"The takeaway subsidy war" restarts over the weekend, with coffee and milk tea orders skyrocketing. JP Morgan asks: Is it worth such fierce competition?

One week after the correction, a new round of "takeout subsidy war" reignited this weekend, with social media flooded with low-priced or even free coffee and tea orders. This conflict, upgraded by Alibaba's Taobao Flash Sale, is forcing industry giants Meituan and JD to get fully involved.

According to the Chasing Wind Trading Desk, JP Morgan conducted an in-depth analysis of this escalating competition in its latest research report. For investors, the core impacts can be summarized as follows:

• Comprehensive Competition Upgrade: Alibaba announced on July 2nd that it would invest RMB 50 billion in subsidies, pushing the intensity of competition in the instant retail industry to new heights. This marks a shift in the initiative of competition to the financially strong Alibaba.

• Short-term Profit Pressure: JP Morgan clearly pointed out that this subsidy war has a negative impact on the profits of all participants (Alibaba, Meituan, JD) in the short term. It is expected that in the next 3 to 6 months, the stock prices of all three companies will face pressure due to downward adjustments in profit expectations.

• Long-term Value in Doubt: Is this "burning money" war worth it? JP Morgan calculated: If the instant retail market can reach a scale of RMB 40 trillion by 2030, then the current investment is reasonable. But if the market scale is only half of the expected size, then the current investment intensity seems "too aggressive."

• Alibaba Holds Advantage: With nearly RMB 600 billion in cash reserves and nearly RMB 100 billion in free cash flow each year, Alibaba has the most ample ammunition in this war of attrition. JP Morgan believes that from a competitive perspective, this strategy is beneficial for Alibaba, while posing challenges for Meituan and JD.

• Investment Strategy Adjustment: In light of the uncertainties brought about by competition, JP Morgan has lowered its target prices for Alibaba and Meituan, stating that it is more optimistic about the digital entertainment sector in the next six months. However, in the instant retail field, its preference order is: Alibaba > Meituan > JD.

Subsidy War Reignited, Giants' Ammunition Showdown

The fire was ignited by Alibaba. According to JP Morgan's report, Alibaba's Taobao Flash Sale announced on July 2nd that it would invest RMB 50 billion in takeout and instant retail subsidies over the next 12 months starting in July. This move quickly triggered a chain reaction in the market, with Meituan announcing multiple subsidy plans in response on July 5th. JD had previously announced that it would invest over RMB 10 billion within a year.

This massive investment battle quickly reflected in order volumes. By early July, Meituan's daily order volume reached a new high of 120 million orders, while Alibaba (Taobao Flash Sale and Ele.me) also achieved a daily order volume of 80 million orders in just two months.

JP Morgan believes that the initiative in competition has shifted. Alibaba not only has a renewed competitive focus but, more importantly, its strong financial resources. The report pointed out that Alibaba has nearly RMB 100 billion in free cash flow (FCF) for the fiscal year 2025, and nearly RMB 600 billion in cash and cash equivalents by the end of March 2025 This financial strength puts it in a favorable position in the war of attrition, posing significant competitive pressure on Meituan and JD.com.

Brutal Cash Burning, Is It Worth It? JP Morgan's "Valuation Calculation"

In the face of such brutal "cash burning," JP Morgan raised a core question: Is this investment worth it? The answer depends on the judgment of the long-term potential of the instant retail market.

JP Morgan conducted calculations based on two scenarios:

1. Optimistic Scenario: The report predicts that by 2030, the gross merchandise volume (GMV) of China's instant retail industry will reach 4 trillion RMB, with industry profits reaching 81 billion RMB. Assuming a discount rate of 15% and a perpetual growth rate of 3%, the ultimate terminal value of this industry could reach as high as 675 billion RMB. If the industry invests 50-80 billion RMB annually to capture this enormous value, JP Morgan believes "the math works."

2. Pessimistic Scenario: However, if the long-term GMV of the market is only half of the above prediction, at 2 trillion RMB, then the terminal value will also be halved to 338 billion RMB. In this case, the total industry loss in the first year could reach as high as 85 billion RMB, making such an investment seem "aggressive."

This valuation model clearly reveals the enormous gamble nature of current investments: all participants are heavily betting on a future market with great potential but full of uncertainties.

How Will the Market Landscape Evolve?

Before the competition intensified, according to iResearch data, Meituan held about 45% of the market share, Ele.me (under Alibaba) accounted for 21%, and JD.com had 5%.

JP Morgan believes that despite the intensified competition, Meituan is very likely to maintain its market leadership, although its market share may decline. Meituan's core advantage lies in its large and efficient rider network (with over 7 million registered riders) and its first-mover advantage in the local supply chain.

However, the report also points out a key differentiation impact: the development of instant retail is 100% incremental business for Meituan, as it does not have traditional e-commerce operations. But for Alibaba and JD.com, the growth of instant retail will inevitably have a "cannibalization" effect on their traditional e-commerce businesses. The report estimates that by 2030, 56% of the GMV from instant retail will come from food and beverages, tobacco and alcohol, and daily necessities, which are important categories for traditional e-commerce.

Direct Impact on Investors: Short-term Pain and Long-term Game

JP Morgan candidly pointed out that this investment expansion will directly impact the short-term profitability of each company, thereby putting pressure on stock prices. The report cited the experience of the community group buying war in 2021, noting that stock prices often react negatively to downward adjustments in profit expectations Therefore, JP Morgan predicts that in the next 3 to 6 months, the stock prices of Alibaba, Meituan, and JD.com will continue to be under pressure.

Based on this judgment, JP Morgan has taken the following actions:

• Downgrade earnings forecast: Significantly lowered the adjusted earnings per share (adj. EPS) expectations for Alibaba for the fiscal years 2026 and 2027, with reductions of 22% and 11%, respectively. At the same time, the operating profit expectation for Meituan in 2025 was lowered by 15%.

• Downgrade target price: Maintained an "Overweight" rating on Alibaba, but lowered its target price for US stocks from $170 to $140, and for Hong Kong stocks from HKD 165 to HKD 135. Similarly, maintained an "Overweight" rating on Meituan, but lowered its target price from HKD 160 to HKD 150.

In summary, the flames of competition in China's instant retail market have been ignited, and a battle concerning the future market landscape is unfolding, characterized by capital and endurance. For investors, there is a need to endure dual pressures of earnings and stock prices in the short term, while long-term returns will depend on whether this gamble can ultimately carve out a sufficiently large market and who can emerge victorious in this brutal war of attrition