to online channels. That's good for us. And small and medium restaurants are also making efforts to improve their online operation, improve their service quality. And they are working more closely with us as a food delivery as that will become their primary revenue source during the pandemic. So the quality improvement on the supply side has been speeded up.

On the demand side, more consumers realize and recognize the convenience and selection that a food delivery platform can offer during a pandemic. So they tend to use food delivery for more diversified consumption scenarios not just for quick snacks but sometimes for very -- quite formal dinners. And they are willing to pay for higher-quality supplies and place high-ticket-size orders. In addition, more and more consumers started to order nonfood categories on our platform during the pandemic. They use our platform to buy almost anything, buy medicine, flowers, anything.

And during this accelerated process optimization for both price side and demand side, we have become confident that our food delivery service will become the infrastructure service for China's older population, and we have ample room for growth in the long term.

So despite the short-term setback due to the COVID-19, we believe we continue to be on track of -- to reach the 100 million orders per day by 2025 and RMB 1 operating profit per order in the long term. And we will have even more business opportunities on the journey, leveraging our largest on-demand delivery capacity and solid merchant base and user base. We will continue to further solidify our leading position in this industry, using technology to continuously create value for both the consumers and the merchants. So yes, we remain quite confident. Thank you.

[Operator]

Your next question comes from the line of David Dai of Bernstein.

[Hao Dai, analyst]

My question is around the average order value and average delivery cost for food delivery. We have seen some very positive trends for both metrics during the pandemic. The average order value has increased 14 -- by 14.4% year-on-year in Q1. What will happen to the average order -- the trend of average order value in the future?

And also on the delivery cost side, we have launched the contactless delivery measures, which have improved the delivery efficiency. How do we expect the optimization of delivery cost per order in the future?

[Shaohui Chen, executive]

Thank you, David, for noticing the AOV increase. This was primarily due to the change of the structure during the pandemic. A lot of top brand and chain restaurants started to work with us, while a large number of small restaurants extended their business operation during the pandemic. Especially, small restaurants closed to [ temper ] and the focus on price-sensitive students remain closed. In addition, consumers also preferred to order from branded restaurants, which were considered to have better food safety and hygiene standards during the pandemic. As a result, the contribution from high-ticket-size orders from branded restaurants increased significantly in Q1. Along with a further recovery in the next few months, we believe more and more small restaurants will resume their operation. Our orders from these restaurants, which usually have much lower ticket size, will gradually pick up. As a result, average order value is expected to fall back and normalize in the short term.

In the longer term, we believe that quality improvement of food delivery suppliers will continue to -- and that most consumers will be willing to pay premium for high-quality food. The positive structure change driven by the pandemic will continue and will provide us with more upside for average order value in the future.

For the delivery cost per order for our 1P model, it increased by more than 10% on a quarter-over-quarter basis in Q1 due to the incentives paid to the delivery riders for working during the holiday season and pandemic situation, the extra cost associated with virus containment as well as the decrease in order density. However, it only increased by about 1% on a year-over-year basis in Q1. Overall, we think delivery cost in Q1 was well under control despite the impact from the pandemic.

First, most orders in February, March were fulfilled under contactless delivery model, which brought considerable efficiency improvement to mitigate the negative impact from order density decrease during the pandemic. Second, the segmentation and flexible mobilization of our delivery riders were further improved in Q1. And third, we did not need to pay additional incentive to our riders since late February, when the capacity of delivery riders recovered faster than the supply and demand of food delivery.

As to a trend in the short term, delivery cost per order has strong seasonality, and we expect a similar trend this year despite the impact from pandemic. In addition, the orders for contactless delivery will decrease from over 80% during the pandemic to a much lower percentage when the control in residential communities is further lifted. Small consumers will still prefer to receive orders at their home door.

From a long-term perspective, we believe the pandemic bring us more opportunities to explore diversified delivery models. We will also continue to invest in the cutting-edge technology for autonomous delivery. Along with the further increase to the business scale and order density in long term, we believe that delivery efficiencies still have room to improve and delivery cost per order may decrease accordingly.

