Travel Restrictions Trip Up Tongcheng-Elong

Covid-19 flare-ups dampened tourism in the third quarter, leading to a 9.3% drop in the online travel agent’s latest quarterly revenue

Key Takeaways:

• Following a weak third quarter, similar travel declines during China’s Oct. 1 ‘Golden Week’ make it difficult to be optimistic about Tongcheng-Elong’s fourth quarter
• Despite suffering from travel restrictions, Tongcheng-Elong’s position standing on shoulders of giants Tencent and Trip.com should help it over the longer term

By Jony Ho

Online travel agent Tongcheng-Elong Holdings Ltd.’s (0780.HK) third-quarter results announced this week were bumpy at best, hobbled by slumping tourism as a result of recurring Covid-19 flareups around China.

That uneven performance has led to differing opinions on the company’s outlook: Some believe more stringent anti-Covid measures will follow the Beijing Winter Olympics next February, which would drag down the entire tourism industry. But others point out the company will continue to benefit from the support of its “giant” business partners. Still, the highest target price for the company in a survey of investors is HK$23 ($2.95), about 30% higher than its current share price, meaning analysts see some but not a huge amount of upside potential.

Tongcheng-Elong’s revenue increased by a tiny 1.3% year-on-year in the third quarter to 1.94 billion yuan ($310 million), but decreased 9.3% from the previous quarter. Its profit fell by 8.7% year-on-year to about 230 million yuan, and its adjusted net profit decreased by a similar 5.6% to 351 million yuan.

The company said travel demand in China began to rise in early July, helping the tourism industry to rebound strongly. But the appearance of Covid-19 Delta infections in Nanjing in July, followed by its spread to other Chinese cities, led to travel restrictions in various provinces and cities, dampening demand during the usually busy summer period.

Tongcheng-Elong shares rose for two consecutive days after its release of the quarterly report late on Monday, gaining nearly 2% over that time to close at HK$17.66 on Wednesday. Affected by the epidemic, most travel platforms have posted sharp declines in revenue and profits, as many recorded losses. Relatively speaking, Tongcheng-Elong’s performance is ahead of its peers in no small part due to China’s ability to keep Covid-19 under control.

Tongcheng-Elong’s third-quarter profit totaled 230 million yuan. Assuming a similar result in the fourth quarter, it would record a second-half profit of 460 million yuan, nearly the same as the first half. That would give it an estimated price-to-earnings ratio of 34.5 times, or well below the 133.9 times of Trip.com Group Ltd. (9961.HK; TCOM.US), China’s leading online travel agent and also one of Tongcheng-Elong’s major stakeholders. International giant Expedia (EXPE.US) is expected to lose money this year, like many travel companies outside China.

The industry’s recent turbulence has dragged into the fourth quarter. Tongcheng E-long’s “Tongcheng Travel” brand issued a report in September saying it expected the number of domestic tourists during China’s “Golden Week” holiday, which ran Oct. 1-7, to reach 650 million, or more than 80% of pre-pandemic levels in 2019.

But those optimistic expectations were ultimately dashed due to ongoing outbreaks. According to calculations by China’s Ministry of Culture and Tourism, travelers made only 515 million domestic trips during holiday period, returning to 70.1% of pre-pandemic levels. That was even less than last year during the pandemic’s first year. Even more frustrating for the industry, related tourism revenue was about 389 billion yuan, or only 60% of the same period pre-pandemic.

More noteworthy is a newer wave of Covid-19 infections in China from Oct. 17 to Nov. 20, which saw 1,348 confirmed cases reported in 21 provinces. Although locally-transmitted new cases have recently returned to the single-digit daily level, the market has obvious reservations about the industry’s near-term prospects.

Stricter epidemic prevention

UBS recently issued a report reducing its fourth-quarter revenue forecast for Tongcheng-Elong by 19.6% to 1.8 billion yuan, representing an 8.4% decline from the fourth quarter of 2019, mainly to reflect the reduction in tourist activity under strict prevention restrictions.

With the Lunar New Year and Winter Olympics coming in the first part of next year, UBS expects tight travel restrictions will continue through the first quarter of 2022. However, with more public holidays in the second quarter and summer vacation in the third, epidemic prevention measures may begin to relax, which will promote the company’s growth.

UBS estimates Tongcheng-Elong will earn revenue next year of 9.5 billion yuan, 4.3% lower than the bank’s August forecast. It also lowered its target price for the company from HK$22 to HK$21, while maintaining its “buy” rating.

Credit Suisse sees Tongcheng-Elong’s position in the broader travel market as “sweetness in a sea of bitterness” due to the company’s position in the relatively less affected China market. It said the pandemic’s rebound during summer vacation affected tourism demand in the third quarter. Conditions in some provinces and cities hadn’t relaxed in the fourth quarter, leading it to predict that strict epidemic prevention measures will be implemented before the Beijing Winter Olympics in February.

Accordingly, the bank lowered its earnings forecasts for the company in 2021 and 2022 by 7% and 4%, respectively, to reflect weak expectations for tourism in the fourth quarter and first quarter of next year.

Despite the earnings downgrades, Credit Suisse maintained its “outperform” rating for Tongcheng-Elong, the equivalent of a “buy,” and raised its target price from HK$19.7 to HK$21, mainly because of its strong performance in smaller cities. Of the company’s new paying users on the WeChat platform – its main traffic source – about 62.7% are from third-tier or lower cities in China, making such small cities an important growth engine for the company.

Relying on giants

Tongcheng-Elong is doing relatively well in no small part because it “stands on the shoulders of giants,” giving confidence to the company’s creditors. Its largest shareholders include two familiar names: China’s leading online travel agency Trip.com, and social networking giant Tencent Holdings Ltd. (0700.HK), which hold 26.98% and 21.98% of Tongcheng-Elong shares, respectively.

Those connections have benefited Tongcheng-Elong during the difficult times. Trip.com provides hotel and air ticket reservation services to the company, and Tencent’s WeChat platform is the primary source of customer traffic. The company’s last results show that 79.6% of its 277 million average monthly active users (MAU) came through its WeChat applet, reflecting how reliant it is on the internet giant.

But at least one Chinese venture capital firm seems less patient with the company. According to the Hong Kong Stock Exchange, Suzhou Huafan Runhe Venture Capital Partnership, which was previously the company’s fifth largest shareholder with about 8% of Tongcheng-Elong’s shares in 2019, has successively reduced its holdings since September last year. In February this year, the partnership’s shareholding stood at 4.83%, falling below the 5% threshold after which investors are no longer required to publicly disclose their stakes.

But not everyone is downbeat. T. Rowe Price, a major US brokerage, disclosed it held 5.05% of Tongcheng E-long’s shares in early September this year, as it crossed the disclosure threshold. Foreign investor optimistic coupled with Chinese investor bearishness reflects the mixed feelings the market now has on the company’s prospects.

Whose outlook is more accurate? With China’s tourism industry facing an uncertain future, Tongcheng-Elong may need to wait until at least the early part of next year when the first clues about China’s new approach to travel restrictions could be revealed after the Winter Olympics.

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