Tongcheng Flies High On Post-Covid Domestic Travel Boom

Key Takeaways:

• Tongcheng’s revenue more than doubled in the second quarter, as domestic travel in China bounced back with the end of Covid restrictions
• The company’s strengths in lower-tier cities and exclusive position on Tencent’s WeChat have given it an edge over more globally-focused rivals like Trip.com Group and Fosun Tourism

By Edith Terry

While gloom besets China’s property sector and analysts warn of deflationary pressures, one area that so far seems immune from the economic malaise is domestic tourism. The sector’s surprising resilience has brought cheer to the travel industry, which was shattered for much of the last three years by Covid lockdowns and a severe curtailing of international flights.

Now, that resilience is powering Tongcheng Travel Holdings Ltd. (0780.HK) and its domestically focused peer Tuniu Corp. (TOUR), as well as hotel stocks like H World Group HTHT and the more internationally oriented Fosun Tourism Group (1992.HK), to huge revenue gains off the lows of 2022 during some of China’s harshest Covid restrictions.

Tongcheng’s revenue more than doubled in the second quarter, rising 117.4% year-on-year to 2.86 billion yuan ($392.2 million), accelerating from a 50.5% increase in the first quarter of 2023, according to its second-quarter financial results released on Aug. 22. It returned to the black for the quarter with a 356 million yuan profit, reversing a 132 million yuan loss a year earlier. Tuniu’s second-quarter revenues jumped by an even larger 170.5%, as it also returned to the black with a 221 million yuan profit after posting a 128.5 million yuan loss a year earlier.

H World Group and Fosun Tourism both posted healthy but slower revenue growth of 65.1% and 40%, respectively, in the first half of the year. Their growth was tempered by large international components to their business mix, since the global travel market had already begun rebounding in the first half of last year as many countries ended their Covid restrictions.

H World CEO Jin Hui described China’s domestic travel rebound as “explosive and concentrated” in his company’s earnings call last week. In a media interview after Tongcheng’s company’s earnings announcement, CFO Fan Lei brashly predicted that tourism would grow faster than China’s GDP over the next 10 years. He explained that the mindset for average Chinese consumers is shifting, with people “switching their spending habits from buying expensive products to paying for experience-type consumption,” which includes travel.

Tongcheng was formed in 2018 through a merger of Tencent-backed online travel agency eLong and Tongcheng Network, which was also backed by Tencent, as well as Dalian Wanda and Trip.com TCOM. It has chafed at some of the restrictions presented by competition with its major shareholders, though it also relies heavily on those connections for its business.

The company gets the big majority of its business from traffic over Tencent’s WeChat and QQ platforms, though it is trying to lower that dependence. Its business has remained largely domestic, while Trip.com has move aggressively into the higher-margin international travel business, competing in the same league as global giants Expedia, TripAdvisor and Booking Holdings.

For this year, at least, Tongcheng’s solid domestic presence has been a boon to the company. It has focused on second-tier cities and domestic partnerships, at a time when China’s outbound tourism is still well below pre-Covid levels. In the second quarter, 86.7% of its registered users and 69.7% of its paying WeChat users came from non-first-tier cities in China. Tongcheng CFO Fan said overseas travel is only at 40% to 50% of pre-Covid levels.

Small-City Travel Boom

According to Trip.com data in May, smaller mainland cities have become some of China’s most popular travel destinations, including Zibo in Shandong province and Yining in the Xinjiang region. In July, the China Tourism Academy predicted that domestic tourism would reach 5.5 billion trips this year, about 80% of pre-Covid levels. During major holidays, Chinese tourism exceeded 2019 levels, according to the academy.

Tongcheng’s Fan said that the surge in his company’s earnings was due to domestic market performance. And while outbound Chinese tourism – the largest in the world before Covid – is likely to resume, the patterns may shift, he added. In the first six months of this year, more than half of outbound Mainland Chinese tourists went to Macau, with another quarter going to Hong Kong. Much of the remainder went to nearby destinations like Taiwan, Japan and Thailand.

Tongcheng’s stock hit a 52-week high of HK$20.40 in January after China ended its “zero Covid” policy, but has tracked downward since then. But even at its latest close of HK$17.58, its current P/E ratio of 63 reflects investor expectations that Tongcheng shares, as well as its profits, will continue to rise. Indeed, analysts polled by Yahoo Finance expect the company’s profit to rise 20% next year.

H World trades at an even higher P/E ratio of 84, while Trip.com trades at 33. All those are higher than the international companies like Expedia, which trades at a ratio of 19, and Booking Holdings, which trades at 27. Tongcheng’s high valuation may seem reasonable for those who believe that China’s post-Covid travel rebound will continue despite increasingly gloomy sounds from other parts of the economy.

And there is certainly reason to bet on Tongcheng’s prospects as one of China’s dominant domestic online travel agencies. It has taken an intensive strategy of applying artificial intelligence (AI) to all aspects of its operations, which helped to boost its average monthly active users (MAUs) by 41.1% year-on-year to 278.8 million in the second quarter. Its monthly paying users increased by an even larger 61.7% to 42.2 million, while its gross merchandise value (GMV) jumped by 145.7% to 59.7 billion yuan.

It said it reached those heights by diversifying its online traffic channels away from its reliance on Tencent. It did that through more effective user engagement, including partnerships with handset vendors, hotels, public transit and music festivals. In the quarter, it established partnerships with the major Chengdu International Airport and Henan Province Airport Group to develop AI-driven solutions.

Tongcheng seems well positioned to dominate the domestic Chinese market by using technology and its monopoly of the WeChat and QQ payment platforms to its advantage. Now, the big question is whether China’s travel boom will maintain its momentum from the first half of the year, even in the face of growing signs of a slowdown in other parts of the economy.