Tongcheng Earnings: Travel Demand Beyond Prepandemic Levels, With More Robust Growth Expected

We maintain our fair value estimate of HKD 21 for Tongcheng Travel after it posted better-than-expected second-quarter revenue of CNY 2.86 billion, which was 4% greater than our estimates. The company provided guidance that it should continue to see robust demand for travel into the rest of the year and it expects revenue to grow 57% year on year next quarter. However, we forecast that operating margins could decline slightly by 100-150 basis points in the second half of 2023, due to greater customer acquisition costs that should pressure gross margin by 100 basis points. Tongcheng indicated that it is already seeing elevated demand for Golden Week, sees robust demand into 2024, and can foresee 20%-30% year-on-year revenue growth for 2024. While we are overall encouraged by the robust demand for domestic travel in China, we believe travel stocks may be fairly valued currently, given that we are already expecting travel to surpass the prepandemic level in 2023, given company commentary from the first quarter.