Meituan

HKEX:3690

Earnings Call Transcript 2020-Q3

[Operator]

Ladies and gentlemen, thank you for standing by, and welcome to Meituan Third 2020 Earnings Conference Call. [Operator Instructions]

I would now like to hand the conference to your first speaker today, Ms. Scarlett Xu, Vice President and Head of Capital Markets. Thank you. Please go ahead, ma'am.

[Scarlett Xu, executive]

Thank you, operator. Good evening, and good morning, everyone. Welcome to our third 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. For today's call, management will first provide a review of our third 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 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's Third Quarter 2020 Earnings Call. During the quarter, as the outbreak of COVID-19 was effectively controlled in China, the economy and consumption steadily recovered across the country. We continued to stick with our Food + Platform strategy, providing consumers with a more diverse and convenient set of service offerings, helping merchants to recover and grow, and creating more job opportunities for society at large. As a result of our continuous efforts, we achieved positive growth in each segment while recording peak daily GTVs across our main businesses, including food delivery and in-store services.

Moreover, in order to ensure that our growth remains holistic and sustainable, we increased investments in key new initiatives with a significant long-term potential. We are a beneficiary of [ sensible ] for the broader economic recovery experience in our country as a result of the effective COVID-19 containments. And we will strive to continue creating unique value for both Chinese consumers and merchants.

I will now provide an overview of our performance in each business segment for the third quarter of 2020, starting with food delivery. Our CFO, Shaohui, will then discuss our third quarter financial performance in more details.

So in general, food delivery is a seasonal business. The summer usually being one of its strongest season in terms of the number of transactions. In Q3, GTV, a number of transactions for food delivery increased by 36% and 30% year-over-year, respectively. In August, our food delivery business had almost fully recovered from COVID-19 with a number of food delivery transactions reaching historical high in that month. Our main food delivery user metric also hit record highs. Our key categories in the segment experienced strong growth momentum during the quarter.

During the quarter, we help merchants grow their operations and accelerate consumers' lifestyle change. We continued to optimize our food delivery supply, expand our high-quality merchant base and increase the diversity of restaurants. We also continued to enhance our operating systems, increase the level of operational granularity from individual restaurants to individual dishes and cooperate with millions of merchants on several summer promotional events such as the Super Delivery Festival, [Foreign Language].

And during the summer, the popularity of different consumption categories, such as late-night snacks and afternoon tea, continued to increase, we thus adopted more tailored and differentiated operations for these category by expanding our merchant supply, improving our product quality and enhancing our category-specific marketing capabilities. For example, after accurately identifying the growing consumer preference for bubble tea, we aligned our strategy to focus on cultivating such consumption habits in more consumers. Leveraging such festivals as Chinese Valentines' Day as well as bubble tea-themed marketing events, we further expanded our bubble tea product offerings and also drove the growth of the number of transactions for the afternoon tea category during the quarter.

For late-night snacks, beyond broadening our merchant and product selections, we also prioritized the exposure of late-night snack merchants at night to enhance their marketing efficiency and worked closely with the merchant to roll out a wider range of late-night snacks set menus. Moreover, we also adopted more innovative marketing solutions by working with several major online media platforms, utilizing new mediums, such as live streaming during late-night hours. As a result, the number of transactions for the late-night snack category also grew significantly in the third quarter.

On the consumer side, we continued to improve our marketing efficiency by allocating more resources to repeat consumers, especially our membership subscribers as well as improving our intelligent recommendation for consumers in different consumption scenario based on their preferences. Our ability to attract and engage with high potential consumers improved significantly during the quarter. The scale of our membership subscriber reached new highs and our members contribute a larger proportions of order toward our total food delivery orders in the third quarter. Our number of monthly transacting users and repeat consumers' transactions frequency also grew to new record highs, driving the overall growth of our food delivery business. Looking ahead, in light of our continuous efforts on both the demand and supply side, we remain confident that we will be able to drive the food delivery industry growth on a steady basis over the long term.

In terms of our delivery network, the strong foundation of our on-demand delivery infrastructure enabled us to ensure the timeliness and quality of our delivery services throughout the busy summer seasons as well as under more extreme weather conditions. More importantly, the safety and social well-being of our delivery riders remained of paramount importance to us and we continued to work towards a better understanding of our riders' needs in the context of business growth.

During the third quarter, we further upgraded our delivery dispatch system to provide our delivery riders with higher flexibility in terms of delivery time and task designations during unexpected situations, such as bad weather and heavy traffic. Furthermore, in order to develop algorithms and technologies capable of ensuring delivery rider safety, we also strengthened our R&D capability and plan to commit more resources on this front going forward. Additionally, by taking safety indicators and other comprehensive factors into account, we improved our rider assessment model, which has enabled our rider to obtain reasonable compensation while also ensuring their safety. Alongside these efforts, this year's 7 -- July -- the 13th Riders Festival, [Foreign Language], we expanded the scope of our Baby Kangaroo Charity Program, [Foreign Language], from health care to education support for our delivery riders' children.

Going forward, we plan to continuously optimize our delivery network operations and improve our delivery riders' management to ensure their well-being. We will continue to build our on-demand delivery network as a critical bedrock for the next-generation infrastructure for our strategy. And we'll expand our delivery services from food to a wider range of goods to create more convenience for Chinese consumers.

