Meituan Dianping (MPNGF) CEO Xing Wang on Q1 2020 Results - Earnings Call Transcript

Meituan Dianping (OTCPK:MPNGF) Q1 2020 Results Conference Call May 25, 2020 8:00 AM ET

Company Participants

Scarlett Xu - VP & Head of Capital Markets

Xing Wang - Chairman and CEO

Shaohui Chen - SVP and CFO

Conference Call Participants

Eddie Leung - Bank of America Merrill Lynch

Ronald Keung - Goldman Sachs

David Dai - Bernstein

Alex Yao - JP Morgan

Thomas Chong - Jefferies

Gary Yu - Morgan Stanley

Jerry Liu - UBS

Kenneth Fong - Credit Suisse

Operator

Good day and welcome to the Meituan Dianping First Quarter 2020 Earnings Conference Call and Webcast. All participants are in a listen-only mode. After today's presentation, there will be an opportunity to ask questions. Please note this event is being recorded.

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

Scarlett Xu

Thank you, operator. Good evening and good morning everyone. Welcome to our first quarter 2020 earnings conference call. Joining us today are Mr. Xing Wang, Chairman and CEO; and Mr. Shaohui Chen, Senior Vice President and CFO of Meituan Dianping. For today's call, management will first provide a review of our first 2020 result 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 account, 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 our 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

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

During the quarter, total revenue decreased by 12.6% year-over-year to RMB16.8 billion. Adjusted EBITDA barely broke even, decreasing by 91% year-over-year. Adjusted net profit turned negative, coming in at a loss of RMB0.2 billion for the quarter. Annual transaction user for our platform increased to 448.6 million, up by 8.9% year-over-year. Our annual active merchants increased to RMB6.1 million, up by 5.0% year-over-year. Average number of transactions, per transaction user increased to 26.2 times, up by 5.3% year-over-year.

However, despite the obvious short term disruptions, I would like to underscore that our long-term strategy and targets have not changed. We have always maintained a long-term perspective when developing our business strategies and investing in our business growth. We remain focused on building a leading e-commerce platform for services in China. Meanwhile, we have to show that our social responsibilities as the industry leader even in some of the most impacted regions we did our best to maintain stable business operations and continue to provide value for both consumers and merchants.

Moreover, we also ensured the adequate supply of daily necessities to restore consumer consumption confidence while launching a series of supportive measures to help merchants overcome difficulty. In the long run, we believe that this pandemic will help to better cultivate consumer habits that are related to online penetration, improve the operational efficiency of merchants and ultimately expedite the digitization process of the entire local service industry.

Now, let me give you an overview of our performance in each business segment for the first quarter of 2020. My colleague, Shaohui, will then talk about our first quarter financial performance in more detail. Starting with our food delivery business, due to the impact of COVID-19, the GDV of our food delivery business decreased by 5.4% year-over-year for RMB71.5 billion, while the daily average number of food delivery transactions decreased by 18.2% year-over-year to RMB15.1 million in the first quarter.

In particular, this segment was hit the hardest from January the 20th to February the 20th. As a strict control measure issued by local governments, that's a shortage of service supplies, and a dramatic drop in our food delivery order volume, shortly after February the 20th. As we work again to resume in an orderly manner across the country, an increasing number of restaurants started to resume their operations, but consumer demand also gradually recovered, driven by the government's progressive lifting of travel restrictions as well as the steady flow of the people returning to work.

The food delivery industry recovered rapidly during March, the daily order volume returning to around 75% of pre-pandemic level at the end of the quarter. In spite of the short-term negative impacts, we strongly believe that the outbreak of COVID-19 will play a positive role in the development of the industry over the long term. On the consumer side, this pandemic has further accelerated the observation of consumption behavior in a positive way, helping to further advocate a portion of heavy users.

Under the mandatory home quarantine, our food delivery service has become extra important and convenient. With a potential number of consumers increasingly realizing that food delivery could become their primary channel to receive daily news, the persistency good experience and diversified supply of our platform efficiently meet the demands of most people, especially, average order value increased by 14.4% year-over-year in the quarter. We also saw increasing preference from consumers for more high ticket price categories during the pandemic due to the increasing adoption of food delivery input for more meals.

Further, anticipation of high-quality suppliers on our platform and the growing demands for branded restaurants as a result of rising hygiene concerns. In the first quarter for example, the percentage of snack fast food orders volume, the total order volume, decreased meaningfully while the proportions of a barbecue, local flavor dishes, and hot-pot order volumes to total volume, which increased on a year-over-year basis. Moreover, the contribution from delivery orders with the distance in excess of three kilometers for which consumers charge a higher delivery fee also increased on post quarter-over-quarter and year-over-year basis during the period.

