CITIC SEC: It is expected that the consumption volume of Spring Festival travel will increase significantly in 2025, with high certainty. There is still a price gap, but it is showing signs of narrowing.

Recently, CITIC SEC released a performance outlook for the social service industry in the fourth quarter of 2024 and a forecast for Spring Festival travel in 2025. The research report states that the consumer travel service industry in 2024 is one of the most prosperous sectors in the consumer industry dominated by domestic demand. With the alleviation of base pressure in the fourth quarter of 2024, the year-on-year growth rate of the industry improved as expected, but to a lesser extent than anticipated. From a performance outlook perspective, long-distance travel scenarios such as Online Travel Agencies (OTA) and hotels slightly exceeded expectations, leisure scenarios such as scenic spots and gambling were relatively stable, and the catering and duty-free industries with high operating leverage showed signs of recovery but still faced pressure. For the 2025 Spring Festival, an increase in travel consumption is highly likely, although there is still a price gap which is narrowing. According to the Ministry of Transport and Flight Manager, railway and civil aviation passenger traffic during the Spring Festival is expected to increase by 5.5% and 10.9% respectively, reaching historical highs and laying the foundation for a prosperous Spring Festival travel season. Overview of the performance outlook for the fourth quarter of 2024: With the alleviation of base pressure in the fourth quarter of 2024, the year-on-year growth of companies related to the service industry improved as expected but to a lesser extent than anticipated, as consumer demand continues to be affected by weak macroeconomic expectations. 1) Long-distance travel remains prosperous, with a 10% increase in domestic air passenger traffic in the fourth quarter of 2024, and a 52.7% increase in international and regional passenger traffic, recovering to 93.5% of 2019 levels. Correspondingly, OTA and hotel bookings are showing resilience, with OTA ticket and hotel bookings increasing slightly compared to the third quarter of 2024, while Revenue Per Available Room (RevPAR) in the hotel industry narrowed to 4.9% year-on-year, laying a slightly stronger foundation for revenue and performance of related companies compared to market expectations. 2) Demand for leisure scenarios is stable, with natural scenic spots outperforming leisure spots. In the fourth quarter of 2024, the Gross Gaming Revenue (GGR) of casinos increased by 6% and had recovered to 80% of 2019 levels, performing well and meeting market expectations. 3) The catering and duty-free industries, which are heavily influenced by macroeconomic expectations and have high operating leverage, showed signs of improvement in the fourth quarter of 2024 compared to the third quarter, but the extent of improvement was less than market expectations, leading to continued pressure on industry performance. 4) Additionally, the human resources sector dominated by business travel demand showed a trend of slight recovery, with the trend of flexible labor and business outsourcing remaining steady. Overall, the demand for travel services remained high, with industries that faced significant base pressures in the past steadily recovering, albeit not sharply, leading to a trend of increasing quantity and lowering prices with supply and demand rebalancing, resulting in differentiated performances among industries and companies. Outlook for the 2025 Spring Festival travel season: High certainty of increased quantity, although price gaps remain but are narrowing. The Ministry of Transport predicts that during the 2025 Spring Festival travel season, the total number of inter-regional travelers is expected to reach around 9 billion, a year-on-year increase of approximately 7%. Both railway and civil aviation passenger traffic are expected to reach historical highs, with year-on-year growth rates of over 5.5% for railways and over 10.9% for civil aviation. Flight managers forecast a 10.9% increase in civil aviation passenger traffic during the Spring Festival, with the average economy class ticket price for domestic flights remaining relatively stable compared to the previous year. The steady growth of travel during the high base of the Spring Festival period lays a good foundation for the flow of customers in the service industry, with OTA platforms expected to maintain a 10-30% growth in bookings, the hotel industry showing mid-single-digit growth in overnight stays but a slight decrease in prices, and overall visitor flows at scenic spots expected to achieve single-digit growth. In the first quarter of 2025, the Gross Gaming Revenue in Macau is expected to increase slightly year-on-year, catering customer flows are expected to remain warm with a slight increase in average spending per customer year-on-year. Looking ahead to the full year of 2025, considering the expected recovery in demand under policy guidance and the positive impact of improvements in supply-side in the industry. OTA: Increased onlineization rate, leading growth in OTA industry, as upstream supply growth slows down and subsidies from various OTAs gradually return to normal, narrowing the gap in hotel night growth. According to Flight Manager data, the total number of civil aviation passengers in the fourth quarter of 2024 was 176 million, an increase of 13.4% compared to 2023, and an increase of 8.4% compared to 2019; domestic passenger traffic was 157 million, an increase of 10% compared to 2023, and an increase of 10.6% compared to 2019, while international/regional passenger traffic