Next, turning to our in-store, hotel and travel segment. During the quarter, segment revenues grew by close to 5% year-over-year, with both the number of transactions and GTV experiencing positive year-over-year growth. On the supply side, for in-store dining, synergies between our food delivery and in-store dining business grew during the quarter as we converted more food delivery merchants into in-store dining merchants. At the same time, we also continued to stratify our merchant base while expanding our coverage of high-quality merchants.

On the demand side, we rolled out various promotional events to accelerate the recovery of industry growth. And as such, in August, our in-store dining business experienced breakthrough growth in terms of the GTV, number of transaction, revenue as well as the number of transacting users. For other local services, we launched a Season of Plays, [Foreign Language], and other marketing initiatives to accelerate our industry's revival and capitalize on peak user engagement during the summer holiday.

Although social gathering activities, such as karaoke and fitness, has not yet fully recovered due to the continuous hygiene concerns. Nonsocial events in categories such as beauty, parents and kids and auto services, all achieved a positive year-over-year growth in the third quarter. Notably, the growth of a few categories that focus on consumption upgrades further accelerated in Q3. For example, the user scale of medical aesthetics ramped up significantly with sales increasing by more than 80% year-over-year. Sales for the pet care category also increased by more than our 40% year-over-year. Meanwhile, certain service categories targeting niche demographics also experienced rapid growth, including the paid study rooms, interactive pet experiences, escape rooms and more. Going forward, we plan to expand the variety of our services, diversify our merchant's price and provide the consumers with a wider range of choices that better meet their new and emerging demands.

In our hotel business, as a result of China's effective control measures and stronger traveling demands during the summer, both cross-city and business travel recovered well in comparison to previous quarters while the growth of total domestic room nights consumed on our platform also turned positive on a year-over-year basis. On the demand side, we saw that consumers' desire for leisure travel mostly recovered, while consumers' preferred travel destinations shifted from overseas to domestic in the summer, which allowed us to leverage our competitive advantage in the domestic market.

On the supply side, as we continued to increase our cooperation with high star hotels, the number of high star hotels that we worked with increased by nearly 20% -- 25% quarter-over-quarter. Our Hotel+X program also continued to expand as we utilize our differentiated value proposition to cover more hotel groups in that period. In addition, we increased our investments in customer service for consumers seeking low to high star hotels while also setting up a special, dedicated service team for consumers seeking high star hotels, enabling us to better cater to each group's specific needs, improve our ability to serve a broader group of consumers.

Now moving on to the new initiatives segment. In the third quarter, we continued to ramp up our investments in new initiatives, especially in those areas that we believe to have promising long-term potential and fit well into our Food + Platform strategy. As a result, revenues from our new initiatives segment increased during the period, growing by 44% year-over-year and 46% quarter-over-quarter. Out of all of our new initiatives, we consider grocery retail to be our top priority. Meituan is an e-commerce platform focusing on food category. Grocery retail is an enormous market opportunity and can help us penetrate into the home cooking food consumption scenario, which is natural essential extension of our existing business.

Currently, we are exploring grocery retail through 3 business models. During the quarter, as a result of a steady user traffic growth, strong momentum in key SKU categories and improved marketing efficiency, Meituan Instashopping, our marketplace model, achieved solid results with a steady number of transactions, increasing by more than 80% year-over-year. As a part of our aspiration to deliver everything to consumers' homes, we successfully expanded our category coverage, while also growing our GTVs in key categories, such as flowers and medicine, with the medicine sales ramping up more than 230% year-over-year and flower sales increasing by more than 160% year-over-year during the quarter. In particular, we observed a structural change in the medicine vertical where consumers increasingly prefer to using online medical solutions and medicine delivery services in the post-COVID-19 period.

As such, by utilizing our online platform and on-demand delivery network, we aimed to provide more convenient solutions to consumers and create value within the medical system for our society at large. As of the third -- the end of Q3, the number of pharmacies operating on the Meituan platform approached 100,000. Moreover, by leveraging our instant delivery infrastructure, we were able to deliver medicines in a timely manner to better satisfy the increasing diverse health care needs of Chinese consumers. And the Meituan Grocery, that's our self-operated model. Meituan Grocery also continued to expand in the quarter as we launched initial operations in Guangzhou and increased its coverage density across those Tier 1 cities in which we were already active. Furthermore, we continued to focus on cultivating user habits, which helped to boost our GTV growth. The number of transactions on Meituan Grocery increased by close to 100% -- 120% quarter-over-quarter, with its quarterly transacting user also doubling on a quarter-over-quarter basis.

And then there's Meituan Select, [Foreign Language]. We successfully launched the community group-purchase model in Q3 and remained focused on iterating its business operations and building key capabilities. To ensure the punctuality of our orders and higher consumer satisfaction, we explored different methods of improving our warehouse efficiency, logistic infrastructure and group leader management capabilities, while also accumulating experiences with a wider variety of SKU products. At the same time, we leveraged our existing supply chain resources and offline business development capabilities to further accelerate our pace of expansion, improve our operating efficiency and enhance our SKU management.

As a result, we were able to promote our unique brand awareness with both consumers and group leaders as we ramp up our operations. We will continue to focus on enhancing our key competencies while expanding our business scale. We will invest to build our long-term foundation to cooperate with a diverse group of local business partners across different functions on this exciting journey ahead. We will continue to make this business stay open and inclusive and very much see this business as a win-win situation for our ecosystem partners.

