Meituan

HKEX:3690

Earnings Call Transcript 2022-Q3

[Operator]

Thank you for standing by, and welcome to the Meituan Third Quarter 2022 Earnings Conference Call. [Operator Instructions]

I would now like to hand the conference over to Ms. Scarlett Xu, VP, Head of Capital Markets. Please go ahead.

[Scarlett Xu, executive]

Thank you, operator. Good evening, and good morning, everyone. Welcome to our third quarter 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 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 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 2022 Earnings Call.

During the third quarter, our total revenue increased by 28.2% year-over-year to RMB 62.6 billion. And this quarter, we stick to our Retail + Technology strategy, continue to leverage our advantages in connecting consumers with local merchants and provide better services to a broader range of consumers and merchants. As a result, annual transacting users on our platform increased to 687 million while the number of annual active merchants increased to 9.3 million. The average number of transactions per transacting users increased to 39.5 for the trailing 12 months of the third quarter compared to 34.4 for the trailing 12 months of the third quarter last year.

We achieved an important milestone with the food delivery orders surpassing a daily record of 60 million, despite the resurgence of Omicron. And we launched various marketing campaigns during festivals and holidays and collaborated with the local governments to distribute consumption vouchers to stimulate the recovery of local consumption.

We have local merchants expand their revenues and incomes through various initiatives, such as traffic support and digital operational tools and overcome the tough time along with our business partners in the ecosystem. We continually enhance our retail capabilities, diversify the supply and optimize logistic efficiency, enabling us to provide consumers with a wider choice of daily necessity and ensure stable supplies during the pandemic. Going forward, we will remain focused on our mission to help people eat better, live better by assisting the government to fulfill people's wish for a better life.

This quarter, the number of transactions in core local commerce was negatively affected by the pandemic. The revenue still achieved a solid year-over-year growth of 24.6%.

For food delivery, we continue to focus on high-quality growth. We effectively met diverse consumer demand across different scenarios, different purchase frequencies and different purchasing power. We enhanced the user stickiness through various measures, including optimized marketing resource allocation, refined operations and diversified marketing campaigns.

This quarter, the number of transacting users of our platform continued to grow steadily, and quarterly consumption frequency reached a record high. Specifically, consumption frequency for high-frequency users, high AOV users, membership users has increased notably. Moreover, retention rate of low-frequency users has also increased. As the pandemic was effectively under control in early August, coupled with the seasonality effect and consumers driving demand during summer holidays, the food delivery daily order volume peaked to over 60 million in the month of August.

We continue to help accelerate the digital transformation of the restaurant industry, including breakfast, afternoon tea and late-night snacks categories, which led to an increase in the number of active merchants on our platform. We also continue to iterate our online marketing tools to better serve our merchants, help them attract and retain customers during a difficult time. For example, we helped a chain restaurant launch [ marketing initiatives ], allowing them to reach targeted customers with higher accuracy and increased revenues as well as further enrich the high-quality supply on our platform.

We also took multiple measures to improve marketing efficiency for the merchants, including simplifying online marketing tools, optimizing the operational mechanism, enhancing user brand [indiscernible], improving the recommendation features and more. We continue to improve our ecosystem and user experience for merchants on our platform, elevating small- and medium-sized merchants' willingness and capability to operate online. We have witnessed that the consumer mindshare of Meituan has been able to deliver everything to their doorsteps, and that has expanded from food to broader categories. An increasing number of our food delivery consumers started to use Meituan Instashopping and their known key delivery scenarios.

During this quarter, Meituan Instashopping maintained a high growth momentum, with the growth rate of user base, purchasing frequency and retention rate all accelerated year-over-year. Notably, daily order volumes peaked at 9.7 million in August, with electronics products growing elevenfold, while beauty, health care and flowers also realizing rapid year-over-year growth during the V Day.

On the one hand, the strong growth was due to rising consumer demand for on-demand retail services. And on the other hand, it benefits from our continuous focus and optimization on the supply side. As a result, both the number of active merchants, the number of newly onboarded merchants grew by 30% year-over-year in the third quarter for Meituan Instashopping.

And we continually strengthen our partnership with the mainstream brands. For example, our collaboration with Apple authorized sellers expanded to over 1,100 stores in over 200 cities. And the sales volume of iPhone 14 on its launch day grew robustly. We also used the drone to shorten delivery time. The delivery of the first iPhone 14 order was completed within 6 minutes from the order placement.

Moreover, we recently have formed a strategic partnership with Suning and onboarded over 600 Suning stores to our platform. Going forward, we will collaborate with more well-known brands to further strengthen our -- the consumer mindshare in the on-demand retail business while continuing to expand the depths and breadth of our supply, including electronics, beauty, health care, baby care and more.

