We believe the emerging community group purchase (CGP) model will become an important driver of retail sales online migration in China in the coming years. We expect its market size to reach Rmb2.8tn by 2025, suggesting over a 100% CAGR in 2020-25. Industry-wide operating margin could reach c3% on a GMV basis (or 15% on a revenue basis) in 2025, as we expect supply chain optimization, economies of scale and a rationalization of competition to drive up industry profitability to a similar level of many other retail models. Among listed names, we expect Meituan/Pinduoduo to be the winners in the market, with 38%/24% shares in 2025, while Alibaba and JD could be the “dark horses,” as they possess the strategic resources for CGP. We believe incremental profit from CGP will bring 36%/29% valuation upside to their current market caps. We upgrade Meituan to OW with a new Dec-21 PT of HK$450 (32% potential upside) and reiterate our OW for PDD with a new Dec-21 PT of US$200 (24% potential upside).

Stock view: We believe Meituan is the best play for long-term upside in China’s CGP market, given its solid execution so far and a sizable new market from user base and TAM perspectives. We expect PDD to benefit from its expansion in the CGP market, but potential cannibalization to its existing marketplace model increases the difficulty of evaluating real incremental value creation from the CGP model. We conservatively price in limited upside from the business for Alibaba and JD, as their investment strategies in CGP remain unclear, but we think they may be the “dark horses” that gain market share, given their strategic resources and ambitions in gaining consumer wallet share, especially Alibaba.

CGP is not just about grocery. We expect China’s CGP market to reach Rmb2.8tn in GMV in 2025, with Rmb1.8tn from non-grocery physical goods. While most industry GMV is from grocery at the current stage, we believe CGP will inevitably expand into non-grocery physical goods, as its development will lead to: (1) high-frequency and transaction-based engagement with a sizable number of consumers; and (2) a highly efficient supply chain and logistics network that works better in rural areas and lower-tier cities than the current one dominated by Tongda operators. Therefore, the development of CGP should have profound implications on long-term competitive dynamics in China’s ecommerce market. For Meituan, CGP opens the door to general-purpose ecommerce, which is incremental to its current TAM, in our view.

Unit economics to improve steadily over time. Similar to many other retail models in China (supermarkets, online marketplaces, online self-operation, etc.), we expect CGP to achieve 3% OPM on a GMV basis in a perfect competition environment in the long term. The keys to margin improvement, in our view, are supply chain optimization and a rationalization of competition.

Downside risks. (1) Regulatory tightening; (2) a failure to build a competitive supply chain to generate sustainable profitability; and (3) competition not easing.