[Operator]

Your next question comes from the line of Alex Yao of JPMorgan.

[Alex Yao, analyst]

I have a couple of questions regarding the monetization rate trends. So for Q1, if we leave aside your self-inflicted demonetization initiatives, such as commission revenue, rebate, et cetera, et cetera, I think some of the -- there were some interesting dynamics that might have longer-term impacts. Number one, you guys mentioned that more and more top brands and the chain restaurants are joining our platform. Are they coming with a higher or lower monetization rate than our current platform average? And your thoughts on the longer-term trends?

And then number two, we also noticed that recently, you guys had negotiation with the Restaurants Association of Guangdong province. Will it have a further negative impact on the monetization rate in the mid to longer term? And are there any similar events emerge in other regions? So overall, can you talk about your thoughts on the monetization rate trends over the medium to longer term?

[Xing Wang, executive]

Okay. Thank you, Alex. So as you have noticed during the pandemic, we launched a series of merchant initiatives, such as commission, rebates, subsidies and free traffic, et cetera, that lowered our monetization rate in Q1 and will continue to have some pressure on the monetization rate in Q2. And in addition, in general, we provide a discount on the commission rate to certain high-quality restaurants, and we think they could provide a more diversified quality supplies to our consumers.

The increasing portion of branded restaurants will modestly bring down the average monetization rate of food delivery business in the short term. In the long term, we believe that the higher portion of high-quality restaurants will give us more potential to monetize from our high-ticket-size orders, which are -- we think, would offset the modest impact on monetization rates. And moreover, restaurants generally decrease their marketing budgets during a pandemic, and advertising revenue as a percentage of GTV decreased in Q1 on quarter-over-quarter basis. That's further decreased the monetization rate in the short term.

In the future, we expect the advertising revenue will gradually get back to the normal check along with the recovery of merchants. And in fact, merchants found our advertising growth is very effective to boost their order volume during their recovery.

In the remaining of 2020, monetization rate of our food delivery business may slightly recover as advertising needs from merchant will rebound, but it is still expected to be at a lower level as compared to 2019. And providing more support to the merchant and driving the order volume recovery will definitely be our top of priority this year. But we remain confident about the monetization potential of our food delivery business in the long term.

And for your second question, for the news you mentioned, yes, the communication with the Guangdong Restaurant Association went quite well. We will have more communication and collaboration with high-quality restaurants in the future and listen to the constructive advice of these restaurants and associations. And we will better understand their pain points and continuously optimize our products and services to create more value to our restaurant merchants. So we believe that the more value we create for merchants, the more opportunities that we are going to have to, again, have to share from their success. So we are doing our job -- our best. Thank you.

[Operator]

Your next question comes from the line of Thomas Chong of Jefferies.

[Thomas Chong, analyst]

I have a question relating to the in-store business. In general, the recovery of the in-store business is behind the food delivery in Q1. Have we seen the recovery accelerating in Q2 for some of the verticals of the in-store? And also, could you please also give some updates about the expectation of in-store recovery for the full year of 2020?

[Shaohui Chen, executive]

Yes. You are right that the recovery of the in-store segment is much slower than food delivery segment. And different service categories are experiencing different recovering speed. For in-store dining, the number of transactions on our platform recovered to around 80% of the pre-pandemic level in the week of May 11 from around 45% at the end of March. However, average order value for in-store dining dropped meaningfully on a year-over-year basis given the recovery of formal meals or gatherings lagging -- lagged much behind the recovery of fast food or light dining. For the other in-store services, the number of transactions on our platform recovered to around 60% of the pre-pandemic level in the week of May 11 from around 30% at the end of March. Especially, services that are discretionary and may involve a big crowd recover much slower. For example, medical, aesthetic, beauty, pet and et cetera recover faster. However, parent and child activities and karaoke had much slower recovery due to the hygiene concerns from consumers as well as crowd control from local governments.