On the merchant side, the pandemic has further accelerated the digitization process, especially for many branded restaurants that provide high-quality supply and were traditionally more focused on in-store dining than delivery services. In the first quarter, we witnessed a large number of premium restaurants, highly-rated restaurants, chain restaurants; Black Pearl listed restaurants as well as five-star hotel restaurants essentially build up their process for food delivery operations for the first time. Some of these high quality restaurants which used to ignore online operation are only generated a small portion of revenue from online order, started to give food delivery at their primary vehicle for business operations in the midst of the pandemics turmoil.

In fact, as of March 31st more than 50% of the restaurant from our must eat list has opened food delivery operations compared to only 30% in December 2019. The decision to open online food delivery operations, not only helped restaurant to navigate through the crisis, but also increased our platforms to high quality supply over the long term. For potential number of small and medium sized independent restaurants, food delivery came close to be their sole source of income during the pandemic. This is more a medium size of restaurant with continues deepening their cooperation with the food delivery platforms and to allocate more resources to online channels going forward.

The restaurant industry in China really disrupted in the first quarter. During this period, we worked closely with the restaurant, promptly updated our products and operations to assist in their digitization process and help them to recover more quickly, mitigating the negative impact of the pandemic on their business. For example, to how the restaurant opened their own operations at a faster pace, we introduced the green channels, which effectively created a more efficient approach for the verification and approval process. By March 31, over 100,000 merchants had an average of a green channel system.

In addition, we provided restaurants with a series of replaced subsidies, and free traffic at the post in order to relieve some of the operational burdens. At the same time, our continuous innovation on products has boosted the marketing capability and operational efficiencies for merchants. According to our survey, in the last week of March over 70% of restaurants has achieved a recovery of 60% or more in terms of order volume, while the remaining 30% had achieved recoveries exceeding their pre-pandemic order volume.

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

We are delighted to see at other platforms on both domestic and global brands have followed shoes. As of March 31st, a percentage of a contactless delivery order volume, the total delivery order volume exceeded 80%, while the percentage of consumers, who always opted for contactless delivery to our total consumer group reached 66%. In addition, we further expanded the adoption of our intelligent adopter coupled with their contactless delivery. We also began displaying safety and sanitary information on our platform, such as the health status of chef's, packers and delivery riders. This practice provides consumer with all the safety information and effectively reduces virus transmissions.

After the pandemic, we expect a percentage of consumers choosing contactless delivery to go down and we believe that this model has the potential to improve our delivery efficiency over the long-term. We have also continued to increase our investments into the frontier of delivery technology. In the first quarter, for example, we piloted the launch of automated delivery vehicles for the first time in Chaoyang District of Beijing. We plan to consistently invest in autonomous delivery technology over the coming years.

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

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

In the first quarter, we launched very supportive measures to directly help small and medium sized merchants solve their short-term liquidity problems and restore their operations. Active measures included commission exemption, extension for subscription-based services period access to business loan with favorable interest rates amount. To stimulate consumption, we utilize our online capabilities to establish safety programs such as Safe QR Code at [indiscernible], Safe-Dining at [indiscernible] and Safe-Pay at [indiscernible] to guide the merchants in streamlining, standardizing and digitizing their safety measure.

We also led the establishment of industry safety and sanitation standards in order to help restaurants develop their own measures. As of March 31st, over 350,000 restaurants had joint our Safe-Dining Program at [indiscernible]. We believe certify the label to be displayed on our platform interface, notably, the average sales volume for those who participate in restaurants with a significantly higher than for those restaurants that did not participate.

As the leading e-commerce platform for local services, we began to work with local governments emerge to launch the Safe-Consumption Festival [indiscernible] and issue vouchers to consumers to be used for local services, especially for restaurant dining, which was impacted the most during the pandemic. In the city of [indiscernible] for example, within only two hours of distributing the vouchers online, all vouchers for the day had been registered.

And according to one restaurant owner, on March 25th, which was just the fourth day after the restaurant had resumed its operation, 80% of consumers used the vouchers at checkout. In addition, the restaurants steady sales return to 80% of its pre-pandemic levels, exceeding everyone's expectations. Although this is just one example, our observation is that consumers vouchers can not only simulate in single time consumptions also have a strong average effects that are capable of fostering the recovery of overall consumption demand in relevant regions and industries.

As a platform that connects 448.6 million annual transaction users, and 6.1 million local merchants effectively direct consumers to merchants and service categories, showcasing the ability of our platform to distribute SABIC allocated subsidies and energize consumption will both accurately and effectively. As of May 15th, we had successfully launched our Safe-Consumption Festival in more than 50 cities and are currently in the process of working with more local governments to distribute additional consumer vouchers.

