Tongcheng Earnings: We Raise Fair Value by 18% as Robust Growth and Margin Expansion Continues

We raise our fair value estimate for Tongcheng by 18% to HKD 27 per share from HKD 23 after it reported third-quarter revenue of CNY 4.9 billion, which represents a 51% increase year on year and was in line with our estimate. Profitability continued to improve this quarter as operating margin for its core online travel business materially expanded by 920 basis points sequentially to 23.8% and the company indicated that it will likely have more operating leverage in the short term as its marketing expenses can be further reduced while keeping the number of staff relatively flat. Revenue was driven by a 22% and 21% year-on-year rise in accommodation and transportation ticketing, respectively, while profitability was boosted by lower-than-expected marketing expenses. In addition, Tongcheng’s international outbound business is growing robustly as its revenue grew over 50% year on year this quarter and is expected to increase 70% next quarter. The firm plans to increase its international revenue to 10%-15% of total sales in the next three years from 5% currently.