Despite weaker growth numbers, TCOM’s 1Q25 results were still above our expectations as revenue/non-GAAP OP increased by 16%/7% YoY respectively. Still, we expect market could remain cautious in the near term given mixed travel industry numbers, such as soft hotel room rate and flight prices. In addition, TCOM would continue to invest more marketing dollars in its overseas platform Trip.com, creating mild margin pressure on a YoY basis. Nonetheless, with reference to May travel numbers, we believe some of the headwinds will ease in 2H25, especially during 3Q25 which is a travel peak season in China. Maintain BUY with a new TP of US$69.9/HK$544.
　　Key Factors for Rating
　　1Q25 slightly above our expectations despite softer numbers. TCOM’s 1Q25 revenue was up 16% YoY to RMB13,850m, in-line with our expectations. Non-GAAP OP/NP were up 7%/3% YoY to RMB4,043m/4,188m respectively, above our expectations (down slightly YoY). Overall, 1Q25 growth numbers are relatively softer versus 1Q24/4Q24, due to a higher base, but it still reflects rather disciplined expenses control, especially when the outbound travel business was disrupted by cancelled trips to Thailand in 1Q25.
　　Some headwinds dragging down 2Q25 GMV, but we are not too concerned. In 1Q25 and May 2025, TCOM and the industry were affected by soft industry operating metrics, such as weaker hotel RevPAR (industry-wide down HSD YoY) and lower flight fares. This had put pressure on TCOM’s revenue despite higher travel volume. However, recent figures, especially during May Labour Day Holiday, had improved sequentially, suggesting issues such as high base under pent-up demand and higher supplies would be moderated. Hence, we expect the downside risk for 3Q and 4Q GMV would not significantly miss, as recent evidence suggests demand and supply conditions are improving.
　　Investment on overseas market still a priority in 2025. In 1Q25, bookings on its overseas platform Trip.com grew by 60% YoY, a solid GMV performance but this also partly dragged the overall profitability, as GPM/non-GAAP OPM declined by 0.8ppt/2.4ppts YoY to 80.4%/29.2% respectively. We now view Trip.com to be a double-edged sword of TCOM. On the bright side, its solid GMV growth trajectory could attract investors when sentiment improves, but as its GMV grows, it could be margin-dilutive, and this could make investors cautious under uncertain markets. However, we view the margin impact to be actually manageable, given that it is mostly marketing driven and could halt when shareholders’ return is impacted. In fact, TCOM also proposed a resolution on 20 May to let TCOM be authorised to buy back shares listed on HKEx. We believe this could actually offer better flexibility to TCOM and enhance return more promptly.
　　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; (4) higher spending to defend market share, and (5) lower-than-expected share buybacks and dividends.
　　Valuation
　　We adjust our FY25E-27E non-GAAP net profit slightly by -0.4% to 0.1% after the 1Q25 earnings, as TCOM’s fundamentals remain largely unchanged.
　　ADR: Our target price of US$69.9 is based on SOTP and a USD/RMB rate of 7.30. 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 23x/21x non-GAAP 2025/26E 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 23x/21x non- GAAP 2025/26E diluted EPS.
　　Our DCF is based on the following key assumptions: (1) WACC of 11.3% (previous: 11.8%), and (2) terminal growth rate of 4.5%.