AI Driven Itinerary Planning And Global Expansion Will Advance Travel

Key Takeaways

• Dual-track strategy aims for revenue growth by deepening domestic market penetration and expanding outbound travel market presence.
  
• AI-driven innovations improve user experience and operational efficiency, potentially boosting net margins and earnings.
  
• The company faces revenue growth risks due to domestic market dependency, margin pressures, and high marketing costs amid competitive challenges in expanding both locally and internationally.

Catalysts

An investment holding company, provides travel related services in the People’s Republic of China.

• The company's dual-track strategy, which focuses on deepening penetration in the domestic mass market and expanding in the outbound travel market, indicates potential for increased revenue and market share growth.
  
• Tongcheng Travel's focus on AI-driven innovations, such as intelligent itinerary planning and real-time booking systems, suggests improvements in user experience and operational efficiency, potentially boosting both net margins and earnings.
  
• The substantial growth in annual paying users and ARPU shows an increasing value per user, indicating a strong potential for revenue growth by enhancing customer engagement and cross-selling services.
  
• The robust growth in the international business, demonstrated by a 130% increase in international air ticketing volume, points to opportunities for future revenue expansion and market penetration as the outbound market recovers.
  
• The planned margin improvement program for both domestic and outbound business segments aligns with the company's strategy to enhance sustainable profitability, likely contributing to net margin growth.

Tongcheng Travel Holdings Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Tongcheng Travel Holdings's revenue will grow by 11.6% annually over the next 3 years.
• Analysts assume that profit margins will increase from 12.6% today to 15.3% in 3 years time.
• Analysts expect earnings to reach CN¥3.8 billion (and earnings per share of CN¥1.53) by about July 2028, up from CN¥2.2 billion today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting CN¥4.2 billion in earnings, and the most bearish expecting CN¥2.5 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 17.3x on those 2028 earnings, down from 20.9x today. This future PE is lower than the current PE for the HK Hospitality industry at 18.6x.
• Analysts expect the number of shares outstanding to decline by 1.12% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.89%, as per the Simply Wall St company report.

Tongcheng Travel Holdings Future Earnings Per Share Growth

Risks

• Tongcheng Travel's reliance on the domestic Chinese market may pose a risk in terms of revenue if there are any significant disruptions or downturns in the domestic travel demand. The company's strategy is heavily focused on the domestic market, which could impact future revenue growth if diversification is not achieved.
  
• The integration of tourism business has affected gross margins, with a decrease from 73.5% in 2023 to 64.1% in 2024, indicating challenges in maintaining profit margins that could impact net earnings.
  
• Despite the rapid growth in outbound travel, the margin improvement programs are still in progress and the profitability of their outbound business has yet to be fully realized, which could delay overall earnings impact.
  
• Marketing and sales expenses remain substantial, and any increase in these costs due to expansion strategies could strain net margins and reduce profitability.
  
• The company's growth projection is based on achieving greater market share in both domestic and international segments, but any missteps or increased competition in these markets could lead to slower growth in revenues and net earnings than anticipated.

Valuation

• The analysts have a consensus price target of HK$25.008 for Tongcheng Travel Holdings based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of HK$28.79, and the most bearish reporting a price target of just HK$18.53.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be CN¥24.8 billion, earnings will come to CN¥3.8 billion, and it would be trading on a PE ratio of 17.3x, assuming you use a discount rate of 8.9%.
• Given the current share price of HK$22.4, the analyst price target of HK$25.01 is 10.4% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.