China Galaxy Securities released a research report stating that it maintains a 'recommended' rating for tongchengtravel (00780), with an expected net income of 2.7 billion yuan/3.6 billion yuan/4.5 billion yuan for 2024-2026 adjusted. The company's outbound travel business expansion is progressing well, with sales and marketing expenses as a percentage of revenue significantly decreasing under the gradual recovery and refinement of subsidies, while the takerate continues to improve. The company has great potential for future business increment and profit capabilities.

Event: The company released its third-quarter performance report. In 3Q24, the company achieved revenue of 4.99 billion yuan, a year-on-year increase of +51.3%, exceeding overall expectations; core OTA business revenue reached 4.01 billion yuan, a year-on-year increase of +21.6%, in line with expectations; net income attributable to equity holders was 0.79 billion yuan, a year-on-year increase of +55.5%; Non-GAAP net income was 0.91 billion yuan, a year-on-year increase of +46.6%.

China Galaxy Securities' main points are as follows:

The increase in hotel takerate has driven revenue growth in the sector, with robust growth in international air tickets and ground transportation revenue.

Looking at the sectors: 1) In the lodging booking sector, revenue was 1.38 billion yuan, a year-on-year increase of +22.2%, with revenue growth outperforming ADR and overall hotel industry volume growth, mainly benefiting from the improvement in hotel takerate, while international nights saw a year-on-year increase of +130%. 2) The transportation ticketing sector achieved revenue of 2.03 billion yuan, a year-on-year increase of +20.6%, reaching a historic high in revenue, mainly due to the international air ticket volume growing by over 110% year-on-year, and the enhancement of the smart travel system improving the monetization ability of train ticketing. 3) Other revenue reached 0.61 billion yuan, a year-on-year increase of +23.7%, mainly driven by the strong growth in the restaurant management business and online vacation business. 4) The holiday sector achieved revenue of 0.98 billion yuan.

The company's paid user growth is stable, with the travel peak season in 3Q driving an increase in ARPU value.

As of 3Q24, the company's average monthly paid users reached 46.4 million, a year-on-year increase of +5%; annual paid users/accumulated service users reached 0.23 billion/1.88 billion respectively, a year-on-year increase of +3.4%/19.9%; 3Q24 ARPU was around 70 yuan, an increase of approximately 6 yuan compared to the previous quarter. The company continues to improve the WeChat ecosystem, actively promote its own app, while focusing on exploring the monetization capability of existing customers' business, increasing consumption frequency and ARPU value.

The company's overall investment and subsidy efficiency improved, and the profitability of the core OTA business further enhanced.

In Q3 2024, the company's gross margin was 63%, down 11.2 percentage points year-on-year and down 1.2 percentage points quarter-over-quarter. On the expense side, service development expenditures, sales and marketing expenditures, and administrative expenditures were 0.51 billion yuan, 1.47 billion yuan, and 0.33 billion yuan, accounting for 10%, 29%, and 7% of revenue, respectively, with year-on-year changes of -4 percentage points, -9.1 percentage points, and +0.6 percentage points, and quarter-over-quarter changes of -1.5 percentage points, -6 percentage points, and +0.2 percentage points. This improvement is expected to be mainly due to the fine-tuning of subsidies and advertising investments and the continuous improvement of takerate. Under overall efficiency optimization, the Q3 2024 Non-GAAP net margin was 18%, down 0.6 percentage points year-on-year, while the core OTA platform margin was 31%, up 6 percentage points year-on-year and 7 percentage points quarter-over-quarter, reaching a new high post-pandemic and also outperforming the same period pre-pandemic.