Ctrip: Where has the recovery of the tourism industry reached?

I. Key Data Overview

1. Net Revenue

In the quarter, net revenue was CNY 5.031 billion, a YoY increase of 7.39%, exceeding market expectations (a 3.5% beat);

For the year, net revenue was CNY 20.039 billion, a YoY increase of 0.13%, meeting market expectations (a 0.81% match).

2. Gross Profit

In the quarter, gross profit was CNY 3.828 billion, a YoY increase of 7.44%, surpassing market expectations (a 5.23% beat), with a gross margin of 76.15%, a YoY increase of 0.03 percentage points;

For the year, gross profit was CNY 15.526 billion, a YoY increase of 0.65%, surpassing market expectations (a 1.14% beat), with a gross margin of 77.48%, a YoY increase of 0.44 percentage points.

3. Adjusted EBITDA

In the quarter, adjusted EBITDA was CNY 0.286 billion, a YoY increase of 429.63%, exceeding market expectations (a 599.13% beat), with an adjusted EBITDA margin of 5.68%, a YoY increase of 4.52 percentage points;

For the year, adjusted EBITDA was CNY 2.151 billion, representing a YoY increase of 66.62%, exceeding market expectations (a 47.89% beat), with an adjusted EBITDA margin of 10.74%, a YoY increase of 4.28 percentage points.

II. Management Remarks

1. Overview

Since the outbreak of the COVID-19 pandemic three years ago, Ctrip has undoubtedly successfully overcome difficulties and turned crisis into opportunity, just as it did in response to SARS 20 years ago. In 4Q22, although the Chinese tourism market is still affected by the pandemic, there are signs of gradual recovery in overseas markets. Generally speaking, according to fixed exchange rates, hotel booking and international flights have fully recovered to pre-pandemic levels on the global platform. Demand for Chinese outbound travel and outbound flights has reached its three-year peak, which demonstrates consumers' confidence in the tourism industry. Since the announcement of the lifting of restrictions in China, there has been strong demand in all areas of Ctrip's business. Hotel bookings and flight bookings have exceeded 2019 levels, and outbound travel bookings have recovered by more than 40%. The shortage of flight capacity is a short-term bottleneck, but it is believed that with the gradual recovery of international flight capacity, China's outbound travel will begin to rebound in 2Q23. Europe and the United States have made good progress in the global travel recovery movement, and China is catching up rapidly after fully opening up and the entire Asia-Pacific region. 2023 will be a year of leading recovery and growth. The future is bright, Ctrip is ready, committed to bringing the world closer together and helping travelers explore more mysterious places.

2. Performance in 4Q22 and 2022

In 4Q22, despite the outbreak of the pandemic, revenue increased by 7% YoY, and overseas business gradually improved beyond pre-pandemic levels. For the entire year of 2022, revenue remained stable YoY. Over the past three years, through the joint efforts of the team and effective cost reduction and efficiency improvement, adjusted EBITDA remained positive. （1）Domestic Travel

4Q22 is the darkness before the dawn. In November and December, the domestic travel market was weak due to the resurgence of the epidemic and strict control measures. The key turning point for the recovery of the Chinese travel market was the announcement in December to reduce quarantine requirements and lift control measures. Overall, although the Chinese tourism market was heavily affected by the epidemic, Ctrip continued to adjust its business strategies and outperformed the market. In 4Q22, the volume of same-city accommodation bookings increased by 10% compared to the same period before the epidemic in 2019, and the annual level in 2022 was 40% higher than that in 2019.

Domestic flight bookings also recovered faster than the market. So far this quarter, long-distance travel bookings have rebounded strongly and exceeded pre-epidemic hotel booking levels in 2019, while short-distance travel has maintained strong growth and bookings have nearly doubled compared to 2019. With the recovery of long and short-distance travel demand, domestic business is expected to maintain a strong growth trend in the remaining time of 2023.

(2) Outbound Travel

The demand for outbound travel from China has always been strong, especially after the announcement in December 2022 to lift control measures. On the Trip.com platform, outbound flight bookings increased by 200% YoY, and outbound hotel bookings increased by 140% YoY. In the first two months of 2023, outbound travel demand continued to grow, with outbound travel bookings increasing by over 300% compared to the same period in 2022.