In addition, the number of Meituan [ instamart ] retention [indiscernible] has increased to nearly 2,000 by the quarter end. And we continue to incentivize consumer demand for on-demand retail through a more comprehensive SKU offerings.

As we grow our business, we also showed more social responsibilities. In particular, as the leading on-demand retail platform in China, we will continually create more local job opportunities across the country. During the quarter, we further optimized our order dispatch system and encouraged restaurants to upload their estimated pickup time so that the couriers can plan ahead and avoid early arrival at restaurants in order to save the time.

We also remain committed to enhancing the welfare benefits for our couriers and help improve their job satisfaction and sense of fulfillment. For example, on July 17, Courier's Day, we hosted a number of events for the couriers and their family members, distributed holiday gifts and offered reward to couriers for their diligent work and continuous service during the pandemic. In addition, when extreme heat swept the country this summer, we not only adjusted the maximum deliver distance in our order dispatch system but also offered protection subsidies and other type of benefits for couriers working under high-temperature conditions.

Despite the challenges from the pandemic resurgence, our in-store, hotel and travel business still demonstrated resilience, especially during summer holidays. We continued to iterate our operational strategy and provided more convenience and efficiency to our merchants and consumers. Both the number of our annual active merchants and quarterly transacting users reached the historical highs, respectively.

In response to the pandemic, we accessed local government including those in Beijing, Tianjing, Nanjing, [indiscernible] and Hubei to distribute the consumption vouchers to stimulate the consumption. And we continue to iterate and optimize the supply, solidifying our merchant base with regard to the degree of negative impact from the pandemic. We launched a self-pickup function for restaurants and provided the merchants with online marketing support and operational tools to help them endure the challenging time -- to endure the -- to help them endure the challenging time.

Thanks to our comprehensive product coverage and our ability to capture the rapidly changing consumption trends, we are able to continually optimize the supply and enhance cross-sell capabilities and meet the vast consumer demand across different macro and consumption scenarios.

We continue to onboard chain restaurants in the light-meals and fast-food categories and further stratified our operation strategy based on merchant's rating. We provided chain restaurant with differentiated digital solutions to help them broaden coverage and expand the transaction scenarios.

Some categories such as pet care and medical service maintain a solid revenue growth of over 30% during this quarter. But camping and other trendy consumption categories also achieved notable growth in summer. We provided a comprehensive suite of products and services for a broad variety of categories during Chinese Valentine's Day and the Mid-Autumn Festival.

Furthermore, we continue to innovate new content formats to help merchants make effective decisions, which eventually help stimulate a transaction. In addition, we continually optimize the display of documentation for the UGC content and improved the authenticity of customer reviews on our platform. The optimized content in an improved platform will enable us to create a safe transaction and stable online operation environment.

Our hotel and travel business continued to suffer from the ongoing pandemic, particularly since September, when serious outbreaks demanded a number of tourist cities like Sanya and Chengdu. Moreover, strict provincial travel restriction remained in place, which led to suppressed consumption demand in travel activities. Nevertheless, consumer demand for local accommodation was relatively resilient, and we continued to leverage our competitive advantage in this domain, with feature specialty local tours and accommodations in some high-tier cities to capture demand from high-value consumers during the pandemic.

In addition, we continue to deepen penetration in the high-star hotel market. In September, we collaborated with the Marriott Group and launched joint marketing events and joint membership schemes and teamed up with a number of well-known hotel groups [ today ]. Furthermore, we continued to collaborate with theme parks and [indiscernible] special marketing events in [ Hu Jian ], Universal Studios, [indiscernible] and more to have merchants acquire traffic and incentivize with recognitions.

Now moving on to our new initiatives. Revenue of the new initiatives segment grew by 39.7% year-over-year in the third quarter. For our largest new initiative, Meituan Select, we upgraded the brand positioning to [Foreign Language], next-day supermarket, in order to capture the evolving consumption trends and to deliver a clear service philosophy to our consumers.

Through this brand upgrade, we are able to better satisfy consumer demand for a wider selection of products with higher quality, more affordable price. So far, our next-day supermarket service model has covered nearly 3,000 cities and counties. We established a nationwide logistics system and self-pickup network to help integrate the digital economy with real economy and to allow consumers to enjoy more value for money, products with more convenience.

