Tongcheng Travel's second-quarter results were in line with expectations. Revenue growth was faster than GMV's growth rate, and the overall monetization rate increased significantly. Core OTA revenue increased 23% year over year, operating margin 24.3%; vacation business contributed 0.86 billion revenue growth. Looking ahead to the second half of the year, we expect steady growth in core OTA business revenue, and operating profit margins may increase as marketing efficiency is optimized, so we will maintain our net profit forecast for the whole year. Taking into account changes in the market environment, the valuation multiplier was lowered, and the target price was adjusted to HK$18.8 to maintain the purchase rating.

Report summary

The results for the 2nd quarter were in line with expectations: total revenue of 4.25 billion yuan, up 48%/10% year over year, in line with our and market expectations. Core OTA business revenue increased 23% year over year (of which transportation tickets/accommodation reservation services increased 17%/13% year over year), vacation business contributed 0.86 billion yuan, up 9% month on month, and revenue share remained flat at 17% month-on-month. The overall revenue growth rate was faster than the GMV growth rate (+4%), and the overall monetization rate increased to 6.8%, compared to 4.8%/5.9% in 2Q23/1Q24. Marketing/R&D/administrative expenses decreased by 3.3%/3.3%/0.8% year on year. Benefiting from ROI-oriented marketing strategies and operational efficiency optimization, adjusted net profit increased 11% year over year to 0.66 billion yuan, slightly higher than our/market expectations of 3%/4%, profit margin 15.5%, and month-on-month improvement. According to the split business line performance, the core OTA operating profit was 0.85 billion yuan, up 13% year on year, and the operating profit margin was 24.3%. Compared with 2Q23/1Q24, it was 26.6%/22.6%, and the vacation business had a break-even balance.

< 5%，对比行业同比降幅>Core OTA business data outperformed the industry: 1) Accommodation reservations: Overall hotel room night volume increased 10% year over year, and hotel ADR decreased by 10% year on year, mainly due to the higher share of low-star hotels in the company and hotels in the sinking market, ADR is more resilient than high-star hotels in the face of industry headwinds. The 15-day cross-selling rate increased to 12%, and user value is still increasing. 2) Transportation ticketing: Overall ticket reservation volume increased by nearly 20% year on year, compared with overall civil airline/domestic passenger traffic, which increased 12%/6% year on year, and ticket business revenue reached a record high. 3) International business:

International air ticket reservations/inter-hotel night volume increased by more than 160%/140% year on year, and the strong growth trend continued until July-August.

Average user spending and order frequency potential were gradually unleashed: APU for the second quarter was 0.23 billion, up 5% year on year, and APU annual cost (APU/GMV for the past 12 months) was 1,107 yuan, up 32% year on year, maintaining the level of 2019. The total number of service users in 12 months was 1.83 billion, and the implied average order frequency was 8.1 times/APU, compared to 6.6 in the same period last year. The increase in cost per capita and frequency reflects the smooth progress of the user value enhancement strategy. Furthermore, the cumulative number of Black Whale members exceeded 65 million, a net year-on-year increase of 35 million/10 million month-on-month, and Black Whale membership expenses were about 2.1 times that of ordinary users.

Forecast and valuation: We expect core OTA revenue to increase 19% year over year in the 3rd quarter, of which transportation/accommodation will increase 18%/19% year over year; vacation business is expected to increase 31% month over month during peak season. Due to weak macro consumption, we lowered our 2024 revenue forecast by 5%, but it is expected that marketing efficiency optimization will basically offset headwinds at the revenue level. Core OTA operating profit may increase in the second half of the year, so we maintain the adjusted net profit forecast for the whole year (2.7 billion yuan, corresponding net profit margin of 15.5%). Considering changes in the market environment, 15 times the price-earnings ratio for 2024 (vs. 18 times the previous price) was lowered to HK$18.8 (previous value: HK$23.3), and the “buy” rating was maintained. We are still optimistic about its core OTA business resilience, increased user value, and medium- to long-term international business potential.

Risks: Weak consumption affects travel spending budgets; ARPU levels fall short of expectations; international business expansion falls short of expectations.