Our hotel business also experienced enormous impact during the pandemic. We recorded the domestic room nights, decreasing by 45.5% year-over-year. As a result of government-issued travel bans, self-quarantine policies for travelers, and a general fear of viral infection, many consumers canceled their travel plans during the period. Even after the peak of the pandemic has subsided, consumers took conservative address, postponing travel related activities and expenditures. Nevertheless, in comparison with industry peers, our hotel business has recovered at a faster rate in the first quarter.

Thanks to our limited exposure to outbound travel and structural advantages in local accommodation in assumptions scenarios. Whether the amount in demand has come relatively faster to further support industry recovery, we leveraged our platform capabilities and launched our Safe-Stay Program at [indiscernible]. In this program, we've partnered with the hotels including well-known hotel groups such as [indiscernible] to provide consumers with a suitable accommodation for quarantine and other purposes.

As a part of our Safe-Stay Program, we worked with our partner hotels to establish preventative measures and increase hotel service capabilities, such work included the adoption of strict house precautions for all employees and consumers, close checking of consumer information, rebooking cancellation and discount for additional. So far, we have achieved noteworthy progress, but that's about engaging about a 100,000 health care’s in overall 300 cities nationwide to participate in this program.

Although COVID-19 had severely impacted our in-store hotel and travel recommend in a shorter and we estimated that our business will take a while to recover. We are very competent in the long run opportunities and transformations that this pandemic will bring. We believe that the pandemic will accelerate high sales expectation, encourage merchant to further enhance their online operation in the future. As a daily and local service platform, we’re committed to continue diversifying our product and service offerings as well as proving and optimizing our digital infrastructure for ends up local merchants allowing these merchants to reach a vast group of target consumers, improve their online operation and better adapt to digital strategy.

Now let’s move to new initiatives. Our investment strategy for the new initiative is second which is based on all our long-term philosophy has now changed in light of the pandemic, in the first quarter revenue from our new initiative segment increased slightly growing by 4.9 year-over-year. We are proud that many of our new initiatives are crucial to ensuring people's livelihoods during the pandemic. Our grocery retail business for example continued to provide a stable supply and efficient the delivery of high quality fresh produce as well as other daily necessities to consumers. The pandemic has served as an opportunity to advocate the consumer regarding the value and convenience of using our on demand delivery service to purchase many other things besides just news.

Helping do better cultivate consumer habits at a relatively low marketing cost although we had a high order volume of our grocery retail business, in the first quarter to normalize in the near future, we fairly believe in the massive potential of our grocery retail fitness as well as our ability to leverage our leading position in the on demand delivery network to grow this business. Therefore we'll continue to look and iterate their business models, optimize our operations and improve the quality of our products and services. We will also continue to invest in both our marketplace and staff operated models. Fresh produce will be one of the categories that we'll most prioritize, owing to its tremendous market size, high-transaction frequency and relevance to our core business strategy. In particular and our marketplace model, we have also launched a separated operated brand known as Caidaquan to enable traditional farm markets to operate online more efficiently.

We have local offline markets to digitize their operations and provide a high quality of fresh produce to consumers. For the self-operated model, we will continue to expand the opportunity coverage with supply chain capabilities and enhance operational efficiencies. This pandemic has disrupted the both the demand and supply side of the local service industry in the short term.

Looking into the new next three quarters to produce, there will still be challenges. There are still uncertainties and the potential downside from the ongoing evolution of the COVID-19 situation. Meanwhile a large number of local service merchants are still struggling for survival. Short term profitability is never our priority. For the rest of this year, we will remain focused and allocate sufficient amount of resources towards helping with the merchant to resume business, improve their efficiencies, and digitize their operations.

We will also work to provide consumers with higher quality products and services and restore consumer confidence. The outbreak of COVID-19 has brought significant changes to society in terms of production up sale and consumption habits. In order to thrive, companies must be able to swiftly adapt to these changes, further optimize their business models and capture new opportunities accordingly. The pandemic has encouraged us to be more determined in strengthening our core elements and competitive advantages in the local service space.

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

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

Shaohui Chen

Thank you, Xing. Hello, everyone. I will now go through our first quarter financial results. In the first quarter, total revenue was RMB16.8 billion, down by 12.6% year-over-year and down 14.5% quarter-over-quarter, primarily driven by the increase in the number of transactions across all major segments during the pandemic.

Cost of revenue decreased to RMB11.6 billion in the quarter, which represented a year-over-year decrease of 18.1% and a quarter-over-quarter decrease of 37.3% Cost of revenue as a percentage of total revenue decreased to 69% from 73.6% in the present year period and increased from 65.5% in the fourth quarter of 2019.