During the third quarter, we continued to implement our high-quality growth strategy, improved supply chain and logistics capabilities and maintained our market leadership. On the product and supply chain front, we adhered to our industry-leading quality control standards, enhanced our operational capabilities in product selections, rising procurement efficiency and supply chain management, which help us to strengthen consumer mindshare and enhance user stickiness. Combined with our constant improvement in logistics, we also innovatively piloted an industry-leading smart-sorting system, which had brought better fulfillment experience for consumers and will continually enhance our consumer efficiency and reduce the costs.

In addition, we continued to optimize the infrastructure and operating system of the cold-chain logistics throughout the entire logistics network and expanded the cold-chain coverage to broader categories, such as in meat and poultry, aquatic products, frozen food and more. Moreover, we actively supported the circulation of agricultural products using our logistics network. As a result, agricultural products now contributed to around 45% of total sales in the third quarter, and the number of off-line self-pickup stations located in smaller counties and rural regions accounted for more than 50%.

We not only helped improve shopping experience for consumers from lower-tier markets but also have created job opportunities and continued to support the rural revitalization. During the pandemic outbreaks in the third quarter, we actively participated in the pandemic control scheme and supported the local governments in providing sufficient supply of food, beverage and daily necessities for people from the affected regions, including Guizhou, Sichuan, Shanxi and Hunan.

Meituan Grocery continued to experience strong growth, with the GTV increasing by close to 80% year-over-year. Thanks to our improvements in product and service offerings, we proactively captured the rising demand during the holiday seasons while ensured sufficient supply in the pandemic-affected areas.

On the Mid-Autumn Festival day, daily order volume surpassed 1 million were a record high. We continued to expand the product offerings to broader categories and selections but also increased the supply of local and seasonal products. During this quarter, we innovatively launched the locally source selected products, that's [Foreign Language] in Chinese, worked closely with local governments and farmers from the product's places of origin.

In addition, we worked with the local governments and provided trainings for new farmers through a variety of practical classes in e-commerce, upstreaming and mainly operation management and more. These classes aimed to assist the farmer to grow and sell the agricultural products.

We also supported the [Foreign Language] program with additional traffic and promotional campaigns to match these products with local consumer demand and ensure delivery time within 30 minutes. We believe that these measures will effectively deepen the integration of the service industry with the agricultural industry and effectively help farmers increase production and income.

Despite the short-term challenges from the pandemic, we have full confidence in the long-term development of our businesses. We firmly believe that the consumer confidence will eventually recover as the pandemic [indiscernible]. And our businesses that were largely impacted due to the pandemic will gradually return to their normal growth.

Meanwhile, we will show the more social responsibilities as a technology-driven retail company with a nationwide coverage. Going forward, we will continue to focus on our Retail + Technology strategy, create more job opportunities in our ecosystem, have the merchant generate more income from our platform, provide consumers with ample supply of products and services and improving people's livelihood and promoting the domestic economic circulation.

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

[Shaohui Chen, executive]

Thank you, Xing. Hello, everyone. I will now go through our third quarter financial results.

During the third quarter, our total revenue reached RMB 62.6 billion, increasing by 28.2% year-over-year in the midst of the COVID resurgence and a challenging macro environment. The increase was mainly driven by the steady revenue growth of our core local commerce segment and the strong revenue growth of our new initiatives segment, especially the goods retail business.

Cost of revenues ratio was 70.4% this quarter, remaining flat on a quarter-over-quarter basis as we increased the seasonal courier incentives, was offset by the continuous improved efficiency of our goods retail business. Year-over-year decrease was mainly due to the improved gross margin of our food delivery, Meituan Instashopping and the goods retail business.

Selling and marketing expenses ratio also remained flat on a quarter-over-quarter basis but decreased year-over-year, reflecting our improved marketing efficiency.

As a result of the improved operating leverage, both R&D expenses ratio and the G&A expenses ratio reduced on both year-over-year and quarter-over-quarter basis to 8.6% and 4%, respectively. We continued to achieve meaningful progress in pursuing high-quality growth with higher operating efficiency this quarter.

Total segment operating profit and operating margin increased from both year-over-year and quarter-over-quarter basis to RMB 2.5 billion and 4.1%, respectively. On a consolidated basis, our adjusted EBITDA and adjusted net profit were RMB 4.8 billion and RMB 3.5 billion for this quarter, turning from loss position to profit on a year-over-year basis and having a remarkable increase on a quarter-over-quarter basis.

Turning to our segment results. We will start with core local commerce. Our core local commerce segment revenue increased by 24.6% year-over-year to RMB 46.3 billion. Operating profit increased significantly by 124.6% year-over-year to RMB 9.3 billion while operating margin for the segment improved on a year-over-year basis to 20.1% by around 9 percentage points.

