TCOM's recorded a strong 2Q24 adj. net profit of RMB5,829m (+45% YoY), exceeding market expectations on decent margin expansion. While this set of results reflected travel demand in China remained intact even overall consumer sentiment was weak, TCOM's profitability was also well maintained amid intensifying competition. We expect TCOM would continue to perform resiliently in 3Q24 and more likely in 4Q24. Outbound travel and its overseas platform Trip.com could remain the key earnings drivers in 2H24, and we expect its continuous investments on its platform and AI would further strengthen its core competency. Reiterate BUY as we view the market has been overly pessimistic on the travel market.
Key Factors for Rating
2Q24 earnings beat on rather strong margins. While 2Q24 revenue slightly tapered QoQ in terms of growth and only grew 14% YoY to RMB12,788m, TCOM's non-GAAP net income of RMB4,985m (+45% YoY) is a rather strong beat. While equity in income of affiliates of RMB1,089m (2Q23: RMB236m) boosted the adj. NP, the key driver of earnings beat would still be TCOM's underlying business growth, as non-GAAP OPM reached 33.1% (+2.2ppts) thanks to strong operating leverage with careful spending. Overall, the 2Q24 results reflected that TCOM managed to still grow despite macro and industry- specific headwinds, such as high base in 2023 due to pent-up demand and lower room rates vs 2023 as hotel room supply increases in China.
Demand during summer holiday still strong to support 3Q24 growth. While 3Q24 may continue to suffer from a high base, we expect TCOM would still be able to enjoy above-industry growth, particularly in outbound travel. The capacity of outbound flights has resumed to around 80% in 3Q24, which could be a rather notable YoY improvement vs 2023, and could draw more travelers from domestic travel to outbound travel, allowing TCOM to enjoy better margins due to higher take rate in this segment. For domestic travel, TCOM still observes rather strong demand, as consumers continued to prioritise spending on travel. Overall, TCOM's resiliency has been evidenced by flattish per capita GMV growth on its platform, and mgt. is confident that 4Q24 could see a normalised growth as high base effect due to pent-up demand no longer applies.
Trip.com platform remains a strong driver. We expect Trip.com would remain a strong contributor to the group, as it achieved >50% YoY revenue growth in 1H24 and accounted for 10.5% of total revenue already. In 2H24, we expect high growth would remain as TCOM continues to invest on this platform to lure customers. Also, inbound travels to China, accounting c.25% of its GMV, could also drive its growth in 2H24, as China already recorded 153% YoY increase in foreign visitors in 1H24, according to China National Immigration Administration.
Key Risks for Rating
Downside risks include: (1) weak recovery of tourism, especially outbound; (2) policies on outbound travels may tighten unexpectedly; (3) keen competition from direct booking platforms; and (4) higher spending to defend market share.
Valuation
We slightly revise up our non-GAAP net profit forecasts for 2024-26 by 0.4-2.4% after the latest 2Q24 earnings release, reflecting better-than-expected margins due to operating leverage and strong cost control.
Reiterate BUY as we believe TCOM has demonstrated strong GMV growth vs peers, and disciplined cost control. Its share price has retreated since 3Q24 due to fear of weakening GMV and intensified competition among OTAs, but we believe the worry is overdone. After the correction, we view the valuation still attractive.
ADR: Our target price of US$63.3 is based on SOTP and a USD/RMB rate of 7.20. We use DCF to derive the value of the core business first, followed by the public investments held by the company. Our TP is equivalent to 24x/21x non- GAAP 2024/25E diluted EPS.
H-share: Our target price of HK$496 is based on SOTP and a USD/HKD rate of 7.84. We use DCF to derive the value of the core business first, followed by the public investments held by the company. Our TP is equivalent to 24x/21x non- GAAP 2024/25E diluted EPS.
Our DCF is based on the following key assumptions: (1) WACC of 11.8%, and (2) terminal growth rate of 4.5%.