Trip.com’s Q1 Guidance Sees Faster Recovery, Higher Steady-State Margin

We raise our Trip.com 09961 fair value estimate to USD 42.50 (HKD 339) from USD 36 (HKD 287) after its first-quarter 2023 guidance showed faster-than-expected recovery for both domestic and international revenue. We are more bullish about an accelerated recovery for China’s travel industry in 2023 and expect it to now recover to 95% of 2019 levels, and that international revenue will account for 20% of total revenue, driven by Trip.com’s overseas business and continued outbound flights. The recovery acceleration and increase in short-term revenue also leads to higher steady-state operating margins, which accounts for about 60%-70% of the valuation increase. We believe long-term operating margins can be greater at 20%-30% (including stock-based compensation) versus prepandemic levels of 19%, after Trip.com was able to reduce its operating expenses and indicated that it can maintain lower spending levels in the long term.

We are more optimistic that international travel revenue should fully recover to prepandemic 2019 levels in 2024, compared with our previous view that it would take until 2025. Management provided better visibility, that it sees international revenue recovering to 70%-80% of 2019 levels under ideal scenarios if there is greater airline capacity. Although outbound air traffic for China remains at only 15% of 2019 according to industry data, international revenue is driven by both Trip.com’s overseas business, as well as higher ticket prices, which contribute to greater monetization. We expect 2023 domestic revenue to surpass 2019 levels as well, driven by increasing room rates and the total number of booked rooms. Although management was positively surprised by the level of recovery in the first quarter, it was also cautious to note that pent-up demand is unlikely to last for the entire year, and to decelerate in the second half. Regardless, we are encouraged with the progress and moved up our recovery timeline, which leads to higher near-term growth.