On-demand delivery achieved 16.2% year-over-year growth in order volume this quarter. For food delivery, order volume recovered well in July and August versus June but was negatively affected by the widespread COVID resurgence in September. Year-over-year growth of food delivery revenue far outpaced order volume growth, which was due to several factors.

First, we continued to control our user incentives spending by placing our focus on high-quality growth in response to the external environment. We allocated more resources to meet and high-consumption frequency in the mid- to high ticket size users, along with high-ticket size orders such as [ 4 to 9 ] meals, which displayed more resilient demand. As a result, user incentives that were [ contract delivery ] service revenue decreased during this quarter compared to the same quarter last year.

Second, we continued to see a great number of premium restaurants, with high ticket size lunch food delivery services on our platform during this quarter, while long-distance orders continue a higher proportion of orders. This higher proportion of high ticket size orders drove a year-over-year increase in commission and delivery service revenue.

Operating profit and operating margin for food delivery business both increased meaningfully on a year-over-year basis, primarily due to the reduction in user incentives, a favorable order mix change and less seasonal incentives to couriers. A sequential decrease in both operating profit and operating margin was mainly due to seasonality as we provided more incentives for delivery couriers to work during the summer season and extreme weather. We also provided more incentives to users to stimulate their consumption during the summer season.

Turning to Meituan Instashopping. This business was overall less affected by the resurgence of COVID than food delivery and continued to benefit from [indiscernible] everything now consumer mindshare and our wider selections. Daily average order volume achieved new highs, and the order volume of Meituan Instashopping accounted for around 9% of our total on-demand delivery orders, increasing meaningfully year-over-year. As we mentioned before, we remain committed to Meituan Instashopping and expect to increase investment in user incentives and marketing in the second half of this year.

During the quarter, we rolled out a series of summer promotions to capture new user's mindshare and encourage the key users to purchase across more categories. We also increased incentives for users in cities that was severely impacted by the pandemic, promoting the recovery of consumption. As such, these incentives order increased sequentially.

AOV also declined quarter-over-quarter as a result of consumers' reduced demand for stockpiling. It continued to increase year-over-year due to our enhanced product mix. As a result, [indiscernible] decreased quarter-over-quarter but improved significantly year-over-year. Year-over-year improvement in [indiscernible] was also driven by a rapid growth in online marketing revenue, [ formally ] spending from the expansion of our online marketing merchant base and the merchant's increased ARPU, especially from the top brands.

Let's turn now to our in-store, hotel and travel business. The wider spread of COVID and the COVID control measures in an increasing number of cities in September weighed on the recovery of our in-store, hotel and travel business. Yet despite facing a challenging external environment, the revenue of in-store, hotel and travel was still a strong recovery from the previous quarter and has displayed steady growth on a yearly basis.

From July to August, consumer consumption demand for in-store services was very strong. COVID situation was much better, and the COVID control were more regular and regional-focused. As a result, in-store GTV saw a healthy recovery in July, picking up further in August.

In particular, in-store dining GTV saw a sharp rebound from July to August, reaching a record high for 2 consecutive months. The recovery of other in-store services was slower as some other [indiscernible] categories and nonessential service categories was still suspended during COVID [indiscernible], especially in Tier 1 cities.

For hotel and travel, the overall recovery of domestic travel activity and hotel booking lagged behind in-store activities. As such, transaction-based commission revenue was lower than in-store GTV growth.

For online marketing revenue, the overall recovery was slower than transaction-based commission revenue for several reasons. First, although we have seen increasing demand from in-store merchants for CPC and display ads compared to the second quarter, merchants remained cautious about spending their online marketing budget, considering the persistent macro headwinds and the continued impact from the pandemic.

Second, due to COVID control measures, Tier 1 cities will contribute a meaningful portion of our CPC revenue, recovered at a slower pace than expected, while some gathering and nonessential in-store service category, which were also a major source of CPC revenue, they all suspended their operation.

Nevertheless, merchants in some categories with more expansion demand, unless impacted by the pandemic, continued to show strong marketing [indiscernible]. For example, online market revenue for both pet care and medical services grew by more than 30% year-over-year, while online marketing revenue for lifestyle services increased by over 80% year-over-year.

Operating profit and operating profit margin for our in-store, hotel and travel business increased on both the year-over-year and the quarter-over-quarter basis. The sequential increase of OP margin was mainly the result of business scale recovery. Year-over-year improvement was a result of our focus on cost reduction and efficiency improvement.

