Robert Way
Prepare for turbulence through the Lunar New Year, but the skies look much clearer after that.
That was the message coming from leading online travel agent Trip.com Group Ltd.’s (NASDAQ:TCOM; 9961.HK), whose latest earnings included some figures showing the difficult path that China’s travel industry has traveled in the last few months. Executives made general comments about the potential for recovery in China’s battered travel market next year following the recent retirement of the country’s “zero Covid” policy that has hamstrung the industry for the last three years.
But wisely, they didn’t provide any guidance that was too specific, since things can always change very quickly in China’s Covid approach. That approach was particularly brutal for the domestic travel industry in the months from September through December, as Covid flareups led to near-citywide lockdowns in Guangzhou, Beijing, and other cities to prevent the virus from spreading.
Trip.com bills itself as a global company, but still derives the big majority of its revenue – between 80% and 85% – from its home China market. It held out other Asian markets, which mostly scrapped their Covid restrictions by the third quarter, as an example of the kind of rebound that China could see after the country’s current wave of Covid infections passes.
It said air ticket bookings for its non-China Asian markets grew 400% in the third quarter year-on-year, fueling a doubling of its non-China air ticket bookings for the quarter. Revenue from its non-China business grew 140% year-on-year for the quarter, accounting for 15% to 20% of total revenue during the quarter, CFO Cindy Wang said on the company’s earnings call last Thursday.
“We actually saw a very strong sequential increase in domestic flight and hotel reservations in the past two weeks following this announcement (of China’s relaxing of its Covid restrictions),” she said. “But in the very near-term, we are still cautious as … it also might take some time for people to get through the first wave of infections before travel demand could fully release and rebound. But we anticipate to see a very nice rebound in growth in the domestic travel segment next year.”
Investor sentiment was similarly mixed in line with that mixed outlook. Trip.com’s U.S.-listed shares rose a modest 1.2% in the two trading days after the announcement, and its Hong Kong-listed shares actually slipped 0.7% when markets opened on Monday. But the stock has actually surged 53% since late October, and is also up 39% year-to-date – something very few stocks can say this year.
From a valuation perspective, Trip.com’s shares are also quite pricey at their current levels. The stock now trades at a lofty price-to-earnings (P/E) ratio of 34, based on 2023 earnings forecasts for the company which is expected to rise fivefold from this year’s levels. Domestic rival Tongcheng (OTCPK:TNGCF) (0780.HK) also trades at a relatively high forward P/E ratio of 28. By comparison, global giants Expedia (EXPE) and Tripadvisor (TRIP) trade at far lower ratios of 11 and 13, respectively.
Third quarter rebound
Having reviewed the flight path ahead, we’ll move on to a review of Trip.com’s third-quarter results which are actually quite solid because they reflect a relatively strong period in July and August before China’s fall Covid flareup.
The company’s revenue rose 29% year-on-year during the quarter to 6.9 billion yuan ($990 million). Its two core areas, hotel bookings and transport tickets rose 32% and 44%, respectively, during the period, accounting for 42% and 38% of total revenue. Those strong gains were offset by slower growth for the company’s smaller corporate and package tour travel businesses, as companies curbed their spending and leisure travelers skipped group tours in favor of more last-minute vacations.
As we’ve previously noted, Trip.com logged the strongest growth in its non-China business. It noted that air ticket bookings for that part of its business returned to about 80% to 90% of pre-pandemic levels in the third quarter, while hotel bookings were actually above pre-pandemic levels for a third consecutive quarter. It said its domestic hotel bookings “almost recovered fully to pre-pandemic levels” during the quarter.
Like many companies in China, Trip.com has become cautious about its spending during these uncertain Covid times. It said its total adjusted expenses, which exclude items like employee stock-based compensation and changes in the fair value of some of its assets, rose 15% for the quarter. As a result, it posted a 266 million yuan profit for the quarter, reversing an 849 million yuan loss a year earlier.
The company was far less upbeat about the current fourth quarter since some of China’s latest and strictest Covid control measures were in effect in October and November. And even with most of those measures now scrapped, December is likely to be a similarly bleak month as many people in China actually become infected and thus are hardly likely to travel.
The company didn’t provide any revenue or profit guidance for the fourth quarter. But analysts polled by Yahoo Finance expect Trip.com to report a profit of just $0.02 per share for the period – down sharply from the $0.22 per share in the third quarter. Such is the bumpy road that Trip.com and its peers are currently traveling.
We’ll end with a brief look at international travel, which is one of the few pieces that have yet to change under the current Covid-easing measures. Chinese tourists were previously one of the fastest-growing segments in the global travel business. But that business ground to a halt as the country slashed its number of international flights and strongly discouraged global travel during the pandemic.
China has recently begun slowly adding back international flights, and Trip.com cited industry data saying the number of cross-border flights has more than doubled over the last four months. But everything is relative, and even after that doubling the total number of international flights is still at just around 10% of pre-pandemic levels.
Company officials said on the call that following the initial policy relaxations, international flight bookings by mainland Chinese rose to their highest levels since the pandemic began. But even after that, such reservations are still at just 20% of pre-pandemic levels.
Disclosure: None
Editor’s Note: The summary bullets for this article were chosen by Seeking Alpha editors.
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