TCOM - Trip.com: Consider Valuations And Catalysts

2023-10-05 08:40:14 ET

Summary

• Trip.com's current Enterprise Value-to-Revenue and EV/EBITDA valuations are lower than their respective historical averages.
• The key catalysts are revenue and earnings recovery, and new shareholder capital return initiatives.
• I continue to award a Buy rating to TCOM stock, after taking into account the stock's valuations and potential re-rating catalysts.

Elevator Pitch

Trip.com Group Limited ( TCOM ) [9961:HK] stock is rated as a Buy. In my prior article for TCOM published on July 27, 2023, I wrote about Trip.com's top line and bottom line prospects. I also touched on the positive impact of AI's rise on TCOM's business operations in the late July write-up.

In this latest update, my focus is on TCOM's undemanding valuations and potential catalysts. Trip.com's valuations are below historical means. A recovery in the company's financial performance to pre-pandemic levels and the resumption of shareholder capital return are the key catalysts.

Positive Expectations Regarding China's Golden Week Holiday

There are expectations that China's Golden Week holiday for the first week of October this year will have a positive impact on Trip.com's Q4 2023 financial performance.

Bloomberg Television interviewed Crédit Agricole's Chief China Economist Xiaojia Zhi in the morning of October 5, 2023. Based on Crédit Agricole's data review that was cited in the interview, tourism revenue in China for the initial three days of the 2023 Golden Week holiday jumped by +125% YoY, and this was +1% above pre-pandemic numbers in 2019. Also, the number of domestic tourism trips surged by +79% YoY during the same period, or just -3% below pre-COVID levels.

Earlier in late September, TCOM issued a media release disclosing that "outbound travel orders increased nearly 20 times, and domestic travel increased more than four times" YoY for this year's Golden Week holiday in China based on its internal data.

The favorable view of Trip.com's near-term business outlook is evidenced by the recent changes to the sell side's financial forecasts. In the past six months, the consensus fiscal 2023 top line projection for TCOM was revised upwards by +22%. Furthermore, 30 of the 31 analysts who cover TCOM's shares increased their respective full-year revenue estimates for the company in the last three months.

Mismatch Between Financial Performance And Valuations

TCOM's current valuations aren't aligned with the company's financial results, which suggests that its shares are undervalued.

Trip.com's 1H 2023 revenue rose by +152% YoY to RMB20.5 billion as indicated in its second quarter earnings press release , and TCOM is on track to meet the sell-side analysts' consensus full-year top line forecast of RMB44.6 billion (source: S&P Capital IQ ). Its actual 1H 2023 sales represent 46% of the FY 2023 consensus estimate, and the latest metrics (as cited in the preceding section) for China's Golden Week holiday were reasonably good.

Normalized EBITDA for TCOM jumped significantly from RMB446 million in the first half of last year to RMB6,498 million for 1H 2023. Trip.com's non-GAAP adjusted EBITDA in the first half of the current year is already equivalent to 51% of the market's consensus FY 2023 EBITDA projection at RMB12,775 million as per S&P Capital IQ data.

As a comparison, Trip.com's pre-pandemic revenue and EBITDA for FY 2019 were RMB35.7 billion and RMB7,850 million, respectively. In other words, it will be pretty realistic to expect TCOM's top line and EBITDA to exceed pre-COVID levels this year.

While TCOM's shares are up by +15% in the past one year, the stock's valuations are still below its pre-pandemic averages. The market currently values Trip.com at 3.2 times consensus forward next twelve months' Enterprise Value-to-Revenue and 11.6 times consensus forward next twelve months' EV/EBITDA (source: S&P Capital IQ ). In contrast, Trip.com's five-year mean (prior to COVID-19 outbreak in 2020) consensus forward Enterprise Value-to-Revenue and EV/EBITDA multiples were higher at 5.7 times and 34.2 times, respectively.

It is reasonable to expect Trip.com's key valuation metrics to be near to its historical averages prior to the pandemic, since the company's top line and EBITDA are projected to surpass pre-COVID levels by a significant margin for the current year.

Taking into account TCOM's current undemanding valuations, it is no surprise that the expected capital appreciation potential for Trip.com is substantial. The mean consensus target price for Trip.com is $50.22 and this translates into an upside of +52%. Even the most bearish analyst think that TCOM's shares are worth 7% than what it is currently trading at, based on the lowest sell-side price target of $35.50.

Shareholder Capital Return Might Be A Potential Re-Rating Catalyst

Apart from above-expectations results driven by the 2023 Golden Week holiday, the return of excess capital to shareholders could be a catalyst for the stock in time to come.

At the company's Q2 2023 earnings briefing last month, Trip.com stressed that "we will consider how to return our capital to return it back to long-term shareholders."

TCOM had RMB75 billion or $10 billion of cash and investments on its books as of end-Q2 2023, which is roughly equivalent to 47% of the stock's current market capitalization. With Trip.com and the global travel industry having emerged from the worst of COVID-19 headwinds, it will be appropriate for TCOM to consider returning capital to shareholders in the form of dividends and buybacks.

In the prior section, I highlighted Trip.com's appealing valuations which will make share repurchases accretive. Separately, TCOM previously distributed dividends in 2008 , and Trip.com will be to attract a new group of income-focused investors if it choose to resume dividend payments.

Concluding Thoughts

TCOM shares are undervalued and there are visible catalysts. I believe that Trip.com stock is worthy of a Buy.

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