Tongcheng Travel: Lowering Fair Value by 19% as Demand Recovery Is Running Into Macro Weakness

We are lowering our fair value estimate for Tongcheng Travel 00780 by 19%, to HKD 17 per share from HKD 21, to reflect our view that the recovery in travel demand may be fizzling out. We estimate that ground and air transportation is at significantly lower-than-expected levels and believe weakness during Golden Week 2023 is likely an inflection point for the deceleration of travel demand. There appears to be a significant decline in the number of travelers compared with 2019, which could signal weakness for the fourth quarter. Therefore, we have lowered our 2024 revenue forecast by 5% to CNY 13.6 billion based on the reduction of accommodation revenue estimates by 2% and transportation estimates by 6% next year. While we expect long-term revenue to still gradually grow, we take a much less bullish stance in the near term on Tongcheng’s growth trajectory, given recent Golden Week data.

According to China, the cumulative number of air travelers as of the fifth day of Golden Week 2023 increased 196% year on year but only 10.73% compared with 2019. The number of flights increased 114.7% year on year but only 2.45% compared with 2019. We estimate that the cumulative traffic flow for China’s main highways was 49.7% higher year on year, but 38% below 2019 levels. Also, Tongcheng has more exposure to ground transportation at 26% of total 2023 revenue compared with Trip.com at 9%, which could mean that continued weakness in ground transportation may affect Tongcheng more than competitors.

More importantly, the daily average number of travelers for Golden Week 2023 is only 55.91 million compared with 87.13 million in 2019, which in our opinion may contradict the increase in air traffic flow data. We believe there could be some restated numbers, but even so, the reported improvement is below our expectations of a 40% increase relative to 2019 numbers and low compared with the 33% increase in air traffic during the weeklong Labor Day holiday in May.