The online travel platform TONGCHENGTRAVEL saw a 14% revenue growth in the first quarter, but its latest earnings report did not mention the antitrust investigation faced by its major shareholder and important supplier, TRIP.COM.
<h4>Key Points:</h4>
<ul>
<li>TONGCHENGTRAVEL's revenue in the first quarter increased by 14.4% year-on-year, with accommodation business revenue growing by 14.7%, and hotel management business seeing a nearly 60% increase.</li>
<li>The latest earnings report did not mention the antitrust investigation launched against TRIP.COM in January this year. TRIP.COM is also the main supplier of TONGCHENGTRAVEL's hotel booking services.</li>
</ul>
Yang Ge
Double-digit revenue and profit growth are still not enough to overshadow the &#34;elephant in the room&#34; that TONGCHENGTRAVEL HOLDINGS LIMITED (0780.HK) deliberately omitted when announcing its latest quarterly results last Thursday.
This &#34;elephant&#34; refers to the antitrust investigation against the online travel leader TRIP.COM (TCOM.US; 9961.HK) announced in January this year. Once the case is ultimately decided, it will almost certainly have a significant impact on TONGCHENGTRAVEL. The reason is that TONGCHENGTRAVEL itself is part of TRIP.COM's market dominance, which is the core of the regulatory investigation. TRIP.COM currently holds about 24% of TONGCHENGTRAVEL's shares and is also the main supplier of TONGCHENGTRAVEL's hotel booking services, which is one of TONGCHENGTRAVEL's three main sources of revenue.
Despite this significant uncertainty looming, TONGCHENGTRAVEL completely omitted any mention of its relationship with TRIP.COM in its latest quarterly results. On the surface, the results still look quite impressive, with a 14.4% revenue growth and a 16.4% profit increase for the three months ending in March.
However, investors were not convinced by these positive numbers. TONGCHENGTRAVEL's stock price plummeted 5% on the Friday following the earnings announcement. After this round of sell-off, TONGCHENGTRAVEL's stock price has fallen 33% year-to-date, almost on par with TRIP.COM's 36% decline. Most of the decline occurred after TRIP.COM confirmed on January 14 that it was under investigation by the State Administration for Market Regulation (SAMR) in China. Other reports indicated that the investigation is primarily focused on TRIP.COM's dominant position in the Chinese hotel booking market.
This round of sell-off has brought TONGCHENGTRAVEL's price-to-earnings (P/E) ratio down to just 13 times, but it is still about twice that of TRIP.COM's severely depressed P/E ratio of 6.6 times. In comparison, the smaller Tuniu (TOUR.US) has a P/E ratio of 16 times, while global travel platform giant Expedia (EXPE.US) stands at 19 times.
To be frank, TONGCHENGTRAVEL may ultimately benefit from this antitrust investigation, as the results will almost certainly allow it to partially or completely break free from TRIP.COM's dominance. TONGCHENGTRAVEL currently relies heavily on TRIP.COM for hotel booking services, which drags down its gross margin, which was only 66.3% last year, far below TRIP.COM's 80.6%, and even lower than Expedia's impressive 90.1%. However, to achieve a higher gross margin, TONGCHENGTRAVEL will need to establish its own independent hotel booking supply system, which will take time.
The company has already begun to lay out plans in this direction, with a major focus on developing its hotel management business. This has also become one of the highlights in its latest results. Last year, TONGCHENGTRAVEL acquired the hotel management business of the troubled real estate company Wanda
Driven by this, TONGCHENGTRAVEL's &#34;Other Business&#34; revenue in the first quarter grew by approximately 60% year-on-year to RMB 961 million (USD 141 million), with this segment primarily including hotel management, accounting for about one-fifth of total revenue; in contrast, the revenue share from related businesses was only 14% a year ago.
With the completion of acquisitions and rapid expansion of hotel management operations, by the end of March, TONGCHENGTRAVEL had increased the number of managed hotels to 3,200, with another 1,900 in the preparation stage. This has positioned the company among China's large hotel management groups, surpassing Atour (ATAT.US) with 2,088 hotels as of the end of March, but still far below the hotel leader Huazhu Group (HTHT.US; 1179.HK) with over 13,000 hotels.
<h4>Rebuilding the Business Model</h4>
TONGCHENGTRAVEL currently manages a network of 3,200 hotels, laying the foundation for establishing its own direct room booking service, which is expected to eliminate the need to go through Ctrip as an intermediary in the future. However, compared to the 4 million hotels and non-standard accommodation options currently covered by its platform, this portion still represents a very small percentage. This suggests that the company may have begun negotiations to establish its own direct room booking partnerships with large hotel groups like Huazhu Group, as well as numerous small and medium-sized chain hotels.
The company's latest annual report shows that the relationship between TONGCHENGTRAVEL and Ctrip is extremely close. About ten years ago, Ctrip led the merger of two large online travel platforms, ultimately forming today's TONGCHENGTRAVEL structure. One of the platforms was controlled by Ctrip, while the other was held by internet giant Tencent. After the merger, Ctrip acquired a 24% controlling stake in TONGCHENGTRAVEL, while Tencent held about 20% of the shares, with not much difference. Tencent is also an important partner for TONGCHENGTRAVEL, as a significant portion of its business traffic comes from its preferred entry position on Tencent's popular platform WeChat.
TONGCHENGTRAVEL's latest annual report indicates that the company expects to receive up to RMB 3.21 billion in commissions and other income from Ctrip in 2025, primarily from hotel booking services, which amounts to about 16.5% of annual revenue. In the latest quarterly results, revenue from accommodation booking services grew by 14.7% year-on-year to RMB 1.36 billion, accounting for 27% of total revenue.
The largest source of revenue for TONGCHENGTRAVEL remains transportation ticketing services, with first-quarter revenue growing by 6.2% year-on-year to RMB 2.12 billion, accounting for 42% of total revenue. This segment theoretically should not be affected by antitrust investigations, as TONGCHENGTRAVEL directly collaborates with airlines, railways, and bus operators in this business.
The growth in accommodation booking and transportation ticketing revenue, along with significant expansion in hotel management operations, drove TONGCHENGTRAVEL's first-quarter profit to grow by 16.4% year-on-year to RMB 779 million, exceeding last year's RMB 669 million.
TONGCHENGTRAVEL has consistently positioned itself as a platform serving customers in China's lower-tier cities, noting in its latest results that 87% of users in the first quarter came from non-first-tier cities. This strategy is quite common in China's consumer industry, where leading companies typically operate directly in the most profitable first-tier cities while expanding into lower-tier markets through partnerships
It is worth noting that TONGCHENGTRAVEL's sales and marketing expenses in the first quarter increased by 16.4% year-on-year, accounting for 42.2% of revenue, up from 40.8% in the same period last year. This may indicate that the company has begun to more actively establish its own hotel partnerships in preparation for potential future regulatory requirements to sever or significantly reduce its cooperation with TRIP.COM. Nevertheless, TONGCHENGTRAVEL has remained silent on this significant issue in both its latest quarterly performance and the annual report released in April. For such an important transformation that could enhance the company's profit margins while also bringing about growing pains, this approach may not be the best practice

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The latest performance report did not mention the antitrust investigation launched against TONGCHENGTRAVEL in January this year

Behind TONGCHENG's impressive performance, the shadow of TRIP.COM still lingers