In 2019, mainland China was the world's largest outbound travel market, with Chinese tourists traveling overseas more than 150 million times. It is gratifying to see that everyone's confidence in travel is growing and they are exploring the world again three years later.

The bottleneck now is the insufficient flight capacity for outbound travel, which is only 15%-20% of pre-epidemic levels, which greatly hinders the overall recovery of outbound travel from China. The aviation sector has launched a plan to restore capacity, and it is expected that the pace will accelerate in the next few quarters.

(3) Pure overseas market

The European and American markets continue to steadily improve, and the opening up of the Asian region has further accelerated the recovery of the Asia-Pacific market.

1. In terms of flight bookings, the overall flight booking volume on the Ctrip global platform increased by more than 80% YoY. Flight bookings in Europe, the Middle East, Africa, and the United States continue to show strong growth. The Asia-Pacific region is also accelerating, with a YoY growth of more than 300%. Calculated with a consistent exchange rate, the overall flight revenue from the global platform has fully recovered to pre-epidemic levels.

2. In terms of hotel bookings, the booking volume on the Ctrip global platform has reached a historic high and exceeded pre-epidemic levels. The domestic hotel booking volume in non-China markets has grown by 140% for four consecutive quarters compared to 2019.

3. Strategic focus

(1) Accommodation

In the past three years, Ctrip has accumulated rich experience in short-distance travel in China and continues to maintain its advantages in long-distance travel. In order to meet the changing needs of customers and create value for partners, Ctrip will continue to improve its product coverage, innovation, inspiration, and recommendation. From the performance of the hotel market in 4Q22, it can be seen that hotels have evolved into destinations themselves, with travelers emphasizing the quality of accommodation. The number of tourist resort hotels increased by 70% compared to 2021, with over 7,000 high-end hotels partnering with Trip.com to provide customers with the best value for money. More than 240,000 hotels have joined the Trip plus program to gain high-quality customers and provide additional discounts. In 4Q22, more than 50% of Trip plus bookings for high-end hotels came from small cities. We're consolidating our dynamic pricing strategy while continuing to use gateway products to attract new customers. The brand collaboration strategy has also helped expand membership to over 30 million, six times the pre-epidemic level in 2019.

(2) International Business

We remain confident in our overseas investment plans for Chinese customers, especially as the world economy recovers from the gradual disappearance of the new crown epidemic. Trip.com will continue to strengthen its relationship with international partners and increase contact with Chinese customers.

As one of the few companies that inject significant capital into global supplier relations even during the epidemic, Trip.com has adequate preparation to meet the strong test of significant outbound demand. In addition to the recovery of Chinese outbound travel, the accelerated recovery of tourism in the Asia-Pacific region is also a significant opportunity. The strong tourism trend provides excellent opportunities for Trip.com to capture more bookings in this region. Trip.com ended 2022 with strong growth in international hotel and air ticket business. The overseas activity business also performed well, with GMV increasing by over 130% year-on-year. Looking ahead, we'll continue to search for unique products and localize activities to capture local demand trajectories while enhancing competitiveness and service capabilities to win local recognition.

(3) Content Platform

As global tourism recovers, people's demand for travel destinations continues to increase. Customers browsing the Trip.com platform are not just booking air tickets or hotel rooms but also seeking inspiration for their next trip. In 4Q22, content generation channels and user engagement continue to improve. The number of KOLs has grown by 47% year-on-year, and user-generated content has also grown by 33%, while the average number of content views per user has continued to rise.

The experimental AI chatbot, TripGen, has been launched on Trip.com. TripGen is a generative AI chatbot that integrates open AI APIs and aims to provide travel help and the most relevant and genuine travel advice to travelers.

(4) Corporate Social Responsibility

We're continually strengthening our ability to serve customers in exploring the world while continuing to promote corporate social responsibility.

First, through the rural revitalization plan, we're planning to launch ten high-quality vacation hotels, empower 100 rural destinations, and train 10,000 rural tourism talents in the next five years. In the past year, we have established 13 Trip.com rural vacation hotels, and a total of 21 rural vacation hotels are currently in operation, with 80% of the employees coming from local residents, making the average annual income of local residents increase by approximately RMB 7,000. Furthermore, Trip.com announced its long-term sustainability goal, which includes launching more than 10,000 low-carbon tourism products to promote sustainable tourism, engaging 100 million travelers in low-carbon practices, and aiming to further reduce carbon emissions throughout the entire operation process. To meet the growing demand for sustainable travel choices, the Trip.com brand has introduced carbon offset options by supporting a range of climate projects that are credible, impactful, and aligned with sustainable development goals to help travelers address their flight emissions. In October, Trip.com became a member of The Global Sustainable Tourism Council (GSTC), raising the sustainability standards of the tourism industry.