We aim to help the industry impacts on parts of accelerating online penetration and thus, improve the efficiency of all participants in this ecosystem. We aspire to create more unique values, not just for our consumers, but also for our business partners, who we will enable to grow alongside this unprecedented growth opportunities. And overall, with COVID-19 well controlled and the economy firmly back on track in China, growth across all of our main businesses accelerated in the quarter on a sequential basis. Further, the number of transactions reached new highs during the summer period.

Furthermore, we have also identified new business opportunities with a strong potential in the post-pandemic period and we will commit to develop these new businesses especially for grocery retail. Over the long term, we believe that our main business has plenty room for continuous and sustainable growth. But our new initiatives also have the potential to further expand our user base, enhance user engagement and provide the consumer with increasing the convenient, holistic and high-quality local services. We will remain focused on our consumers and merchants, stay patient for long-term growth, embrace changes, spearhead digital transformations and continue to expand our core capabilities going forward. Most importantly, we will have operated social responsibility at the heart of everything we do in order to optimize our delivery network, create millions of job opportunities and further build out the next-generation infrastructure for society at large.

We will also continue to assist millions of small local merchants that improve their marketing efficiency by promoting digitization of the local services industry. We are delighted to see that during the COVID-19, our delivery network, products and offerings have helped millions of Chinese people to obtain their daily necessities and have enabled millions of merchants to resume their operations.

Going forward, we will continue to focus on leveraging technology to create more value for our consumers, merchants and many other stakeholders, always fulfilling our mission to help people eat better and live better.

With that, let me now turn over to Shaohui to discuss our financial results.

[Shaohui Chen, executive]

Thank you, Xing. Hello, everyone. I will now go through our third quarter financial results. In the third quarter, total revenue increased by 28.8% year-over-year to RMB 35.4 billion primarily driven by the solid revenue growth of our food delivery business, steady recovery of our in-store hotel and travel business and robust revenue growth of our new initiatives. Meanwhile, total revenue increased by 43.2% quarter-over-quarter as we continue to recover from COVID-19, enjoy the benefits of positive seasonality and expanded into other new initiatives at a rapid pace.

Cost of revenue increased to RMB 24.6 billion in the quarter, which represented an increase of 37.3% year-over-year and an increase of 52.2% quarter-over-quarter. Cost of revenue as a percentage of total revenue was 69.4% in this quarter increasing from 65.1% in the prior year period and 65.3% in the second quarter. The year-over-year increase of 4.3 percentage points was mainly due to the increase in delivery rider cost resulting from the government's temporary VAT exemption policies granted to our delivery partners. The quarter-over-quarter increase of 4.1 percentage points was primarily attributable to the lower gross margin of our food delivery business driven by the seasonal and temporary incentives paid to our delivery riders in this period.

Selling and marketing expenses increased to RMB 5.8 billion in this quarter from RMB 5.6 billion in the same period of 2019 and RMB 4.2 billion in the last quarter. This significant increase on a sequential basis was primarily attributable to the increased marketing spending for consumer campaigns as well as of expansion of new businesses. Selling and marketing expenses as a percentage of total revenue were also kept under control, declining to 16.5% in this quarter, which represented a year-over-year decrease of 3.9 percentage points and a quarter-over-quarter decrease of 0.4 percentage points.

Importantly, the year-over-year decline was mainly a result of our improved market efficiency. R&D expenses as a percentage of total revenue were 8.4%, increasing from 7.8% in the prior year period. This increase was mainly driven by the increase in our R&D headcount resulting from our expansion of new business as well as our higher share-based compensation. The quarter-over-quarter decrease of 1.2 percentage points was a result of our improved operating leverage. G&A expenses as a percentage of total revenue was 4% in this quarter, remaining flat on a year-over-year basis and decreasing by 0.7 percentage points on a quarter-over-quarter basis due to our improved operating leverage.

Operating profit was RMB 6.7 billion this quarter, increasing from RMB 1.4 billion in the prior year period and RMB 2.2 billion in the second quarter. This significant increase was due to RMB 5.8 billion in fair value gains on investment in listed entities, especially the one-off mark-to-market gain for the IPO of Li Auto. On a consolidated basis, both adjusted EBITDA and adjusted net profit experienced year-over-year growth, increased to RMB 2.7 billion and RMB 2.1 billion, respectively. However, gross adjusted EBITDA margin and adjusted net profit margin decreased on a year-over-year basis to 7.6% and 5.8%, respectively. It was mainly attributable to the decrease in operating margin of our new initiative, resulting from our business expansion efforts and partially offset by the increase to the margins of our corporate initiatives. On a sequential basis, the decrease of both adjusted EBITDA margin and adjusted net margin was mainly due to the decrease of our food delivery business operating margin.

Now moving to our segment reporting for the quarter, starting with food delivery. During the third quarter, although the number of active food delivery merchants near university campus had recovered, in fact, even higher at the end of September, than the pre-pandemic level. The strict lockdown policy of many Chinese universities continue to negatively impact the recovery of our food delivery transaction volume from college students. Nevertheless, the growth in both our number of monthly transacting users and repeat user transaction frequency was further stimulated by favorable analogies, our enhanced consumer marketing efficiency, effective food delivery membership program and promotional events during the quarter. Meanwhile, by strengthening our operating capabilities, we also continue to boost the variety and quality of our platform food delivery supply, helping us to further expand our consumption scenarios for a larger pool of consumers.