We continue to notice the operating pressure of our in-store merchants. In general, merchants of our in-store services only reserves net working capital for about 3 months. If the recovery continues to be slow, they will likely shut down their business at the end of Q2 or the beginning of Q3.

For the second quarter of 2020, we expect the recovery for our in-store business may encounter a bottleneck for a while. It will take a relative longer time to fully rebuild the consumption confidence and the supply for those most impacted discretionary services categories.

Transaction-based commission revenue and the CPC advertising revenue of the in-store segment, which decreased by more than 50% and 40% year-over-year, respectively, in Q1, need to gradually come back in line with the transaction volume recovery. At the same time, contract renewal for subscription-based services may continue to be dampened by the potential shutdown of many merchants in the next few months. We expect the revenue growth for the in-store business will still be negative in Q2.

As the leading commerce platform for local services, we will continue to optimize our products and operation to help merchants. We will further stratify our merchant base and adopt tailored approach to better serve them. We will also strengthen the collaboration with local governments on consumer vouchers, which are effective for the recovery of consumer confidence in next few quarters. Overall, challenges and uncertainties remain, but we will be committed to work closely with our in-store merchants along their recovery. Thank you.

[Operator]

Your next question comes from the line of Gary Yu of Morgan Stanley.

[Gary Yu, analyst]

My question is more related to your hotel booking business. You have previously mentioned some of the structural advantages on the recovery. But we also observed some favorable data points coming out during the May long holiday. So could you share more details on the recovery pace for different type of cities and type -- different kind of hotels and your view of the forecast for the full year this year?

And a related question is also on your hotel business. Are you seeing any risks of intensified competition on the domestic side in the next few quarters as the opportunity of [ alpha ] markets seems very limited?

[Shaohui Chen, executive]

Thank you, Gary. As of late March, the same number of domestic room nights consumed on our platform was slightly over 50% of the pre-pandemic level. In the week of May 11, it gradually recovered to over 70% of the pre-pandemic level.

We have observed several trends along the recovery. First, local accommodation recovered much faster than cross-city travel. We have a larger base of younger generation in both high-tier and low-tier cities, and they have much more demand for local accommodation. At the end of March, we already achieved positive room night growth on year-over-year basis for local accommodation, while the cross-city room nights still decreased by more than 40%. Second, the hotels in lower-tier cities generally had better recovery due to early lifting of their containment measures. Third, in general, the comfortable 3- to 4-star hotels had better recovery as they had better flexibility to provide both attractive [ how ] and quality services to cover a wide range of demand from our consumers. Fourth, company cutting budgets of business travels and embracing video conference tools, which led to the slower recovery of [ hospitality ] for business travelers. All of these factors gave us structural advantages during the recent recovery.

During the May holiday, the consumption of domestic room nights on our platform bounced back faster than we the original expectation, and some higher-tier cities lifted containment restrictions right before the holiday. However, domestic room night immediately fell right after the holiday. Overall, we tend to be conservative for the recovery of hotel business for the full year. We expect that cross-city travels for both the [ patient ] business will take much longer time to fully recover as hygiene concerns from consumers are expected to last for a while. We expect the volume and revenue growth for the hotel booking business will continue to be negative in Q2 and may even be negative for the full year of 2020.

In terms of competitive dynamics, given the structural advantage we have during the recovery, we believe we could further solidify our leading position in terms of domestic room nights this year. Our platform provides hotels in lower-tier cities with more efficient channels to do online marketing during the recovery. We will also make further progress on high star hotels, for both 4-star comfortable hotels and the 5-star luxury ones. These high star hotels need to do promotions in more channels during the recovery, and we could provide diversified products and valuable traffic to help them. Thank you.

[Operator]

Your next question comes from the line of Jerry Liu of UBS.

