Tongcheng Provides Encouraging Outlook on Recovery in 2023

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

Tongcheng’s fourth-quarter revenue declined 19% year on year and was only 76% of 2019 levels, which is unsurprising given the lockdowns back in November and December. The weakness was reflected in the 20% decline in gross merchandise volume as well as the 21% decline in paying users. Operating margin was negative 11% compared with 5% in 2019, which reflects the high operating leverage of the business. Given the headwinds faced in the fourth quarter of 2022, management cut back on costs and operating expense declined 5% year on year, but we expect to see operating expense increase significantly in 2023 on recovery in activity. Sales and marketing expense and service development costs should remain at 40% and 20% of revenue, respectively, which imply about a 45% increase for both year on year. We forecast adjusted net income margin for 2023 (including share-based compensation) to be about 16%-17%.

We forecast Tongcheng’s total room nights to increase 65% year on year in the first quarter of 2023 and transportation gross merchandise volume to rise 35% year on year for air and rail ticketing. We have lower conviction about how the recovery will play out for the rest of 2023, but management already sees continued demand for the Qingming Festival, Labor Day, and Dragon Boat weekends from April to June. No specific guidance was given on the call, but we forecast that Tongcheng’s 2023 revenue should significantly surpass that of 2019, based on the assumption that domestic travel should fully recover by the end of this year in China.