In the last quarter, Trip.com was awarded the 2022 Customer Relationship Management Excellence Award and named the 2022 International Outstanding Customer Service Champion in Singapore, recognizing its outstanding service and local commitment to the Ctrip brand.

Overall, boosted by its performance and recent robust recovery momentum, Trip.com is grateful to its team members for their commitment to providing high-quality service over the past three years. Looking ahead, Trip.com looks forward to working more closely with global partners to shape products and services around customer needs and value pursuits. Whether travelers choose to explore and travel wherever, they will have unforgettable trips in 2023 and beyond.

Looking ahead to the first quarter of 2023 since the lifting of travel restrictions related to the pandemic, the strong demand for travel that had been suppressed has been released in the domestic tourism market in China over the first two months of 2023. In recent weeks, air passenger volumes have recovered to around 80%, hotel RevPAR has fully recovered, and international flight capacity has also returned to 15%-20% of pre-pandemic levels, and continues to rise.

As of today, all business lines have performed well. Firstly, domestic hotel and flight bookings have surpassed the level from the same period in 2019. Secondly, outbound travel bookings have grown by more than 300% year-on-year, and hotel and flight bookings on the global platform have grown by triple digits year-on-year.

The lifting of pandemic-related restrictions and the reopening of borders are important drivers of global travel and Trip.com's business recovery. The potential uncertainty of the pandemic may disrupt the recovery trend, but the Group is confident in the strong desire of travelers to travel and its ability to respond to challenges. Trip.com will continue to maintain lean operations, invest continuously, and seize future opportunities.

Q: How has the domestic and international platform performed in the past few weeks?

A: Both domestic and international businesses have performed strongly. International: Achieved triple-digit year-on-year growth in some regions.

Q: Will total revenue fully recover to pre-pandemic levels by 2023?

A: Due to the relatively short booking window and limited visibility, confidence remains in restoring to pre-pandemic levels.

Domestic: The momentum of domestic tourism recovery will remain strong, and outbound tourism will increase as cross-border flight supply rises with the improvement of the macro environment.

International: On the right track to gain market share in different markets, growth momentum is expected to continue this year.

Overall, continuously striving to gain market share in China and abroad, to drive revenue to pre-pandemic levels.

Q: During the pandemic, cost structure has been optimized. With rapid demand growth post-pandemic, how will you balance cost-effectiveness and investment and achieve the 2023 profit margin target (guideline: 20%-30%)?

A: Satisfied with the efficiency improvement of various brands and business departments over the past 2-3 years. For example, the improved backend operating system enables a small-scale product purchasing team to maintain extensive coverage and active product innovation; content strategy helps to improve user engagement and conversion rates, thereby improving marketing efficiency.

In the long run, profit margin is not a goal, but a natural result of healthy business growth and strict cost control. Currently, most business departments operate at a profit margin surpassing pre-pandemic levels, benefiting from better scalability and synergy between brands. Confident in achieving the 20%-30% profit margin target this year and sustainable business growth in the long run.

However, in the short term, the lag in the recovery of outbound tourism with high profit margins will affect group profit margins to some extent.

Q: Growth targets and plans for 2024 and 2025?

A: First, will continue to expand the customer base, especially in low-tier cities with huge growth potential brought by rapid urbanization. At the same time, focus on enhancing user engagement, which can be translated into higher user consumption and frequency. For example, there has been an increase in the higher cross-sales rate from transportation to accommodation and other services, and user cases have been expanded to cover more short-distance travel scenarios. In addition, comprehensive contentization not only provides inspiration and planning for users, but also opens the door to the tourism advertising market. The estimated size of the tourism advertising market was 90 billion yuan in 2019.

Second and most importantly, outbound tourism. Ctrip is one of the few companies that have maintained contact with Chinese customers and international tourism suppliers over the past three years, and is therefore in a very favorable position to continue to benefit from strong outbound travel demand. For example, in the past few months, despite aviation capacity still being at around 15%-20%, Ctrip's outbound tourism business has greatly surpassed industry growth, rebounded to over 40% (compared to pre-pandemic levels).