The quarter-over-quarter increase of 3.5 percentage points was mainly due to the increase in fixed costs, including depreciation expenses. The year-over-year decrease of 4.6 percentage points was mainly driven by our food delivery segment improved gross margin, decrease in depreciation expenses for bike and the change in revenue mix for our new initiative.

Selling and marketing expenses decreased to RMB3.2 billion in the quarter from RMB3.7 billion in the same period of 2019 and from RMB5.3 billion in the fourth quarter of 2019. A significant decrease on a sequential basis was primarily attributable to less incentives for our for delivery and hotel transacting users, reduced the spending on promotional campaigns during the pandemic, and a decrease in sales commission, which was in line with the overall increase in revenue.

Selling and marketing expenses as a percentage of revenue remain stable on both year-over-year and quarter-over-quarter basis. In addition, R&D expenses as a percentage of revenue increased to 13.7% from 10.6% in the prior year period while G&A expenses as a percentage of revenue increased to 6.4% from 5.3% in the prior year period, mainly due to decreasing operating leverage.

Operating loss in the first quarter of 2020 extended on a year-over-year basis for RMB1.3 billion to RMB1.7 billion in the quarter, in while operating margin decreased from negative 6.8% in the prior year period to negative 10.2% in each quarter, which was mainly attributable to the fair value loss on an equity investment during the first quarter of 2020, partially offset by the operating margin improvement in our popular business and new initiatives and other segments.

On consolidated basis, our adjusted EBITDA and adjusted net loss was positive RMB41.3 million and the negative RMB216.3 million, respectively. Adjusted EBITDA margin decreased to positive 0.2% in the quarter from positive 7.7% in the previous quarter and the positive 2.4% in the prior year period. Adjusted net margin to negative in the quarter is 1.3% from positive 8.1% in the previous quarter, improved 4.2 percentage points on a year-over-year basis.

The quarter-over-quarter declines in adjusted EBITDA margin and adjusted net margin were attributable to decrease operating margins across all segments. The year-over-year decrease in adjusted EBITDA margin was mainly due to the fact that our in-store hotel and travel segments revenue contribution and operating margin, all significantly decreased compared to the same period last year, despite the operating margins of both our food delivery segment and new initiatives and other segment improving on a year-over-year basis.

The improvement in adjusted net margin was mainly due to the significant reduction in depreciation expenses while Meituan bike, partially offset while decrease in revenue contribution and operating margin of our in-store hotel and travel segment for the period. Before going through our segment reporting, I would like to highlight the changes that we have made to our disclosure for this quarter.

From this quarter on, we will present operating profit and loss by segment instead of gross profit loss by segments. As we believe this new presentation and help both management and investor better understand and track each segment operating results. Meanwhile, we are no longer disclosing GTV for both our in-store hotel and travel segment and the new initiatives and other segments.

As we believe that the changes in GTV do not accurately reflect the business performance and growth potential of these two segments. More specifically, the growth of in-store hotel and travel revenue is not entirely correlated with the growth in transaction volume due to the increasing contribution from advertising revenue in the segment.

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

Let’s now take a look at our segment reporting starting with our food delivery segment. Other volume for our food delivery business declined significantly or quarter-over-quarter basis due to a strict control measures implemented by the government across the country as a result of the pandemic as well as the seasonality of Chinese New Year in particular from January 20th to February 20th.

A severe supply shortage and reduce demand led to extremely low transaction volume. It's a result of hiding consent, the ongoing closure of university and school and the work from home policies which apply to many of our high frequency consumers, consumers demand continue to be negatively impacted with our other volume only recovering to around 75% of its pre-pandemic level by quarter. As a result, the other volume of our food deliver business experience negative year-over-year growth with a daily average number of food delivery transactions increased by 18.2% year-over-year to 16.1 million.

On a positive side, the average order value experience both increase with an uptick in contribution from high ticket size orders, especially those orders from branded restaurant, which was partially a result of the most diversified and high quality supply during the pandemic. As such food deliver GTV increased by 5.4% year-over-year to RMB71 billion meanwhile budget mocking demand reduce techniques during the pandemic outbreak in the holiday season leading to a 4.9% quarter-over-quarter increase in online marketing revenue.

However, throughout the recovery process, we saw a revival in the online marketing demand of merchants, which partially offset the significant reduction in advertising needs during February contribute a 20.9% year-over-year increase in online marketing revenue in this quarter. The monetization rate of our food delivery business equates to 13.3% in a quarter from 14.2% in the same period of 2019 it’s a result of the fellowship and the implementation of policies in support of merchant as well as change in our order mix. As a result, food delivery revenue in the first quarter tied by 11.4% year-over-year to RMB9.5 billion.

