Is Trip.com About To Take Off?

When the going gets tough, packing up your bags and going on holiday isn’t most people’s idea of a first choice.

That’s unless you’ve been hemmed in at home for two years under some of the world’s toughest Covid lockdown restrictions and saved up a heap of cash. With more holiday seasons due at the end of the fourth quarter, the Chinese travel industry will soon be getting prepared for a winter break followed by two New Years’ events.

Trip.com Group Limited TCOM, a market-leader in the domestic Chinese travel sector, may be about to make a big break to the upside in a scenario that increasingly looks like a return to the skies for China’s burgeoning middle class, say analysts.

In September, Trip.com reported Q2 profits of $89 million, or $0.70 per share, which beat analyst expectations of around $0.5 per share. The company posted an increase in sales of over 180% from the same year-ago period, and was one of the few Chinese firms to increase quarterly revenue too, by 22%. That outperformance is likely to continue, according to CMB analyst Saiyi He.

“[The] release of pent-up demand in the domestic travel market is stronger-than-expected and likely to sustain,” wrote He in a recent research note. He cites strong revenue growth and management’s acumen when it comes to cost-cutting as the principle reasons for Trip’s outperformance. CMB has a Buy rating on the stock.

Most other analysts agree: the average price target for the 31 analysts covering Trip.com is $50 vs. the current market price of around $35 making Trip one of the highest-conviction Buy ratings among Chinese companies trading on US markets.

Despite the bullish sentiment, an accumulation of short-side bets on Trip.com’s stock has recently amassed, rising by half over the past two weeks. A big short presence in a stock can lead to more volatile upside gains in the event of an upturn as short-sellers are forced to cover their positions by buying it back.

About a fifth of the company’s stock is currently being targeted by short-sellers, up from just 13% on October 10. Much of this has been the result of a general sell-off among Hong Kong shares as China’s property woes have weighed on investors’ risk appetite. Since the week beginning October 14, the Hang Seng Index is 6% lower.

That doesn’t match up with trends in the domestic Chinese travel sector, say analysts, which are on the up. During the previous Golden Week national holidays, travelers made 826 million domestic trips which generated around 750 billion RMB ($102 billion) in revenue for the Chinese travel industry overall. While that was about 5% shy of the Chinese government’s official forecasts, it was up 1.5% over the same period in 2019, suggesting that domestic travel has returned to pre-pandemic levels when Trip was trading in the 40s.

“The company can be highly profitable and grow quickly, as evidenced by its pre-FY20 performance. Our view is that they can replicate this,” wrote analysts from Welbeck Ash Research in a note earlier this year. “Based on our valuation of the business, we see an upside of 20%.”

Welbeck Ash analysts points to Trip.com’s 17% compound annual growth over the past decade and potential improvement for gross margins to 20-30%, which is roughly where those of Expedia Group Inc EXPE are as the main catalysts for earnings improvement now that China’s economy is open again for travel business.

Then there’s the hand of the Chinese government in helping to stimulate Trip’s P&L: local Chinese media reports cite numerous examples of incentives for domestic travel as a preference over foreign travel lately for mainland consumers. That adds up to a boon for Trip, which mostly operates in the domestic Chinese travel market.

Bhagyesh Shah, a former analyst for Citi and Adani Group and now an independent research consultant for global funds, has a price target of $42 for Trip.com. He writes in a note issued at the start of this month that while Expedia.com, Tripadvisor Inc TRIP and Booking Holdings Inc BKNG all trade at a forward P/E multiple of 21x, Trip’s 17.5x valuation by comparison makes the company very cheap right now.  

Shah cites record Chinese household deposits, which total 132 trillion RMB after many consumers saved up over the Covid period, as a big bullish catalyst for Trip’s forthcoming earnings. During the first half of 2023, Chinese household savings increased by 12 billion RMB, the highest in a decade.  

“Trip.com has exposure in fast growing markets such as India and China which seems to be relatively better off [than its competitors],” writes Shah.

“We believe the recent price correction offers an attractive entry point for long-term investors and initiate a Buy.”

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