Company Reports

Narrow-moat Trip.com competes in China’s crowded online travel agent, or OTA, industry by leveraging the largest selection of both domestic and international hotels in China on its platform and relying on user stickiness as a one-stop shop for travel ticketing, accommodations, and packaged tours. The platform is now also generating revenue from advertisement in which it hopes to take 3%-5% of the ad market, but nearly all its revenue streams are travel-related, and coronavirus lockdowns in China has cratered demand due to the inability to travel or unwillingness to quarantine.

We raise our fair value estimate for Trip.com to USD 44 (HKD 352) from USD 36 (HKD 290) after the firm said on its fourth-quarter earnings call that it will aggressively expand its overseas platform. The aim is for the platform to increase its contribution to overall revenue to 15%-20%, from the 6% currently, in the span of 3-5 years. The company also reiterated a long-term non-GAAP operating margin target of 25%-30%—or a GAAP operating margin of 20%-26%—including stock compensation expenses. This may imply that it may not have to sacrifice significant profitability while expanding its business. Trip.com’s international outbound revenue has also recovered to about 90% of prepandemic levels, above the industry average of 70%, which should suggest market share gains on the nondomestic end. Our new fair value estimate reflects a more favorable outlook for international travel and assumes that international revenue can grow at a 23% CAGR from 2023-28, revised from 18% previously. We expect only minor changes to our domestic revenue growth forecast as Trip.com again expects it should decelerate to the high teens year over year in 2024, from 103% growth in 2023. Despite our fair value increase, we view the shares as fairly valued, but suggest position accumulation upon a pullback as China’s travel sector remains resilient amid the country's macroeconomic headwinds.

Narrow-moat Trip.com competes in China’s crowded online travel agent, or OTA, industry by leveraging the largest selection of both domestic and international hotels in China on its platform and relying on user stickiness as a one-stop shop for travel ticketing, accommodations, and packaged tours. The platform is now also generating revenue from advertisement in which it hopes to take 3%-5% of the ad market, but nearly all its revenue streams are travel-related, and coronavirus lockdowns in China has cratered demand due to the inability to travel or unwillingness to quarantine.

We maintain our fair value estimate of USD 36 (HKD 290) for Trip.com after it reported third-quarter 2023 revenue of CNY 13.74 billion, which was in line with Refinitiv consensus estimates. Operating margin of 29% was 100-200 basis points better than guidance due to seasonality, but should revert to the midteens next quarter as Trip.com expects operating margin to moderate at mid-20% for the long term. Trip.com guided to a fourth-quarter 20%-26% increase on fourth-quarter 2019 revenue, suggesting that there is further travel demand. However, its revenue outlook of above 10% increase year on year in 2024 supports our view that travel demand has moderated since the beginning of the year—given disappointing Golden Week results that showed only a 10% increase over the 2019 level in air travelers. We still believe that Trip.com should see long-term revenue growth, but believe shares are fairly priced currently given both demand and operating margin moderation.

Narrow-moat Trip.com competes in China’s crowded online travel agent (OTA) industry by leveraging the largest selection of both domestic and international hotels in China on its platform and relying on user stickiness as a one-stop shop for travel ticketing, accommodations, and packaged tours. The platform is now also generating revenue from advertisement in which it hopes to take 3%-5% of the ad market, but nearly all its revenue streams are travel-related, and coronavirus lockdowns in China has cratered demand due to the inability to travel or unwillingness to quarantine.

We lower our fair value estimate for Trip.com by 15% to USD 36 (HKD 290) from USD 42.50 (HKD 339), due to our view that the recovery for travel demand may be fizzling out. We estimate that both ground and air transportation are at significantly lower-than-expected levels and believe that weakness during Golden Week 2023 is likely an inflection point for the deceleration of travel demand. There appears to be a significant decline in the number of travelers compared with 2019, which could signal some upcoming weakness for the fourth quarter. We believe this could linger into 2024 and beyond and could also disrupt margin expansion progress. Therefore, we lowered our revenue in 2024 by 7% to CNY 51.9 billion, based on the reduction of accommodation revenue estimates by 11% and transportation estimates by 3% next year. While long-term revenue would still gradually grow, we take a much less bullish stance in the near term in terms of its growth trajectory, given the recent Golden Week data.

Narrow-moat Trip.com competes in China’s crowded online travel agent (OTA) industry by leveraging the largest selection of both domestic and international hotels in China on its platform and relying on user stickiness as a one-stop shop for travel ticketing, accommodations, and packaged tours. The platform is now also generating revenue from advertisement in which it hopes to take 3%-5% of the ad market, but nearly all its revenue streams are travel-related, and coronavirus lockdowns in China has cratered demand due to the inability to travel or unwillingness to quarantine.

