Tongcheng’s 4Q24 adj. NP of RMB660m (+36.8% YoY) was a slight beat, reflecting the benefits from solid travel demand and a favourable competitive environment. We expect the competitive landscape for OTAs would remain supportive for the company to focus on monetisation, and new business development, especially the outbound travel with higher margins. We believe Tongcheng is at a better position than its major competitors since it still enjoys: (i) the lifting of ARPU on its sheer amount of sticky users in low-tier cities; (ii) the low hanging fruits of growing outbound business due to a very low base, and (iii) a very limited investments on overseas platform which means margin drag is negligible. Reiterate BUY with a higher TP of HK$23.3.
　　Key Factors for Rating
　　4Q24 a beat in both lines. 4Q24 revenue was up 35% YoY to RMB4,238m while adjusted NP was up 37% YoY to RMB660m, both above our expectations by 6%/5%. Aside from strong demand from travel and encouraging user metrics such as higher ARPU and purchase frequency, this is also driven by: (i) continuous improvement of take rate as it reduced promotions through precise marketing, and (ii) restrained selling and marketing expenses as the company started to focus on margins.
　　We expect the favourable trend will last in 1Q25, and full year. Given the competitive environment of OTAs has moderated, Tongcheng has reduced promotional efforts, while targeting existing users more precisely to enhance ROI. Hence, we expect Tongcheng would be able to continue to lift margins organically. What’s more, the company’s outbound travel business is also gaining traction. For instance, outbound flights accounted for c.5% of the flight tickets sold in 4Q24, with triple-digit YoY growth. We expect such growth would continue in 2025 and could be supportive to the overall margins. We expect adj. NPM will expand by 0.5ppt YoY to 16.6% in 2025.
　　A beneficiary of DeepSeek and Tencent Yuanbao AI ecosystem.
　　Tongcheng has been the frontrunner of deploying DeepSeek to its OTA system to supplement its proprietary Huixing system to offer customised travel solutions. It is also exploring options to expand the use of generative AI for cross-selling travel products via various platforms. In addition to its own mobile app, which is gaining users strongly, we also see it a strong candidate of leveraging Tencent ecosystem, given its close ties with Tencent. We see this as a strong competitive advantage over OTA peers while the capex is manageable.
　　Key Risks for Rating
　　(1) Weak recovery of tourism; (2) worsening relationship with top shareholders; (3) keen competition; (4) higher spending to defend market; and (5) newly acquired business weaker than expected and failing to create synergy.
　　Valuation
　　We lower our FY25E adj. NP forecast by 4% mainly due to the anticipation of weaker tourism business after the safety incident in Thailand, but we lift our adj. NP forecast for FY26E by 0.5% as we turn more positive on its monetisation and long term margin trend.
　　Maintain BUY as we see Tongcheng very well positioned in the OTA industry where it could benefit from the favourable trend of strong travel in both domestic market and outbound travels. We also see it in the sweet spot of leverage the ecosystem of Tencent and higher penetration of Alibaba-related apps.
　　Our DCF-based TP is lifted to HK$23.3 with the following key assumptions: (1) WACC of 15.4%; (2) terminal growth rate of 3.0%; and (3) HKD/RMB rate of 0.94. Our TP is equivalent to 20x/16x 2025/26E P/E.