Tongcheng Earnings: Should Benefit From Continued Demand for Domestic Travel in China; Shares Cheap

We maintain our HKD 21 fair value estimate for Tongcheng Travel 00780 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.