Betting on new growth drivers with strong conviction

Tongcheng's 4Q23 adj. net profit reached RMB482.5m, a record quarterly high and slightly better than our expectations. As 2023 earnings hit record high, it announced a dividend payment for the first time, an encouraging positive sign. Also, its management is very confident on its ability to grab more market share and hence outperform industry growth rate in 2024. We believe key growth drivers would include: (1) the newly acquired packaged tour business; (2) new customer acquisitions through apps such as Amap and Alipay, and (3) ambitious expansion of outbound travels and international business. Hence, we turn even more positive on Tongcheng as we believe its past M&As would be ready to create new business opportunities. Reiterate BUY as we revise up our FY24 core EPS forecast by 1%.

Key Factors for Rating

4Q23 slightly above expectations. Thanks to robust travel demand in

4Q23, revenue was up strongly by 110% YoY to RMB3,144m, and adj. NP reached 482.5m (+1,188% YoY due to low base in 4Q22). In addition, revenue from other segment also jumped 236% YoY to RMB789m, as businesses such as hotel management grew strongly, while packaged tour, which was acquired and consolidated in 4Q23, also contributed. However, due to the nature of packaged tour, this also dragged the overall GPM to 69%, lower than 3Q23's 74.5%. Still, we believe this is within market expectations.

Expect packaged tour business to contribute meaningfully in 2024. 2024 will be the first year for the packaged tour business to contribute fully. It even generated RMB923m revenue in 2021 when outbound travel was halted. Hence, with accelerated recovery of outbound travel, we forecast its revenue could reach around RMB3bn in 2024, accounting for 15% of our total revenue forecast. While its margin may be lower, we believe the impact to the overall NPM will be limited, as core OTA business' margin should turn even better as GMV continues to ramp up in 2024 and further achieves economies of scale.

Grabbing more users from Alibaba camp to outperform industry. With

proven track record of ROI, Tongcheng will dedicate more dollars to acquire new users on Amap and Alipay in 2024. Hence, its mgt. is highly confident on outperforming the industry as its market share on travel services will increase. We share such view, and maintain our view that Tongcheng will achieve strong growth through: (1) higher OTA penetration in low-tier cities, and (2) grabbing more market share from other OTAs while defending its share from Douyin.

First dividend payment a positive signal. Tongcheng declared a final dividend payment for the first time since IPO, with a DPS of HK$0.15, equivalent to c.20% payout ratio. We believe this reflects Tongcheng's matured business model and a balanced approach to provide shareholder return while seeking ways to supplement growth through minor M&As.

Key Risks for Rating

(1) Weak recovery of tourism; (2) worsening relationship with top shareholders;

(3) keen competition; (4) higher spending to defend market, and (5) newly acquired business weaker than expected and fail to create synergy.

Valuation

We lift our FY24-25E core EPS forecast by 1%/7%. The following reasons explain such major revision:

(1) Our forecast now includes the impact of the acquisition of Beijing Tongcheng

Tourism Investment (BTTI), which was acquired in Oct 2023. We expect 2024 revenue to be around RMB3bn. This alone could already boost 2024 revenue by c.25% YoY.

(2) We are more positive on tourism industry after strong 2024 CNY demand, suggesting a faster structural shift towards experimental consumption.

(3) We are more positive on Tongcheng's GMV growth as its new channel strategy will grab more users that is not sticky to Weixin ecosystem.

We lift our DCF-based TP to HK$25.7 with the following new key assumptions: (1) WACC of 18.6%; (2) terminal growth rate of 3.0%, and (3) HKDRMB rate of 0.92. Our TP is equivalent to 28x/21x 2024/25E P/E.