Trip.com Earnings: Margin Expansion Should Be Recurring; Shares Cheap Given Continued Recovery

We maintain our fair value estimate of USD 42.50 (HKD 339) for Trip.com 09961 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.

We forecast Trip.com revenue of CNY 10.8 billion next quarter with gross and operating margins about 81% and 29%, respectively, due to further improvement in per-unit economics despite greater expected sales and marketing expenses. We expect spending to tick back up again, given reignited competition in the industry, and will likely represent 25% of revenue on a steady-state basis. For the full year, we forecast overall revenue to increase 114% year on year, or 20% from 2019 levels, which reflects that the domestic hotel vacancy rate and air traffic in China have already surpassed that of 2019.