Trip.com minutes: "Trends remain unchanged, demand recovery is still strong"

Below is the summary of the conference call for Ctrip's Q1 2023 financial report. For the interpretation of the Q1 financial report, please refer to "Ctrip: Surviving the Hard Times, Reaping the Rewards" (https://longportapp.com/topics/7014503?app_id=longbridge&channel=t7014503&invite-code=276530).

I. Key Points from Management:

1. China Market

In Q1, domestic hotel bookings increased by over 100% YoY; long-distance hotel bookings grew the fastest, reaching 176% YoY, 32% higher than in 2019. Bookings for same-city hotels increased by 150% compared to 2019.

1. Outbound Travel:

Overall outbound hotel and flight bookings have recovered to 40% of pre-pandemic levels, compared to the industry average of 15%.

The recent outbound travel capacity has recovered to around 40% from 10% in 2019, and this trend is expected to continue in the coming months.

1. Global Business

(1) TRIP.com, the global OTA platform, saw flight bookings increase by over 200% YoY, 100% higher than in 2019; hotel bookings reached a historic high, more than double that of 2019.

(2) Inbound travel: About 90% of inbound travel users to China come from Asia, the Middle East, and Europe.

1. Others

a. User loyalty program: Over 50% of TripPlus bookings come from high-end hotels. The co-branded membership program has also helped expand the membership base to over 30 million, six times that of pre-pandemic levels in 2019.

b. Content: Covering 6,300 destinations, KOLs increased by 45% YoY, and user-generated content increased by 34% compared to the same period last year.

1. 2Q23 Outlook

II. Analyst Questions:

Q: The Impact of AI

A: First, the company has been using generative AI technology internally to improve productivity in all functional departments, especially in marketing and engineering.

Second, for customer service, generative AI can further improve automation and customer experience. Finally, an AI assistant has been launched on the Trip.com application to help customers plan their travels. The company will continue to explore ways to use generative AI technology to improve customer experience and productivity.

Q: Sustainability of the Lower Sales Expense Ratio Compared to 2019

A: The adjusted EBITDA profit margin and non-GAAP operating profit margin for Q1 2023 reached the highest level in the past 20 years, mainly driven by the strong release of suppressed demand and effective cost control. In the short term, profit margins may slightly decline in 2Q23 as marketing and promotional activities catch up. Despite this, it is still expected that the full-year profit margin will return to the range of 20%-30% in 2023.

The company does not view profit margin as a target, but rather as a natural result of healthy business growth and scalable business models. Looking ahead, we will continue to improve efficiency while retaining flexibility to make necessary investments in long-term business growth strategic initiatives.

Q: Performance guidance for 2H23 and 2023

A: Looking at the full year of 2023, revenue will fully recover and exceed 2019 levels, driven by strong growth in both domestic and overseas markets in China. Based on the performance of tourism markets in other countries that opened earlier, even after the initial suppressed demand is released, tourism demand is still growing strongly.

From a more cautious perspective, due to seasonal factors, the growth rate of domestic tourism in China may slow slightly after the summer and National Day holidays. However, as the capacity of outbound flights continues to increase, it is expected that the further release of outbound demand will also help sustain growth throughout 2023.

Q: Guidance for domestic tourism, outbound tourism, international tourism, and summer bookings in 2Q23

A: So far, the domestic tourism market in China has fully recovered and exceeded pre-pandemic levels in 2019. The capacity of outbound flights has steadily increased from around 30% in April to around 50% recently. Based on the published summer flight schedules and occupancy rates, it may reach around 60% of 2019 levels in the coming months.

The company has seen that the recovery rate of the domestic and outbound tourism markets in China continues to outpace the industry: Ctrip's domestic hotel bookings are 60% higher than in 2019, and the bookings for outbound travel packages have also recovered to 60% of 2019 levels. So far, overseas markets continue to follow the trend of 1Q23, but the growth rate in 2Q23 may slow down due to relatively high base numbers in the same period of 2019 and last year.

Q: Reasons for the outstanding performance in 1Q23; outlook for the full-year recovery level in 2023, and whether competition will intensify as the market recovers

A: Demand for outbound tourism is strong, far exceeding 2019 levels; however, supply, especially air transport capacity, is still recovering, with the industry's recovery rate in 1Q at around 15% and rising to around 40% in 2Q.

Firstly, the company has made significant investments in customers and partners, committed to "customer first." In addition, during the pandemic, the company provided funds to customers, who have developed trust in the company's brand and are clear that with Ctrip, anything is possible, and Ctrip will always support and help them when they travel abroad. Therefore, consumer confidence is very strong. Now that the industry is making a comeback, consumer demand is very strong.

