We held a Tongcheng non-transactional roadshow last week. The company shared recent Dragon Boat Festival OTA business trends and discussed dimensions such as overseas business development, user multi-channel strategies, hotel ADR trends, and profit margin prospects.
The growth rate of hotels and traffic during Tongcheng Dragon Boat Festival was better than the general market. 2Q24E performance is expected to improve, and the financial guidelines for the whole year remain optimistic. Investors generally agree with the company's business growth and market share growth logic. The core concern is dilution of potential profits. We believe that the market is overreacting to profit margin trends due to: 1) the impact of dilution of overseas business investment will gradually weaken in 2H24E; 2) unlike the ADR pressure on the hotel market, Tongcheng Hotel's ADR will remain stable; 3) there is a natural difference in tourism profit margins compared to OTA due to business attributes. Reiterating Tongcheng's long-term optimism, he expects 2H24E revenue growth to accelerate and profit margins to boost valuations. Summer travel and the September/October vacation are potential catalysts. Maintaining a “buy” rating, the target price is HK$26.1.
The resilience of Dragon Boat Festival travel is prominent, and the market share continues to rise. The number of domestic travelers at Dragon Boat Festival increased by 6.3% year on year, total expenses increased by 8.1% year on year, and per capita travel consumption increased by 1.7% year on year. Management said that growth was strong during the Dragon Boat Festival. The growth rate of hotels and traffic was far higher than that of the market. Among them, the growth rate of air tickets was about 3 times that of the market. Management reiterated its financial guidance for the full year and remained optimistic about the full year results. We expect 2H24E revenue to grow at an accelerated pace, stemming from the 3Q strong season and the normalization of the base.
Overseas business is actively expanding, and the impact of profit margin dilution will weaken in 2H24E. International business currently accounts for about 3%-4% of OTA revenue, and the target is to increase its share to 10%-15% within 2-3 years. Tongcheng will continue to use the advantages of international air ticket prices to penetrate the Southeast Asian market. Among them, the supply chain is diversified, and there is misplaced competition with most friendly merchants. The overseas launch of 1H24 is expected to have an impact of 1-2 ppts on the profit side of OTA, and it is expected that the impact on 2H24E profit margins will gradually weaken. The market previously overreacted to fluctuations in profit margins (dilution of international business and tourism), expected a recovery in 2H24E profit margins, and was optimistic about long-term profit release after the investment period in overseas business had passed.
Hotel ADR remains steady, and new business gradients are relaying. Investors are more concerned about ADR trends in hotels and their impact on profit margins. Compared with the ADR pressure from Youshang and the hotel market, Tongcheng Hotel's ADR remained stable (1H24 is expected to be flat year on year), due to the fact that low-star hotels account for a relatively large share of the hotel portfolio and are highly defensive. At the user channel level, the company's own app traffic expansion has achieved results. The frequency of repurchases and ARPU are higher than those on the non-app side, and the customer base is highly differentiated; the WeChat channel's contribution is stable, and the frequency of repurchases is steadily increasing. In addition to the international business, the hotel management business is expected to contribute more: Currently, Tongcheng has 10 major brands and opened more than 1,600 hotels, which is expected to accelerate store expansion.