Tongcheng's 2Q24 earnings (adj. NP +11% YoY) were largely in-line with market expectations, reflecting some challenges on the industry side and its aggressive attempt to grab market share on outbound travel business. This strategy has gathered negative feedbacks from the capital market, and the company has then changed its course to refocus on profitability again by the end of 2Q24. Hence, we believe the market should be relieved to hear that mgmt. targets to lift the margins for its core OTA business in 2H24 comparable to 2H23, a record level. Despite moderated spending, we still expect company will gain market share, particularly in outbound business thanks to its focus on mass market and user conversion. Maintain BUY with a new TP of HK$20.3.

Key Factors for Rating

2Q24 still in-line despite industry weakness. Tongcheng's 2Q24 revenue was up 48% YoY to RMB2,866m while core OTA revenue increased by 23% YoY. Adj. NP was up 10.9% YoY to RMB656.7m. These numbers are actually in-line with market expectations, reflecting: (i) more contribution from low- margin tourism business that is consolidated since 4Q23, (ii) some adverse impact from bad weather particularly in southern China, and (iii) intentionally higher selling and marketing expenses to capture more share.

Spending less and focus on margins: a positive signal. Since 1Q24, Tongcheng has been aggressively increasing subsidies to fuel its outbound travel business, yet this has encountered shareholders' disapproval as share price was down 40% over the past 3 months. Tongcheng has acknowledged this and has changed this strategy since then by spending less and focusing on ROI of its investments. With this in mind, for its core OTA segment, the company targets to achieve better margins in 2H24 comparable to 2H23 and 2019, which could be achievable through careful spending and operating leverage. We believe this could be a rather positive signal that removes some overhangs, as the market has worried the previous strategy could mean strong margin erosion if GMV further slows down in 2H24 amid macro headwinds.

Slower GMV growth but unlikely a big concern now. In 2Q24, Tongcheng only achieved 4% GMV growth while no. of average MPU only grew by 0.7% YoY to 42.5m, which could seem weak. However, we believe the GMV was weighed by a high base in 1H24, while hotel room rate and air ticket prices see some YoY moderation. We expect the new strategy adopted by Tongcheng will partly address this issue through monetisation, while a relatively lower base in 2H23 may also mean the YoY numbers for 2H24 may turn better sequentially.

Overhang related to platforms removed in 3Q24. Tongcheng also renewed its strategic cooperation and marketing promotion framework with Tencent (700 HK, BUY) on 30 July 2024. The dollar amount in the renewed agreement implies more co-operations with Tencent in the future. We believe this could remove some concerns that Tongcheng's relationship with Tencent may be weaker after Tongcheng has put more focus on its standalone app and other non-Tencent camp apps, such as Amap.

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 failing to create synergy.

Valuation

We lift our EPS forecast for 2024 by 1.2% to reflect less aggressive selling and marketing expenses in 2H24, but we lower our EPS forecast for 2025-2026 by 6% to mainly reflect weaker GMV growth assumptions.

Our DCF-based TP is lowered to HK$20.3 with the following key assumptions: (1) WACC of 15.4% (previous: 21.3%); (2) terminal growth rate of 3.0%, and (3) HKD/RMB rate of 0.92. Our TP is equivalent to 22x/18x 2024/25E P/E.

Maintain BUY as we believe the investment thesis of Tongcheng remained intact: it is still achieving above-industry average growth with strong monetisation capability, as reflected in recent performance.