Let's now turn to our new initiatives segment. During the period, revenue in this segment increased by 39.7% year-over-year to RMB 16.3 billion, mainly due to the development of our goods retail business. Operating loss for this segment remained flat on a quarter-over-quarter basis, while operating margin improved by 6.4 percentage points quarter-over-quarter to negative 41.6%, primarily attributable to improved operating efficiency of our goods retail business and under new initiatives.

On Meituan Select, operating loss slightly increased on a sequential basis due to business recovery. Our operating margin loss, as a percentage of GTV, continued to narrow sequentially. During the quarter, we implemented a series of cost control and efficiency improvement measures to improve our business capabilities through the refinement of our operation and management, facilitating an overall enhancement in logistic efficiency. Meanwhile, our improved pricing mechanism, supply chain management and product mix has driven a sequential increase in price per item.

On Meituan Grocery, both operating loss and operating loss margin increased sequentially. Both AOV and other [indiscernible] declined from the previous quarter, given consumers' reduce demand for stockpiling, given better COVID situation in Tier 1 cities compared to earlier quarter. However, delivery cost and warehouse expenses continued to decrease on per order basis, a result of our improved operating efficiency.

For other new initiatives, power banks turned profitable, while bike-sharing, B2B food distribution, restaurant management system all narrowed their operating loss on a sequential basis.

Now turning to our cash position. As of September 30, 2022, we continued to maintain a strong net cash position, with our cash and cash equivalent as well as short-term treasury investments totaling RMB 111.5 billion. Additionally, our operating cash flow further increased on a quarter-over-quarter basis to RMB 9.4 billion this quarter.

To conclude, I would like to say that although the ongoing pandemic has brought continuous challenges to every member of our ecosystem, including ourselves, we remain confident in the recovery of China's economy and the long-term growth potential of our core local commerce segment.

At the same time, our continued exploration of the goods retail business, through multiple business models, will help us satisfy more consumers' needs. This will allow us to create more value to consumers and society and also create more growth opportunity for the company.

Given the challenges ahead, we will continue to enhance our core competence and dynamically adjust our operating strategy to balance growth and profitability, aiming for high-quality growth for our company and long-term value for our shareholders.

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

[Operator]

[Operator Instructions] Your first question comes from Thomas Chong with Jefferies.

[Thomas Chong, analyst]

Congratulations on a strong set of results. I understand that the growth rate for core local commerce segments slowed down in September as compared to July and August. Could management share September and the latest monthly recovery trend for core local commerce segment, especially on the food delivery and in-store, hotel and travel business? Considering the recent COVID resurgence, how should we think about the growth trajectory for the segment in Q4?

[Shaohui Chen, executive]

Thank you, Thomas, for the question. Thank you for noticing that the growth volatility in different months due to the COVID situation. Overall, as we have mentioned, Q2 was heavily affected by the control measures, and in Q3, we have seen a couple of good months. But in late August, we saw that a number of medium-risk and high-risk areas increased sharply, reaching a peak in early September and continue to rise again in Q4. So the strict COVID control measures in these regions materially impacted our core local commerce business.

For food delivery, order volume growth benefited from the high temperature in August, which further boost demand for food delivery services in summer. However, when the temp cooled from the end of August partially impact demand for food delivery. Moreover, COVID affected food delivery more materially in September than in August. Food deliver order volume on the different consumption scenario was particularly affected in more regions. As a result, food delivery order volume year-over-year growth decreased significantly in September compared to August.

COVID also had a major impact on our in-store business. Year-over-year growth of our in-store GTV dropped significantly in September versus August. On the one hand, high-tier cities such as Beijing, Shanghai, Guangzhou and Shenzhen, which contribute a similar percentage of our total in-store GTV and marketing revenue was still under COVID control measures. On the other hand, lower-tier cities' overall GTV recovered strongly in August but declined significantly in September due to COVID resurgence and strict control policy in more regions.

Looking to our hotel and travel business, the COVID resurgence further discouraged intercity travel. And hotel room [ night ] decreased year-over-year.

Meituan Instashopping was less impact as we broadened and diversified our offerings. Meituan Instashopping order volume maintained strong growth in September. In October, COVID resurgence was seen in different regions across the country, and the number of medium- to high-risk areas further increased compared to September and continued to rise too high in November, with much higher month-over-month increase. Especially since [ mid- to like ] November, COVID situation became worse. The control measures had a great impact in Tier 1 cities. Winter, basically a flu season, contributed to the increased COVID cases. So we think the COVID control measures may last to at least year-end, with December COVID situation worse than November.

Overall, despite the new optimized COVID [indiscernible], which is impact from COVID on core local commerce growth, will be much greater in Q4 compared to Q3. However, we believe this fluctuation will be short term before things get better with gradual relaxation.

