Tongcheng Earnings: Previous Guidance Echoed; Dilutive Margin Concerns From New Business Overblown

We maintain our fair value estimate of HKD 23 for Tongcheng after it reported first-quarter revenue of CNY 3.86 billion, which is 2% higher than our estimate and guided to second-quarter 2024 revenue that was in line with our forecast. Tongcheng guided to 48%-52% revenue growth year on year next quarter, but this includes its newly acquired offline tourism business. Otherwise, guidance is driven by strength in its legacy core business, which includes airplane ticketing revenue, which was guided to increase by 20%-25%. We note that its operating margin declined by 420 basis points year on year due to dilutive impact from the new tourism business, which has a 2%-5% operating margin. Tongcheng acknowledged that margins could be lower next quarter and possibly for the rest of the year due to its new dilutive business, given seasonality is the strongest for it. However, expectations for its core travel segment in accommodations and transportation remain the same. Given the same 2024 revenue guidance as its previous 15%-20% expectations for the core business, we believe the 10% stock price decline today is an overreaction to its margin dilution. The pullback presents an attractive entry point for gaining exposure to China’s long-term travel industry tailwinds.