(Yicai) Aug. 28 -- Meituan’s shares tumbled after the on-demand delivery giant reported a 97 percent plunge in second-quarter profit because of intensifying competition in China’s food delivery market and warned of further near-term pressure on earnings.

Meituan [HKG: 3690] finished 12.6 percent lower at HKD101.70 (USD13.05) a share in Hong Kong today. The stock has fallen by a third since the end of last year.

Net profit was CNY365.3 million (USD51.3 million) in the three months ended June 30, compared with CNY11.4 billion (USD1.6 billion) a year earlier, the Beijing-based company’s latest earnings report showed yesterday. Revenue rose 12 percent to CNY91.8 billion (USD12.9 billion).

“In the second quarter, the competitive dynamics of both food delivery and more generally, on-demand retail, evolved rapidly,” founder and Chief Executive Officer Wang Xing said on Meituan’s earnings conference call. “The on-demand delivery industry entered a new phase and another round of intense competition.”

Online retail giant JD.Com's entry into China’s meal delivery market earlier this year sparked rapid responses from Meituan and Alibaba Group Holding’s Taobao (which includes the Ele.me food delivery and local services platform), with both cranking up their spending on instant retail.

Meituan increased rider incentives and consumer subsidies, which drove costs up. Sales and marketing expenses surged 52 percent to CNY22.5 billion.

“We expect there will be continued fierce competition in the near term and that will bring a negative impact on our financial results,” Wang pointed out.

Involution’s Impact

JD.Com said on Aug. 14 that its second-quarter net profit shrank 51 percent to CNY6.2 billion (USD863.5 million), dragged down by heavy investment and losses at new businesses, especially its new food delivery venture.

Earlier this month, Meituan, JD.Com, Ele.me, and other platforms vowed to end predatory practices like ‘zero-yuan purchases’ to curb ‘neijuan,’ or involution, a self-defeating cycle of ever-intensifying competition that yields diminishing returns.

“The intensified competitive landscape will not change our commitment in building a healthy ecosystem,” he added. "We aim to keep our focus toward improving user experience and enhancing supply and bringing competition back to the track of value creation.

“Meituan has grown through competition, and we’ve achieved our leading position today by continuously competing,” he noted.

The rivalry between the platforms has evolved into a multidimensional battle, according to industry analyst Chen Liteng at NetEase’s e-commerce research center.

Going forward, Taobao will hasten the integration of all of its local lifestyle resources, including Ele.me, while Meituan will deepen its focus on in-store and local services, and JD.Com will continue to prioritize quality-driven strategies, Chen said.

Revenue Gains

Meituan’s revenue from its core local commerce segment, which includes food delivery, rose 7.7 percent to CNY65.3 billion, but operating profit plunged 76 percent to CNY3.7 billion (USD517.6 million), as operating margin shrivelled to 5.7 percent from 25.1 percent because of the fiercer competition in food delivery.

The new initiatives segment, which encompasses businesses such as community group-buying and innovative services, saw revenue climb 23 percent to CNY26.5 billion in the period. Its operating loss widened 43 percent to CNY1.9 billion, despite the operating margin improving to minus 7.1 percent from minus 10.2 percent.

Regarding the instant retail business, Wang said that Meituan’s low-tier city markets grew 50 percent in the second quarter from a year earlier. The instant retail market is far larger than initially anticipated, with long-term growth driven not only by subsidies but also by optimizing supply and cultivating consumer habits, he explained.

Meituan’s overseas business Keeta grew strongly in terms of order volume and gross transaction value in the quarter, and aims to achieve a GTV of CNY100 billion (USD14 billion) within a decade, Wang noted.

As of June 30, Meituan had CNY101.7 billion in cash and cash equivalents and CNY69.4 billion (USD9.7 billion) in short-term treasury investments, according to the earnings report.

Editor: Futura Costaglione