Trip.com Earnings: Fair Value Up 4% as Margins Expand and Revenue Defies China's Macro Slowdown

We raised our fair value estimate for Trip.com to $52 (HKD 416) per share from $50 (HKD 400) after it reported second-quarter revenue of CNY 12.8 billion, slightly above its guidance midpoint of CNY 12.7 billion. Adjusted operating margin was 27.8% this quarter, flat sequentially, but improved by 130 basis points year on year. The company’s CNY 15.6 billion guidance midpoint for third-quarter revenue represents 13.5% growth year on year. We are encouraged to see that its guidance defies current macroeconomic headwinds in China within the retail sector. In addition, we forecast operating margin (including share-based expenses) to increase by 150 basis points sequentially to 29.3% next quarter. Although third quarters usually have the highest operating margins due to seasonality, Trip.com also expects its personnel costs to increase minimally at 0%-5% year on year. We have slightly lowered our operating costs assumptions in the outer years, which explains the valuation increase. We believe China’s consumers are shifting their spending toward services rather than products and goods, and see Trip.com as the best-in-class company in China that offers travel services. For investors who still wish to gain exposure to China’s spending, we recommend shifting away from the retail goods sector and toward services, given changing consumer preferences.