Other deliver capacity was not a bottleneck for our food delivery business during the pandemic, delivery caused by order increased both from a quarter-over-quarter and on year-over-year basis. This uptick was the result of increased incentives paid to give the writers both during the Chinese New Year and in height of the outbreak. Additional costs relate to COVID-19 preventive mergers and the decline other than it. In terms of profitability or foot delivery business experience in operating loss of RMB17.9 million in the quarter compared to an operating profit of RMB482.8 million in the fourth quarter of 2019 while operating margin tend to negative 0.7% in this quarter from positive 3.1% in the fourth quarter of 2019.

The sequential decrease was mainly due to the decline in the monetization rate as well as the increase in both delivery costs and operating expenses order partially offset the increase in average order value. However, our food deliver business operating loss narrow on a year by year basis while it's operating margin improved by 0.7 percentage points year-over-year, this year-over-year improvement was mainly due to the higher average order value increasing contribution from online marketing revenue and improved market efficiency.

Now tending to our second segment hotel and travel, the pandemic has already caused a severe disruption for both the demand and supply sides of the segment. As a result, revenue in the segment decreased by 31.1% year-over-year to RMB3.1 billion due to the strict pandemic containment majors and hygiene consents, consumer demand points product especially for those categories of discretionary consumption, which normally only occur in social or in statements scenarios decline significantly as a substantial portion of local merchants suspended their operation during the operation.

Meanwhile, our hotel business was severely affected in the first quarter due to the dramatic increase in tourism and leisure month for the entire month of February. As such, domestic room nights in this quarter decreased by 45.5% year-over-year and by 61% quarter-over-quarter for 42.8 million while the average daily rate per room night experienced an year-over-year decline in the quarter.

Although local accommodation and business travel activities have started to gradually rebound at a quicker pace, especially in lower tier cities. The recovery of leisure and business travel between cities in China is expected to take a longer time. Consumers still prefer to avoid travel for entire work or vacation purposes until the pandemic has run its course. The combination of these negative factors cost in-store hotel & travel's transaction-based commission revenue to declined dramatically decreasing by 50.6% year-over-year and the 62.6% quarter-over-quarter.

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

Operating profit for our in-store hotel & travel business decreased by 57.3%year-over-year, and by 70.8% quarter-over-quarter to positive RMB680 million in this quarter. While operating margin decreased by 13.5 percentage points year over year and by 14.7 percentage points quarter-over-quarter to 22% in this quarter. Both the year-over-year and quarter-over-quarter decrease in operating margin was due to the decreases in both commission revenue and online marketing revenue. As a result of the pandemic impact, partially offset a decrease in expenses which occurred as a result of less incentive for transacting users as well as less promotion and advertising expenses.

Let's now turn to our third segment, new initiative and others. In the fourth quarter, revenue in the segment increased to RMB4.2 billion, up by 4.9% will be here, mainly due to the increase in revenue from Meituan Instashopping and our macro business, partially offset by the decrease in the revenue from car-hailing services and the B2B food distribution services all of which were affected by the pandemic.

Operating loss from new initiative and other segments extended by 3.4% to RMB1.4 billion in a quarter from RMB1.3 billion in the fourth quarter of 2019, remain relatively stable on a sequential basis. The quarter-over-quarter decrease was primarily attributable to the decrease in most of our new initiatives operating margin, which occurred as a result of the pandemic's negative impact as well as the change in revenue mix.

Operating margin decreased to negative 32.7% in the first quarter of 2020 from negative 21.7% in the fourth quarter of 2019. Operating loss from the new initiative and other segments narrowed on a year-over-year basis, while operating margin improved by 32.3 percentage points. The year-over-year improvement was primarily attributable to the significant decline in depreciation expenses as well as the segments change in revenue mix.

Now moving on to our cash position, as of March 31, 2020 our cash, cash equivalents and short term investments totaled RMB56.5 billion, decreasing from RMB62.8 billion as of December 31, 2019. Our operating cash flow turned negative in the first quarter RMB5 billion from positive RMB3.1 billion in the fourth quarter of 2019. The sequential decrease in operating cash flow was primarily due to the RMB5.5 billion in net working capital changes on the balance sheet date and the net changes in profit loss before income tax.

Due to the seasonality and the pandemic, the number of transactions across all the segments declined dramatically leading to significant decline in GTV and thus a decrease in the backlog of payable to merchants and advance from transacting users. Meanwhile, the payment for annual owners caused a decline in other payables and accruals. The combination of these factors accounting for most of the changes in working capital during this quarter.

And to the government effective containment of the pandemic, the Chinese economy has started to reopen, local service consumption has begun to pick-up and our business has continued to gradually recover too much. However, by taking a more conscious view for the remainder of 2020, this view take into account the ongoing pandemic precautions the insufficient consumption confidence of consumers in certain local service category and the potential risks of merchant closures, which could have a negative impact on our core business in the remainder of 2020.

