Trip.com Earnings: Continued Margin Expansion Is a Positive but We Await More Attractive Entry Point

We maintain our fair value estimate of USD 42.50 (HKD 339) for Trip.com 09961 after it reported better-than-expected second-quarter revenue of CNY 11.2 billion, which was 5% better than the Refinitiv consensus estimate. The company continued to expand its operating margin to 26.5%, an increase of 150 basis points sequentially, as previously expected, and we are encouraged that it believes 25%-30% operating margins can be maintained in the long term given industry consolidation and better per unit economics. We expect Trip.com to see further margin expansion and secular demand, given its international business that represents another catalyst for long-term growth—and which still hasn’t yet returned to prepandemic levels. We believe it remains one of the few companies still seeing pent-up demand within the China internet sector but we also expect its recovery story to be priced in already, given only a 5% upside to our fair value estimate from the Sept. 1 closing price. However, if its share price pulls back, we suggest investors capitalize on more attractive entry points and accumulate a position for the long term.

Trip.com guided for further growth next quarter driven by continued pent-up demand on the back of domestic hotels and transportation. It expects revenue of CNY 13.6 billion, an increase of 98% year on year. We forecast gross and operating margins to be 80%-81% and 26%-27%, respectively. We expect domestic room bookings and flight revenue to increase to 160% and 150%, respectively, relative to 2019 prepandemic levels. The number of outbound bookings on Trip.com remains weak at only 60% of prepandemic second-quarter 2019 levels, but was still greater than the industrywide rate of 37% this quarter. The company hopes the international business can recover by the fourth quarter. Our base-case scenario expects it to not reach prepandemic levels until at least later in the first half in 2024, and an earlier recovery would be a positive surprise.