Ctrip: Can high investment in inbound tourism "turn the tide"?

On February 25th, Beijing time, after the US stock market closed, $Trip.com(TCOM.US) announced its Q4 financial report for the fiscal year 2024, with the following key points:

This quarter, Trip.com Group achieved a net revenue of 12.7 billion yuan (excluding business tax), a year-on-year increase of 23.4%, showing a significant acceleration compared to the less than 20% growth in the previous two quarters, and exceeding the market expectation of 19.4%. The performance is good .

According to the company's disclosure, this quarter, the booking volume for outbound travel has exceeded 120% of the same period in 2019 (the previous quarter's figure was close to 120%), the booking volume for pure overseas business increased by 70% year-on-year, better than the previous quarter's 60%. The booking for inbound travel increased by over 100% year-on-year. Combined with the recent slowdown in government policies on visa-free entry for overseas tourists, the strong inbound travel and pure overseas business are the main contributors to the company's better-than-expected growth.

In terms of financial metrics, the two main pillar businesses this quarter, the revenue from hotel booking business increased by nearly 32.7% year-on-year, reaching the upper limit of the company's previous guidance. The growth rate jumped by a full 11 percentage points compared to the previous quarter. According to the company's prior guidance, the growth level of domestic hotel and travel booking revenue should be around 20%, while the revenue growth for outbound and pure overseas travel should be over 50%, thus driving overall growth.

The revenue growth rate for the ticketing business also recovered to 16.4%, better than the expected growth of about 14%. On one hand, the company actively reduced the impact of bundled sales items like insurance tied to flight tickets, which had a nearly completed base period. On the other hand, higher-priced international flights for inbound and outbound travel also bring higher revenue elasticity.

3. Among Trip.com's other three smaller businesses, the business travel segment grew about 88% compared to the same period in 2019, but the growth rate has been continuously declining from over 100% throughout 2024. Compared to the relatively hot leisure travel, the demand for business travel shows signs of continued weakening, which has certain implications for the overall business activity sentiment.

The other revenue primarily from advertising grew by 69% compared to the same period in 2019, but the trend has significantly declined since the high point in Q2 2024 (114%). This continues to reflect the weak domestic environment, with a decline in the willingness and ability to invest in hotel and travel advertising.

On the profitability front, this quarter, Trip.com's gross margin decreased by 1.2 percentage points to 79.3%, interrupting the trend of gross margin improvement, falling below 80% for the first time since 2023, and also below market expectations.

In terms of expenses, this quarter, the marketing expenses amounted to 3.37 billion yuan, a year-on-year increase of 44.6%, significantly higher than the revenue growth, reflecting a notable increase in marketing spending amid subdued domestic demand and the need for customer acquisition and expansion in overseas & inbound and outbound businesses. **

In terms of other expenses, this quarter R&D expenses and management expenses increased by 16.5% and 19% year-on-year, with a significant acceleration in growth. The total of the three expenses accounted for a year-on-year increase of 2 percentage points in revenue share.

Combined with the decline in gross profit margin and the expansion of expense ratios, the operating profit margin this quarter decreased by more than 3 percentage points to 18.1%. Although revenue growth was strong, the operating profit for this quarter was 2.3 billion, a year-on-year increase of only 5%. Although this is better than the company's guidance and market expectations of 2.2 billion, the lack of profit growth despite revenue growth is clearly not a good sign.

Adding back stock-based compensation, the adjusted net profit under Non-GAAP standards was 3.03 billion, a year-on-year increase of about 13%.

Dolphin Research Perspective:

Overall, from the perspective of expectation differences, this quarter's performance of Trip.com remains a stable "top student," with both revenue growth and profits significantly better than market expectations. However, setting aside expectation differences, the trend of this performance has both positive and negative aspects.

