TOUR - Tuniu: If China Opens Up The Company Should Run

Summary

• The company continues to struggle from the effects of China's COVID-19 policy.
• With China opening up, the company should do very well, assuming there isn't a return back to tight controls.
• There is more than enough cash for the company to endure a prolonged shutdown, but leveraging it for growth initiatives while playing defense would be the preferable actions to take.

Tuniu Corporation ( TOUR ), an online leisure travel company based in China, has taken a big hit as a result of the COVID-19 policies instituted by the Chinese government, resulting in a significant slowdown in its business.

It eventually received a non-compliance letter from the Nasdaq on September 23, 2022, notifying the company it was no longer in compliance with minimum price requirements. After closing above $1.00 per share for ten straight trading days, the company was notified that it was once again in compliance with minimum requirements.

Recently Chinese regulators announced they were easing requirements for international travelers entering the country, with new guidelines allowing for entry if there is a negative COVID test within two days of the flight.

With enormous pent-up demand ready to be released, a tour operator like Tuniu would be an immediate beneficiary of the Chinese government easing restrictions associated with COVID.

If this results in a significant increase in tourism and internal travel, TOUR is strongly positioned to take advantage of the changing COVID environment in China.

In this article we'll look at some of its recent numbers and the future potential of the company under the changing policies of the Chinese government.

Some recent numbers

Revenue in the third quarter was $10.9 million, down 32.1 percent year-over-year. The decline in revenue was primarily attributed to COVID-19 policies.

Interestingly, revenue of $5.8 million from its core packaged tour business was only slightly above revenue of $5.1 million from its Other business, which mostly entails commission fees from products related to travel.

If China wasn't about to open up more for travel, the commission fees would be a segment of the company to watch because it would probably easily overtake tour revenue in the near future.

But if China does open up on a consistent basis, revenue from tours should easily surge above the commission fee revenue. I think commission fees could be a nice add-on revenue stream in the future, but it would only be able to generate incremental growth if China enters into another strict lockdown.

Cost of revenues in the reporting period was $4.6 million, down 56.2 percent year-over-year. As a percentage of net revenues cost of revenues was 42.2 percent compared to 65.3 percent in the third quarter of 2021.

Gross margin in the quarter jumped to 57.8 percent up from 34.7 percent in the third quarter of 2021.

Operating expenses in the reporting period were $8.3 million, down 38.5 percent year-over-year.

Sales and marketing expenses were $3.7 million in the third quarter of 2022, dropping 36.4 percent from the third quarter of 2021.

Net loss in the reporting period was $3.1 million.

At the end of the third quarter of 2022 the company held cash equivalents, restricted cash and short-term investments of $133.5 million. I think this is the most important of its earnings and financial numbers, as it provides the company with a lot of room if the government reverses direction on the COVID lockdowns, or if it further eases restrictions resulting in the tour business taking off again. Under the latter scenario it would empower the company to boost sales and marketing spend to quickly grow market share.

There are two things I think investors should look at with this earnings report. First, it gives a baseline to work from if there is a return to restrictions, with investors primarily focusing on its commission fee business as the growth segment of the company, even if it is at an incremental pace.

Second, it will help investors to discover the impact an easing policy will have on the company in the quarters and potentially years ahead if the country permanently eases restrictions. Even if the easing of restrictions is significant but partial, it'll have the potential to be a strong tailwind for TOUR going forward.

Packaged tours, commission fees, and B&B

With its exposure to Chinese government policies concerning COVID, management has worked on diversifying its revenue streams to reduce its risk profile.

One of the new revenue streams is live streaming shows that feature agricultural products; this largely targets the still large rural village population in China. The other segment it's starting to develop is with self-operated B&B's. It has focused initially on the Xinjiang market with its B&B product, which generates a gross operating profit of over 50 percent, according to management.

TOUR has plans in place to expand its B&B's to other regions of the country. This actually has a lot of potential over time, and it will be leveraged even further if it is accompanied by a surge in packaged tour demand.

The point in this is for investors to understand what would be considered ancillary revenue streams under a pre-COVID business environment, could become the growth engines of the company if things tighten up again.

And in the best-case scenario, the country will open up even as TOUR improves and expands upon these secondary revenue streams.

Conclusion

We shouldn't make any mistake about it, TOUR is going to perform in accordance with the impact easing of COVID restrictions will have on the company in the near term, and if the country remains open and eases further, the performance of TOUR should vastly improve along with its share price.

Based upon the revenue it has generated from commission fees in particular, along with the long-term potential of its B+B business, it has found a decent source of revenue that could help it find support if market conditions once again turn against it. It would still get hammered if the country is tightly shuttered again, but if it is able to continue to grow these other businesses it'll support a higher floor as the market starts to take notice that it has exposure to significant revenue streams outside the packaged tour business.

But that's for the long-term growth trajectory of the company. In the near term, there is no doubt the company will enjoy a significant tailwind if tourists start to flood the country again, and demand for packaged tours rebound, which is close to a certainty.

Under current market conditions and assuming China keeps the country open, TOUR is highly undervalued based upon its current share price and should enjoy a strong rebound with the current visibility we have.

And in the worst-case scenario it'll revert back to modest packaged tour revenue with its other revenue streams surpassing its core segment under strict COVID controls.

The major challenge for the company and investors is concerning appreciating its secondary businesses if its primary business falters again. Yet, it shouldn't be ignored that commission fees are not too far away from generating as much revenue as its packaged tours are.

That would of course quickly change in a positive business environment, but it should be considered as an alternative growth path for the company if packaged tours remain under pressure.

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