[Yuan Liu, analyst]

My question is around the new initiatives segment. We heard some comments just now about some of the newer delivery businesses. I just also want to get an update on some of the other investments we've made in the past, especially for electric bikes, where I see recently there are some orders for as much as 1 million bikes. Just wondering if this is additional CapEx. And more broadly, what is the rationale and strategy for the bike-sharing business or any of the other nongroceries deliveries businesses? And then overall, how might we think about the operating loss for the new initiatives segment going forward?

[Xing Wang, executive]

Thank you, Jerry. Yes. About 2 years ago, we acquired Mobike, and then we put quite substantial resources and efforts into the integration. We further invested in that business, the bike-sharing business. And we make those decisions from a very long-term perspective. We believe bike-sharing will be a very important component for transportation industry in the long term. And we believe it will better serve our consumers' high-frequency, short-distance transportation needs, increase their stickiness to our platform and expand cross-selling opportunities with the other local services. And in addition, those yellow Meituan Bikes will increase our brand awareness, exposures through millions of yellow bikes all across the country, and -- which will further benefit our platform's overall branding and traffic acquisition. And for the existing bikes, we plan to finish the replacement for the remaining 3 million old bikes within this year. More than half of the replacement is expected to be completed in Q2. And for the new electric bikes and based on our current assessment, we believe it has good potential in terms of market size and use cases and consumer experience and unit economics. And we think other players who already launched their e-bikes may share the same view. And this could be a profit-making business in several years down the road while bringing new high-frequency transaction scenario to our platform.

The information in the media may not be accurate. We plan to launch several hundred thousand e-bikes for early-stage exploration in Q2, and we'll continue to monitor the business performance. And this means additional capital expenditure to the replacement of existing bikes. It is material to our cash position and will be well assessed and under control. And we will continue to plan our subsequent investment in bike-sharing business based on a careful ROI assessment. Thank you.

[Operator]

Your last question comes from the line of Kenneth Fong of Crédit Suisse.

[K. Fong, analyst]

For the new initiative, except for bike sharing, could you share any, like, updated investment plan? Will you adjust your investment budget this year given the significant operating cash outflow in the first quarter and the ongoing challenges on the recovery of your business?

[Xing Wang, executive]

Similar to bike-sharing business that I just mentioned, we always assess our investment for new opportunities from a long-term perspective. And so we will not decrease our investment for the long-term growth just because we are facing this business disruption and challenges in the short term. So on the contrary, as the new e-commerce platform for services in China, we believe we have even better opportunities to increase investment to accelerate the digitalization for both the demand side and the supply side this year. We still have sufficient cash balance to support our business development. And we will continue to do capital ROI assessment and actively allocate resources to attractive new initiatives.

So in addition to bike sharing, we will increase our investment this year in other new initiatives that we think have important strategic values. As the demand potential of Meituan Instashopping has been further proven in the pandemic, we will further invest to better leverage the marketplace model and our delivery network to enable more diversified merchants and providing on-demand delivery of their goods to our consumers. And at the same time, for self-operated Meituan Grocery business, that's Meituan Maicai, we will invest to expand our geographical coverage where it is going to cover more cities and improve our supply chain capability and do more correlation on different business models. And also for our B2B food distribution business that's quite new, we will invest to continue to improve the supply chain and the integrated service capability, aiming to better serve the high-quality merchants and increase their stickiness and increase the ARPU. And for our RMS, the Restaurant Management System, the SaaS business, we will further invest in the R&D to improve our products and optimize the business development team coverage to provide a better service to more high-quality restaurant merchants.

So in summary, I agree that there are challenges. I don't think -- I think the COVID-19 is not going to be the end of the world, so we will keep investing and we will keep building. Thank you.

[Operator]

There are no further questions at this time. I would now like to hand the conference back to today's presenters. Please continue.

[Scarlett Xu, executive]

Thank you for joining our call. We look forward to speaking with everyone next quarter. Thank you.

[Operator]

Ladies and gentlemen, this does conclude our conference for today. Thank you for participating. You may now all disconnect.