Introduction to this report:

The performance is in line with expectations. The tightening of revenue management subsidies supports steady growth against the trend of performance, and profitability is expected to improve sequentially.

Key points of investment:

Maintain an “Overweight” rating. Considering industry sentiment, the adjusted net profit of the company was lowered to 26.17/30.93/36.17 (-0.98/-1.98/-4.09) billion yuan (same below) in 24/25/26, giving the industry an average valuation of 17.6 xPE in 2025, maintaining a target market value of 54.3 billion yuan, maintaining a target price of HK$25.97, and increasing its holdings.

Performance summary: 24Q2 achieved revenue of 4.245 billions/ +48.11%, of which core OTA business revenue was 3.525 billions/ +23%. Operating profit +23.94%, net profit to mother +21.85%.

Adjusted net profit to mother 0.657 billion/ +10.85%, adjusted EBITDA 0.913 billion/ +13.36%.

In line with expectations, subsidies have been tightened. ① Operating data: MPU growth slowed (+0.71%), GMV growth slowed to 4.36%. However, the tightening of user subsidies led to an increase in the take-rate (5.7% increase from 4.9% in Q1) and rapid revenue growth (core OTA +23%). The above data is in line with the company's strategic shift from bringing in new hires to increasing conversion rates. ② Split by business: The growth rate of accommodation +12.8% and transportation +16.6% both slowed month-on-month (Q1 +15.6%/+25.6%, respectively), and the base figure was the main cause (23Q2 high base difference +94%/+141%). However, advertising, ticketing, and ancillary value-added services maintained high growth (+87%). ③ Core OTA platform operating profit. The OTA operating profit growth rate was 12.8%, compared with 6.6% in Q1; Q2 core OTA operating profit margin was 24.3%, -2.2 pct year on year, narrowing compared to -3.7 pct in Q1.

Focus on profit, profitability is expected to continue to improve. ① The market previously worried: 1) the month-on-month decline in sentiment is dragging down revenue growth; 2) the impact of exit subsidies on core OTA profit margins is uncontrollable.

② Revenue growth did slow month-on-month, mainly due to high base, sluggish demand, and narrowing subsidies; however, the impact on core OTA profit margins improved month-on-month, mainly for outbound businesses to begin revenue management, so the impact on profit margins in the first half of the year was 2pct. We expect the impact to narrow in the second half of the year. The impact of overall outbound business subsidies on profits is limited and manageable. Subsequent companies will also adopt a series of measures such as improving efficiency to further push profit margins back to 19-year levels. ③ Compared to the travel market, Tongcheng hotels and traffic growth rates are still excessive, indicating that low-tier travel services are still increasing structurally, and Tongcheng's own transformation and take-rate increases are relatively stable.

Risk warning: Macroeconomic fluctuations have impacted domestic travel and business travel demand; new Internet platform leaders are entering competition and intensifying; and the progress of the transformation of existing user operations falls short of expectations.