It was evident that during the summer where COVID situation improved, core local commerce growth showed strong recovery. It should be very clear that our business is very resilient and still has high potential once the control measure is release.

Food delivery and Meituan Instashopping passed the milestone of 50 million and 9.7 million daily orders, respectively, in August. GTV of in-store dining also reached new heights for 2 consecutive months in regions that was less affected by COVID -- or control measures were normalized. Core local commerce business showed healthy growth momentum. The demand for local consumption has always been there. We firmly believe that once the situation normalized, our core local commerce segment will resume its growth trajectory. We remain confident in long-term growth potential. Thank you.

[Operator]

Your next question comes from Gary Yu with Morgan Stanley.

[Gary Yu, analyst]

I had a question on margin. So the operating profit for the core local commerce continued to rise in Q3 versus Q2. What are the key drivers? And how should we think about the operating profit for core commerce -- for core local commerce segment in Q4?

[Shaohui Chen, executive]

Gary, thank you for the questions. As we mentioned, we are very pleased to see the operating profit of our core local commerce increase sequentially in Q3. Breaking down into different business, food deliver operating profit dropped slightly quarter-over-quarter in Q3 due to seasonality as we're increasing the [ subsidy ]. Delivery cost increased accordingly. Also COVID situation got better in July and August versus Q2. So we increased marketing incentive to consumers to drive order volume.

Meituan Instashopping operating profit dropped slightly in Q3 versus Q2 because we also increased the consumer incentives to help drive the consumption. We also increased brand marketing spending for Meituan Instashopping.

For in-store, hotel and travel, OP margin improved meaningfully on a sequential basis, driving the OP increase for the entire segment, with [ line offers ], local services demand and consumption rebounding the [ shuffling ] as a result of better COVID situation. We also optimize our marketing resources and continue to cut cost where necessary.

On a year-over-year basis, the core local commerce operating profit also increased meaningfully. Although more areas are affected by COVID this year versus last year, we proactively adjust our operating strategy and response to the external changes. We continue to pursue high-quality growth and increase our overall efficiency.

Looking forward, COVID situation are still impacting our core local commerce business. As we mentioned, the top line growth will highly depend on how this COVID situation evolves. We expect in Q4, it will be more affected than Q3. But we will continue our cost cutting efficiency improvement, especially around our consumer incentive when consumer demand is more affected by COVID. So on a year-over-year basis, operating profit and OP margin should be expected to continue to improve meaningfully. For food delivery, we will pursue high-quality growth while maintaining a reasonable level of incentive.

Competition is expected to remain rational. For Meituan Instashopping, we will continue to invest for growth, increasing user mindshare and prioritize our resources for key categories as we believe it's an important growth stage for Meituan Instashopping. Unit economics should improve as we achieve higher economic scale and high AOV. But currently, the growth is the #1 priority for Meituan Instashopping.

In-store, hotel and travel business should see greater impact than food delivery. And we continue to improve efficiency and cut costs where necessary. On marketing, we will use more effective online channels and optimize the off-line channels to pursue high-quality and sustainable growth. And then we are also planning to continue our investment into the in-store business to strengthen our user mindshare and bring more high-quality merchants and high-quality deals on our platform.

Overall, we believe our core local commerce business has [ kicked in ] into a stage of financing the growth and profitability. We will maintain a strategy for high-quality growth, and we are confident that this segment will continue to perform well. Thank you.

[Operator]

Your next question comes from Ronald Keung with Goldman Sachs.

[Ronald Keung, analyst]

So I have a question on -- that's the growth for in-store businesses seem to have slowed, as you just shared. Other than the COVID impact, are the other factors that might have caused this? Some of the other companies in the sector has also been doing or starting local service businesses. So what actions are we planning to take in the current competitive landscape? And what are we doing from product, content, merchant sides to maintain our competitive advantage?

[Xing Wang, executive]

All right. Thank you, Ron. This is a good question and a tough question. And over the past quarters, our GTV and revenue growth of in-store, hotel and travel was more impacted by macro and COVID. It will take longer time for a full range of categories to go back to normal operations across the country. And for merchants to recover confidence, especially for advertising, we noticed that every time COVID situation got better, for example, in July and August, consumer demand for in-store categories quickly rebounded. And this business is highly resilient and flexible. So we are positive on the mid- and long-term growth for our in-store business and after COVID situation eventually normalize. So that's about the macro or the total addressable market.

And now let's talk about what you may be interested in, and that's competition. And currently, a short-form video platform achieved a relatively faster growth in their local service business. And the GTV is not apple to apple to our GTV, and our in-store businesses and other platforms provide the user or merchants with quite different values.