In line with these growth drivers, our food deliveries and order volume maintain a healthy growth momentum since July, with the daily average number of food delivery transactions increasing by 30.1% year-over-year to 34.9 million in this quarter. At the same time, the average order value was RMB 47.4, representing a year-over-year increase of 4.5% and a quarter-over-quarter decrease of 2.9%. The year-over-year increase was mainly due to the fact that lower ticket size [ temporary ] orders have yet to fully recover as well as a greater contribution from higher ticket sized orders, which including orders from quality brand restaurant and the late-night snack category in particular. The quarter-over-quarter decrease was mainly due to more small- and medium-sized restaurants that resumed their operations in this period.

Food delivery GTV increased by 36% year-over-year to RMB 152.2 billion in this quarter. Notably, we have continued to see a growing willingness from merchant to acquire traffic online as our advertising merchant base increased by almost 50% year-over-year in the quarter. As such, our online marketing services maintained their rapid growth, increasing by 60.1% year-on-year. Meanwhile, our monetization rate decreased by 0.3 percentage points year-over-year to 13.6% this period mainly due to our increased spending on marketing to accelerate our order volume growth. As a result, our food delivery revenue increased to RMB 20.7 billion in the third quarter, representing an increase of 32.8% year-over-year.

On the cost side, the impact of VAT exemption policies granted to our delivery partners continue to weigh on our delivery cost orders, especially offsetting the contributions from our enhanced delivery for efficiency and [ refined ] the delivery network in our operations. As a result, our delivery cost order increased on a year-over-year basis as well as on a sequential basis, less of which was due to the fact of seasonality and temporary incentives paid to delivery riders.

Meanwhile, as a result of the lower average order value, increased marketing spending, lower contribution from online marketing revenue and higher delivery rider costs as compared to the second quarter of 2020, our food delivery business operating profit and operating margin declined on a sequential basis to RMB 768.5 million and 3.7%, respectively.

Similarly, on a year-over-year basis, our food delivery business operating profit and operating margin increased by 132.2% and 1.6 percentage points, respectively, mainly due to our improved of margin efficiency and higher contribution from online marketing revenue, both of which were partially offset by the increase in delivery rider cost.

Now moving on to our second segment, in-store, hotel and travel, in which our year-over-year revenue growth rate turned to positive 4.8% in the quarter. As seen from the effective containment of COVID-19 and favorable seasonality, local services in China experienced a strong recovery in the period, and our in-store business continued to gradually rev back up during this quarter. For example, our in-store business transaction volume and GTV achieved positive year-over-year growth. Thanks to our continued effort to expand our services and variety, diversified merchant supply as well as launch various festival and promotional campaigns, which help merchant to both increase their exposure and better incentive consumer spending.

As a result, the year-over-year growth of our in-store segment commission revenue turned positive in this quarter. Moreover, in regards to the recovery of advertising demand, we continue to see that merchants prefer spending their advertising budgets on products that yield higher user transaction conversions with more certainty. In support of this observation, subscription-based advertising maintained its healthy growth momentum. CPC advertising revenue experienced positive year-over-year growth, and our CPC merchant adoption rate continued to ramp-up during this -- in this quarter. [ Gradually ], consumption in marketing demand from local merchants helped the segment have tighter revenue to achieve 10.4% year-over-year growth. With respect to our hotel business, both our hotel booking business and the broader industries recovery continued to experience ongoing improvement in this quarter as the year-over-year growth rate of domestic room nights consumed on our platform turned to positive 3.7%.

More specifically, local accommodation and intercity travel maintained their heavy growth momentum, while the year-over-year decline in cross-city travel narrowed potentially from the previous quarter, [ the lack of which ] were due to China's effective control of COVID-19 and uptick in hotel booking demand during both the summer period and the period leading up to China National Day holiday.

Finally, contributions from high star hotels also continued to increase on a year-over-year basis driven by our efforts to further strengthen our collaboration with hotels in this segment. Operating profit for our in-store, hotel and travel business was RMB 2.8 billion in the quarter, representing increase of 19.5% year-over-year and 47.4% quarter-on-quarter. Meanwhile, our operating margin improved to 43%, representing an increase of 5.3 percentage points year-on-year and 1.4 percentage points quarter-over-quarter. The year-over-year improvement was primarily attributable to our increased marketing efficiency and high contribution from online marketing revenue, while the quarter-over-quarter improvement was mainly due to our improved operating leverage.

Let's now turn to our third segment, new initiatives and others. During year period, revenue in this segment increased to RMB 8.2 billion, representing an increase of 43.5% year-over-year and 46.1% quarter-over-quarter. Such growth was mainly due to the increase in revenue from our B2B food distribution services, grocery retail services and bike-sharing services, as each business continued to recover from the outbreak of COVID-19. And also, we further accelerated our business expansion efforts.

Operating loss for our new initiatives and other segment was negative RMB 2 billion in this quarter, representing an expansion of 39% from negative RMB 1.5 billion in the prior quarter. The loss expansion was mainly due to our increased business expansion efforts and the resulting uptick in operating loss from grocery retail services. Meanwhile, on a sequential basis, operating margin improved by 1.2 percentage points to negative 24.7% in this quarter. The sequential margin improvement was mainly due to the improved operating leverage of some new initiatives, partially offset by the decrease in the margin of our grocery retail services.