We maintain our fair value estimate of USD 42.50 (HKD 339) for Trip.com after it reported better-than-expected second-quarter revenue of CNY 11.2 billion, which was 5% better than the Refinitiv consensus estimate. The company continued to expand its operating margin to 26.5%, an increase of 150 basis points sequentially, as previously expected, and we are encouraged that it believes 25%-30% operating margins can be maintained in the long term given industry consolidation and better per unit economics. We expect Trip.com to see further margin expansion and secular demand, given its international business that represents another catalyst for long-term growth—and which still hasn't yet returned to prepandemic levels. We believe it remains one of the few companies still seeing pent-up demand within the China internet sector but we also expect its recovery story to be priced in already, given only a 5% upside to our fair value estimate from the Sept. 1 closing price. However, if its share price pulls back, we suggest investors capitalize on more attractive entry points and accumulate a position for the long term.

We maintain our fair value estimate of USD 42.50 (HKD 339) for Trip.com after it reported better-than-expected first-quarter revenue of CNY 9.2 billion, which was 13% better than Refinitiv consensus estimates. More importantly, adjusted operating margin was 28.5% (excluding stock-based compensation), which significantly improved from 1.4% sequentially and is 830 basis points better than our expectations. The key takeaway is the company expects margin improvement will be recurring and that its steady-state adjusted operating margin will remain 20%-30% in the long run—higher than the 2019 prepandemic level of 19%. Trip.com's margin expansion was due to better per-unit economics from its high operating leverage, as well as better optimization of personnel, including the use of generative artificial intelligence to improve customer experience. While there are signs of slowdown in China’s recovery, we believe that investors are too concerned with the narrative that growth is stagnant, without realizing that there are still pockets of robust demand coming mostly from the services sector. We believe these concerns are overblown and our fair value represents an attractive upside coupled with low risk, given our view that China’s international travel will eventually recover once capacity bottlenecks are alleviated.

Narrow-moat Trip.com competes in China’s crowded online travel agent (OTA) industry by leveraging the largest selection of both domestic and international hotels in China on its platform and relying on user stickiness as a one-stop shop for travel ticketing, accommodations, and packaged tours. The platform is now also generating revenue from advertisement in which it hopes to take 3%-5% of the ad market, but nearly all its revenue streams are travel-related, and coronavirus lockdowns in China has cratered demand due to the inability to travel or unwillingness to quarantine.

Narrow-moat Trip.com competes in China’s crowded online travel agent (OTA) industry by leveraging the largest selection of both domestic and international hotels in China on its platform and relying on user stickiness as a one-stop shop for travel ticketing, accommodations, and packaged tours. The platform is now also generating revenue from advertisement in which it hopes to take 3%-5% of the ad market, but nearly all its revenue streams are travel-related, and coronavirus lockdowns in China has cratered demand due to the inability to travel or unwillingness to quarantine.

We raise our Trip.com fair value estimate to USD 42.50 (HKD 339) from USD 36 (HKD 287) after its first-quarter 2023 guidance showed faster-than-expected recovery for both domestic and international revenue. We are more bullish about an accelerated recovery for China’s travel industry in 2023 and expect it to now recover to 95% of 2019 levels, and that international revenue will account for 20% of total revenue, driven by Trip.com’s overseas business and continued outbound flights. The recovery acceleration and increase in short-term revenue also leads to higher steady-state operating margins, which accounts for about 60%-70% of the valuation increase. We believe long-term operating margins can be greater at 20%-30% (including stock-based compensation) versus prepandemic levels of 19%, after Trip.com was able to reduce its operating expenses and indicated that it can maintain lower spending levels in the long term.

Narrow-moat Trip.com competes in China’s crowded online travel agent (OTA) industry by leveraging the largest selection of both domestic and international hotels in China on its platform and relying on user stickiness as a one-stop shop for travel ticketing, accommodations, and packaged tours. The platform is now also generating revenue from advertisement in which it hopes to take 3%-5% of the ad market, but nearly all its revenue streams are travel-related, and coronavirus lockdowns in China has cratered demand due to the inability to travel or unwillingness to quarantine.

