Given a flood of booking cancellation and travel limitation, OTA could be negatively affected from the epidemic. By segment, we expect international business to suffer more than domestic travel, while railway could be relatively resilient. Tongcheng-Elong (“TC”) ‘s financials and operation metrics in 1Q20E could bear short-term pressure, but we keep positive on its secular growth and recovery after epidemic. Given epidemic duration uncertainty, we temporarily maintain its earnings forecast, but trimmed our TP from HK$19.7 to HK$17.
- OTA to suffer direct hit from epidemic. Given recent epidemic outbreak, OTA would be negatively suffered, with a flood of booking cancellation and travel limitation. According to the Chinese Ministry of transportation, China’s overall travelers declined 39% YoY during CNY (10 Jan – 7 Feb 2020), in which railways/ airlines volumes dropped 31%/31% YoY, posing short-term notable pressure on traffic & hotel growth. Noted that railway/air traffic volume /star-hotel revenue YoY growth declined 40ppts/50ppts/12ppts sequentially in 2Q13 (SARS), and recovered in 3Q13. OTA demand would be suppressed in 1H20E, but we expect TC to deliver higher-than-industry topline growth, and long-term benefit from industrial consolidation with share gain. On the expense side, OTA players will strategically cut its S&M efforts and subsidies, to alleviate its margin pressure.
- International business under pressure, while railways resilient. TC’s cancellation rate was estimated to be 20%-30% on 23-30 Jan (10ppts higher than usual). By segments, we expect international business to suffer more than domestic travel, for book cancellation expenses. For instance, both Ctrip and TC launched refund security fund (RMB200mn) <2亿保障金> for international cancellation in CNY. However, we believe TC’s direct impact from international business would be relatively small (compared to Ctrip), since: 1) TC’s overseas business only accounted for < 5% of total revenue; and 2) majority of overseas providers are willing to refund the upfront fund, suggesting actual losses failing far behind RMB200mn budget. Railway could be relatively resilient as return demand just delayed two weeks. By geography, Hubei/ Wuhan’s GMV accounted for less than 5%/1.5% for TC.
- Maintain BUY. TC would put top priority on social responsibility and service enhancement in this epidemic (e.g. online medical services for free). We trimmed our TP from HK$19.7 to HK$17 (16.7x FY20E P/E, vs. prev 17.5x P/E), with earnings estimates temporarily unchanged. The stock is trading at 10.7x FY20E P/E. Valuation is attractive. Maintain BUY.
