Company Reports

We increase our fair value estimate by 35% to HKD 23 from HKD 17 after Tongcheng Travel reported revenue of CNY 3.14 billion, which is in line with our estimate, but more importantly, guided to 2024 revenue that was better than our forecast. The strong guidance can be attributed to an expected 20%-25% year-on-year revenue increase for each transportation and accommodation business, which is faster than peers. The guidance is driven by higher average room rates and greater international demand. Tongcheng had about 5% revenue exposure to international travel prepandemic, but expects a 10%-15% increase year on year in 2024 given recent approval for visa-free travel to Southeast Asia and it forecasts international travel to account for 10% of revenue in three years. The firm isn't seeing a consumption downgrade currently and domestic and international travel has recovered to 80% and 70% of prepandemic levels, respectively, with further momentum expected. We're also encouraged by management’s more upbeat tone this quarter than previously due to greater visibility for 2024 demand. It is also guiding for a 30%-40% increase in other revenue, which includes hotel management services and business travel demand. Given the lack of a consumption downgrade by China’s travelers, we see companies such as Tongcheng or Trip.com as bright spots among China's macroeconomic headwinds.

We maintain our fair value estimate of HKD 17 for Tongcheng Travel after third-quarter revenue of CNY 3.3 billion was 5% above our estimate and represented a 60% increase year on year, but was offset by demand uncertainty and lack of visibility into 2024 amid commentary from Tongcheng’s peers. Hotel bookings increased 70% while transportation saw 47% revenue growth, compared with same-period 2019 levels. Tongcheng expects next quarter's revenue to increase 45% compared with fourth-quarter 2019—we forecast this to be driven by a 66% increase in hotel bookings compared with the same period in 2019. However, we expect air and ground transportation gross merchandise volume, or GMV, to only grow 10%-15% and flat, respectively, compared with the fourth quarter of 2019. We are slightly concerned as to whether moderation in GMV growth represents an inflection point where pent-up demand is fizzling out.

We are lowering our fair value estimate for Tongcheng Travel by 19%, to HKD 17 per share from HKD 21, to reflect our view that the recovery in travel demand may be fizzling out. We estimate that ground and air transportation is at significantly lower-than-expected levels and believe 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 weakness for the fourth quarter. Therefore, we have lowered our 2024 revenue forecast by 5% to CNY 13.6 billion based on the reduction of accommodation revenue estimates by 2% and transportation estimates by 6% next year. While we expect long-term revenue to still gradually grow, we take a much less bullish stance in the near term on Tongcheng's growth trajectory, given recent Golden Week data.

We expect Tongcheng Travel’s revenue to return to growth as China relaxes its reopening policies, which should allow its citizens to travel with fewer restrictions. We expect near-term revenue to increase modestly, driven by recovery of the travel industry. Assuming no return of lockdown headwinds in China, we expect Tongcheng’s revenue to increase 10%-15% per year in the near to midterm.

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.

We maintain our HKD 21 fair value estimate for Tongcheng Travel after the company posted better-than-expected first-quarter revenue of CNY 2.59 billion, which was 5% greater than our estimates. While the company provided strong guidance for the second quarter—it expects revenue growth of 70%-75% from 2019 prepandemic levels, or 108% year on year, buoyed by the transportation and accommodation segments—it also indicated that sales and marketing expenses could be slightly higher for the rest of the year. First-quarter results reflect the continuing recovery after China’s reopening and pent-up demand, in line with commentary from other travel industry peers. We forecast accommodation revenue to increase 72% from 2019 as hotel room rates and vacancy rates increase, and we expect transportation revenue to increase 48% from 2019 as demand remains strong for ground and air ticketing. Tongcheng raised the midpoint of its revenue guidance to CNY 10.85 billion from CNY 10.35 billion for the full year, which implies continued momentum in the back half of the year. We view the current 36% upside to our fair value estimate (as of the May 25 close) as an attractive risk/reward ratio, given our expectations that Tongcheng should benefit from medium-term tailwinds arising from ongoing robust pent-up demand for travel in China and its position as one of the larger online travel platforms, with 287 million monthly users.

We maintain our HKD 21 fair value estimate for Tongcheng Travel after it reported fourth-quarter results and provided an encouraging outlook on its recovery prospects for 2023. Based on the March 21 closing price of HKD 15.54, this implies 35% upside, which we believe is an attractive risk/reward given that China’s travel industry continues to show signs of recovery.

We are initiating coverage of no-moat Tongcheng Travel with a fair value estimate of HKD 21 based on expectations that revenue modestly increases in the near term due to further easing of traveling restrictions in China. The slight valuation upside to the market value as at the close of trading on Jan. 5 reflects our optimism that travel will become normalized long-term, but we believe upside may be limited given the company lacks major catalysts that could propel the stock to trade at higher multiples in the long term. Our fair value implies 24.5 times P/E forward multiple on 2024 earnings, which is similar to its prepandemic 2019 P/E forward multiple of 25 times. With the recent runup in China travel stock valuations, we believe there is now less upside, but any pullbacks to Tongcheng's share price could be an attractive entry for moderate risk/reward.

We expect Tongcheng Travel’s revenue to return to growth as China relaxes its reopening policies, which should allow its citizens to travel with fewer restrictions. We expect near-term revenue to increase modestly, driven by recovery of the travel industry. Assuming no return of lockdown headwinds in China, we expect Tongcheng’s revenue to increase 10%-15% per year in the near to midterm.