Summary. We are positive on TC’s long-term user expansion, enhanced monetization and margin improvement, despite short-term negative impact from 12306 waiting list features. We maintain our TP of HK$19.71, with earnings estimates barely changed.
- 2Q19 beat; but conservative on 2H19E margin. Tongcheng-Elong (“TC”) delivered solid 2Q19 results, with revenue/ adj. net profit +21%/ 60% YoY, 1%/ 12% above our estimates, mainly on lower-than-expected S&M expenses. 2Q19E was a soft quarter for weak seasonality, and we expect 2H19E to pick up in terms of user metrics and take rate. In terms of net profit, however, we expect lower net profit in 2H19E than 1H19, given 1) heavier marketing efforts will be put to enhance paying ratio and loyalty in 2H19E, as mgmt. guided; and 2) 12306 competition is yet to be over.
- Enhanced monetization with paying user acceleration. 2Q19 MAU grew 15% YoY to 182mn, but declined 9% QoQ for weak seasonality. As stated in our previous preview report, paying users accelerated to 27.7mn in 2Q19, up 54% YoY, with paying ratio up to 15% (vs. 11% in 2Q18). Looking ahead, we expect both MAU and MPU to achieve sequential growth in 3Q19, mainly on stronger seasonality and heavier S&M efforts on cross selling and membership loyalty program.
- Take rate to pick up in 2H19E. Strong momentum of accommodation continued, up 25% YoY in 2Q19 (> 40% YoY, excluding distribution channel factor). Accommodation take rate remained intact at 8.5% in 2Q19. Market concern lies on its transportation deceleration (+13% YoY) dragged by 12306 waiting list features (排队候补功能). 12306 competition had more impact on its take rate and attach rate, rather than GMV growth. 2Q19 transportation saw weak take rate (< 3%, in which air ticket was 3.5% and ground transportation was < 3%), primarily due to 1) heavier 12306 impact on soft season; and 2) more traffic for cross-selling. We expect 3Q19 take rate up to pick up to over 3%, and to peak at 4Q19 (> 3.5%), thanks to 1) stronger demand from ticket-grabbing for earlier Chinese New Year; and 2) enriched VAS products (e.g. Huixing system“慧行”).
- Maintain We maintain our TP of HK$19.71, with earnings estimates barely changed. Our TP represents 22.4x FY19E P/E, in line with industry average. Stock price might bear near-term volatility for market concern on 12306 competition, but we remain positive on TC’s secular growth.