was 17.6 million, an increase of 52.7% compared to 2023, and a decrease of 6.5% compared to 2019. The competitive landscape for OTAs has stabilized, with the slowdown in supply growth expected to impact the monetization rate slightly lower than the third quarter but higher than the same period last year. Flight Manager predicts a 10.9% year-on-year increase in civil aviation passenger traffic during the Spring Festival, while CADAS forecasts an increase of around 8.9% in domestic and 34.7% in international/regional airline passenger throughput during the Spring Festival, with Ctrip's order growth rate expected to be similar to that of the aviation market (approximately 10% for domestic and over 30% for international, with Tongcheng's growth rate being twice that of the industry at around 20%). Scenic spots: Natural scenic spots outperform leisure spots in the fourth quarter of 2024, with a stable performance expected during the Spring Festival. The fourth quarter is traditionally a low season for scenic spots, and in the fourth quarter of 2024, with relatively clear weather and moderate temperatures, the overall operation of the scenic spots sector was stable, although there was noticeable differentiation among different spots. The growth in visitor traffic continues to be a highlight for the top natural scenic spots, with visitor traffic at attractions such as Huangshan and Changbai Mountain Tourism increasing by 24% and 27% respectively year-on-year in the fourth quarter. However, leisure and vacation spots are still affected by the consumption environment, with visitor traffic at attractions such as Tianmu Lake Tourism in Jiangsu and Wuzhen and Gubei Water Town under China Cyts Tours Holding all declining year-on-year, showing weaker performance compared to top natural scenic spots. Visitor traffic at the scenic spots exceeded expectations during the two post-epidemic Spring Festival holidays, and we anticipate that the performance of scenic spots during the 2025 Spring Festival holiday will be generally stable, with the sector as a whole expected to achieve single-digit visitor traffic growth above a relatively high base, making it advisable to focus on related stocks with high growth potential and solid fundamentals in the first quarter of 2025. Hotels: Improvement in supply and demand balance, with a narrowing decline in RevPAR. In the fourth quarter of 2024, due to the slowdown in supply growth and the lowering of price bases, the year-on-year decline in Revenue Per Available Room (RevPAR) narrowed. According to data from Hotel HouseIn 2024, the average RevPAR of hotels in Q1-Q4 decreased by 7.3%, 11.0%, 9.8%, and 4.9% respectively compared to the same period last year. As of the end of December, the number of hotels increased by 2.6% year-on-year, the number of rooms increased by 6.9% year-on-year, and the average daily demand for hotel room nights increased by approximately 4% year-on-year. The difference in supply and demand growth rates led to a 5% year-on-year decrease in the average ADR for the whole year. Considering the high price base during the 2024 Spring Festival, we expect the growth rate of hotel room nights demand in 2025 to be in the mid to low single digits, slightly lower than the growth rate of travelers (about 7% increase in inter-regional personnel flow during the 2025 Spring Festival travel rush) and supply growth rate (around 7%). We predict that the average RevPAR of hotels during the Spring Festival holiday in 2025 will decrease by a mid-single digit percentage.Gambling: The peak season of the Spring Festival is approaching, and short-term preference for top operators with operational efficiency advantages. According to CRRCITICS-CLSA, there is a high correlation between Macau GGR and income expectations of urban residents and relatively high-income groups in first-tier cities. Therefore, from a forward-looking perspective, we believe that GGR is a leading indicator of economic recovery and domestic demand warming. The current valuation of the Macau gambling industry is still low, and we believe that the industry (especially large leading companies) has strong cyclical attributes. In comparison with other sectors in the leisure industry, the data realization is relatively stable, and we are optimistic that the Macau gambling industry is expected to thrive in 2025 against the backdrop of improving consumer sentiment and the recovery of the tourism industry. Due to seasonal effects, we expect industry GGR to decrease slightly year-on-year in January, increase slightly year-on-year in February, and slightly increase in 2025Q1 compared to the same period in 2024. Looking at 24Q4, despite some disruption in December due to high-level activities such as the celebrations of the 25th anniversary of Macau's return, the industry GGR in 24Q4 increased by 6% to 57.4 billion Macau dollars, reaching 80% of the same period in 2019, demonstrating good performance. We believe that the current industry reinvestment ratio is still high, and a significant decrease in reinvestment is expected to take 1-2 quarters. Operators are tending to invest in renovation and improving property quality through Capex input. We believe that a more orderly competitive environment will help in a moderate increase in EBITDA profit margins. Duty-free: Negative operating leverage effects persist, focusing on the progress of downtown store openings. According to Haikou Customs, tax-free sales in Hainan's outlying islands in 24Q4 decreased by 21.4% year-on-year (down 29.3% for the whole year), with shopping trips down by 19.4% (down 15.9% for the whole year) and per capita consumption down by 2.6% (down 15.9% for the whole year). We analyze that this is mainly