Investor confidence in China takes a hit, but we remain bullish on a messy final phase for their economy
If you are an investor with a traditional long-term approach to China, there has undoubtedly been frustration and also the disappointment in the results of the last 2 years. I believe that the investment landscape for China will improve in the future.
If you are a trader with a defined return target and have spent time developing the ability to know which levels are likely to cause a bullish reaction and which regions are the levels where market makers are ready to dump (reset) the stock , The stock environment in China is still difficult, but constantly offers opportunities.
In this case, I wrote one positive feedback on NetEase (DETENTION) and a Black Swan Event essentially disappeared the stock. That said, as a trader in the China sector, we found an opportunity to buy (and later close) long NTES calls at Friday’s open for an intraday profit of 30%.
Survivors of the China investment landscape have learned to focus and trade on price action and while macro policy from the mainland is almost impossible to predict, there will be Alpha at the right levels.
Despite the tough investment environment, China as a sector is my specialty and I cannot abandon it. I am regularly invited to conferences to speak about investing in China, and I routinely share my conclusion that rapidly changing sentiment is part of the game. There is a high degree of mental fitness required.
There also continue to be names that will work in the long term, and one of them I believe is Trip.com (NASDAQ:TCOM). We believe the stock is headed higher and that investors who already own the stock should hold out for further recovery. I have been an investor in this name since the mid-20s and continue to have a favorable long-term view of it.
Catalysts for Trip.com and Fundamental Outlook
Trip.com is the leading travel and hotel accommodation booking agency in China. With over 1.4 million hotels on its platform, it is by far the leader in China’s Online Travel Agency (OTA) industry. The next closest competitors include Meituan (360K listings) and Fliggy (200K listings).
As of the latest quarter, the company generated 13.74 billion yuan in revenue and maintained an operating margin of 29% that beat expectations by nearly 2% in a challenging spending environment in China. China’s travel industry is expected to normalize in 2024, as international outbound travel becomes a greater focus point for the OTA and TCOM industry in particular. So far, TCOM’s international travel business has recovered approximately 80% of its pre-pandemic revenue. While volumes are down, airfares are up 20-30% from pre-pandemic levels, compensating for fewer people traveling abroad.
Geopolitics between mainland China and the EU and US play a role as visa applications are key to making TCOM’s international travel business clear the current hurdle it is experiencing. Long visa wait times are a major key factor preventing a return from mainland Chinese citizens seeking to travel internationally, and The US Travel Association appreciates the following industry observation:
As US Commerce Secretary Gina M. Raimondo BEN official visit to China, new analysis by the US Travel Association shows that a full recovery of Chinese visitation (to 2019 levels) — which currently lags substantially behind other countries — would boost the U.S. economy US with 2 million additional visitors per year and more than $11 billion in export spending.
The US Travel Association also estimated that China was the third largest source of overseas travelers to the US and that Chinese visitors typically spend more than $5,000 per trip, so there is an economic incentive to speed up wait times. visas.
The positive aspect about this is that tourist travel to the US is unlikely to face a host of obstacles that exist in the semiconductor and chip technology cold war that the US and China are currently facing.
For now, according to US Travel Association, the waiting time for a visa to travel from China to the US is about 164 days. Additionally, weekly flights from China to the US are less than 10% of pre-pandemic capacity.
There is great potential for these obstacles to be resolved over time and this will greatly help Trip.com exceed next year’s revenue estimates.
Meanwhile, investors will focus on China’s domestic travel fundamentals, which are currently holding steady in today’s slowing consumer spending. China Tourism Academy (reported by the Ministry of Culture and Tourism on ChinaDaily) RATINGS that the tourism revenue figure will increase by 114% in the first 9 months of 2023 compared to last year, which then recovers 90% of the pre-pandemic level. This achievement is quite impressive given the deep macroeconomic slowdown taking place across China. TCOM’s competitive price and scale as the leading OTA will help it recover faster than other competitors such as Meituan and Fliggy.
The company is also focused on managing its cost structure, which is top of mind for all investors in this environment. The Sell Side expects to see net margins improve to the 16-17% region from 7% in 2022, primarily due to headcount reductions, a more efficient bottom-line IT system that will result in productivity gains, and optimized advertising and customer acquisition costs.
We can see from the charts below that the Street expects revenue and EBITDA to grow at a 10-20% growth profile, which is currently a rarity in the Hang Seng H-share market, where most names are struggling to achieve more than 7- 9% growth in the top line.
Table 1: Trip.com Revenue Expectations (Expected to Grow 10% in 2023-2025)
Table 2: Trip.com EBITDA Expectations (Expected to grow 12-18% in 2023-2025)
Risks, thoughts on entry and valuation
Given that the current valuation at TCOM using its multiple sales (cannot use historical earnings or EBITDA because previous years were turbulent due to the pandemic) is close to the historical limit, there is reasonable room for expansion. rating as visa waiting times are reduced and capacity for flights from China to the US is increased.
There are a number of macro and company-specific risks that we’ll want to keep on our radar. The obvious big picture risk that investors should pay attention to is that weakness in consumer spending in China still persists, clearly reflected in indirect indicators such as e-commerce spending, BABA/JD earnings results, and it also points to the latest Golden Week results showing a 10% increase over 2019 in air travelers (analysts had expected more). Another key overall risk that could prevent TCOM from reaching its potential is if US-China relations deteriorate further and the US delays visa wait times for Chinese travelers as well as any reduction in flight capacity from China to the US if this it happens it will take longer than expected for TCOM’s international business segment to recover, and that’s where most of the upside potential comes from for 2024 revenue, EBITDA and EPS estimates to exceed Street expectations. Prior to 2019, the international business segment was nearly 25% of its business mix, but due to travel restrictions, it is currently less than 5% of the mix. We will need to see growth in the international business segment again for the stock to gain strong favor among investors.
Investors looking for opportunities in China may want to focus on areas less likely to be affected by sudden regulatory changes. NetEase and Tencent are likely to see a technical rebound from its pre-Christmas sales, but the gaming industry has structurally changed, so any rebound in NTES is likely to be an opportunity to reduce exposure. Tencent is slightly more diversified, so its fundamentals should be somewhat more protected, but in a short-term sense it drives price action in China stocks.
I personally find the travel industry to be a bit more insulated from the regulatory landscape as China is in fact it actively seeks to boost its domestic tourism industry. I also believe that if US-China relations stabilize, one of the most “negotiable” areas of an improved relationship is greater travel access between the two countries. This is my opinion, but of course, the landscape could change negatively as we know it and ongoing geopolitical developments remain as macro risks.
That said, I believe that once the domestic travel industry in the China market and the international travel segment recovers (and there is a high likelihood of doing so in the long term), Trip.com will continue its gradual ascent. above investment time frames.
Editor’s Note: This article discusses one or more securities that are not traded on a major U.S. stock exchange. Please be aware of the risks associated with these stocks.