Nevertheless, across both food delivery and in-store hotel &travel segments, we remain committed to working closely with our merchants, supporting them along the path to recovery. Further, optimizing our product, and improving operational capability to create more long term value for their continuing success.

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

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

Question-and-Answer Session

Operator

Ladies and gentlemen, we will now begin the question-and-answer session. [Operator Instructions] Your first question comes from the line of Eddie Leung of Bank of America Merrill Lynch. Please ask your question.

Eddie Leung

Hey, good evening, guys. Thank you for taking my questions. I have a question on your food delivery business, which performed quite well in the first quarter despite the epidemic. Also just wondering, what's the trend we have seen in the second quarter, in particular, are we seeing a decline in the average order value of how people returning to our work? And when do we expect the business returns to a kind of like more normal growth path and margin profile, any risk factors for the recovery? Thank you.

Shaohui Chen

Thank you, Eddie for the question on food delivery. For the order volume in Q1, the results were better than our original expectation. First, we had a healthy growth momentum in the first 20 days of January, with more than 30% GDP and revenue growth year-over-year.

Secondly, thanks to the effective containment in China, the skills to deliver business recover quickly in March, order volume on 20th. February was less than 30% of the pre-pandemic level, and you reach around 75% at the end of March. On the supply side, the number of active food delivery merchants was more than 90% of its pre-pandemic level to the end of March.

And as of late April, we have seen the number of active food delivery merchants fully recovered, including the newly acquired merchants, especially the number of branded and high quality restaurants on our platform continue to increase and enabling us to further extend our high ticket site collections, which is further recovery in the past few months.

There are still certain number of merchants who have been resumed operations so far, especially some independent and small restaurants. On the demand side food delivery daily order volume continues to recover gradually in Q2. Busting the demand for hotpot bakery and other categories that consumers generate cannot cook at home recovering at a fast pace. The consumption recovery for lunch in the afternoon tea outpaced the recovery for dinner and night snack, while what they ordered continue to recover faster and we can orders.

In general consumption recovery in lower tier cities is ahead of higher densities. In the week of May 11, the daily order volume recovered around 90% of their pre-pandemic level. However, the further healthy recovery after delivery of the volume released further relaxation of the control are many residential communities in Northern China, we opened of Tempur and further recovery of mid- to-low ticket size supplies for food delivery demand for late dinner and night snacks with less hygiene concerns among consumers. If market restrictions could be lifted in June, we expect the order volume growth of the food delivery business were 10 positive year-over-year in Q2.

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

Operator

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

Ronald Keung

Thank you, Xing, Shaohui, Scarlet and team. So on to delivery, as we look longer term with COVID transforming some of the styles and structural changes to industries. Can you update us on any change or any things that you think about the view on longer term market size of the delivery, sustainable growth rates and kind of profit per order longer term? I’m thinking about the RMB1 of operating profit per order, any timetable for that? And the update to reaching the 100 million orders per day as Xing, you had commented a year and a half ago? Thank you.

Xing Wang

Thank you, Ronald. In a short-to-midterm, there are still quite a lot of uncertainties regarding COVID-19 from the next few quarters. As such, it's evolving in other countries and potential negative impact on global economy. And we all know food delivery and other novel services in China are closely related to spending power and competence, so they are not going to be completely immune to the global, potential global recession.

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

So, the quality improvement on the supply side has been speeded up. On the demand side, more consumers realized and recognized the convenience and production at a food delivery one can offer during the pandemic. So, they tend to use food delivery for more diversified consumption scenarios not just for quick snacks but sometimes for very quite formal dinners. And they are willing to pay for higher quality suppliers and place high ticket size orders.

In addition, more and more consumers started to order non-food categories on our platforms during the pandemic. They use our platform to buy almost anything, buy magazine, flowers, anything. And during this accelerated process optimization for both price side and demand side, we have become more competent that food delivery service will become the infrastructure service for China's urban population, and we have ample room growth in the long-term.

So despite the short term CapEx due to the COVID-19, we believe we continue to be on a track to reach 100 million orders per day by 2025 and RMB1 operating profit order in the long-term. And we will have even more business opportunities on the journey, leveraging our largest on-demand delivering capacity and solid merchant base and user base. So, we will continue to further solidify our leading position in this industry and using technology to continuously create value for both the consumers and the merchants. So, yes, we remain quite competent. Thank you.

Operator

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

David Dai

Thank you, Xing, Shaohui, Scarlett and team. Thank you for taking my questions. My question is around the average order value and average delivery costs for food delivery. We have seen some very positive trends for both metrics during the pandemic. The average order value has increased by 14.4% year-on-year in Q1. What will happen to the average order -- the trend of average order value in the future? And also on the delivery cost of side, we have launched the contactless delivery measure, which has improved the delivery efficiency. How can we expect the optimization of delivery cost per order in the future? Thank you.

