Robert Way
Elevator Pitch
My investment rating for Trip.com’s (NASDAQ:TCOM) [9961:HK] shares stays as a Hold.
I assessed China’s Mid-Autumn holiday tourist statistics and previewed TCOM’s Q2 2022 earnings with my earlier September 15, 2022 article for the company. I focus my attention on China’s COVID-zero policy pivot and Trip.com’s outlook in this latest update.
I am positive on the recent reopening moves by China, and I think this will have a favorable impact on TCOM. On the flip side, Trip.com’s current stock price has priced in the positives, and TCOM’s actual business recovery should still take quite some time. In conclusion, my opinion is that Trip.com warrants a Hold rating now.
China’s COVID-Zero Policy Pivot Is A Positive Development For TCOM
In my previous mid-September 2022 write-up, I made specific reference to a McKinsey research report calling Trip.com the “largest online travel agency” in “the world’s largest outbound-travel market”, China. This means that TCOM is one of the biggest beneficiaries of China’s potential reopening and pivot away from its COVID-zero policy.
Recent developments send a strong signal that China is making positive changes to its pandemic approach, and this is good for Trip.com.
In late-November, key Chinese cities such as Guangzhou, Beijing, and Chongqing did away with mass COVID-19 testing, according to Chinese state media The Global Times. Bloomberg reported on November 29, 2022 that China’s National Health Commission revealed that it “would bolster vaccination among its senior citizens” in the country. On November 30, 2022, China’s state news agency Xinhua cited Vice Premier Sun Chunlan’s comments regarding “the importance of constantly optimizing the country’s COVID-19 response.”
There have also been tweaks made to COVID-19 measures specifically relating to travel and border reopening. Chinese media publication, Caixin Global, noted in an earlier November 11, 2022 report that the country discontinued its “circuit breaker mechanism for inbound flights and shortened the quarantine period for overseas travelers.”
The move away from a strict COVID-zero strategy in China is expected to be a tailwind for TCOM. It is noteworthy that Trip.com previously revealed at its most recent quarterly earnings call that when the Chinese “authorities adopted milder and more precise control measures” to tackle COVID-19 in July 2022, it drove an increase in TCOM’s “China domestic hotel bookings.”
But Consensus Numbers Suggest TCOM Will Take Time To Recover To Pre-COVID Levels
Trip.com is most probably going to take quite a while to get back to where it was before the pandemic, even though China is making decent progress in reopening as discussed in the preceding section.
The consensus financial figures obtained from S&P Capital IQ indicate that even assuming that China does a full reopening by next year, TCOM’s top line and bottom line will only exceed pre-pandemic levels in 2024. Trip.com reported a revenue of RMB35.7 billion and a normalized net profit of RMB6.5 billion in fiscal 2019 before the COVID-19 outbreak. The sell-side analysts predict that Trip.com’s top line will expand by +27% from RMB30.0 billion for FY 2023 to RMB38.2 billion in FY 2024, while they see the company’s normalized net income growing by +46% from RMB5.2 billion to RMB7.5 billion during the same period.
A recent Chinese consumer survey conducted by Oliver Wyman suggests that the Chinese traveler boom will require some time to come into fruition. This explains why Trip.com will only see a substantial recovery in its revenue and bottom line in two years’ time or even longer.
A December 2022 Oliver Wyman research report titled “China’s Consumption Outlook: What The Future Holds After A Rollercoaster 2022” highlights that 31% and 20% of Chinese respondents indicate that they will wait “several months” and “one year or more” to travel outside the country, respectively after China reopens. In other words, assuming that a full China reopening occurs in the middle of 2023, more than half of Chinese travelers might only consider overseas travel again in 2024. The Chinese travelers who are apprehensive about travelling again have concerns regarding “about getting COVID-19 while traveling” and “changes in re-entry policies” as mentioned in the survey.
Closing Thoughts
I continue to assign a Hold rating to TCOM’s stock.
Trip.com’s share price has more than doubled from its 52-week low of $14.29 recorded on the March 14, 2022 trading day to $33.11 as of December 6, 2022. Notably, TCOM’s last done share price is just -6% below the company’s stock price of $35.22 as of December 30, 2019. This implies that the positives related to China’s recent COVID-19 policy pivot have been largely factored into TCOM’s stock price.
Furthermore, Trip.com’s valuations aren’t as appealing as another Chinese listed travel company, Tongcheng Travel Holdings Limited (OTCPK:TNGCF) [780:HK]. As per S&P Capital IQ’s valuation data, TCOM trades at consensus forward next twelve months’ Enterprise Value-to-Revenue and normalized P/E multiples of 6.2 times and 46.3 times, respectively now. As a comparison, the market currently values Tongcheng Travel at 4.2 times consensus forward next twelve months’ Enterprise Value-to-Revenue and 35.0 times consensus forward next twelve months’ normalized P/E.
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