Trip.com: “What Doesn't Kill Me Makes Me Stronger”

Dolphin said that after the epidemic, Trip.com's investment opportunities mainly depend on the implementation progress of three major logics: 1) Supply-side clearance during the epidemic + retaliatory consumption after the epidemic, surviving leading companies obtain greater revenue elasticity; 2) Extreme survival environment, extreme cost reduction and efficiency improvement, bringing stronger profitability to Trip.com after the epidemic; 3) The development of incremental markets during the epidemic can bring additional valuation imagination space.

Starting from the first quarter performance, it entered the verification period of the above three major logics. From this perspective, Trip.com's first quarter answer is quite "amazing". "Numbers are the most powerful response" without much ado.

In the figure below, Dolphin directly folds the magical two years. Comparing the key figures of the first quarter of this year with those of the first quarter of 2019, combined with market expectations, it can be seen very clearly:

I. Revenue: Surviving a great difficulty will bring great fortune

The seller's consensus expectation is basically based on the benchmark assumption of the first quarter of 2019, implying that this year's first quarter will barely recover to the pre-epidemic level, and more accurately, the revenue is slightly lower than the pre-epidemic level. However, the cost reduction and efficiency improvement during the epidemic have restored the profitability to the same level as before the epidemic.
The actual results delivered by Trip.com are that the total revenue reached 9.2 billion, exceeding the pre-epidemic level by about 13%. From the elasticity space of revenue:

a. Travel: Among the two pillars, the travel repair speed is exceptionally fast, which is the delivery of the aforementioned logic 1): the outbound travel market in the first quarter has recovered to 15% of 2019, but Trip.com's outbound hotel and air ticket business has already recovered to 40% of 2019; there is also the delivery of logic 2): Trip.com's OTA platform Skycanner, which has been newly acquired, will flow to Trip.com.

b. Hotel: The real incremental volume of domestic hotel bookings should mainly come from Trip.com's short board in local tours in the past two years: local hotel bookings are 2.5 times that of the same period in 2019; considering that during the May Day holiday, many people still choose local tours due to the crowdedness of outbound travel, it is expected that local tours will still have strong demand rigidity in the second quarter.

c. Business travel & package tours: Business travel has exceeded expectations, but the total volume is small and does not constitute a key source of expectation difference; package tours have been repaired to some extent because travel groups have not been fully opened in the first quarter, but there is still a lot of room for repair compared to the pre-epidemic level.

d. Advertising/finance, etc.: Due to the weak original content ecology, Trip.com's air and hotel businesses are mainly commission-based, and advertising revenue is basically ignored. After Trip.com gradually began to try information flow business in the past two years, advertising revenue gradually caught up, and its volume has gradually caught up with business travel and package tours.

2. Extreme Test to Improve Efficiency

After three years of hardship, the absolute levels of cost, R&D, and administrative expenses have basically remained at pre-epidemic levels. Sales elastic costs have further decreased compared to pre-epidemic levels. The three-year extreme test has taught Trip.com to tighten its belt from the inside out.

Therefore, when revenue quickly recovers and costs are still in a state of inertial contraction, the newly added revenue is basically converted into profit: in the first quarter, excluding non-operating income and expenses (investment income and equity incentive expenses), Trip.com achieved an operating profit of 2.6 billion yuan, directly reaching the level of the summer peak season in the three quarters before the epidemic, and the operating profit margin reached 28.5%, a historical high.

3. Future Outlook

Obviously, with some after-effects of travel in the first quarter, Trip.com's extraordinary repair may lead to a significant upward revision of market expectations in the future. Especially during the May Day holiday, domestic travel is booming, so many people choose short-distance trips first, delaying the demand for long-distance trips. There are also the Dragon Boat Festival, family trips during the upcoming summer vacation, which means that Trip.com's revenue elasticity during the peak season may be higher.

Dolphin will update the latest demand repair speed for travel and accommodation through Trip.com's conference call information, and see if it can exceed the previous season's upward trend in the second and third quarters.

In addition, it is also necessary to pay attention to the fact that Trip.com may need to relax its cost control level in extreme survival situations, but how much to relax and how much the cost reduction skills learned during the epidemic can boost the medium- to long-term profit margin level also needs to be observed through the post-epidemic investment plan of the management.

4. Valuation Revisited: Moving Towards Optimistic Expectations, Valuation Needs to be Adjusted Upwards

These three issues represent the three major valuation points for the new Trip.com after the epidemic: At the last financial report, the formal market sentiment was optimistic, ignoring the current fundamentals and driving the stock price crazy.

At that time, the market value of 25 billion US dollars had already reached the high point of the epidemic, and Dolphin emphasized that almost all of it was based on the logic of repair and cost reduction. Dolphin judged that there was not much room for upward movement, and Trip.com did indeed continue to fluctuate downward afterwards.And this quarter's performance shows that as we enter the realization period of logical imagination, its delivery capability actually exceeds the optimistic expectations of Dolphin.

Dolphin estimates that the after-tax operating profit (including equity incentives NOPAT) of the main business in the first quarter was RMB 2 billion. From a seasonal perspective, the first and fourth quarters are off-seasons, and the second quarter's revenue is usually slightly higher than the first quarter. The third quarter is the busiest season of the year, and the profitability is also the strongest. The after-tax operating profit for the whole year is expected to reach RMB 10 billion, and a 20 times PE ratio basically means a valuation center of USD 25-30 billion. Compared with the current market valuation of about USD 22 billion, there is still relatively certain upward space.

V. Other charts