Shaohui Chen

Thank you, David, for noticing the AOV increase. This was primarily due to the change of the structure during the pandemic. A lot of top brands and chain restaurants started to work with us while a large number of more restaurants extended their business suspension during the pandemic, especially small restaurants closed to 10% and the focus on price-sensitive students remain closed. In addition, consumers also prefer to order from branded restaurants which were considered to have better food safety and hygiene standards during the pandemic.

As a result, the contribution from high ticket side orders from branded restaurants increased significantly in Q1. Along with the further recovery in the next few months, we believe more and more small restaurants will resume their operation. Our orders from these restaurants which usually have much lower ticket size will gradually pick up. As a result, average order value is expected to fall back and normalized in the short term.

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

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

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

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

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

Operator

Your next question comes from the line of Alex Yao of JP Morgan. Please ask your question.

Alex Yao

Thank you for taking my question. I have a couple of questions regarding the monetization rates trends. So, for Q1, if we leave aside your self-inflicted demonetization initiatives such as commission revenue, rebate, et cetera, et cetera. I think some of the interest -- there were some interesting, dynamic that might have a longer term impact. Number one, you guys mentioned, more and more top brands and the chain restaurants are joining our platform. Are they coming with a higher or lower monetization rates than our current platform average and your thoughts on the longer term trend? And then number two, we also noticed that recently, you guys had negotiation with the restaurants association of Guangdong Province. Will it have a further negative impact on the monetization rates in the medium to longer term? And are there any similar event emerged in other regions? So overall, can you talk about your thoughts on the monetization rate trends over the medium to longer term? Thank you.

Xing Wang

Okay, thank you, Alex. So as you haven't noticed, during the pandemic, we launched series of merchant initiative such as commission rebate, subsidies and free traffic, et cetera. That lowered our modernization rate into one, and we'll continue to have some pressure on monetization rate in Q2.

And in addition, in general, we provide a discount on the commission rate to certain high quality restaurants, as we think they could provide a more diversified quality supplies to our consumers. The increasing portion of branded restaurants will modestly bring down the average monetization rates of food delivery business in short-term.

In the long term, we believe that the higher portion of high quality restaurant will give us more potential to monetized from our high ticket size orders, which are we think would offset the modest impact on monetization rate. Moreover, restaurant generally decreased their marketing budget during the pandemic and advertising revenue as a percentage of GTV equating to one on quarter-on-quarter basis. That further decreased the monetization rate in the short term.

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

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

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

Operator

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

Thomas Chong

Hi. Good evening. Thanks managements or taking my questions. I have a question relating to the in-store business. In general, the recovery of the in-store business needs behind the foot delivery in Q1. Have we seen the recovery accelerating in Q2 for some of the verticals of the in-store? And also could you please also give some updates about the expectation of in-store recovery for the full year of 2020? Thank you.

Xing Wang

Yes, you are right that the recovery of the in-store segment is much slower than food delivery segments and different service category are experiencing different recurring fee. For in-store dine, the number of transactions on our platform recovered to around 80% of their pre-pandemic level in the week of May 11 from around 45% end of March. However, average order value for in-store dinning dropped meaningfully on a yearly year basis even the recovery of all formal meals or gathering kindly lagged much behind a recovery of fast food or light dining.

For the other in-store services, the number of transactions on our platform recovered to around 60% of the pre-pandemic level in the week of May 11th from around 30% at the end of March, especially services that are discretionary and may involve a big crowd recover much slower. For example, medical, aesthetic, beauty, pet and et cetera recovered faster. However, parent and child activities and karaoke had much slower recovery due to the hygiene concerns from consumers as well as crowd control from local companies.

We continue to notice the operating pressure of in-store merchants. In general, merchants of our in-store services only reserved networking capital for about three months. If the recovery continued to be slow, it will like be shut down their business in the end up Q2 or the end of Q3. For the second quarter of 2020, we expect the recovery for our in-store business may encounter a bottleneck for while. It will take relative longer time to fully reveal the consumption confidence in the supply for low most impacted discretionary services categories.

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

As the leading e-commerce platform for local services, we'll continue to optimize our programs and operation to help merchants. We will further stratify our merchant base and adopt tailored approach to better assessment. We will also strengthen the collaboration with local government and consumer vouchers, which are effective for the recovery of consumer competence in a few quarters. Overall, challenges and uncertainties remain, but we will be committed to work closely with our in-store merchants along their recovery.