While we raise our fair value estimate to USD 36 (HKD 287) from USD 31 (HKD 249) for Trip.com on more robust travel demand recovery assumptions, we think the shares are already fairly valued. We think the market is already baking in an optimistic recovery as: 1) international travel, which will be Trip.com’s main valuation driver, is unlikely to fully recover until 2024; 2) domestic travel in China during COVID-19 lockdowns was already relatively high compared to international travel as hotel occupancy rates were 86% of 2019 levels in the third quarter of 2022, according to industry data, which may imply a smaller magnitude of rebound for domestic revenue; and 3) recovery may be hindered by capacity constraints. PitchBook consensus estimates indicate that Trip.com is currently trading on a 2023 forward P/E multiple of 36 times and 2024 P/E of 22 times. This is already comparable to the prepandemic 2019 P/E of 24 times. Our current base-case forecast already assumes that Trip.com will hit a record high net profit of CNY 6.3 billion in 2024 on an operating margin of 24.3% that is well above 2019’s 14.3%.

Narrow-moat Trip.com competes in China’s crowded online travel agent (OTA) industry by leveraging the largest selection of both domestic and international hotels in China on its platform and relying on user stickiness as a one-stop shop for travel ticketing, accommodations, and packaged tours. The platform is now also generating revenue from advertisement in which it hopes to take 3%-5% of the ad market, but nearly all its revenue streams are travel-related, and coronavirus lockdowns in China has cratered demand due to the inability to travel or unwillingness to quarantine.

We maintain our fair value estimate for Trip.com at USD 31 after the company posted better-than-expected third-quarter revenue, but partially offset by the possibility of disruptions to recovery in 2023. We are encouraged by the company’s results, which suggest that recovery started even before the recent protests. However, Trip.com guided for fourth-quarter revenue of CNY 4.85 billion—only an increase of 5% year on year—due to lockdowns in October and November before the government eased its quarantine and testing requirements. Trip.com’s tepid outlook does not change our view that the rate of recovery in 2023 remains the key factor for the company currently, as the stock is fairly valued, in our opinion. As of Dec. 14, the current price suggests a 2023 forward P/E multiple of 30 times. Compared to the prepandemic 2019 forward P/E multiple of 26 times, we think the stock is priced in already and further upside is now contingent on unexpected catalysts such as sooner-than-expected recovery of international travel or full unrestricted domestic travel in the near term.

Narrow-moat Trip.com competes in China’s crowded online travel agent (OTA) industry by leveraging the largest selection of both domestic and international hotels in China on its platform and relying on user stickiness as a one-stop shop for travel ticketing, accommodations, and packaged tours. The platform is now also generating revenue from advertisement in which it hopes to take 3%-5% of the ad market, but nearly all its revenue streams are travel-related, and coronavirus lockdowns in China has cratered demand due to the inability to travel or unwillingness to quarantine.

We are raising our fair value estimate for Trip.com to USD 31 (or HKD 249) from USD 24 and HKD 191, respectively, after the National Health Commission of the People's Republic of China released the latest official guidance on COVID-19 controlling measures on Nov. 11. The change to our valuation reflects greater steps toward reopening and specifically scrapping international flight bans. This should favor Trip.com’s international business, which contributed 25% of Trip.com revenue before the pandemic but dropped to 10%-15% of total revenue in 2022. Although sentiment around the Chinese travel industry may improve as a result of the announcement, we do not expect a V-shaped recovery in 2023, but rather a gradual revitalization of the travel industry. This is given that the inbound quarantine was only reduced to eight days from 10, which may still deter travelers. As the policy does not represent a full reopening of borders, we don't expect a recovery of international revenue to prepandemic levels in our model until at least 2025.

Narrow-moat Trip.com competes in China’s crowded online travel agent (OTA) industry by leveraging the largest selection of both domestic and international hotels in China on its platform and relying on user stickiness as a one-stop shop for travel ticketing, accommodations, and packaged tours. The platform is now also generating revenue from advertisement in which it hopes to take 3%-5% of the ad market, but nearly all its revenue streams are travel-related, and coronavirus lockdowns in China has cratered demand due to the inability to travel or unwillingness to quarantine.

We are reiterating our view that the upside for Trip.com still lies within the recovery of its international revenue, and until we see a complete reopening for international travel, it may be premature to conclude that China’s travel stocks are set for recovery in the near term. This comes after China’s Ministry of Culture and Tourism released underwhelming Golden Week (from Oct. 1 to Oct. 7) statistics showing that tourism revenue in China for the 7-day holiday declined 26% year on year, to CNY 287.2 billion compared with CNY 389.1 billion last year. The drop in revenue was driven by an 18% year-on-year decline in the total number of tourists to 422 million during the holiday, compared with 515 million last year.