1Q22: Above Expectations; Cautiously Optimistic For 2H22
TT’s 1Q22 results were above expectations. Revenue grew 6.5% yoy to Rmb1.7b, 3.8%
above the street’s estimates. Across the three business segments, only transportation
ticketing reported negative yoy growth, while the rest exceeded pre-COVID-19 levels.
Gross margin declined 2.1ppt yoy to 72.5%, in line with our and consensus
expectations. Adjusted net profit declined 18% yoy to Rmb245m, 11.7% above
consensus estimates. Maintain BUY with a lower target price of HK$17.50.
RESULTS
• Better-than-expected top-line performance. Tongcheng Travel Holdings’ (TT) 1Q22
revenue growth of 6.5% yoy beat management’s previous guidance of a 0-5% growth.
Transportation ticketing revenue saw a mild drop of 0.6% (1Q21: -7%) to Rmb1,017m, which
can be attributed to the lockdown measures imposed in Shenzhen and Shanghai in earlyMar 22. TT saw bus ticketing volume spiking 170% yoy in 1Q22 vs a 150% yoy increase in
1Q21. The accommodation reservation segment saw a revenue growth of 18% yoy (1Q21:
+100%) to Rmb543m due to the increase in cross-selling from the transportation business.
In 1Q22, TT registered a 10% yoy growth in room nights sold in the lower-tier cities with
absolute amount surpassing the pre-pandemic level as overall domestic room nights sold
was 5% higher than 1Q21. Average daily rate (ADR) saw a yoy decline during 1Q22.
Revenue from other segments rose 20% yoy to Rmb158m (1Q21: +48%) due to an increase
in revenue from value added service (VAS) and advertising services.
• 2Q22 guidance. TT has guided for its top-line to decline 40-45% yoy in 2Q22, with its
midpoint being 18% below street’s estimate and implies a 23% decline vs 2Q19. The weaker
guidance was given in tandem with the domestic tourism industry being affected by the
lockdown measures which management described it as “more severe than 2020”. TT
expects 2Q22 adjusted net profit to reach Rmb50m-100m, a growth of 80% yoy with
adjusted net margin of 6% (2Q21: 18.6%).
STOCK IMPACT
• Operating metrics and margin performance. In 1Q22, 87% of TT’s users were residing in
non-first-tier cities, vs 81% in 4Q21 and 86.4% in 1Q21. 84.1% of the new paying users on
the Weixin platform were from tier-3 and below cities, vs 80.7% in 4Q21 and 83% in 1Q21.
Both monthly active users (MAU) and monthly paying users (MPU) registered 4.5%/16.1%
yoy growth to 244.8m/31.7m respectively with total paying ratio edging up slightly by 1.2ppt
yoy to 12.9%. Gross merchandise value (GMV) saw a 2.7% yoy decrease to Rmb32.4b as a
result of the pandemic’s impact on product prices and volume. Gross margin contracted
2.1ppt yoy to 72.5% as a result of a rise in the cost of pre-purchased inventory. Adjusted net
margin contracted 4.3ppt yoy to 14.3%, better than management’s guidance of 13.6%.
• Revenue guidance by segment. In terms of revenue guidance by segment,
accommodation reservation is expected to grow 35-40% yoy (17% below 2Q19), while
transportation ticketing is guided to decline 45-50% yoy (32% below 2Q19) as the pandemic
(in March) had a more pronounced impact on the transportation segment. The others
segment is guided to drop 20-25% yoy. Management guided that hotel ADR will continue to
be on a downtrend due to product mix shift towards lower-tier cities as well as pricing
pressure as a result of the pandemic. As near-term visibility remains uncertain, management
is cautiously optimistic that 3Q22 revenue should be flattish yoy and expects to see positive
yoy growth in 4Q22. For full-year 2022, TT expects top-line to decline 5-10% yoy with
adjusted net margin target of 15-16%.
• Near-term outlook. TT guided that it had implemented discipline cost control measures in
terms of sales & marketing (S&M) spending since Mar 22. As majority of the S&M spendings
are discretionary, management expects stringent spending coupled with stable G&A
spending (mostly fixed basis) as the company does not plan to expand its workforce and will
prioritise maintaining overall margin performance. Moving forward, the company expects its
blended take-rate for hotels to remain relatively steady as the company reduced its coupon
offerings coupled with the increasing demand for non-room VAS.
• Current outlook for domestic tourism sector. The Shanghai city mayor had on 17 May
announced Shanghai had achieved “Dynamic Covid-Zero” status in 16 districts. As shops
and banks have resumed operations (with strict SOPs) since the third week of May, we
reckon the lockdown measures should be lifted in stages. With lockdown uncertainty still
lingering in major cities like Shanghai and Beijing, we think lower-tier cities offer relatively
safe travelling options due to lower COVID-19 transmission risk (as well as lower risk of
lockdown) and should anchor the tourism sector’s near-term recovery. We think there is still
ample room for growth for lower-tier cities given that the online penetration rates from lower-tier cities remain low (ie hotel and bus ticketing stand at only 25% and low single digits), and
TT should continue to benefit from users growth via its investment in ticket vending and hotel
QR code scanning.
EARNINGS REVISION/RISK
• We lower our 2Q22 revenue estimate by 49% as we expect that 2Q22 should be the trough
level in 2022 given that some of the cities had gradually allowed businesses to resume
operations. We estimate 2Q22 adjusted net profit margin of 9% which is around the trough
level in 1Q20 (8%) during the first pandemic outbreak in China.
• Risks: Prolonged travel restrictions will impact the domestic tourism industry.
VALUATION/RECOMMENDATION
• Maintain BUY with a lower target price of HK$17.50, pegged at 25x 2023F PE. Our target
price implies PEG of 0.7x and EPS CAGR of 37% from 2023-26. TT currently trades at 24x
12-month forward PE, 0.4SD below its historical mean of 26x.
SHARE PRICE CATALYST
• Catalysts: a) Positive progress in vaccination, b) implementation of travel bubbles with
relatively low-risk countries, and c) easing of travel restrictions.