TCOM recorded another strong quarter, as 3Q24 adj. net profit grew 23% YoY to RMB6,006m, beating consensus. This suggests strong momentum on all business fronts despite the high base of 3Q23 due to the unleashing of pent-up demand after reopening. While the industry will continue to normalise as the impact of reopening fades, we believe TCOM will remain as a frontrunner in terms of growth. Its international platform Trip.com would remain a key driver for the group, given its fast growth (mid to high double-digit) and higher revenue contribution (9% already in 3Q24). We remain convinced that TCOM will continue to outperform in 4Q24 and 2025 given its extensive product offering, while being an early adopter of AI would help maintain higher margin. Reiterate BUY.
　　Key Factors for Rating
　　Strong 3Q24 as revenue and margin beat expectations. 3Q24 revenue was up 16% YoY, c.2% above market expectations, thanks to strong revenue from accommodation (+22% YoY to RMB6,802m) and other revenue (+41% YoY to RMB1,234m). Revenue from transportation (+5% YoY to RMB5,650m) is also impressive, given the 3Q23 high base and normalising ticket price in 2024. 3Q24 GPM reached 82.4% (+0.4ppt YoY), a record high, and with strong SG&A control, non-GAAP OPM reached 34.4% (+2.2 ppts), also a record high. Hence, non-GAAP OP of RMB5,465m (+34% YoY) & non-GAAP NP of RMB6,006m (+23% YoY) is 5% above our estimates, a strong operating leverage seen.
　　Domestic and outbound business likely remain strong in 4Q24. The strong performance of 3Q24 partly reflected the demand for the Golden Week holiday, and TCOM’s GMV indeed benefited during the holiday. Such trend even strengthened after the holiday in terms of YoY growth, as travelers now prefer off-peak travels. Given this demand, we expect the adverse impact of industry supply, such as higher hotel supply and hence lower room rate, may moderate in 4Q24. Hence, we expect 4Q24 domestic GMV would remain moderately strong, thanks to strong growth in volume and less unfavourable ASP. Meanwhile, given c.40% growth of outbound travel in 3Q24, we expect this will continue in 4Q24 as flight capacity resumes above 80% of pre-COVID level.
　　Intl platform Trip.com remained a key driver. In 3Q24, Trip.com platform accounted for c.9% of total revenue, or RMB1.4bn already. However, it still achieved mid to high double-digit growth in 3Q24, and we expect it could carry such growth momentum in 4Q24 (revenue +>50% YoY) thanks to higher user penetration in APAC region and more recently in Europe. Given this significant revenue scale, we expect it will lift the overall marketing expenses higher, as Trip.com is still in the phrase of user acquisition. However, we expect the overall impact would be manageable, given the cost saving initiatives of TCOM.
　　Cost saving initiatives aided with AI: 3Q24’s earnings demonstrated strong GPM and hence OPM with the help of AI, which reduced the need of labour despite sheer GMV growth. We expect TCOM’s margin would remain intact in 4Q24 and 2025 despite normalised environment, i.e. we still expect non-GAAP OPM to remain above 30% in 2025 despite higher contribution from Trip.com, and also a likely higher spending on sales & marketing dollars.
　　Key Risks for Rating
　　Downside risks include: (1) weak recovery of tourism, especially outbound; (2) policies on outbound travels may tighten unexpectedly; (3) keen competition from direct booking platforms; and (4) higher spending to defend market share.
　　Valuation
　　We lift our EPS estimate for FY24-26 by 8-10% to reflect the stronger-than- expected margins of TCOM, demonstrated by the economies of scale under strong GMV growth. The competitive landscape is also better than our expectations, and hence the need of subsidising user is also seemingly lower than before.
　　Reiterate BUY as we believe TCOM is benefiting from: (1) a natural trend of Chinese consumers shifting more spending towards experiential consumption such as travel; (2) growing trend of outbound travels in China, and (3) a strong momentum of Trip.com platform thanks to high growth in APAC region and its price advantage over traditional travel agencies and OTA platforms.
　　ADR: Our target price of US$69.9 is based on SOTP and a USD/RMB rate of 7.20. We use DCF to derive the value of the core business first, followed by the public investments held by the company. Our TP is equivalent to 24x/21x non- GAAP 2024/25E diluted EPS.
　　H-share: Our target price of HK$544 is based on SOTP and a USD/HKD rate of 7.78. We use DCF to derive the value of the core business first, followed by the public investments held by the company. Our TP is equivalent to 24x/21x non- GAAP 2024/25E diluted EPS.
　　Our DCF is based on the following key assumptions: (1) WACC of 11.8%, and (2) terminal growth rate of 4.5%.