Tongcheng reported a rather decent set of 3Q25 earnings, asrevenue/adj. NP grew by 10%/17% YoY respectively, slightly ahead ofour expectations. The earnings and comments from mgmt. bothpointed to the Company’s dedication to improving margins withoutundermining its market share. We hence expect its core OTA businesswould see improvement in profitability, driven by higher take rate andlower spending. We expect this could lay a better foundation when itstarted to have more acquisitions to be consolidated in 2026. Hence,we estimate that the overall margin impact related to its Wanda HotelManagement acquisition to be manageable, and we also do not expectTongcheng would see material impacts from fewer outbound travels toJapan. Maintain BUY with a higher TP of HK$24.6.
Key Factors for Rating
3Q25 slightly beat as margins improved to 9-quarter high. Dragged bynon-core tourism business revenue (-8% YoY to RMB900m), Tongcheng’s 3Q25revenue grew by 10% YoY to RMB5,509m. However, thanks to improvement involume and take-rate, revenue of its core OTA business actually grew by 15%YoY, and it helped overall adj. NP to grow 16.5% YoY to RMB976m, while adj.NPM reached 19.2%, up 1.0ppt YoY and the highest since 3Q23, reflectingTongcheng’s strong cost control and focus on profitability.
Insisted on seeking better profitability with maturing scale. We expectTongcheng would continue to remain such approach to protect its margins in4Q25 for the core-OTA business, given steady competitive landscape while traveldemand remained strong in 4Q25 QTD. We see there are favourable factors thataid such positioning: (1) for accommodation, industry RevPAR is stabilising andimproving, which could offer better backdrop to its GMV, and (2) internally,Tongcheng also reduced promotions to focus on ROI, while factors such asimproving product mix within its OTA platform due to higher spending propensityof its users, especially on hotels in low-tier cities, also provided support. Hence,we expect 4Q25 adj. NPM would still improve YoY.
Consolidating Wanda Hotel Management should have limited impacton P&L. On 16 October 2025, Tongcheng completed the acquisition of WandaHotel Management and added 239 hotels to its hotel mgmt. business. Weestimate this should account for 0.7%/4.0% of our forecasted revenue. Whilewe expect it could take time for the profitability to ramp up and achieve synergy,we expect the margin impact to 2025 & 2026 would be very limited, as theoperation is expected to remain stable after the takeover.
Outbound travel as the next focus but we see limited impact fromJapan. Tongcheng’s 3Q25 could be seen as a milestone for its outboundbusiness, as international flight ticket business now accounted for 6% of its totalticketing revenue (+2ppts YoY), while the overall outbound business turnedprofitable for the first time. We expect Tongcheng would continue to ramp upthe segment, since outbound travel carries better margins than domesticbusiness. While there could be concerns that deteriorating relationship betweenChina and Japan since Nov 2025 could weigh on such segment, we believe theimpact on its GMV would also be manageable as travellers could redirect theirtrips to other destinations, and they have demonstrated a similar pattern whenthe travel demand to Thailand decreased in early 2025.
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 revise down our EPS forecast for FY25-27 by +2%/-2%/-2% to mainly reflectbetter margins in 2025, but we expect Tongcheng may incur most costs in 2026and 2027 as it may spend more after its acquisitions to create more synergy andbusiness opportunities.
Our DCF-based TP is revised upwards to HK$24.6, which is based on followingkey assumptions: (1) WACC of 14.4% (previous: 15.4%); (2) terminal growthrate of 3.0%; and (3) HKD/RMB rate of 0.92. Our TP is equivalent to 17.7x/16.4x2025/26E reported P/E, or 15.7x/14.2x 2025/26E P/E based on adj. EPS.
We maintain BUY as we see Tongcheng as a solid player in the OTA segment,and its dedication to defend margins should mean decent shareholders’ returnin the near term. We expect its M&As, especially the deal around DalianShengya (600593 CH, NR) announced in July 2025, may cause some shorttermoverhang due to uncertainties on its earnings, but we expect the solidtraction of the OTA business should overcome such factors.