due to the weakening of consumer demand under the macroeconomic backdrop, intensified competition from taxed channels lowering conversions, and the continued diversion of high-quality customer traffic due to the continuous growth of outbound tourism. In 24Q4, there was an increase in discount promotions, narrowing the decline in sales compared to the previous quarter. Leading companies in 24Q4 saw a year-on-year decline in revenue/net profit of 19%/77%, with a significant decline in operating negative leverage. We believe that the turning point of duty-free business still awaits a warming consumption environment, but in 2025, as the base pressure eases, tax-free sales are expected to gradually improve year-on-year. In the short term, following the safety incident in Thailand, there may be a partial return of outbound tourists from Southeast Asia to Hainan. The new policy for downtown duty-free shops has been implemented, and companies benefit from first-mover advantage in layout. We recommend continuing to track the progress of new downtown duty-free store openings. Catering: Overall competition stabilizing, prices stabilizing, traffic bottoming out, expected to demonstrate elasticity under policy stimuli. Due to the low base, the growth rate of catering sales has increased since October 2024, from around 3% before to around 4% now, while the number of catering outlets on the supply side is still decreasing. Looking at listed companies, price pressures have eased, traffic performance has stabilized, and the overall same-store sales decline in 24Q4 is expected to stabilize, while HAIDILAO shows a decline under a high base, but relatively stable performance compared between the first and second halves of the year. Leading companies in specific segments are the first to adjust prices, which we believe to some extent reflects the overall stabilization of competition. The marginal impact of low-price strategies on stimulating traffic is weakening, and the possibility of further intensifying price wars is low. According to our in-depth report on the catering industry chain released on January 17, under the direction of boosting domestic demand, we recommend allocating the catering chain to capture resilience in various scenarios. Currently, the overall performance of key catering companies is at a neutral level, considering policy incentives, there is room for performance improvement in optimistic scenarios, reaching 6% to 60%. The average dynamic P/E ratio for catering companies in 2025 is 20 times, and the elasticity of valuation is likely to be manifested whether it is due to policy confrontation or the expected turning point in the industry's own recovery, with the sustainability of valuation performance depending mainly on the degree of data realization. Human Resources: Weak recovery in recruitment demand in 2024, focus on bottom-up allocation opportunities. According to Datayes, the number of new job postings in 2024 increased by about 5% compared to the previous year, and the number of new recruiting companies increased by about 6%, showing a weak recovery overall. We expect high-end recruitment and human resources management businesses to still be under pressure in 24Q4, while the trend of flexible employment and business outsourcing is expected to continue, with double-digit revenue growth expected in the sector. Looking ahead to 2025, the growth certainty of outsourcing businesses remains high, and with the expected economic recovery, there is potential for upward recovery elasticity in cyclical businesses such as high-end recruitment and human resources management. If demand from mid-level customers picks up, there is also room for improvement in the gross profit margin of outsourcing businesses. Currently, the country places a high emphasis on employment, and we recommend continuing to track the progress and effectiveness of subsequent employment-related policy implementation in the human resources sector. The human resources sector is currently in the historical valuation bottom range, so we suggest focusing on bottom-up allocation opportunities. Risk factors: Economic slowdown surpassing expectations, consumer downgrading trends surpassing expectations; risks of unexpected changes in domestic and overseas travel policies; risks of unexpected changes in visa application policies for outbound travel; delays in the recovery of cross-border aviation capacity; increased market competition, etc. Investment strategy: Looking ahead to 2025, considering the expected recovery in demand under policy transmission and the positive promotion of industry supply improvements. From the perspective of leisure and business travel, the continuation of leisure prosperity is a high probability event, and any adjustments in holiday policies may further stimulate leisure demand release. We recommend selecting quality stocks as basic portfolio configurations. Business travel demand has a stronger beta elasticity compared to the macroeconomic cycle. closely monitor the pace of policy implementation to corporate profit improvement, with a more aggressive allocation approach. 1) First, we recommend the OTA sector and local life, which has high demand resilience, online rate improvement, and business expansion as multiple drivers, and the industry has a dual nature of leisure and business travel. 2) Next, we recommend the human resources and hotel sectors dominated by business demand, which are expected to demonstrate the greatest cyclical resilience. 3) Furthermore, we recommend high-quality stocks in the catering, gambling, and scenic spots dominated by leisure attributes and operational leverage. 4) Continuing to monitor the recovery of data in the duty-free industry.