Secondly, in terms of partners, the company established billions of funds to help partners solve cash flow problems during very difficult times. Now that business is recovering, they also trust in their partnership with Ctrip-they know that Ctrip will always provide support for them during difficult times. Finally, the company has made a lot of investments in technology products and customer service to ensure that wherever customers are, the Trip.com team is behind them to support them. Therefore, with all these investments and advantages combined, we are confident that we will be able to expand our leadership position in outbound business as airline capacity increases.

Q: Outlook for domestic tourism business in the next few years

A: Overall, we are confident in the long-term prospects of Chinese tourism consumption. As part of service consumption, tourism demand is expected to continue to grow, especially among middle and high-income groups, whose consumption capacity is relatively more elastic.

First, the company has also retained those overseas markets that were opened earlier, and has maintained a continuous growth trend even after the release of pent-up demand.

Second, the epidemic has actually accelerated the online penetration of the tourism industry in various segmented markets, which is another growth driver for the company's business.

Third, higher cross-selling rates from transportation to accommodation and other services are another powerful growth driver.

In addition, the comprehensive content platform not only provides inspiration and planning for users, but also creates more opportunities. The size of the tourism advertising market is expected to exceed RMB 90 billion in 2019.

1. In terms of domestic business, we will continue to focus on expanding product supply and continuously improving services to match a wider range of user cases.

First, we will continue to expand our user base, especially in mid-to-low-end cities with large populations and per capita GDP catching up with first-tier cities. In the past three years, despite the challenges of the epidemic, the user base in mid-to-low-end cities has improved significantly.

Second, we will continue to focus on promoting user participation and user stickiness, which will also translate into higher purchase frequency and consumption power. For example, even though long-distance travel has fully recovered, short-distance travel has become a new trend after the epidemic and continues to drive growth.

2. In the business travel sector, this business provides tremendous value for companies looking to optimize travel expenses, and hotel bookings accounted for a higher proportion of business travel during the epidemic.

In terms of outbound travel business, Trip.com Group has maintained close contact with Chinese consumers and international partners over the past three years. The company seized the demand for outbound tourism and achieved a significant increase in market share in the past few months. It is expected that in the next few quarters, flight capacity in the industry will continue to recover, and outbound travel business will gradually return to normal growth mode.

3. In the pure international business sector, even after the suppressed demand is released, the demand for international travel has shown strong resilience. The travel recovery trend in the Asian market is particularly strong and will continue to increase. The company has made significant progress in integrating backend systems, standardizing frontend products, and aligning global services with domestic standards. These measures during the epidemic have helped to promote long-term synergies between different brands. Compared to the level before the epidemic, the international platform has achieved double-digit growth since the beginning of this year and is expected to become an important long-term growth driver.

4. In terms of inbound tourism, promoting inbound tourism has been included in China's 14th Five-Year Plan, and more convenient visa and inbound tourism policies have been launched in the past few months. The proportion of China's inbound tourism to GDP is only 0.3%, indicating ample room for improvement in the future. Although the macro environment is uncertain, the company remains optimistic about the long-term prospects of the tourism industry. Based on this, we are confident that we can outperform the industry by a large margin in various tourism sub-markets. In a stable and normal environment, even after the release of suppressed demand, a growth rate of 10-20% is expected.

Q: Margin expectations for 2023 and 2024; recovery of outbound travel in different countries

A: Full-year and future margins are expected to recover to 20%-30%. Outbound margins are generally higher than the company's average level, but the pure international business is still in the investment stage, and investment in strategic regions remains flexible. No significant differences in profitability have been observed between different regions.

Q: Gross margin expectations

A: The release of pent-up demand has raised various levels of profitability, including gross margin. Automation of users and company customer service has also improved. The gross margin will remain at 75%-80%, leaning towards the higher end.

Looking ahead, the company has been actively exploring the use of generative AI tools in customer service, for example. Currently, over 70% of customer requests are handled by Al chatbots. Although we are optimistic about the role of AI in the service sector, we will be very cautious in advertising.

Q: Penetration strategy for lower-tier cities in the past few years and future growth strategy

A: 1. The company has an advantage in the high-end market, but during the epidemic, the company supported suppliers through various means such as BOSS live broadcasts, other live broadcasts, flagship stores, and joint brands to penetrate the sinking market.

2. Outbound market: Demand was low during the epidemic, but the company reached customers with outbound demand and strengthened cooperation with local suppliers, such as travel agencies and car rental companies, and made many investments in overseas markets.

3. Inbound market: There is great potential for growth, and the government's 14th Five-Year Plan welcomes more foreign tourists to enter the country. The company has taken active measures to respond to the needs of inbound business travel and leisure travel. The company will continue to invest in the above areas.

Q: Long-term development strategy

A: The company has discussed with global suppliers and can provide customers with good inventory and products, which will also enhance the company's overseas market influence. Trip.com helps improve services for overseas users, continuously improve infrastructure overseas, enhance brand awareness, and continue to invest.

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