TRIP.COM-S(09961): Can inbound tourism withstand the high investment and turn the tide?

As of February 25, Beijing time, after the US stock market closed, TRIP.COM-S (09961) released its fourth quarter financial report for the 2024 fiscal year. 1. Ctrip Group achieved a net income of 12.7 billion yuan in this quarter (excluding business tax), an increase of 23.4% year-on-year, showing a noticeable acceleration compared to the growth of less than 20% in the previous two quarters, and higher than the market's expected 19.4%, performing well. According to the company's disclosure, the volume of flight and hotel bookings for outbound travel in this quarter has exceeded 120% of the same period in 2019 (close to 120% in the previous quarter), with a 70% year-on-year increase in pure overseas business, better than the 60% in the previous quarter. The booking volume for inbound travel increased by over 100%. Combining with the recent slowdown in the government's policy of visa-free entry for overseas tourists, strong inbound travel and pure overseas business are the main contributors to the company's growth exceeding expectations. 2. In terms of financial performance, the two major core businesses of hotel booking revenue in this quarter increased by nearly 32.7% year-on-year, reaching the upper limit of the company's previous guidance. The growth rate jumped by 11 percentage points compared to the previous quarter. In accordance with the company's previous guidance, the revenue growth of domestic hotel travel bookings in this quarter should be around 20%, while the growth in outbound and pure international hotel travel bookings should be over 50%, thus driving the overall growth. Ticketing revenue growth also recovered to 16.4%, better than the expected growth of around 14%. On the one hand, the impact of bundled sales items such as insurance tied to air tickets has decreased. On the other hand, higher-priced international flights for inbound and outbound travel will also bring higher revenue elasticity. 3. Among Ctrip's other three smaller businesses, corporate travel services grew by about 88% compared to the same period in 2019, but the growth has been declining steadily over the past two years. Compared to the hot leisure travel market, the weakening demand for corporate travel services signals the overall business activity outlook. Other revenue primarily driven by advertising increased by 69% compared to the same period in 2019, but the trend has significantly declined after reaching a high point in 24Q2 (114%). In continuation of the weaker domestic environment, the decline in advertising willingness and capabilities for hotel travel further decreased. 4. In terms of profitability, Ctrip's gross margin decreased by 1.2 percentage points year-on-year to 79.3%, breaking the trend of gross margin improvement, falling below 80% for the first time since 2023 and below market expectations. On the expense side, marketing expenses in this quarter surpassed 3.37 billion yuan, a substantial increase of 44.6% year-on-year, significantly higher than the revenue growth. With domestic demand becoming flat and the demand for acquiring customers and expanding overseas and inbound travel business, marketing expenses increased significantly. In terms of other expenses, research and development expenses and management expenses increased by 16.5% and 19% year-on-year, respectively, showing significant growth. Overall, the proportion of the three expenses as a percentage of revenue increased by 2 percentage points year-on-year. 5. Combining the decrease in gross margin and the expansion of expense rates, the operating profit margin in this quarter decreased by over 3 percentage points to 18.1%. Despite strong revenue growth, operating profit in this quarter was 2.3 billion yuan, an increase of only 5% year-on-year. Although better than the company's guidance and market expectations of 2.2 billion yuan, the lack of profit growth with revenue growth is not a good sign. Adjusting for non-GAAP terms such as stock-based compensation, the adjusted net profit for this quarter was 3.03 billion yuan, a year-on-year increase of about 13%. Dolphin Research's viewpoint: Overall, from the perspective of expectations, Ctrip's performance in this quarter remains a stable "top student", with both revenue growth and profit better than market expectations. However, looking beyond expectations, this performance has both positives and negatives. On the positive side, stimulated by the government's relaxation of visa policies for inbound travelers, the strong influx of foreign tourists for inbound travel and the rapidly growing pure overseas business of Trip.com have taken over the slowing growth of domestic and outbound travel businesses, achieving a renewed acceleration in revenue growth, exceeding 20%. Looking ahead to 2025, the probability of continued double-digit growth in inbound travel and Trip.com's pure overseas business is high. If there are additional policy boosts, there is a possibility of surpassing expectations further. Assuming stable domestic demand, this could drive incremental growth for the group. On the negative side, it is evident that due to the weakening hotel and travel market in China (especially on the supply side, with research showing that many hotels or service providers have seen a significant decline in business since the first half of 2024), Ctrip cannot continue the situation of low supply and high demand of the past two years, where they controlled costs while enjoying excess profits. While the pure overseas business is growing rapidly, it also requires high expenses and investments, and the pace of profit release will not be rapid. This has led to Ctrip's profit growth stalling this quarter, with increased revenue but no incremental profits. The company's previous guidance for profit growth in 2025 is also quite conservative. Profit acceleration from the overseas or inbound business is needed to raise profit expectations for 2025 and further drive the group's estimated growth. From a valuation perspective, based on current profit growth