During this quarter, segment reporting loss expanded by 68.8% year-over-year. At the same time, operating margin decreased by 3.7 percentage points year-on-year mainly due to the change in our revenue mix and the decreases in operating margin for both Meituan Instashopping and Meituan Select, which effectively offset the margin improvement of our RMS services, B2B food distribution services and the bike-sharing services. More notably, although the year-over-year and the quarter-over-quarter basis, our bike-sharing services operating loss narrowed sharply, while the operating margin improved substantially. Bike-sharing services accounted for the majority of our CapEx during this quarter. We believe that our continuous investment in bike-sharing services has the potential to further promote our total user frequency, increasing our total user engagement and creating more cross-selling opportunities. Going forward, we will launch more e-bike, a category in which we have observed better unit economics and turnover rate than that of traditional bikes.

Now moving on to our cash position. Operating cash flow decreased to RMB 3.3 billion in this quarter from RMB 5.6 billion in the second quarter of 2020. This decrease was mainly due to the RMB 2 billion decrease from working capital change. As of September 30, 2020, our cash, cash equivalent and short-term investment totaled RMB 53.4 billion, decreasing from RMB 58.5 billion as a result of -- as of June 30, 2020.

In summary, [indiscernible] healthy revitalization of the broader economies in China and our improved operating efficiency, we've achieved a robust operating result during the third quarter. Specifically, we continue to showcase our value in improving the convenience of online consumption for consumers and enabling merchants to accelerate their digitization to resume their business growth. We feel more confident about the long-term growth potential of our core business. More importantly, we continue to see promising opportunity in the digitization of food-related consumption across a broader range of lower-tier cities in the post-COVID-19 period, especially in the grocery retail area. Similarly to our food delivery business, early and heavy investment in this vertical will be essential to our long-term success.

In fact, over the next few years, we believe that our grocery and retail business will be one of our most important areas for future investment. From a broader perspective, we will continue helping our resources towards those areas capable of widening our enormous [indiscernible] and [boasting in] our competitive advantage. As always, we will continue to follow our philosophy to prioritize long-term results over short-term profitability, which we think will eventually maximize long-term value for our shareholders.

With that, we are open for your questions.

[Operator]

[Operator Instructions] The first question comes from the line of Ronald Keung.

[Ronald Keung, analyst]

My question this quarter will be on your new initiatives given your key focus on groceries. We can see that Meituan increased focus on Meituan Select and competed in this segment very actively as we could see. So could management just give us some updates on the progress? What Meituan has achieved, say, in the past few months? And what do you think are the competitive advantages compared with other players in this business and your expected kind of level of investment?

[Xing Wang, executive]

Thank you, Ronald. So actually, Meituan Select is something very new, so we officially launched Meituan Select in the beginning of July. So that's a new product in this quarter. So it's kind of hard to believe only one -- a little more than one quarter. So -- but we sent our -- a lot of people to -- into this market. So in the past quarter, we have actively expanded the Meituan Select business. And we have witnessed very rapid growth in both the number of orders and active [ buy ] users. And in the past few months, we focused more on establishing our core competence. So because this is something new to us, we are trying to figure out how to make it work. So we are not the first mover in this market. And we -- actually, I would say, we are one of the late movers.

I think this is something we definitely want to do because of our mission. And the mission of Meituan is to help people eat better and live better. So there are several ways for people to eat better. You can either go out to a restaurant to eat, or you can -- order the food online, we will deliver it to you. But there are still a lot of people who want to buy grocery and cook for themselves, for whatever reasons. So actually, the majority of old people still buy grocery and cook for themselves. So that's a huge market. And we want to find a way to help them. So in the past 3 years, we have tried several models.

Finally, we see Meituan Select seems to be a very efficient model to penetrate the bigger market, especially for lower-tier cities. So we have been doing this for, well, less than 5 months. A lot has happened in that past 5 months. And now we don't know who will be the final winner. But we just want to iterate as fast as possible. So in the past few months, we made a lot of investment in warehouses and we continue to improve our logistic capabilities to make sure we can deliver the products on time. That's not easy when -- especially when you are growing super-fast. And we are fine-tuning our approach to new city launches and further iterate the compensation incentive plan for all the group leaders.

And Meituan Select continued the growth momentum in October and November. And we expect to expand to more than 1,000 cities and counties before the end of this year. So that's very fast. And Meituan Select is the top priority for our businesses. And geographic coverage is the top priority for Meituan Select.

So overall, we -- well, I don't want to pretend that I have all the answers. I know you have a lot of questions. And I also have a lot of questions. All that I can say is that we will move fast. And we will try to learn as fast as possible and iterate and build the team that can learn and iterate. So I think, ultimately, that's a competition about how well you can organize your talent, your people and how you can identify the needs of the customer, the market, and how well you can organize all the existing resources to make sure there is going to be a win-win situation in the end.

So -- of course, we have several advantages. For example, we know how to do off-line business development. We know how to manage a big local sales force in that the way we can quickly onboard and work closely with our community group leaders. And also, because in the past, we have been running some related business such as our Meituan Grocery, the Meituan Maicai. And another example is our B2B food distribution service as Kuailv Jinhuo. So we have some existing knowledge and know-how about the supply chain.