Through our shop-based and search-based offerings, we can better meet users' demand to intentionally look for stores and discounts and deals. And it also better meets merchants' online marketing needs for stable day-to-day operations. And on the other hand, a short-form video platform is a [ deeper ] discount to stimulate consumer demand and [indiscernible] with the merchants' marketing needs during a short, special period of time such as new store openings and event-based promotions through their big user traffic.

Either way, all the players can accelerate the digitization process of local services industry to proactively grow the pie bigger and to better serve our merchants and consumers. During the past quarter, because there are quite a widespread of COVID resurgence, so many stores are in short of traffic or demand. So that created better opportunities for other players who are good at doing concentrated marketing during this time.

And overall, I would say the in-store industry is still at a very early stage in terms of digitalization. They will enjoy a fast growth. Current penetration is still low, with more upside in the future. Online penetration is only high single digits for in-store dine-ins and low single digit or other in-store services. And there were other players in the market in the past. Over the years, thanks to our strategy and execution, we continue to lead the industry growth. And we are highly confident that -- of the future industry growth and welcome other players to join us in accelerating its digitization and to help merchants and consumptions to recover.

Well, in the past year -- several years, we have accumulated a large group of high-quality consumers with over 15 billion authentic user reviews. And our merchants and category coverage, together with our advanced LBS-based algorithm, can better adjust consumer preference with the right merchants. And that provides merchants better user conversion and retention.

And overall, our products are effective in addressing merchants' diverse marketing needs. So we are confident that we remain their top choice for merchants' online operation in the long term. And in future, we will further improve our orders. We will increase the merchants and category offerings with more quality additions and provide a differentiated and unique value to the merchants. Also, we will diversify and upgrade content formats and recommendations to better meet the needs of consumers with great choice. And we'll also expand the traffic channels and to use off-line and online events to broaden our user coverage and strengthening user mindshare.

And overall, we remain confident of our mid- to long-term growth for our in-store business. But at the same time, we are working hard to improve our products, so that's it. Thank you.

[Operator]

Your next question comes from Ya Jiang with Citics.

[Ya Jiang, analyst]

Meituan already achieved the adjusted EBITDA breakeven in Q2 and Q3, but new initiatives segment still have big operating loss. Could you provide more color regarding ongoing cost cutting initiatives for new initiatives segment? And when should we expect their earnings breakeven?

[Shaohui Chen, executive]

Thank you for the question. Yes, our cash flow has been very strong in Q3, thanks to the strong momentum from Q2 and our pursuit of high-quality growth across the company. Our operating profit also improved sequentially in Q3. Loss from new initiatives narrowed significantly on a year-over-year basis and narrowed slightly sequentially as well. The pandemic resurgence in Q2 was positive for certain new initiatives such as Meituan Grocery in terms of unit economics.

Our operating loss margin in Q3 for new initiatives segment still improved significantly versus Q2 as we further refined our operation. Our goods retail business, including Meituan Grocery, Meituan Select and our B2B distribution service, continued to make meaningful progress during Q3.

On Meituan Grocery, our order volume grew steadily, allowing us to further solidify our market position. Competition also became more rational. On Meituan Select, we continued to enhance our supply chain and fulfillment capability and gradually reduced user incentives and marketing expenses to further improve operating efficiency.

For our B2B food distribution service, we continued to solidify our leading position and reach profit breakeven on [indiscernible] level in several cities. For other new initiatives, we continued to optimize our operation and narrow operating loss by maintaining health growth on scale. We are confident that our pursuit of high-quality growth and cost optimization were continuing to show positive results in the near future.

Meanwhile, we also reviewed the progress of new initiatives proactively and will dynamically adjust our resources allocated to support this high-quality development. Goods retail, with a focus on grocery through several business models, it's a key investment area and an important strategic direction for our company. We are confident in terms of development and stand-alone profitability. We are also confident that this will have significant increasing the growth potential for our company.

[ We'll ] achieve breakeven for our goods retail and new initiatives. While achieve our business goals, key is to continuously [indiscernible] our business models and build up the key competence.

That's what we are focusing on at this moment. Meanwhile, we will continue to lower cost and expenses and increase our operating efficiency whenever reasonable. While we don't think cost reduction in the near term should jeopardize the business development for the long term, we will balance the long-term growth with short-term loss reduction and be more ROI-driven when we allocate resources.

We will continue to dynamically adjust our investments, [ enabling ] initiatives based on the business development and the operating cash flow from our core local commerce. Given the current macro environment, we will try to achieve free cash flow positive going forward. Thank you.

