TCOM - Trip.com: Consider Financial Outlook And AI Tailwinds

2023-07-27 13:59:20 ET

Summary

• TCOM's financial prospects for the medium term are excellent with expectations of strong revenue growth and decent margin improvement.
• Trip.com can leverage on AI to optimize the company's sales process and improve its operating efficiency.
• I raise my rating for Trip.com to a Buy, after considering the company's financial outlook and AI-related tailwinds.

Elevator Pitch

I rate Trip.com Group Limited ( TCOM ) [9961:HK] shares as a Buy.

Previously, I reviewed Mainland China's metrics relating to tourism and travel for the Lunar New Year holiday and assessed the read-throughs for TCOM's business performance with my earlier February 28, 2023 update .

My attention turns to TCOM's financial outlook and AI tailwinds. I have made the decision to upgrade my investment rating for Trip.com from a Hold earlier to a Buy now. I have a positive opinion about TCOM's future revenue growth and profitability improvement potential, taking into account various metrics detailed later in this article. Also, the presence of AI tailwinds means that Trip.com's actual top line and bottom line for the medium to long term might be even better what the market expects now.

Top Line Growth Outlook

Trip.com's top line growth prospects are pretty good.

As per S&P Capital IQ's consensus financial data, the analysts see TCOM's revenue in local currency or RMB terms rising by +111.7% from RMB20.0 billion in fiscal 2022 to RMB42.4 billion for FY 2023. Trip.com's sales were expected to recover strongly in the current fiscal year, as TCOM's FY 2022 top line performance was badly affected by China's COVID-zero policy. However, it is worthy of note that the RMB42.4 billion consensus FY 2023 revenue for Trip.com is much higher than the company's pre-pandemic sales of RMB35.7 billion recorded in FY 2019. Furthermore, the sell-side predicts that TCOM will be able to achieve mid-teens percentage revenue growth for both FY 2024 (+16.6%) and FY 2025 (+15.2%).

There are metrics supporting the market's positive view of TCOM's future top line expansion.

Mainland Chinese broker China Renaissance Securities issued a research report (not publicly available) titled "Management Call Takeaways" on June 14, 2023 sharing insights regarding a meeting between Trip.com's management and investors that it organized on June 13. According to China Renaissance Securities' June 14 report, TCOM revealed at the June 13 investor meeting that its "average ticket size is (still a) single-digit percentage lower than in 2019." In other words, there is room for Trip.com's top line to grow in tandem with a larger average ticket size. It is reasonable to expect an increasing number of travelers to opt for longer trips and upper-tier hotels (comfort becomes a key priority for long-haul travel as opposed to shorter trips) going forward, as more people get comfortable with traveling again.

Also, the travel demand recovery isn't fully reflected in TCOM's current revenue numbers yet as a result of supply constraints. Trip.com stressed at its Q1 2023 results call last month that "the supply side, particularly for the air capacity, is still on the way to recover", even though it has observed that "the demand side have far exceeded 2019 level." Specifically, TCOM highlighted that international flight capacity in May 2023 was only around 40% of what it was prior to the COVID-19 pandemic.

The metrics outlined above suggest that the analysts' intermediate term revenue growth expectations for Trip.com are realistic and achievable.

Profitability Improvement Potential

TCOM's normalized EBITDA margin improved significantly from 2.2% for Q1 2022 and 5.7% for Q4 2022 to 31.7% in Q1 2023. At the company's first quarter earnings briefing in June, Trip.com emphasized that its quarterly EBITDA margin "reached the highest level in the past decade", thanks to "pent-up demand and as well as the effective cost control efforts."

Looking ahead, the sell-side is of the view that Trip.com's profitability can continue to improve in both the short and midterm. The consensus financial estimates (source: S&P Capital IQ ) point to TCOM's non-GAAP adjusted EBITDA margin expanding further to 31.1% and 31.7% for Q2 2023 and Q3 2023, respectively. For the medium term, TCOM's normalized net profit margin is forecasted to increase from 20.3% for FY 2023 to 26.1% in FY 2026 based on the consensus financial figures. The market's consensus forecasts are in line with Trip.com's target of achieving annual net margins in the 20%-30% range for the future, as mentioned at its most recent quarterly results call.

TCOM noted at its Q1 results briefing that it has been working hard at "improving automation for both the travelers as well as for our internal staff", which has led a lower number of employees needed even as travel demand recovers. Therefore, it is reasonable to expect Trip.com's profit margins to expand meaningfully in the future, as per management guidance and analysts' projections.

AI Tailwinds

The rise of AI is also a key positive development for TCOM, as Trip.com is well-positioned to capitalize on AI to boost its top line and bottom line.

In terms of revenue growth, Trip.com revealed at its first quarter earnings briefing that it had rolled out its "AI assistant TripGen on Trip.com app in February and Trip.com plug-in for ChatGPT in May" with the aim of "assisting users in finding the most suitable products." As the process of finding the most appropriate travel plans on TCOM's platform becomes as frictionless as possible with the help of AI, the revenue outlook for Trip.com is expected to become even more favorable.

With respect to cost optimization, TCOM disclosed at the company's most recent quarterly investor call that it currently has AI chatbots dealing with more than 70% of client enquiries, implying that the company can do the same or more with fewer employees. It won't be surprising to see Trip.com's cost structure become leaner in the future, thanks to the utilization of AI to drive greater operating efficiency.

Closing Thoughts

Trip.com stock is rated as a Buy in consideration of the company's good financial prospects and the tailwinds relating to the utilization of AI. Furthermore, TCOM's current valuations are reasonably attractive; the stock trades at consensus forward FY 2025 EV/EBITDA and normalized P/E multiples of 11.4 times and 16.1 times (source: S&P Capital IQ ), respectively.

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