expectations, Ctrip's current market value corresponds to a PE ratio of approximately 16x for 2025 earnings. Looking at the entire Chinese asset class, with around 15% to 20% revenue growth + lower profit growth, this valuation is relatively high and does not offer a clear value proposition. In terms of shareholder returns, the company's occasional $400 million share repurchase scheme and the approximately $200 million cash dividend in this quarter correspond to a market value of over $40 billion. The shareholder return rate is relatively limited. Therefore, Dolphin Research believes that Ctrip is more suitable for investors seeking certainty and accepting stable but not high expected returns. However, for investors seeking elasticity, its attractiveness is slightly weaker. Below is a detailed analysis: 1. Strong Inbound & Overseas Travel Trends Drive Growth Acceleration In this quarter, Ctrip Group achieved a net income of 12.7 billion yuan (excluding business tax), an increase of 23.4% year-on-year, showing a noticeable acceleration compared to the growth of less than 20% in the previous two quarters, and higher than the market's expected 19.4%, eliciting a pleasant surprise. According to the company's disclosure, the volume of flight and hotel bookings for outbound travel in this quarter has exceeded 120% of the same period in 2019 (close to 120% in the previous quarter), with a 70% year-on-year increase in pure overseas business, better than the 60% in the previous quarter. The booking volume for inbound travel increased by over 100%. Combining with the recent slowdown in the government's policy of visa-free entry for overseas tourists, strong inbound travel and pure overseas business are the main contributors to the company's growth exceeding expectations. 2. In terms of financial performance, the two major core businesses of hotel booking revenue in this quarter increased by nearly 32.7% year-on-year, reaching the upper limit of the company's previous guidance. The growth rate jumped by 11 percentage points compared to the previous quarter. In accordance with the company's previous guidance, the revenue growth of domestic hotel travel bookings in this quarter should be around 20%, while the growth in outbound and pure international hotel travel bookings should be over 50%, thus driving the overall growth. Ticketing revenue growth also recovered to 16.4%, better than the expected growth of around 14%. On the one hand, the impact of bundled sales items such as insurance tied to air tickets has decreased. On the other hand, higher-priced international flights for inbound and outbound travel will also bring higher revenue elasticity. 3. Among Ctrip's other three smaller businesses, corporate travel services grew by about 88% compared to the same period in 2019, but the growth has been declining steadily over the past two years. Compared to the hot leisure travel market, the weakening demand for corporate travel services signals the overall business activity outlook. Other revenue primarily driven by advertising increased by 69% compared to the same period in 2019, but the trend has significantly declined after reaching a high point in 24Q2 (114%). In continuation of the weaker domestic environment, the decline in advertising willingness and capabilities for hotel travel further decreased. 4. In terms of profitability, Ctrip's gross margin decreased by 1.2 percentage points year-on-year to 79.3%, breaking the trend of gross margin improvement, falling below 80% for the first time since 2023 and below market expectations. On the expense side, marketing expenses in this quarter surpassed 3.37 billion yuan, a substantial increase of 44.6% year-on-year, significantly higher than the revenue growth. With domestic demand becoming flat and the demand for acquiring customers and expanding overseas and inbound travel business, marketing expenses increased significantly. In terms of other expenses, research and development expenses and management expenses increased by 16.5% and 19% year-on-year, respectively, showing significant growth. Overall, the proportion of the three expenses as a percentage of revenue increased by 2 percentage points year-on-year. 5. Combining the decrease in gross margin and the expansion of expense rates, the operating profit margin in this quarter decreased by over 3 percentage points to 18.1%. Despite strong revenue growth, operating profit in this quarter was 2.3 billion yuan, an increase of only 5% year-on-year. Although better than the company's guidance and market expectations of 2.2 billion yuan, the lack of profit growth with revenue growth is not a good sign. Adjusting for non-GAAP terms such as stock-based compensation, the adjusted net profit for this quarter was 3.03 billion yuan, a year-on-year increase of about 13%. Dolphin Research's viewpoint: Overall, from the perspective of expectations, Ctrip's performance in this quarter remains a stable "top student", with both revenue growth and profit better than market expectations. However, looking beyond expectations, this performance has both positives and negatives. On the positive side, stimulated by the government's relaxation of visa policies for inbound travelers, the strong influx of foreign tourists for inbound travel and the rapidly growing pure overseas business of Trip.com have taken over the slowing growth of domestic and outbound travel businesses, achieving a renewed acceleration in revenue growth, exceeding 20%. Looking ahead to 2025, the probability of continued double-digit growth in inbound travel and Trip.com's pure overseas business is high. If there are additional policy boosts, there is a possibility of surpassing expectations further. Assuming stable domestic demand, this could drive incremental growth for the group. On the negative side, it is evident that due to the weakening hotel and travel market in China (especially on the supply side, with research showing that many hotels or service providers have seen a significant decline in business since the first half of 2024), Ctrip cannot continue the situation of low supply and high demand