Tongcheng’s 1Q25 adjusted NP was up 41% YoY to RMB788.2m, aboveour expectations. This reflects Tongcheng’s monetisation strategy hasbeen working, despite headwinds such as a higher base in 2024, andsoftening hotel room rates. Meanwhile, Tongcheng’s focus on usersfrom low-tier cities also helped it to outperform its peers in the nearterm. The Company will continue to emphasise on further monetisationand improve ROI of its sales and marketing efforts, which we expect tobe supportive for its margins. We believe this set of results would alsoease some concerns of investors, and offer revisit opportunities afterthe Company’s announcement to acquire Wanda’s hotel managementbusiness. Reiterate BUY.
　　Key Factors for Rating
　　1Q25 beat as NP jumped 41% YoY. 1Q25 revenue was up 13.2% YoY toRMB4,377m, but adj. NP jumped 41% YoY to RMB788.2m, as adj. NPMexpanded by 5ppts YoY to 26.5%. This is above our expectations, reflectingTongcheng’s strong execution to lift monetisation and it is more restrained insales & marketing efforts versus 2024. The results also reflected Tongchengbenefited from the strong demand of users from lower tier cities to travel bothdomestically and internationally, which is strong enough to offset someweakness related to Southeast Asia (tourism revenue -12% YoY to RMB585m).
　　Well positioned to capture the improving demand on leisure travel. Wesee Tongcheng is better positioned than some of its peers as its core usersgroup, the travelers in low-tier cities, is more resilient in travel demand,especially for leisure travel. This could be reflected in the Company’s 2Q QTDperformance, where its accommodation revenue is on good track, supported byHSD-DD YoY growth room nights and positive growth in average room rate(ADR). This is outperforming the overall hotel industry and OTAs that focus onhigh-tier cities, and we expect Tongcheng’s user mix, which has strongcorrelation with leisure travel, would continue to do well in 2025.
　　More refined approach to improve monetisation. While we expectTongcheng’s 2025 margin will be supported by improving revenue mix (strongerrevenue from outbound travel with higher take rate), we also view thatTongcheng is now more focused on lifting margins by ensuring decent ROI in itsmarketing efforts. Hence, its mgmt. expects its sales & marketing expenses as %of revenue would decline in 2025, and we see it a rather encouraging sign todeliver earnings growth. We turn more confident for it to achieve 20% YoY NPgrowth in 2025 even before accounting the Wanda deal.
　　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) newlyacquired business weaker than expected and failing to create synergy.
　　Valuation
　　We slightly revise up our FY25-27E EPS by 0.8-1.5% after the 1Q25 earningsbeat. We currently do not factor in the earnings contribution (up to 5% on a fullyearbasis) from the acquisition of Wanda Hotel Management, which isannounced on 17 April 2025 as the deal is subject to a long approval process.
　　Maintain BUY as we see Tongcheng very well positioned in the OTA industrywhere it could benefit from the favourable trend of strong travel in both domesticmarket and outbound travels. We also see its focus on monetisation and marginin 2025 should lure more investors to revisit.
　　Our DCF-based TP is lifted to HK$23.6 with the following key assumptions: (1)WACC of 15.4%; (2) terminal growth rate of 3.0%; and (3) HKD/RMB rate of0.94. Our TP is equivalent to 20x/16x 2025/26E P/E.