So we will leverage our existing resources to have quicker access to suitable products and logistics in some areas. And also, as a technology platform, we have good R&D capability to develop the relevant system and online products for optimized user experience. And also, specifically, over the years, we have built out quite good capability for developing and operating nationwide AI-based dispatching system. I would say, in this aspect, we are second to none, globally. And the experience in forging innovative logistic infrastructure technology will be a very exciting challenge we would like to take on. I think that will give us advantage in critical features of this business.

And also, overall, our experience and know-how in [ outdoor area ] can also help us in continuous -- iterate and improve off-line operations and efficiency. So looking ahead, we will continue to prioritize our resources and invest very actively in Meituan Select. And we will need to make investment in supply chain and procurement infrastructure and provide incentive to cultivate consumer habits and expand our group leader basis.

So all this investment will lead to a significant expansion of operating loss of our new initiative segment for the next few quarters. And we would like to evaluate our investment from a very long-term perspective in terms of the long-term ROI and strategical value. So we believe our investment will be successful in the end and will bring us long-term rewards and create a lot of values for the society at large. It's not going to be a quick win. So yes, we are going to be focused on this. And I think we are going to learn more, and I can answer more questions in -- hopefully, in a few quarters.

[Operator]

We have our next question from the line of Eddie Leung.

[Eddie Leung, analyst]

Also, a follow-up question on your grocery business. So we have seen multiple models under Meituan. And some of your peers also doing multiple models, right. So just wondering if -- seeing you can talk about what could be the long-term vision for the industries. Do you see the existence of multiple business models? For example, for Meituan, do you see someday in the same city, you will have multiple business models or you keep your different business model for different geographical location, as an example? So this is my first question.

And then just like quick question on Meituan Select. Wondering if, Shaohui, you can help us to understand, on the accounting side, how you guys account for Meituan Select? For example, would you book so-called gross revenue or net revenue, how you account for the compensation for the group leaders, et cetera?

[Xing Wang, executive]

Okay. So thank you, Eddie. So it seems everybody is very interested in online groceries. So that's no surprise because we have -- we are also interested in this. That's why we have been trying for several years, and we have been trying several models. So -- okay, although we think online -- the community group purchase [indiscernible] had big potential to widely penetrate into this market. We also believe online grocery market is unlikely to be dominated by only one single business model. And it's large enough and diverse enough for multiple players and businesses to coexist. So we have identified and will continuously iterate our 3 grocery models with different focus on different -- with different SKU pools and different [indiscernible].

So the first one is Meituan Select. Meituan Select will mainly focus on lower-tier cities, where consumers focus more on price. They are more price sensitive. And this model is able to provide a next-day delivery for less developed areas. Our current physical goods e-commerce players currently cannot deliver next day. Therefore, we can leverage this model to rapidly penetrate into lower-tier cities. [indiscernible] but also very deep into counties and towns in some cases. So also in this model, we only offer selected -- limited SKUs at attractive prices to provide extreme value for money for our consumers. So it's going to be a very sharp business model.

And the second is the Meituan Instashopping, Meituan Shangou. And that's our marketplace model. We believe it has both potential in higher-tier city and lower-tier cities, and it is well positioned to have a wider range of categories. And we could also leverage by far the largest food delivery network for on-demand grocery order in a timely manner. So using traffic growth of Meituan Instashopping -- the traffic of Meituan Instashopping was steady in Q3 on the back of improved marketing efficiency and with very strong momentum in certain SKU categories, such as medicine and flowers. The daily number of transactions increased by more than 80% year-over-year.

And the third -- we also have a self-operated model that’s Meituan Grocery or Meituan Maicai [indiscernible]. We’ve got -- with this model, we could better control the supply chain and also provide an on-demand delivery around 30 minutes, very convenient. That way we can guarantee a consistent user experience on quality and convenience. I'm a user of Meituan Maicai, I don't use Meituan Maicai to buy grocery. I use Meituan Maicai to buy fruits and some snacks, when we will have very long meeting. So the user experience is very good. And I think with this model, the unit economic is a challenge.

Anyway, we believe this model has better potential in the higher-tier cities that incur a high upfront cost for some warehouses and neighbors. So that way, it needs higher AOV and gross margin to breakeven. And this quarter, we further enhanced our [ front ] distribution warehouse strategy with over 100 new one opened in Q3 and made further operational improvements, including further expanding our SKU selection to potentially improve average order value and increasing our investment in the supply chain and SKU management and digitization infrastructure.

So it's not easy. It's a very demanding job. So overall, we will deepen our operations on all 3 business models and the online growth rate. However, at current stage, we will allocate more resources in Meituan Select, given this model has great potential to rapidly penetrate into a wider range of lower-tier cities or even less developed regions and can help us gain access to a wider base of new consumers. So it's very clear Meituan Select is the key. So that's my answer.

[Shaohui Chen, executive]

Eddie, on your question on the revenue booking. For now, we booked Meituan Select commission as the revenue, not the total GMV. This was confirmed with our auditors. But you should know that this model is still very early, and the whole industry is still evolving. So we will continue to monitor this and in close discussion with our auditors. If we have any new change, we will update you accordingly.

[Operator]

We have our next question from the line of Tom Chong.

[Thomas Chong, analyst]

I noticed that our monthly transacting users reached record high this quarter. Despite the food delivery business is still recovering in July, in Q3. The overall number of orders achieved over 30% year-on-year growth. What should we expect the order growth going forward and for next year? And my second question is, what's your goal on transaction users and transaction frequency in the long term? And what strategies do we have to achieve that?