On the positive side, stimulated by the country's relaxation of visa-free entry policies, strong foreign tourist arrivals and the rapidly growing pure overseas Trip.com business have taken over the growth of the domestic and outbound tourism business, achieving a renewed acceleration in revenue growth, returning to over 20%. Looking ahead to 2025, inbound tourism and Trip.com's pure overseas business are likely to continue to maintain at least mid-to-high double-digit growth. If there are incremental policy benefits, there is potential for further exceeding expectations. Thus, assuming stable domestic demand, it could drive the group's incremental growth.

On the negative side, it can be seen that due to the weakening of the domestic hotel and tourism market (especially on the supply side, combined with research, many hotels or service providers have seen their operating conditions deteriorate significantly since the first half of 2024), Trip.com cannot continue the environment of supply exceeding demand that prevailed in the previous two years, where costs were controlled while enjoying excess profits. Meanwhile, the pure overseas business, while growing rapidly, also requires high expenses and investments, and the pace of profit release will not be quick. This has led to Trip.com's profit growth this quarter being nearly stagnant, with revenue growth but no incremental profit. Moreover, the company's previous guidance for profit growth throughout 2025 was also quite conservative. A rapid release of profits from overseas or inbound and outbound businesses is needed to adjust the profit expectations for 2025, which is expected to drive further growth in Trip.com's estimates.

From a valuation perspective, based on the current profit growth expectations, Trip.com's current market value corresponds to a PE multiple of about 16x for 2025 profits. Looking at the entire Chinese concept assets, corresponding to a possible 15%~20% revenue growth + lower profit growth, this valuation is relatively high, with no obvious cost-effectiveness. From the perspective of shareholder returns, depending on the situation, there is an irregular $400 million repurchase quota + this time a cash dividend of about $100 million, corresponding to the company's market value of over $40 billion. The shareholder return rate is relatively limited Therefore, Dolphin Research believes that Ctrip is more of a target favored by investors who pursue certainty and accept stable but not high expected returns. However, for investors seeking flexibility, the appeal is somewhat weaker.

Here are the detailed comments:

1. Strong inbound & overseas travel, driving growth to accelerate again

This season, Ctrip Group achieved a net revenue of 12.7 billion yuan (excluding business tax), a year-on-year increase of 23.4%, significantly accelerating compared to the less than 20% growth in the previous two quarters, and higher than the market expectation of 19.4%, which is somewhat of a pleasant surprise.

According to the company's disclosure, this quarter the booking volume for outbound travel has exceeded 120% of the same period in 2019 (the previous quarter's figure was close to 120%), the booking volume for pure overseas business increased by 70% year-on-year, better than the previous quarter's 60%. Inbound travel bookings increased by over 100% year-on-year. Coupled with the recent slowdown in government policies on visa-free entry for overseas tourists, it is evident that strong inbound travel and pure overseas business are the main contributors driving the company's growth to continue exceeding expectations.

From a financial perspective, this quarter Ctrip's hotel booking business revenue grew nearly 32.7% year-on-year, reaching the upper limit of the company's previous guidance. The growth rate jumped a full 11 percentage points compared to the previous quarter. According to the company's prior guidance, domestic hotel and travel booking revenue grew approximately 20% year-on-year, with outbound and pure overseas business both experiencing strong growth of over 50%, driving overall growth.

In addition, the revenue growth rate for ticketing business also recovered to 16.4%, better than the expected growth of about 14%. On one hand, the company actively reduced the impact of bundled sales items such as insurance tied to flight tickets, which had a nearly completed base effect. On the other hand, higher-priced international flights for entry and exit will also bring higher revenue elasticity.

2. The recovery degree of business travel & advertising business has weakened, what does it mean?

Compared to the strong performance of the aforementioned two pillar businesses accelerating again, the performance of the other three smaller businesses was relatively flat:

The business travel sector grew about 88% compared to the same period in 2019, but the growth rate has continuously declined from over 100% throughout 2024. This indicates that compared to the relatively hot leisure travel, the demand for business travel is continuously weakening, which has certain implications for the overall business activity sentiment.