of the past two years, where they controlled costs while enjoying excess profits. While the pure overseas business is growing rapidly, it also requires high expenses and investments, and the pace of profit release will not be rapid. This has led to Ctrip's profit growth stalling this quarter, with increased revenue but no incremental profits. The company's previous guidance for profit growth in 2025 is also quite conservative. Profit acceleration from the overseas or inbound business is needed to raise profit expectations for 2025 and further drive the group's estimated growth. From a valuation perspective, based on current profit growth expectations, Ctrip's current market value corresponds to a PE ratio of approximately 16x for 2025 earnings. Looking at the entire Chinese asset class, with around 15% to 20% revenue growth + lower profit growth, this valuation is relatively high and does not offer a clear value proposition. In terms of shareholder returns, the company's occasional $400 million share repurchase scheme and the approximately $200 million cash dividend in this quarter correspond to a market value of over $40 billion. The shareholder return rate is relatively limited. Therefore, Dolphin Research believes that Ctrip is more suitable for investors seeking certainty and accepting stable but not high expected returns. However, for investors seeking elasticity, its attractiveness is slightly weaker.Labeled as close to 120%, bookings for pure overseas business increased by 70% year-on-year, better than the 60% growth in the previous quarter. Bookings for inbound tourism have increased by over 100% year-on-year. Combined with the recent slowdown in the government's policy of visa-free entry for overseas tourists, it is evident that strong inbound tourism and pure overseas business are the main contributors driving the company's growth to continue to exceed expectations.Financially, in terms of revenue, Ctrip's hotel booking business in this quarter saw a year-on-year increase of nearly 32.7%, which is at the upper limit of the company's previous guidance. The growth rate jumped by a significant 11 percentage points compared to the previous quarter. Combining with the company's previous guidance, domestic hotel and travel booking revenue in this quarter increased by approximately 20% year-on-year, with outbound and pure overseas businesses both experiencing strong growth of over 50%, driving overall growth. Additionally, the revenue growth rate of ticketing business also recovered to 16.4%, better than the expected growth of about 14%. On one hand, the impact of bundled sales items such as insurance on ticket revenue is close to completion. On the other hand, higher-priced international flights for inbound and outbound travel are expected to bring higher revenue elasticity. Business travel & advertising business recovery weakened, what does it mean? Compared to the strong performance of the two core businesses mentioned above, the performance of the other three small-volume businesses is relatively flat: 1) Business travel business grew by about 88% compared to the same period in 2019, but the growth rate has been declining consistently over the past 24 years. This suggests that compared to the popular leisure travel, the demand for business travel is weakening, which has some implications for the overall business activity. 2) After experiencing a full 4-year recovery, packaged tour products finally exceeded the level of 2019, with a year-on-year growth of 23.6% in this quarter, showing relatively strong growth. 3) Other revenue mainly composed of advertising grew by 69% compared to the same period in 2019, but has been continuously declining since the peak in 24Q2 (114%). This is due to the weakened willingness and ability to advertise in the weak macro environment (domestic hotel and travel prices are falling), resulting in a decline in advertising expenditure. Expenses significantly expanded, leading to revenue increase but not profit increase? In terms of profitability, Ctrip's gross profit margin in this quarter decreased by 1.2 percentage points year-on-year to 79.3%, interrupting the trend of gross profit margin improvement. This is the first time since 2023 that it has fallen below 80%, and it is also lower than the market's expected 80.6%. The change in revenue structure and higher expenses are the main reasons for the decline in gross profit margin. However, despite the decline in gross margin, with strong revenue growth, gross profit reached 10.1 billion, better than the expected 9.94 billion. On the expense side, marketing expenses in this quarter exceeded 3.37 billion, a significant increase of 44.6% year-on-year, significantly higher than the revenue growth rate. With domestic demand becoming flat and the need for customer acquisition and expansion in overseas and inbound & outbound businesses, marketing expenses have increased significantly. In terms of other expenses, research and development expenses and management expenses also increased by 16.5% and 19% respectively year-on-year, showing a significant increase in growth rate. In summary, all expense categories for Ctrip in this quarter showed significant increases. Overall, the combined expenses as a proportion of revenue increased by 2 percentage points year-on-year, combined with the decrease in gross profit margin by 1.2 percentage points, the operating profit margin in this quarter dropped by over 3 percentage points to 18.1%. Under GAAP, due to the significant decrease in profit margin, despite the strong revenue growth performance, the operating profit for this quarter was 2.3 billion, increasing by only 5% year-on-year. Although it is better than the company's guidance and market expectations of 2.2 billion, the fact that revenue growth does not result in profit growth is not a good sign. Adjusting for stock-based compensation under the Non-GAAP basis, the adjusted net profit was 3.03 billion, an increase of approximately 13% year-on-year. This article is reprinted from the "Dolphin Investment Research" WeChat public account, GMTEight editor: Chen Xiaoyi.