Online travel agency posted a substantial loss in the first quarter due to China’s Covid travel restrictions, but is predicting more lucrative days ahead
• Trip.com posted a 989 million yuan loss in the first quarter, as revenue fell 12% from the previous quarter.
• Despite the weak performance, the company was upbeat about a potential boom in outbound China tourism once the country relaxes its travel restrictions.
By Andrew Curran
It’s a tough gig running an online travel agency in China these days. The country remains off limits to international travelers, and ongoing Covid-related restrictions inside China are hitting the domestic travel sector hard as well.
Acutely feeling that pain is Trip.com (TCOM.US; 9961.HK), the Shanghai-based online travel juggernaut that has just reported its first-quarter results that don’t look so good. But there was also a lot of sunny optimism from company officials, who believe they are well positioned to hitch a ride on a travel gold rush that’s building globally and could soon come to China when the country reopens for international travel.
First the bad news. Trip.com reported it lost 989 million yuan ($148 million) in the first three months of the year, reversing a 1.78 billion yuan profit a year earlier. Revenues totaled 4.1 billion yuan for the quarter, down 12% from the previous quarter and roughly flat compared with a year earlier.
CEO Jane Sun said the company has long weathered the ups and downs of the travel industry and put its lessons learned to good use during the pandemic. She said the key to survival is retaining cash, which the company has plenty of, totaling 33.3 billion yuan at the end of March.
Despite the less-than-stellar results, Trip.com’s executives had a persuasive story to tell to investors and analysts – and it seemed they were buying into it.
The company’s Hong Kong-listed stock jumped as much as 25% on Tuesday after the results were released and finished up 16% for the day. They have given back some of the gains since then, though they’re still 12% ahead of pre-announcement levels.
Such gains look especially strong when one considers that no amount of gloss can cover up the impact of draconian travel restrictions imposed on Trip.com and its peers as part of China’s efforts to halt the spread of Covid-19 within its borders. The company has worked hard to increase its revenue from international markets that aren’t heavily affected by China’s restrictions. But more than half of its business still comes from within China.
Data from aviation analytics business OAG showed that in June there were just shy of 64 million aircraft seats available on flights that arrived or departed from a Chinese airport, down over 20% from pre-pandemic levels in June 2019. Nearly 62.2 million of those seats, or 97.3%, were on domestic flights as the nation has severely curtailed international travel.
Domestic travel within China tends to recover quickly after lockdowns. But the real money for Trip.com is in international travel by Chinese tourists that has come to a near halt for the last two years. What’s more, China isn’t issuing tourism visas for inbound tourists, and all but forbids Chinese citizens from traveling abroad for tourism.
Peers faring better
Unlike Trip.com, some other China-based online travel agencies that rely mostly on domestic travel managed to generate profits in the first quarter. Jiangsu-based Tongcheng Travel (0780.HK) earned a tidy 245 million yuan profit for the period. While Tongcheng is also an online travel agent, the vast bulk of its registered users live in smaller third-tier cities that escaped the worst of China’s lockdowns. That allowed such tourists to continue traveling domestically, boosting Tongcheng’s coffers in the process.
China’s top resort operator, Fosun Tourism Group (1992.HK), owner of the popular Club Med brand, also managed to avoid the downturn because it generates 75% of its revenues from outside China, allowing it to capitalize on rebounding travel in key U.S. and European markets in the first quarter. Fosun generated net revenues of 4.2 billion yuan from its core resorts and tourist destinations business in the first three months of 2022, more than quadruple the year ago period.
By comparison, Trip.com said it was heavily impacted by Covid outbreaks and resulting lockdowns in first-tier cities such as Shenzhen, Shanghai and Beijing, contributing significantly to its quarterly loss.
With the lockdowns in those cities extending well into the second quarter and the Chinese government showing no signs of relaxing international travel bans, the outlook for Trip.com’s second quarter results isn’t so bright either.
“In the quarter-to-date, the industry level air passenger volume was down by 70% to 90%,” CFO Cindy Wang said during the company’s earnings call this week. “And the industry-level hotel revenue per available room was down by 40% to 60% compared to the same period in 2019, among which a significant portion was attributable to quarantine requirements.”
As a result, the company expects “a relatively weak second quarter,” CEO Sun told analysts.
Trip.com’s Hong Kong share price is down over 19% from a 12-month high of HK$289.80, while its Nasdaq-listed shares are down by an even larger 23% over the same period. But the company’s U.S. shares still trade at a relatively strong price-to-sales (P/S) ratio of 6.2, higher than Tongcheng’s 4.4 and well ahead of the 1.6 ratio for global travel giant Expedia (EXPE.US).
That premium could owe partly to the overall upbeat tone from Trip.com’s executives, which helped to fuel the post-earnings rally as investors and management imagined brighter days ahead. The bottom line is that China can’t keep its borders closed forever. And when they do reopen, millions of Chinese will be cashed up and keen to hit the “buy” button on the websites of online travel agents like Trip.com
Outside China, long-haul travel has already roared back to life as countries reopened and eased restrictions. In many markets, demand for seats and hotel rooms is exceeding supply, sending travel industry yields soaring. Prices are high, but people don’t care. They want to travel and are willing to pay extra to do so.
Trip.com isn’t the only big Chinese company waiting for the day to arrive when China will reopen its doors. One of the nation’s biggest hotel operators, Huazhu Group (HTHT.US; 1179.HK), oversees nearly 8,000 hotels with over 750,000 rooms. It has also suffered from the pandemic’s impact, posting a net loss of 630 million yuan in the first quarter.
But banking on a brighter future, Hauzhu opened over 300 new hotels in the three-month period and has more than 2,200 in the pipeline. How’s that for confidence in China’s travel market?
One non-Chinese airline executive recently called the current travel environment the most revenue rich he’s seen in three decades. After two years of a Covid-fueled bust, there’s a global travel industry gold rush underway. And once China reopens, Trip.com and its investors stand to reap the rewards – explaining why everyone was so sparky this week despite the quarterly loss.
“While our short-term perspective may not seem optimistic, demand for travel is still strong, which offers a brighter outlook for the long-term,” said Trip.com Chairman James Liang. “Global travel continues to recover at a strong pace as governments continue to open up. We anticipate seeing a similar pattern in China once the restrictions are eased.”
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