Consumer Staples, Consumer Discretionary Author: Ivan Platonov, Yuchen Fu Aug 13, 2021 12:00 AM (GMT+8)

We see a glint of long-term growth potential in the company's recent moves.

Trip.com  Scores Cooperation With Emirates Airlines

A multitrillion-dollar industry, global travel and tourism was arguably the largest victim of the COVID-19 outbreak and the subsequent lockdowns. As per the World Travel and Tourism Council's latest report, the sector almost halved in 2020 to USD 4.67 trillion, from USD 9.17 trillion a year earlier. Its contribution to the world's GDP dwindled as well – from 10.4% to 5.5%. Meanwhile, the labor market struggled big time: the Council estimates that 62 million travel-related jobs were lost throughout the pandemic's first year. 

Cross-border travel has been suffering due to tourists' fears, governments' restrictions and corporates' discovery that teleconferencing tools can be a decent low-cost alternative to business-class tickets and five-star hotel bookings. UNCTAD, for instance, has projected that the number of international tourist arrivals dropped by 74%, or around 1 billion trips, in 2020. To stay afloat, many incumbents, like airlines and hotel chains, relied on state support or pivoted their businesses. There is however a group of new-economy enterprises that couldn't do either.

Online travel agencies (OTAs), digital platforms for a broad spectrum of travel-associated services, had thrived pre-COVID. This Internet-powered sub-industry flourished in the 2010s, owing mostly to the increasing population mobility and consumer technology penetration. In 2019, approximately 40% of global ticket orders and two-thirds of hotel bookings were made via OTAs' products.

Then came the pandemic. Their dependence on real market demand – perhaps the biggest of any platform business' pain points – soon manifested itself through shrinking sales and slumping profit margins. In 2020, a quintet of the planet's immense OTAs saw their combined revenues decline by over USD 19 billion year-on-year; the whole market contracted by at least 20%, which by all means is a conservative figure.

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But while all the OTAs seem equal in their financial failures amid the global healthcare crisis, some, as often happens, have proven to be 'more equal than others.'

China, which managed to control the initial outbreak in a matter of a few weeks, then enjoyed a V-shaped recovery. The country's domestic tourism hit the pre-epidemic levels in early 2021, an achievement most states can only dream of these days. And Trip.com Group (TCOM:NASDAQ, 09961:HK), the local OTA pioneer, has won big from this speedy rebound.

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Trip.com Group's global ambitions – shelved 

Founded in 1999, Ctrip.com International went public on Nasdaq in 2003. Nearly two decades later, the company offered its shares again, this time in Hong Kong.

With around 60% of the Chinese OTA market, the Shanghai-headquartered firm has set a course for international expansion buttressed by results of two massive deals: it acquired flight-search unicorn Skyscanner in 2016 and travel booking site Trip.com in 2017. That allowed Ctrip to change its name later on to Trip.com Group, a moniker that "can be easily remembered by global users," as James Liang, the company's co-founder, executive chairman and ex-CEO, put it.

On the firm's 20th anniversary, Mr. Liang set a goal (link in Chinese) of becoming the world's largest OTA in 5 years.

After buying out over 40 travel industry players – the latest of which, to date, was Dutch platform Travix – Trip.com Group currently operates a number of short-term rental, ticketing and OTA brands worldwide. Fueled by demand from multitudinous Chinese tourists, it had been rapidly growing in the foreign markets before the coronavirus started spreading across the map. In 2019, Trip.com Group made CNY 4.46 billion outside of China, with this segment reaching a double-digit share (12.5%) in the company's total annual revenue for the first time.

This figure fell to merely 7.1% in 2020 though, as movement restrictions hampered the business.

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For obvious reasons, China's inbound and outbound travel will see no quick recovery. For Trip.com Group this means that their globetrotting plans are effectively postponed. It is also rather naive to expect the so-called 'foreign-foreign' segment to show much progress in the short term, given the inconsistent lockdown policies in the lion's share of popular tourism destinations.

China as a blueprint?

But the domestic market is offering some hope. Now, Chinese citizens are traveling between provinces more frequently than in 2019. Ctrip, Qunar and the Group's other products are thereby commercially benefitting from the state's firm grip on the virus, while also collecting data to feed algorithms necessary for business optimization.