[Xing Wang, executive]

Thank you. In Q3, food delivery business gradually recovered in July and fully recovered in August in the number of food delivery transactions and also monthly transacting users as well as transaction frequency of repeated users, all reached historic highs in Q3. And our food delivery business remained robust post the COVID-19. And we are very positive about the industry long-term growth.

Now online food delivery platforms only penetrate about less than 2% -- 2.5% of the urban meal consumption in China. And we think here -- there is significant upside to come in the future, which will continuously drive order volume growth. Moreover, the pandemic has brought a positive structural change to the food delivery industry and may accelerate their behavior shifts on both consumers and supply side. We had the MTU of our food delivery business. And have the potential to increase to 300 million in the long run while transacting frequency keep steady growth at the same time.

In general, the longer consumer stays on our platform, the more frequency he or she transacts. Meanwhile, supply side operation and structural change are key to further update the frequency of [ mature cohorts ]. And we will continue to diversify the selection on -- of platform and expand the available hours and [ erase ] distance of our [ client ]. And we will continue to provide a wider range of solutions and work closely with restaurants to help them digitize their operations. We will also make further investments for the exploration of new supply and diversify the remodels. We will continue to upgrade our product offerings and finding intelligent recommendations for our consumers. And our membership program also further demonstrate its effectiveness, increasing the purchase frequency of high potential consumer in Q3, and we will continue to allocate sufficient resources with continuous innovation.

Also, we will further acquire new transacting users onto our platform. As we continue to penetrate into lower-tier cities and older populations with more service categories and consumption scenarios. Then we will dedicate ourselves to continuing upgrade our delivery network infrastructure, the digitization of the whole restaurant industry and focusing on identifying and catering to the evolving demand of consumers. We remain very confident on the long-term growth potential for our food delivery business. And I think we are on track to achieve our long-term goal of delivery orders. Thank you.

[Operator]

We have the next question from the line of Jerry Liu.

[Yuan Liu, analyst]

Yes, I want to touch on the in-store business, specifically on travel. We also saw a recovery in travel -- in hotels in the third quarter. So I'm just wondering what kind of competition environment is Meituan seeing? Is it intensifying, especially in the low star hotels as we see a recovery? And also, in the high star hotels, I noted the comments earlier in the press release about some of the new developments here, so just wanted to get maybe a little bit more color on your strategy, what are some of your updated development plans post-COVID?

[Xing Wang, executive]

Yes. Thank you. So we continue to solidify our leading position in lower-tier city and lower star hotel segment in this quarter. During the recovery from COVID-19, China recovered demand for hotels has been entirely shifted inward domestically, which further benefit us. So we think the overall competitive environment actually is beneficial to us. Hotel booking recovery continues to be faster in lower-tier cities. Local accommodation in which we have structural advantages continue to outperform and remain robust year-over-year growth.

In Q3, we have become the world's largest online platform for hotel booking in terms of room nights. In the mid to long term, we think hotel booking business in lower-tier city still has a good potential for substantial growth and more scalable monetization, especially in many rapidly developing regions where consumption power and need for travel is still -- is going to rising over the long run. Online penetration among low star independent hotel is still less than 25% in China.

There are still a lot of work to do to digitize the industry in this market and increase the penetration. We will continue to focus in these lower star markets and to create more value for consumers and merchants. For high star market, we also see the recovery on 5-star and 4-star hotels were also strong during the summer. And we also allocate more resources into capturing the growth of high star hotels in Q3. We provide better value for money products for consumers and integrate these services into hotel merchants.

In Q3, more high star hotels were willing to work with us. So access to wider younger generation consumer base. Because we have a much broader consumer base and a broader coverage and also a much higher frequency interface with local consumers, we believe will provide a very new and strong growth driver for these high star hotels. With a dedicated service team set up, the quality of our customer service capability for high star hotels are also improving over the past quarter. We continue to improve the quantity and quality of our high star hotel supply, and we'll also continue to upgrade our consumer service capability to improve user experience, and we are very confident that we will continue to penetrate into the high star hotel and high star hotel consumers to strengthen our overall leadership in the hotel and travel space.

[Operator]

We have the next question from the line of Kenneth Fong.

[K. Fong, analyst]

And congrats on a very strong set of results. I have one -- first question, please. Do you have any initial comment on the drop antitrust rules that were released recently? And how do you expect this to impact your overall business?

[Xing Wang, executive]

Thank you, Kenneth. So we have reviewed the recently released consultation papers and are very closely monitoring the situation as it’s an important guideline, not just for us, but for the whole Internet industry. As the Internet platforms becomes bigger and more important to the economy, regulation framework will also evolve. We have observed that this is a natural outcome globally. And we think that the new antitrust consultation paper is supportive of the healthy development of Internet and the whole technology industry in the long term and aim to prevent misconduct. It helps to promote have a fair competition within the industry, reinforce regulation, further promote industry innovation and ensure balance of interest is achieved for all stakeholders.

Continuous encouragement of innovation from the government have benefited our business growth in the last decade. We are still confident and optimistic for the vitality of the Internet industry in China and the revolution of regulatory policies. So staying open and achieving win-win will continue to be an essential principle of our platform and business. We are currently in constructive dialogues with the regulatory authority to better understand the spirit of the consultation paper. We will further accelerate our products innovation, improve the openings of our platform, find new our -- business operations, aiming to actively follow regulatory guidance and continue to comply with the regulatory requirements. That’s all. Thank you.