The packaged travel products have finally recovered to above the level of 2019 after a full four years of recovery, with a year-on-year growth of 23.6%, which is considered relatively strong growth.

Other revenues mainly from advertising grew 69% compared to the same period in 2019, but the trend has significantly declined since the peak in Q2 2024 (114%). This continues the weak macro environment (the average price of domestic hotel and travel has decreased year-on-year), leading to a decline in the willingness and ability to invest in hotel and travel advertising. **

3. Significant Expansion of Expenses, Is There a Situation of Increased Revenue Without Increased Profit?

In terms of profitability, Ctrip's gross margin decreased by 1.2 percentage points year-on-year to 79.3% this quarter, interrupting the trend of rising gross margins. This is the first time it has fallen below 80% since 2023 and is also lower than the market expectation of 80.6%. The change in revenue structure and higher expenses are likely the main reasons for the decline in gross margin. However, despite the drop in gross margin, strong revenue growth led to a gross profit of 10.1 billion, which is still better than the expected 9.94 billion.

In terms of expenses, this quarter's marketing expenses increased significantly by 44.6% year-on-year to 3.37 billion, clearly outpacing revenue growth. With domestic demand becoming relatively flat and the need for customer acquisition and expansion in overseas and inbound & outbound businesses, marketing spending has seen substantial growth.

In other expenses, this quarter's R&D expenses and management expenses also increased by 16.5% and 19% year-on-year, with significant acceleration in growth. Thus, all expense categories for Ctrip this quarter have shown noticeable increases.

Overall, the combined proportion of the three expenses to revenue increased by 2 percentage points year-on-year, coupled with a 1.2 percentage point decline in gross margin, the operating profit margin this quarter decreased by over 3 percentage points to 18.1%.

Under GAAP standards, due to the significant decline in profit margins, although revenue growth was strong, the operating profit this quarter was 2.3 billion, a year-on-year increase of only 5%. Although this is better than the company's guidance and market expectation of 2.2 billion, the situation of increased revenue without increased profit is clearly not a good sign.

Adding back stock-based compensation, under Non-GAAP standards, the adjusted net profit was 3.03 billion, a year-on-year increase of about 13%.

Dolphin Research Past Analysis on [Ctrip]:

November 19, 2024 Financial Report Review “Playing Out of the Country, Ctrip is Still Doing Great” Link

November 19, 2024 Conference Call “Ctrip: Will There Be Surprises in 2025? (3Q24 Conference Call)” Link

August 27, 2024 Conference Call “Ctrip: How Did Domestic and Inbound/Outbound Business Perform During the Summer?” Link

August 27, 2024 Financial Report Review “Ctrip: Between Underperformance and Madness, There’s Finally a Normal One Among Chinese Concepts!” Link

May 21, 2024 Conference Call “Ctrip: Seizing Overseas Markets and Inbound/Outbound Travel” Link

May 21, 2024 Financial Report Review “Ctrip: Traveling ‘High’ Overseas, But Afraid of the Cold at High Places” Link

February 22, 2024 Conference Call “Ctrip: International Business, Inbound Travel, AI—Three Major Strategic Directions for 2024” Link

February 22, 2024 Financial Report Review “Ctrip: Can Domestic Stability Be Maintained in 2024, and Can Overseas Take Over?” Link

November 21, 2023 Conference Call “Ctrip: 15% Growth Next Year, Outbound & Overseas as Main Drivers” Link

November 21, 2023 Financial Report Review “After the Violent Recovery, How Far Can Ctrip Continue to Go?” Link September 5, 2023 Conference Call: Trip.com: The trend of leisure travel will continue, with growth seen overseas

September 5, 2023 Earnings Report Commentary: It's exploded again! Is Trip.com a "rainbow" after the rain or a "long rainbow" after the rain?

June 8, 2023 Conference Call: Trip.com Minutes: "The trend remains unchanged, and demand recovery is still very strong"

June 8, 2023 Earnings Report Commentary: Trip.com: Surviving a great disaster brings future blessings

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