Third, significant progress has been made in the unified backend operating system, standardized international front-end products, and alignment of international and domestic service standards, which helps to drive long-term synergy between international brands. In addition, the Fourteenth Five-Year Plan clearly promotes inbound tourism, and with Ctrip's high-quality one-stop tourism platform and user base, there is confidence to make a huge contribution to inbound tourism in China. Overall, driven by the aforementioned three factors, the travel industry is expected to maintain at least double-digit growth rates in the coming years.

Q: Recovery trajectory of outbound tourism under the bottleneck of outbound flight supply, and the primary travel destination in user search results

A: Airlines are making their best efforts to adjust their capacity, which is currently at around 15%-20% of pre-pandemic levels. It is hoped that capacity will be restored to 50% by the end of June and to 80%-90% by the end of this year.

Despite the limitations on outbound travel capacity, Ctrip's outbound travel bookings have recovered to over 40% of pre-pandemic levels. Ctrip has been working closely with global partners to provide strong products and services for outbound travel customers.

Q: Views on the accommodation price trends in the domestic market for 1Q23 and 2023, and whether the accommodation price trends in the US and European markets are similar to those in the domestic market

A: In terms of domestic travel, when demand fully recovers and surpasses pre-pandemic levels, the average price will slightly increase due to a rise in the proportion of lower-tier cities, which will bring some drag. As hotel and flight supply remains relatively stable compared to pre-pandemic levels and the coal price index remains at a low level, the average price in the domestic market is not expected to rise significantly.

For outbound travel, due to the tight flight capacity and high airfare, prices will drop as supply increases. The average hotel price is still lower than pre-pandemic levels due to varying recovery rates in different destinations.

ADR in Europe and the US has sharply increased, but for most Ctrip customers, ADR in the Asia-Pacific region is still lower than pre-pandemic levels.

Q: Development and future prospects of the sinking market, international business, and outbound travel business

A: (1) International and Outbound Travel Business

In terms of profitability, outbound travel was definitely the most profitable business in 2019, followed by the domestic market. Skyscanner or other mature international brands have very healthy profit margins, but they are still in the investment period for the group, and there are still some losses, but the team will work to improve the growth and efficiency of the group's business strategy.

(2) Sinking Market

During the pandemic, the sinking market has successfully gained a lot of market share, contributing relatively more revenue, but most of the profits in the domestic market still came from the middle and high-end businesses.

During the pandemic, Ctrip worked hard to improve efficiency across all business lines and is confident in maintaining this after the pandemic. Ctrip not only seizes a share of the sinking market but also increases middle and high-end market shares, so it will not affect the overall profitability.

Q: Competitive situation of short video platforms and their impact on the tourism market, progress in Ctrip's content strategy

A: The travel industry is one of the most attractive industries in the world, attracting many potential participants trying to enter the tourism market, and the group is confident in the bright future of the travel industry.

In terms of content, content platforms mainly provide location services and pre-sale products, which has limited overlap with Ctrip's core business. The group will closely monitor the market dynamics of content platforms. However, the most important thing is that Ctrip will focus on developing its core strengths, such as strong product innovation, service, and performance capabilities, to ensure that it always provides customers with the most reliable services and the best experiences. In the fortunate tourism industry, as experts, Trip.com will continue to ensure that we are among the best in the industry.

Q: International Business Progress and Increasing Market Share

A: Development is going smoothly, and Trip.com has the following three advantages:

First, we provide a one-stop shopping platform where users can find everything they need when traveling abroad on Trip.com.

Second, leveraging experience in the Asian market, users have a very smooth experience on the app, and we provide 24-hour service.

Finally, Trip.com has advantages in outbound travel and can provide affordable deals for users worldwide.

Overall, the overarching strategy is to move from the Asian market to the world.

Q: Latest Developments of TripGen

A: TripGen is still in its very early stages and mainly has the following three functions:

First, it helps customers find more relevant information faster.

Second, it links search results more effectively to existing products.

Third, the team can provide services more efficiently.

Risk Disclosure and Statement for this Article: Dolphin Disclaimer and General Disclosure for Longbridge Research