[Operator]

Your next question comes from Yang Bai with CICC.

[Yang Bai, analyst]

I saw some news articles about your expansion into Hong Kong and some recent hiring. Could you share more about your expansion plans? What is your plans around investment? And could you quantify the expected losses for Hong Kong or offshore business? And do you consider offshore business a new growth engine for the company?

[Xing Wang, executive]

Thank you. And yes, we have expanded over the -- throughout the past more than 10 years, digitizing and growing the local services industry in Mainland China. And well, we have accumulated a lot of operational experience and know-how. And right now, we are the largest player globally in terms of scale and have the highest operational efficiency in on-demand retail. And China is a massive market with a population of 1.4 billion, where we believe all local services is still early in its development and have great growth potential.

And as we continue to develop our business in Mainland China, we may explore to leverage our know-how from Mainland China and provide products and services to consumers in also overseas market. And this could further broaden our addressable market. Hong Kong is a special administrative region of China or part of China that enjoys similar Internet infrastructure to match up many overseas markets. It is also multilingual, multicultural, and at the same time, Hong Kong residents will be selected with the Mainland residents in terms of culture, language and especially eating habits. So Hong Kong is a good testing ground for us to experiment our global infrastructure and practice.

And right now, it's still a very early trial. It's just a very small-scale piloted programs. We understand there are differences between the food services market in Hong Kong and Mainland China, and our delivery model may be different. And our team will also need more time to learn and to -- and the operational model and package we use in Hong Kong may change. So given the current macro environment, we will be very disciplined with the help of -- to build up our overseas organizational capability through small investments.

So overall, for us to develop overseas business, we believe that the refined operational capability and deep understanding of business models in local markets will be the key. Again, we are not currently exploring -- again, we are currently exploring, and it's actually at a very early stage. So we will conduct prudent and comprehensive evaluations. So the overall budgeting for our overseas business will be very ROI-oriented, and we expect very limited impact on our corporate P&L. Thank you.

[Operator]

Your next question comes from Eddie Leung with Bank of America.

[Eddie Leung, analyst]

Would you mind talking a little bit about your thoughts on Tencent special dividend and whether that will have any impact on your cooperation with Tencent? Related to that, we have also seen some media reports about certain investors of Tencent when they receive Meituan shares, they might consider selling down those shares. So also if you have any thought or comment on that, that would be helpful.

[Xing Wang, executive]

Thank you, Eddie. So Tencent has been a long-term shareholder and supporter of us, and we expect to continue our collaboration from here.

In terms of synergies, we help to enrich Tencent reaching consumption scenarios and contributed to the growth in Tencent payment, advertising and cloud business. And Tencent has helped us expand our consumer reach through [ Weixin ] and supporting our growth, especially during the early stage of our divestment.

We have now entered a stage of self-sufficiency in terms of both financing and business growth. Nevertheless, we believe that we will continue to collaborate with Tencent on strategy and operation levels as we continue to serve more consumers and merchants with more diversified products and services.

Our existing VCA with Tencent will expire at the end of 2023, and we will proceed to discuss on the renewal upon exploration. And we are confident that the win-win business collaboration will continue in the future.

And our existing shareholder base and that of Tencent's have significant overlaps. Most of Tencent's institutional shareholders are already our shareholders, and we expect and hope that our existing shareholders to continue to support and be part of our future business growth as a result of this special dividend. And we will also have additional shareholders to our register, and we warmly welcome them. We are keen to maintain growth dialogues and share our long-term visions and growth potentials with them.

We have reached a stage of [ a virtuous ] self-financing, where our core local commerce business generated healthy profits and cash flows, and our new initiatives, it continues loss reductions and efficiency improvements. We are to deliver in our long-term growth trajectory and our ability to execute on our vision. We are confident to generate long-term value for our shareholders as we create more commercial value through our various businesses and continue to enhance our social value.

And [indiscernible] Tencent distributed the shares. And yes, we saw the news that [ investors ] will hold our shares as assets for sale when they receive the stocks. We just released our financial results, and we will initiate conversations with investors to help them understand our short-term results and long-term strategies, and we understand that investors will look for the best way to find and increase the life value for their shareholders overtime.

On one hand, our shares have a strong liquidity, and we have started an investor base. On the other hand, we still believe that our long-term value will be appreciated by more investors. We will continue to focus on executing our strategies and creating more value for both shareholders and the societies. Thank you.

[Operator]

There are no further questions at this time. I'll now hand back to Ms. Xu for 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]

That does conclude our conference for today. Thank you for participating. You may now disconnect.