Ctrip: Leisure travel trends will continue, with incremental growth overseas.

Below is the summary of Ctrip's Q2 2023 earnings conference call. For the interpretation of the financial report, please refer to the article "Is Ctrip a Rainbow or a Longbridge After the Rain?"

I. Management Remarks

Steady capacity in the Asia-Pacific region: In the first half of the year, popular travel destinations in Asia included Hong Kong, Macau, Southeast Asia, South Korea, and Australia. With a large number of Chinese tourists returning, the global tourism market is recovering. The global business maintained strong momentum in Q2, with the Asia-Pacific region remaining a driving force for growth. Flight bookings on the company's global OTA platform increased by over 120% compared to the same period in 2019.

Strong recovery in domestic travel demand: Domestic hotel bookings increased by 170% compared to the same period last year and grew by over 60% compared to the same period in 2019. Short-distance hotel bookings nearly doubled compared to the same period last year.

With the rising trend in global tourism, the company will continue to strengthen supply chain management and collaboration among business units. Ctrip has successfully increased its market share in major regions such as Hong Kong, South Korea, and Southeast Asia, and will continue to make strategic investments in the high-end market. The DAU (Daily Active Users) on the global OTA platform also showed strong growth, reaching a new historical high. The brand enhancement of the global OTA platform will also help expand coverage of international tourists and gain favor from potential inbound tourists, allowing Ctrip to explore untapped inbound markets.

2. Key Strategies

Accommodation: With the strong growth of the Chinese tourism market, Ctrip has been consolidating its competitive advantage in the entire travel industry since the beginning of this year. Ctrip offers high-value packages from over 8,000 high-end hotels for customers to choose from. Over 240,000 hotel partners provide additional benefits to premium customers. Over 50% of Ctrip's bookings come from high-end hotels.

AI: In the era of the pandemic, users often seek efficient and personalized solutions for travel planning. To respond to this industry innovation trend, Ctrip has launched Trip Genie to help meet user needs, answer their questions, and directly push information pages.

Content: Ctrip has also upgraded its travel list to provide users with more content to meet the ever-changing needs of travelers. In the second quarter, the channels for generating content continued to grow steadily, with a 30% increase in the number of KOLs (Key Opinion Leaders) compared to the same period last year. User-generated content also increased by 23% compared to the previous quarter. In terms of content marketing strategy, focusing on product and technological innovation, Ctrip will continue to utilize AI tools to strengthen marketing operations and improve customers' booking experience in a timely manner.

3. Financial Data

Accommodation bookings: Both domestic and outbound hotel bookings achieved strong growth, surpassing the industry average. Hotel bookings reached a new historical high, with an increase of over 50% compared to the same period in 2019. Leisure Travel: Q2 revenue reached 722 million RMB, recovering to 69% of the level in 2019. Among them, domestic package tours have exceeded the level of 2019, while the recovery of outbound package tours still lags behind.

Business Travel: The volume of business travel flight bookings has grown by double digits compared to 2019, and business travel hotel accommodations have increased fivefold year-on-year.

Costs and Expenses: Q2 adjusted administrative expenses increased by 2% compared to the previous quarter, mainly due to salary increases and high-performance bonuses paid to recognize the outstanding achievements of the company in the second quarter. The total number of product development and general and administrative teams is significantly lower than the same period in 2019. Q2 adjusted sales and marketing expenses increased by 34% compared to the previous quarter, mainly due to increased marketing and promotional activities.

Funds: As of June 30, the balance of cash and cash equivalents, restricted cash short-term investments, and held-to-maturity time deposits and wealth management products amounted to 75 billion RMB (equivalent to 10.3 billion USD).

4. Q3 Guidance

In July, the industry's air passenger volume is expected to increase by 10% to 15% compared to 2019, and the industry's hotel RevPAR is expected to increase by 10% compared to 2019. The outbound air travel volume is expected to recover to 50% compared to 2019 by the end of this quarter. The company's hotel bookings are expected to increase by 70% compared to 2019, and during peak periods, the increase is expected to reach 100% compared to 2019. Outbound flight and hotel bookings are expected to recover to 80% and exceed the 2019 level during peak periods. International OTA platforms are expected to maintain triple-digit growth compared to the pre-pandemic period.

2. Q&A

Q: How is the AI assistant doing and what is its impact on OTA?

