Tongcheng Travel - 4Q24 post-results NDR takeaway: Higher visibility on margin expansion story
- Positive tone from management during the NDR, on the core OTA revenue growth momentum and overall margin expansion
- Management expects hotel ADR to stay stable, and will increase hotel take rate to c.10% in FY25, from 9.5% in FY24, thanks to a steady market environment
- We expect adj. net profit to grow 21% CAGR from FY24-26F, with margin expanding from 16% in FY24 to 18% in FY26F
- Higher earnings visibility, supported by its margin improvement program. Maintain BUY with unchanged TP HKD26
Related Stories
- Tongcheng Travel - 4Q24 results ahead; core OTA revenue growth momentum to sustain21 Mar 2025
- Tongcheng Travel Holdings Ltd - 2Q24 results slightly above; outbound business to break even in FY2522 Aug 2024
- Tongcheng Travel Holdings Ltd - 1Q24 results in line; continue to invest into overseas for incremental growth22 May 2024
We hosted a post-results investor group call on 26 March 2025 with Tongcheng Travel. The company is poised for solid growth, supported by continuous penetration in lower tier cities in China. Management expects the strong growth in its core OTA business to be maintained, with high teen-level growth in 1Q25 and FY25.
The outbound business, which contributed 4%-5% of its To-C core OTA revenue (namely, accommodation reservations and transportation ticketing services revenue) in 4Q24, is expected to reach 7%-8% in FY25.
The company also launched a margin improvement programme recently, with two key areas of focus – (1) shifting from new user acquisition to existing users, due to higher return on investment (ROI); (2) ensuring the outbound business reaches breakeven in FY25 (and turn profitable in 3Q25).
We favour Tongcheng for the higher visibility of its margin expansion story. The stock looks attractive at 12x FY25 P/E (with a 21% CAGR in earnings in FY24-26F), compared to 16x for Trip.com (with an 11% earnings CAGR). In contrast, Trip.com’s short-term margin outlook is less certain due to increased investments in its overseas Trip.com platform.
During the call, we discussed – (1) margin expansion programme, (2) hotel ADR trend, (3) hotel take rate outlook, (4) market landscape, (5) marketing spending focus, and (5) AI development and initiatives.
Key takeaways from the NDR
Margin improvement programme
The company has launched a margin improvement programme focusing on both domestic and outbound businesses. In the domestic segment, the emphasis is on enhancing user purchase frequency and value rather than acquiring new users, as marketing to existing users has higher ROI. For the outbound business, initial subsidy strategies were aggressive, but the company has optimised ROI based on user behaviour data recently. Management shared that the outbound business is expected to start breaking even by 3Q25, contributing to overall margin improvement.
Hotel ADR trends
The Average Daily Rate (ADR) for hotels on the company’s platform has remained resilient, experiencing only a low single-digit decline compared to the industry's high single-digit decline in FY24. The company explained that the pricing for mid-to-low-end hotels is more resilient, compared to higher tier hotels. The company’s higher mix of mid-to-low-end hotels has contributed to stable ADR performance. The company expects hotel ADR on its platform to stay flat in 1Q25 and FY25.
Market landscape and hotel take rate
The overall competitive landscape in the OTA industry remains stable, particularly in lower tier markets, where Meituan is the only competitor. Management opined that Meituan is likely to maintain similar marketing and subsidy spending in FY25. Given the stable market landscape, Tongcheng’s blended hotel take rate has improved from 8%-8.5% in FY23 to 9%-9.5% in FY24. Management believes the hotel take rate can improve further to the 9%-10% range in FY25. In addition, value-added services (e.g., hotel and dinner vouchers, and cancellation insurance) will also help increase the take rate, and management expects the contribution from value-added services (currently 0.5-1 ppt contribution) to the take rate will further increase going forward.
Outbound business outlook
The outbound business has experienced rapid expansion, with transaction volume increasing by over 100% in FY24. Outbound travel now accounts for more than 10% of total ticket volume and contributes 4%-5% of core OTA revenue. The company has set a long-term target to raise the outbound business' revenue contribution to 15% by 2027. The outbound business dragged the FY24 adjusted net profit margin by 1-2ppt. The segment is expected to achieve breakeven in FY25 and, once mature, is anticipated to generate higher margins than the domestic business.
Marketing via Wechat vs. its standalone app
The user acquisition cost on WeChat is low, as the portal fee (pay to Tencent) makes up only a small part of marketing expenses and user acquisition is effective in terms of ROI. For the standalone app, the user acquisition cost is around RMB80-100, significantly higher than the user acquisition cost on WeChat. However, standalone app users have higher value, e.g., these users usually book more expensive rooms. All in all, the company will shift its marketing focus from new user acquisition to its existing users with the aim of increasing their spending and order frequency, and expects marketing expenses as a percentage of revenue to improve further in FY25.
AI development and initiatives
To enhance its service offerings, the company has developed its own tourism-focused generative AI products, ChenXin/DeepTrip, which is integrated with DeepSeek. This AI technology enhances itinerary planning and improves customer service efficiency. Additionally, the company has partnered with other leading generative AI platforms such as Tencent’s Yuanbao and Baidu’s Ernie. Management shared that the company’s AI products will help boosting user traffic and user purchase frequency in the long term, and also limit increases in capex for new AI initiatives.
Shareholder return
Management shared that they have no plan for share buybacks given the low trading liquidity. They will try to balance dividend payout (FY24: 20%) and new business investment opportunities, such as its hotel management business.
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Related Stories
- Tongcheng Travel - 4Q24 results ahead; core OTA revenue growth momentum to sustain21 Mar 2025
- Tongcheng Travel Holdings Ltd - 2Q24 results slightly above; outbound business to break even in FY2522 Aug 2024
- Tongcheng Travel Holdings Ltd - 1Q24 results in line; continue to invest into overseas for incremental growth22 May 2024
Related Stories
- Tongcheng Travel - 4Q24 results ahead; core OTA revenue growth momentum to sustain21 Mar 2025
- Tongcheng Travel Holdings Ltd - 2Q24 results slightly above; outbound business to break even in FY2522 Aug 2024
- Tongcheng Travel Holdings Ltd - 1Q24 results in line; continue to invest into overseas for incremental growth22 May 2024