Trip.com sees clearer skies ahead – but investors already knew that

China’s largest online travel agent’s revenue rose 7% in the fourth quarter on rebounding Asian demand, as analysts forecast growth accelerating ot 50% this year

Key Takeways:

• Trip.com’s revenue rose 7% in the fourth quarter, as a strong rebound in its non-China business offset weakness from its core domestic business
• Analysts expect the company’s revenue to bounce back strongly this year, though a return to pre-pandemic levels is probably still at least a year away

By Doug Young

Investor fatigue was in the air in Hong Kong and New York on Tuesday, as shares of leading Chinese travel agent Trip.com Group Ltd. (TCOM.US; 9961.HK) failed to get much lift after its latest quarterly report referred to good times ahead as China and the rest of the world put the pandemic behind them. Truth be told, the lack of enthusiasm feels a bit like a case of “the boy who cried wolf,” since travel stocks have rallied numerous times over last three years whenever it looked like pandemic restrictions were being scrapped.

We tend to believe that, this time, the end of Covid has really finally arrived, as most Asian countries reopened their borders in the middle of last year, and China became the last to join the crowd with the official ditching of its “zero Covid” policy in early December. Still, people have predicted rebounds before, only to scrap those forecasts later when the pandemic resurged.

The China numbers during the recent Lunar New Year holiday nicely summarize what’s now happening in Trip.com’s home China market, which still accounts for up to 85% of its business. Chinese made 1.6 billion passenger trips during this year’s 40-day holiday period that ran from Jan. 7 to Feb. 15, up 51% from the previous year and the highest level since the pandemic began, according to government data.

Still, the latest figure was only about half the 3 billion trips for the same period of 2019, the last year before the pandemic, showing things are still far from back to normal.

Trip.com’s U.S.-listed shares rose by 1.8% in after-hours trade after it issued its latest report. Its Hong Kong shares performed similarly, opening unchanged before creeping up gradually to post a 1.6% gain midway through the morning session. But no one should feel too sorry for shareholders of this company, since the stock is up 8% so far this year and has doubled over the last 52 weeks on the kind of hopes for a strong rebound that we previously referenced.

Analysts polled by Yahoo Finance expect Trip.com’s revenue to jump nearly 50% this year to about $4.3 billion, while the company’s profit is expected to leap nearly 10-fold to $1.06 per American despositary share (ADS). But we should also note the company reported revenue of $5.2 billion and earnings of $1.66 per ADS in 2019 before the pandemic, showing the company still has a long way to go to return to its pre-pandemic business levels.

In fact, the company’s latest report didn’t discuss the road ahead in great detail, probably because it has tried to make such forecasts numerous times in the past, only to have to revise them sharply when things rapidly changed.

“During the fourth quarter, the European and the U.S. markets made further progress towards normalcy, while the Asia market was quickly picking up the pace,” Chairman James Liang said in remarks contained in the latest report. “We have seen rapid growth for China’s outbound travel since the beginning of 2023, showing a strong pent-up demand for outbound travel.”

Rough road

Like most companies in the travel business, Trip.com has had a rough time over the last three years. Its revenue tumbled by half in 2020, the first year of the pandemic, as China shut down most domestic travel in the first half of the year, and slashed international flights entering and leaving the country, under its zero Covid policy that was taking shape.

The company’s revenue recovered slightly in 2021 as things stabilized, though the 10% growth that year came off a very low base. The newly released annual figure of 20 billion yuan ($2.9 billion) for 2022 was flat from the previous year.

While annual growth was flat, the trends were far choppier in the fourth quarter, as China tried to stamp out the latest Covid flareups through numerous lockdowns in October and November before finally throwing in the towel in early December. The company’s overall revenue actually grew 7% year-on-year to 5 billion yuan for the latest quarter. But most of that was due to a big increase in air ticket bookings outside China, mostly in Asia, as travelers in those recently reopened markets engaged in “revenge spending.”

But revenue from its core hotel revenue business – which is traditionally the biggest piece of its pie and relies heavily on domestic travelers – actually fell 12% year-on-year to 1.7 billion yuan during the quarter. Revenue from ticketing, its other major income source, rose by 45% year-on-year during the quarter to 2.2 billion yuan due to surging demand from non-Chinese travelers.

Trip.com also drew attention to international travel, which is expected to boom this year as China allows its citizens to resume global travel after a three-year pause. It said its outbound air bookings jumped 200% year-on-year during the fourth quarter. Outbound hotel bookings rose by 140%, though we should note that year-ago figures were probably both extremely low.

The bottom line was that Trip.com reported a net profit for the quarter, reversing a year-ago loss. On a non-GAAP basis, which excludes non-cash items like employee-related stock incentives, the company posted a 498 million yuan profit for the latest quarter, up from a 309 million yuan profit a year earlier. And as we’ve previously noted, the profits are expected to grow sharply this year.

From a valuation perspective, Trip.com is still the pick of the litter among both domestic and global travel stocks, reflecting its market-leading position in China and also its growing international exposure. Its stock now trades at a price-to-earnings (P/E) ratio of 36, based on profit forecasts for this year. That’s ahead of forward P/E multiples of about 22 for domestic peers Tongcheng (0780.HK) and Fosun Tourism (1992.HK), and triple the 12 for U.S. giant Expedia (EXPE.US).

While the industry trends are clearly positive, the picture is a bit muddier for investors trying to decide if there’s any upside left in these stocks. There’s almost certain to be lots of hype when Trip.com announces its first post-pandemic report in three months. But that said, its current P/E ratio looks quite high, meaning most of the post-pandemic hype is probably already priced into the shares.

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