Softer Data For 2023 Dragon Boat Festival; Summer Travel Boom To Revitalise Outbound Travel
The Dragon Boat Festival delivered alleviated performance with total revenue/tourist numbers recovering to 95%/113% of pre-COVID-19 levels vs 101%/119% during the Labour Day holiday. However, we foresee better momentum during the summer holiday amid continuous improvement for outbound travel. We still prefer Trip.com as it is the key proxy to benefit from a rebound in international and outbound travel. Maintain OVERWEIGHT on the OTA sector.
WHAT’S NEW
• Key statistics for 2023 Dragon Boat Festival. The Ministry of Cultural and Tourism (MCT) reported 106m total domestic tourists during the three-day long Dragon Boat Festival holiday, up by 32.3% yoy and recovering to 112.8% of pre-pandemic levels (vs Labour Day: 119%). Total domestic tourism revenue was Rmb37.3b, up 44.5% yoy, and recovering to 94.9% of pre-pandemic levels (vs Labour Day recovery: 100.7%). According to the MCT, high-speed rail tours, self-driving tours and short-haul tours were some of the more popular choices among tourists during the holidays.
• Outbound travel momentum continues to improve. According to data from the National Immigration Administration, during the 2023 Dragon Boat Festival period, the daily average number of inbound and outbound personnel was 1.32m, which soared by 2.3x yoy and recovered to 64.6% of the Dragon Boat Festival in 2019 (vs. 59.2% during the Labour Day holiday). According to third-party data, the number of international flights during the 2023 Dragon Boat Festival holiday and Labour Day holiday had recovered to over 40%/30% compared with 2019’s level, respectively. For regional airports, the international passenger traffic has improved sequentially albeit Mainland China still tracking behind other APAC regions by recovering to 67% of pre-pandemic levels. This implies a strong potential for release of pent-up demand moving into 2H23.
• Overview of Tongcheng-Travel’s Dragon Boat Festival tourism data. According to Tongcheng-Travel’s (TT) 2023 Dragon Boat Festival tourism report, during this holiday, the volume of flight bookings, hotel bookings, attraction tickets, and holiday packages has outstripped the same period in 2019. The number of visitors to domestic attractions grew rapidly by over 30% compared with 2019’s level during the same period. Hotel bookings in the vicinity of concerts and music festivals saw 300% yoy growth while the visitor traffic to domestic scenic spots rose over 30% vs 2019’s level.
• Trip.com’s Dragon Boat Festival tourism data overview. According to Trip.com (TCOM), the recovery progress of certain tourism sectors has exceeded pre-pandemic levels, with domestic ticket bookings and other orders doubling compared with the same period in 2019. TCOM’s platform shows its hotel average daily rate (ADR) in some popular destinations such as Xi’an/Nanjing/Guangzhou dropping 20-30% during the Dragon Boat Festival holiday compared with the Labour Day holiday. TCOM believes that this year’s Dragon Boat Festival has marked a successful conclusion to 1H23 and put the tourism market back on a growth trajectory. In addition, the company expects that pent-up tourism consumption of the summer travel market will be unleashed early due to the Dragon Boat Festival’s proximity to the summer vacation period.
STOCK IMPACT
• Tracking airfare trend to glimpse outbound travel sentiment for summer holiday. During the Dragon Boat Festival, average domestic airfares in China slipped to low single digits compared with 2019, from high-teens during the Labour Day holiday. For the upcoming summer holiday, Civil Aviation Administration Of China (CAAC) forecasts domestic flights/air passengers to grow 11%/7% vs. 2019 and a 20-30% increase vs 2019 for domestic economy-class airfare. For international recovery, air flights for international/regional flights are expected to recover to 49%/56% of 2019’s level. According to TT’s Summer Travel Outlook Report, airfare prices are projected to increase 32% yoy, 5% above 2019’s level, and the proportion of family travellers for civil aviation and railway during the 2023 summer is expected to outstrip the same period in 2019.
• Our take on the Dragon Boat Festival performance. We expect the recovery trajectory to accelerate in 3Q23 with long-haul domestic and outbound travel pent-up demand to be further unleashed in the upcoming summer holiday. OTA players’ 2Q23 performance will remain robust, followed by a significant qoq recovery in 3Q23 on the back of stronger seasonality as anchored by the summer holiday.
• Guidance for TT and TCOM:
a) Promising 2Q23 outlook for TT. In view of the positive sentiment upon release of pent-up demand, TT’s top-line is estimated to surge 70-75% in 2Q23 compared with 2019, and 2023 full-year revenue will be at Rmb10.5b-11.2b, or 46-52% higher than 2019, 10% higher than our previous estimate. ADR is guided to grow over 20% yoy but remain below 2019 levels due to a structural change of user mix. Management expects ADR to recover to 2019 levels in 2H23. Net margin is guided at 17-18% for 2Q23 and full-year 2023. Selling and marketing expense ratio will be stable at 38-40% during 2Q23.
b) TCOM’s 2Q23 outlook remains intact. We forecast 2Q23 revenue to surge 169% yoy to Rmb10.8b, or 25% above 2Q19’s level. Gross margin was guided at 80-81%, edging up marginally from 2019 levels. Non-GAAP operating profit was guided at Rmb3.1b in 2Q23, translating to non-GAAP operating margin of 29%. For 2023, revenue is guided to grow over 20% above 2019’s level, mainly bolstered by the release of domestic travel demand. Operating margin for 2023 is projected at about 25%.
EARNING REVISION/RISK
• Our forecasts for TT and Trip.com remain unchanged.
VALUATION/RECOMMENDATION
• Maintain BUY on Trip.com (9961 HK) with an unchanged target price of HK$411.00 (US$33.00) as we ascribe 22x 2023F PE and 20x EV/EBITA respectively to the company’s accommodation+transportation ticketing and package tour+corporate travel segments respectively. TCOM is our top pick in the OTA sector as it is the key proxy to benefit from the rebound in outbound travel and strong momentum in overseas travel. Our target price implies 5x 2023 EV/sales, against the company’s historical average of 6.3x.
• Maintain BUY on Tongcheng-Travel (780 HK) with an unchanged target price of HK$22.00 based on 21x 2025F PE, with 1.1x PEG on the back of 27% EPS CAGR from 2023-26. The company’s key catalysts include penetration into lower-tier cities as well as resilient domestic tourism performance in the absence of overseas revenue.
SECTOR CATALYST AND RISK
• Sector catalysts: Strong macro recovery, continued penetration of OTA platforms into domestic offline and lower-tier cities travel markets.
• Risks: Price war and competition may arise given growing market demand, softer travel consumption spending power.