The Group's clout in China naturally puts it among the relative winners of the entire COVID-19 narrative. Yet, this doesn't mean that sitting by is the best thing it can do. The industry is constantly changing, so should the company's strategy.

In essence, OTAs setting great store by the vaccination campaigns have to focus on three strategic directions in order to be capable of meeting and properly managing the future pent-up demand. Those three are grasping target users' consumption patterns (demand factor), strengthening ties with local service providers (supply factor) and seeking alternative ways to boost cash flow (business model factor). Trip.com Group's 'local focus, global vision' motto embodies the former two; and its digital content venture is an attempt to unlock new revenue sources.

  • Demand factor: focus on Generation Z

Demographic change is a game-shaping trend in the tourism sector. Generation by generation, altering values and consumption patterns bring about fresh business opportunities. In China's fast-paced environment, this change is utterly apparent. 2021's Dragon Boat Festival, for example, saw post-90s and post-00s tourists accounting for 43% and 17% of the total number respectively, according to Trip.com Group's data.

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The company is developing user-generated content products for China's youth, luring them to circumvent the likes of Meituan's Dianping and Alibaba-backed Xiaohongshu (that quest might be somewhat challenging though). It also uses common marketing techniques, including cooperation with industry influencers, such as travel bloggers.

  • Supply factor: 'ecosystem' thinking

To satisfy its supply-side partners, Trip.com Group has lately launched the 'Star Hub,' a digital platform designed to "transform partners' roles from suppliers to marketers and operators." Travel destinations managers, hotels and tourism property owners can use this new channel to compete in the digital space for travelers' money and time.

It is vital in China to maintain relationships with local governments. In the GR domain, the company is focusing on popular clusters tourists gravitate to. One such 'magnet' is Hainan. Trip.com Group has initiated over 10 projects with the province's authorities in the past year, VP Benny Wang told EqualOcean. Besides, some of the Group's strategies appear to be aligned with China's broad development plans. An example, improved countryside tourism experience indirectly accelerates the desired rural revitalization (link in Chinese).

  • Business model factor: leveraging digital traffic

"Our customers have very strong buying power; our own website can host content and booking together, and the conversion rate will be very high," said CEO Jane Sun, discussing the Group's recent attempt to profit off its online platforms through ads.

The company's product framework favors such an endeavor: although it boasts a "prudent and disciplined M&A approach," its major projects are mutually cannibalizing, unlike, say, Booking Holdings' (BKNG:NASDAQ) more complementary blend. With a few wannabe superapps, Trip.com Group can potentially generate more traffic.

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Thus, capitalizing on ads may indeed be a logical step here. However, there is a standard caveat about a tradeoff between splendid user experience and easy profits from banner placements.

Bottom line: one big risk, three things to keep an eye on

In China, August 2021 started with a surge of Delta variant cases that caused new lockdowns and left the country's watchers reeling. Despite that this outbreak is likely to be handled in a couple of weeks, the 1.4-billion-strong state – even with the borders closed – is not immune from further healthcare shocks.

The Group's domestic rivalry is bleak, with Meituan being in the regulators' scope and LY.com losing its competitive edge. COVID-19 vulnerability is hence the only significant external risk at this point.

The company is expected to post its Q2 2021 financials in late September. This time, there will be three elements to pay attention to:

  • Adjusted EBITDA. Although instant profitability is barely an issue (the firm had over USD 10 billion in cash on hand as of the end of Q1 2021), an ability to return from the red to the black during the holiday-rich second quarter would be an indicator of the OTA's sharpness.

  • R&D expense-to-revenue. In Q1 2021, the ratio reached its highest level since Q1 2016, mirroring the Group's need for new revenue sources. If this number remains relatively high in Q2, the company's outlook will be even rosier.

  • Revenue from non-core segments, or from businesses other than accommodation reservations, transportation ticketing, packaged tours and corporate travel. The digital advertisement initiative looks promising and is not hard to deploy. From here on, it might become a figure important to track.

CtripOTATraveltourismChinaBooking HoldingsZhang HuapingHefei Economic Development Zone