[Operator]

We have the next question from the line of Alex Yao.

[Alex Yao, analyst]

For your in-store business, looks like certain categories outperformed the industry peers during the recovery period from the COVID impact. Could you talk us through the growth outlook for different service categories in the coming quarters?

And then secondly, from a segment margin perspective, I noticed your operating margin for the in-store business was a record high this quarter. How should we think about the margin outlook for this segment going into the next couple of quarters?

[Xing Wang, executive]

Thank you, Alex, for your question. So on the first part of your question about the growth and recovery for in-store. So we are very happy to see the overall recovery of in-store business in Q3. The accelerating growth was especially notable in certain categories, such as medical aesthetics, health care, pet caring, auto services and household-related services, which will reflect the consumption upgrade trend in China. It's encouraging to see the healthy resumption of people's usual lifestyles and the strong demand during the summer season, not only was this reflected on strong transaction volume growth across both dining and other in-store services. Also, merchants are willing to allocate more budgets into advertising on our platform.

In order to drive substantial growth of our in-store business going forward, we will continue to onboard quality merchants and stratified different types of merchants, innovate our product and event operation to improve the marketing efficiency of different merchants in different service categories. We expect the consumer demand for in-store services will continue to grow. So identifying any -- essentially pairing to their emerging needs for different service types are very important to us. We think this is a -- reflecting the overall trend of digitization of people's life, especially upon people's life in China. And we, as a platform for local services, will continue to benefit from this, and we will continue to invest for our infrastructure to drive the growth.

On the second part of question on operating margin. Yes. It's a good -- you notice that we have a record high margin. For the second segment, the margin increased on a year-over-year basis on the back of effective marketing budget control and higher advertising revenue contribution. And the increase of OPM on quarter-over-quarter basis is mainly due to the increased operating leverage, given GTV and commercial revenue resumed healthy growth since Q3, while advertising revenue remained good growth momentum. But at the same time, I want to mention that this is a -- in-store business is a very good business model. We like it, and we are very confident for the growth. But margin improvement is not our priority for now. We consider this is more -- this quite is more a natural result when more merchants appreciate the value of our product, rather than proactive strategic move by the company.

We continue to focus in developing the business, increasing developing more transaction-based products and also advertising solutions suitable for different merchants. We will also penetrate into more lower-tier cities and expand our service categories, which we expect will incur more sales and marketing expenses in the near term. But those investments are necessary, and I think will be valuable to us and to the industry in the long run. Overall, we expect these in-store services will maintain healthy margin and will continue to generate healthy cash flow for our platform.

[Operator]

We have the last question from the line of Binnie Wong.

[Wai Yan Wong, analyst]

[Foreign Language] Congrats on another strong quarter. Last quarter, you mentioned about bike sharing, especially in e-bike, it's also an important new initiative that you focus on this and the coming year. Given the potential large or huge CapEx, can you comment on your investment plan and economics for the e-bike sharing business? And will you increase the CapEx as well? And then, I guess, overall, if you look at the synergies, as Meituan is tapping into every aspect of life, how do you see the cross-selling ratio across your multiple categories? Or how do you measure this internally?

[Shaohui Chen, executive]

Yes. Thank you, Binnie, for the question. We invested over RMB 4 billion CapEx in total in Q3. For bike-sharing business, we continue to realize and explore its strategic values on our platform and have made good progress in this quarter. The turnover rate of the traditional bikes increased by more than 30% in Q3 on a quarter-over-quarter basis. Bike-sharing business continued to supplement well to the short distance community -- commuting needs for more and more consumers in more and more cities and help us to acquire new users at low cost and create a more cross-selling opportunities, as we mentioned.

For e-bikes, we have observed that they have better user experience and many consumers are willing to pay premiums to use e-bikes. With longer traveling distance under the same time frame, we further enlarge the TAM of bike-sharing to replace the demand for some traditional local transportation like bus and taxi. e-bikes also have better [ unique management ] traditional bikes, with higher turnover rate and higher price per ride. Standalone profitability will be achieved as we further increase the scale of the service in the medium to long term.

In the future, we will allocate more resources to e-bikes than traditional bikes, and we plan to launch more e-bikes in more cities next year. We have a very cautious assessment, and we believe that the CapEx of e-bikes could be fully covered by the cash flow generated in its life span, and e-bikes business has strategic value in addition to its positive financial return. Meanwhile, our goal is not just about expansion of this business, but also to continue the operating efficiency improvement and user experience improvement. Within these continued introduction of new service category on our platform, not only expand our service offerings, also strengthen our brand awareness and our brand [ my shares ] for consumers when they are in search of different local services.

The cross-selling takes time to realize. It takes time for consumer to use more categories, but our cohort have shown very healthy and strong results that the longer the consumers stay with us, the more they will purchase. And the more category, they put on us, the more sticky and higher life time value they will -- that will bring to our platform. So we will continue to stick to the first platform strategy, and we are confident that we will also able to continue to improve the operating leverage of the new service that introduced to our platform.

[Operator]

I would now like to hand the call back to Scarlett Xu for any closing remarks.

[Scarlett Xu, executive]

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

[Operator]

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