JP Morgan expects JD.com to gain about 5% market share in mainland China's food delivery over the next two years, but the subsidy strategy is difficult to sustain

JP Morgan published a report stating that Meituan-W (03690.HK) and JD-SW (09618.HK) have underperformed the China concept internet index ETF (KWEB.US) benchmark over the past month. The main reason, according to the bank, is investor concerns about JD's aggressive entry into the Chinese food delivery market and Meituan's potential response. The bank expects JD's entry to have a negligible impact on the current market structure, with Meituan and Ele.me holding 75% and 25% market shares, respectively. The bank anticipates that JD will capture about 5% of the market share when it enters the mainland food delivery market in 2025 and 2026, with delivery volume and market share increasing to 10% by the end of 2025, but declining in 2026. Although JD's entry may pose downside risks to the short-term profit outlook for both companies, the bank believes Meituan's short-term profitability may be more resilient than JD's, as Meituan has not adopted a price subsidy strategy in response.

In terms of valuation, the bank believes Meituan has greater upside potential compared to JD, as Meituan's sustainable double-digit profit outlook places it among the top tier of Chinese internet companies, which typically trade at 15-20 times forward price-to-earnings ratios. The bank maintains an "overweight" rating on both Meituan and JD, but is more optimistic about Meituan in the short term. The bank has lowered Meituan's target price from 190 yuan to 165 yuan; JD's target has been reduced from 215 yuan to 180 yuan.

Although JD rapidly captured 5% of the Chinese food delivery market within just two months, the bank believes JD's deep subsidy growth strategy is unsustainable for the following reasons: (1) the significant losses incurred by JD Group's food delivery business; (2) the difficulty of fully offsetting food delivery losses through cross-selling activities. The bank believes that acquiring significant market share in the Chinese food delivery market through deep subsidy strategies is too costly for new entrants (based on JD's current unit economics, the bank estimates that each 5% market share will result in a financial loss of 8 billion to 9 billion yuan). Due to the industry's low average order value, the profit gap between Meituan and Ele.me is evident (the bank estimates that in 2024, Meituan will generate a profit of 32 billion yuan from its food delivery business, while Ele.me will barely break even). The bank estimates that JD's entry will lead to a loss of 2-3 percentage points in market share for both Meituan and Ele.me.

JP Morgan expects Meituan to continue avoiding a tit-for-tat price subsidy strategy, which will lead to a moderate decline in market share and delivery volume, but relatively stable profit margins. The bank has lowered its adjusted earnings per share forecasts for Meituan in 2025 and 2026 by 2% each to reflect the impact of JD's entry.

Regarding JD, the bank anticipates that the incremental loss to JD's net profit from the food delivery business will not undermine its commitment to achieving profit growth in 2025, as food delivery expenditures will partially replace existing marketing expenses, and JD will monetize its food delivery business in the second half of 2025. The bank has lowered its adjusted earnings per share forecasts for JD in 2025 and 2026 by 6% and 5%, respectively, which is only 3% and 1% lower than market consensus Due to the significant impact on JD.com's profitability, it indicates that JD's current price subsidy growth strategy is unsustainable. The bank expects Meituan to continue avoiding aggressive price subsidy strategies. Therefore, the bank anticipates that Meituan's market share will decline by 3-6 percentage points in the coming quarters. If JD chooses to maintain a moderate market share of 5%, Meituan's market share may stabilize at around 70% by 2026. According to the bank's estimates, this decline in market share will result in a 2% impact on Meituan's profitability in 2025 and 2026