A: The first AI assistant was launched in February, and TripGenie was released in July, which can be operated through open text and voice commands. The company has also introduced AIGC to complement content creation and improve quality and efficiency. AIGC will not replace OTA platforms, but AI can help OTA companies improve efficiency. With a deep understanding of industry customers and rich data, the company can establish its own AI system.

Q: Is there a trend of consumer downgrading? What are the long-term trends for business travel and leisure travel in China?

A: We remain optimistic about the long-term growth of the Chinese tourism market because leisure travel has a significant impact on industry growth, and the demand for leisure travel has remained strong since early 2023. There is no significant trend of consumer downgrading. There are several reasons why we are confident in the growth: (1) Consumer spending has shifted from goods to services, and travel is expected to account for a larger share of household expenditure. (2) The continued penetration of online travel industry will drive further growth of OTA, helping to offset some potential negative impacts of economic fluctuations.

Business travel has a strong correlation with economic activities, and the short-term impact is negative. However, companies will increasingly adopt managed business travel services as a way to optimize their overall travel budgets. The company's business travel segment has continued to perform strongly this year, driven primarily by the expansion of hotel offerings and growth in corporate clients.

Q: Recent performance and expectations for the upcoming National Day holiday? Q4 and future expectations?

A: Domestic hotel bookings have increased by 70% compared to 2019, while outbound flight and hotel bookings have recovered by 80%. International platform bookings have grown by triple digits compared to 2019. We remain optimistic about the National Day holiday, as most bookings for this period will contribute to Q3 performance. Visibility for Q4 is relatively low. Although domestic tourism in China may slow down due to seasonal factors, the increase in international flight capacity is expected to further boost outbound tourism.

Q: How has business travel recovered compared to 2019?

A: Business travel in Q2 has grown by 178% compared to 2019, with a QoQ increase of 31% and a YoY growth of 89%. This growth is mainly driven by the aviation and hotel sectors, with business travel accommodation revenue increasing fivefold compared to 2019. Business travel is closely related to the economy, and our management services help clients manage their overall travel expenses. Our business travel segment has attracted new users at an accelerated rate, which has partially offset potential negative impacts.

Q: What is the competition like in the domestic market? Will the sales expense ratio increase?

A: Douyin (TikTok) and online travel agencies (OTAs) have different strengths. Douyin primarily provides inspiration, while OTAs focus on transactions and services. Our company has a strong supply chain and service capabilities, enabling us to offer a wide range of products, seamless booking experiences, personalized services, and reliable travel services. Short video platforms find it challenging to achieve these capabilities, and our company is also creating content to inspire users.

Q: What is the trend for sustainable growth? What are the long-term growth drivers?

A: GDP growth is expected to be around 5%, while the tourism industry's growth rate is projected to be several percentage points higher than GDP, at approximately 7% to 8%. The conversion from offline to online is expected to outpace industry growth, with the company anticipating a growth rate of 15% to 25% in the coming years. As the prices of outbound flights and hotels for Chinese travelers increase, hotel customers tend to stay longer during their overseas trips. Therefore, when the proportion of outbound travel increases, both average daily rate (ADR) and gross merchandise volume (GMV) will rise. Content and marketing are among the driving forces, along with efficiency improvements and the provision of personalized products through technology. Another driver is geographical expansion, including an increase in customer destinations and global market suppliers.

Q: Will outbound travel affect domestic travel?

A: It is expected that outbound flight capacity will recover to 60% to 65% in the second half of the year, with a 50% recovery during the summer. The company's outbound flight and hotel bookings have already recovered by 80%. The expansion of overseas group tour destinations contributes to the recovery of outbound group travel. Currently, the number of approved destinations has increased to 138, and most destinations for outbound travel are no longer restricted. This may accelerate the recovery of international flight capacity and local service capabilities in destination countries, benefiting not only group tours but also the company's outbound flight and hotel businesses. Although outbound product prices have increased, the service costs are similar to domestic ones, so it will not affect the company's operations internally. However, consumers' decision-making will become more diverse. Q: Cash usage?

A: The capital allocation method is guided by a strict framework, prioritizing four key objectives. First, ensuring sustainable operations, especially in the face of macroeconomic uncertainty, particularly after the recent pandemic. The primary task during the pandemic is to maintain positive operating cash flow. Second, investing in strategic initiatives that drive long-term growth, such as investments in artificial intelligence, global business expansion, and Trip.com. Third, fulfilling debt obligations. Finally, considering returns to long-term shareholders.

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