Operator

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

Gary Yu

Hi. Good evening. And thanks for the opportunity to ask questions. My question is more related to your hotel booking business. You have previously mentioned some of the structural advantages on the recovery, but we also observed some favorable data points coming out during the May long holiday. So could you share more details of the recovery pace for different types of cities and different kinds of hotels and your view of the forecast for the full year this year? And the related question is also on your hotel business. Are you seeing any risks of intensifying competition on the domestic side in the next few quarters as the opportunity of open market seems very limited? Thank you.

Shaohui Chen

Thank you, Gary. As of mid-March, the big number of the domestic room nights consumed on our platform was slightly over 50% of the pre-endemic level. In the week of May 11th, it gradually recovered to over 70% of the pre-pandemic level. We have observed several trends along the recovery. First, local accommodation recovered much faster in cross-city travel. We have the larger base of younger generation in both high tier and low tier cities, and they have much more demand for local accommodation. At the end of March, we already achieved positive room night growth on a year-over-year basis for local accommodation while the cross-city room nights still decreased by more than 40%.

Second, the hotels in lower tier cities generally had better recovery due to early lifting of the containment measures. Third, in general, the comfortable three to four star hotels had better recovery, as they had better flexibility provide both attractive [indiscernible] and quality services to cover wide range of demands from our consumers. Fourth, company cutting budgets of business travels and embracing video conference tours which led to the slower recovery of hospitality for business travelers, all of these factors give us structural advantages during the recent recovery.

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

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

Operator

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

Jerry Liu

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

Xing Wang

Thank you, Jerry. Yes, about two years ago, we acquired a Mobike, and then we put quite substantial resources and efforts into the integration. We further invested in that business, the bike sharing business. And we make those decisions from a very long-term perspective. We believe bike sharing will be a very important component for transportation industry in the long-term.

And we believe it will better serve our consumers' high frequency short distance transportation needs, increase their stickiness to our platform and extend cross-selling opportunities with other local services. And in addition, those yellow Meituan bikes will increase our brand awareness exposures through millions of yellow bikes all across the country and which will further benefit our platforms overall branding and traffic acquisition.

And for the existing bikes, we plan to finish the replacement for the remaining 3 million old bikes within this year. More than half of the replacement is expected to be completed in Q2. And for the new electric bikes and based on our current assessment, we believe we have good potential in terms of market size, used cases and customer experience, unit economics. And we think other players who already launched impact may share the same view. And this could be a profit making business in several years down the road while bringing new high frequency transactions scenario to our platform. Information in the medium may not be accurate.

We plan to the several hundred thousand e-bikes for early stage exploration in Q2 and we'll continue to monitor the business performance, and this means additional capital expenditure to the replacement of existing bikes. It is material to our cash position and will be well assessed and under control. And we will continue to plan our subsequent investment in bike sharing business based on our capital our assessment. Thank you.

Operator

Your last question comes from the line of Kenneth Fong of Credit Suisse. Please ask your question.

Kenneth Fong

Hi, Xing, Shaohui, Scarlett and team, thanks for taking my question. For the other new initiative except for bike sharing, could you share any like updated investment plan? Will you adjust your investment budget this year given the significant operating cash outflow in the first quarter and ongoing challenges on the recovery of your business? Thank you.

Shaohui Chen

Thank you, Kenneth. Similar to bike sharing business that I just mentioned, we always assess our investment for new opportunities for long-term perspective. So, we will not decrease our investment for the long-term growth just because we are facing business disruption and challenges in the short-term.

So, on the contrary, as the new e-commerce platform for services in China, we believe we have even better opportunities to increase investment to accelerate the digitization for both the demand side and the supply side this year. We still have sufficient cash balance to support our business development and we will continue to do capital assessment and actively allocated resources to attractive new initiatives.

So in addition to the bike sharing, we will increase our investments this year in other new industries that we think have important strategic values, as the demand and potential of Meituan Instashopping has been further proven in the pandemic. We will further invest to better leverage the marketplace model and our delivery network enable more diversified merchants and providing on-demand delivery of their goods to our consumers.

And at the same time for self operated Meituan Grocery business, that's Meituan Maicai had, and we will invest to expand geographical coverage where it is going to cover more cities and improve our supply chain stability and do more correlation on different business models. And also for our B2B food distribution business that's quite new, we will invest to continue to improve the supply chain and the integrated service capability, aiming to better serve the high quality of merchants and increase their stickiness and increase the ARPU.

And for our RMS, the Restaurant Management System, the staff business, we will further invest in the R&D to improve our products and optimize the business development team coverage to provide better service to more high quality restaurant merchants. So in summary, I agree that there are challenges. I don't think -- I think the COVID-19 is not going to be the end of the world, so we will keep investing and we will keep building. Thank you.

Operator

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

Scarlett Xu

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

Operator

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