Tongcheng Travel (TC) reported 2Q24 results: total revenue was RMB4.2bn, up 48% YoY, and was inline with Bloomberg consensus estimates; adjusted net income was RMB657mn, up 11% YoY, and was 4% better than consensus, which in our view was driven by efficient sales and marketing expense control. Overall travel demands are likely better than feared in 3Q24, while management guided to scale back user subsidy to drive for balanced and efficient business development amid current macro environment. Outbound travel demand remains a solid driver for long-term revenue and earnings growth for TC, in our view. We believe that the Company is well-positioned to benefit from the rising travel demand in lower tier cities over the long run, aided by enhanced product capability and strategic cooperation with Tencent. We transfer coverage with a BUY rating and a target price of HK$23.5, which translates into 18.7x adjusted 2024E PE.
Core OTA business delivered solid revenue growth. In 2Q24, TC's core OTA business reached RMB3.5bn (83% of total revenue), up 23% YoY (1Q24: 23.9% YoY), among which transportation ticketing services/ accommodation reservation services/others revenue achieved YoY revenue growth of 16.6%/12.8%/87.3% YoY (1Q24: 25.6/15.6/36.0%). Revenue generated from Tourism business reached RMB719mn in 2Q24 and contributed to 16.9% of total revenue. Management highlighted a solid trend in user frequency improvement on its platform: the number of twelve- month accumulated number of travellers served reached 1.86bn in six month ended 30 June 2024, up 30% YoY, compared to annual paying users increase of 4.8% YoY during the same period. Also, the cross-sell ratio between transportation ticketing and other business and products has increased to 12% in 2Q24 (compared to low-single digit range prior to merger of Tongcheng and Elong).
3Q travel demand likely better than feared. For 3Q24E, we estimate TC to ink total revenue of RMB4.9bn, up 47% YoY, driven by 20% YoY solid revenue growth of Core OTA business, and incremental revenue contribution from the consolidation of Tourism business. Within the Core OTA business, we expect combined revenue growth of 20% YoY for accommodation reservation services and transportation ticketing business, aided by: 1) mid-teens hotel room nights growth and expansion in take rate due to the scaling back of user subsidies; 2) solid transportation ticketing volume growth. We estimate a deceleration in Other revenue to 22% YoY in 3Q24, due to a high base for ads and membership services revenue. However, with proactive scaling back of user subsidies from management and drive for quality growth amid current macro backdrop, we estimate adjusted net profit growth of 33% YoY to RMB826mn in 3Q24E.
