Tongcheng-Elong (“TC”) delivered better-than-expected 1Q20 results, with revenue/ adj. net profit -44%/-83% YoY, 4%/177% above consensus. Despite 2Q20 guidance soft on government restrictions in Apr, we suggest investors to move into 2H20E recovery, with margin improvement. Mgmt guided TC’s revenue drop to narrow to 10% YoY in Jun, and we expect both transportation/ hotel to achieve flat or positive growth in 3Q20E, backed by travel recovery in lower-tier cities and solid hotel. We keep our forecast unchanged, with higher TP of HK$17 (rolling over to FY21 multiple). Maintain BUY.
Strong 1Q20. 1Q20 revenue dropped 44% YoY, 0%/4% above our estimate/ consensus. Adj. net profit declined 83% YoY, 56%/177% above our estimate/ consensus, for effective cost control. 2Q20E guidance came at -24%-29% YoY (vs. consensus -24%), and bottom line at RMB120mn-RMB170mn (vs. consensus RMB212mn), mainly on government restrictions in high-tier cities in Apr.
Recovery trend intact in 2H20E. TC’s transportation/ accommodation revenue declined 45%/53% YoY in 1Q20, in line with our estimate. Given stringent control in Apr in high-tier cities, 2Q20 recovery path was slightly below our expectation. However, we keep positive on its 2H20E recovery, and confident on its positive revenue growth of both transportation and hotel in 3Q20E, mainly on: 1) narrowing revenue decline to <10% YoY in Jun, from -40% YoY in Apr, <-30% YoY in May, as mgmt. estimated; and 2) hotel ADR back to normal in 3Q20E, with continuous positive room night growth. For 2Q20E guidance, hotel rev would decline 28%-33% YoY in 2Q20E, in which domestic market will decline 20%-25% YoY. Room nights in lower tier cities have already turned to positive growth since Apr. ADR drop was the key concern, while take rate would keep stable. Transportation rev would decline 20%-25% YoY in 2Q20E, in which domestic market to decline 15%-20% YoY. Bus tickets business would be new driver for its user expansion.
Disciplined expenses ahead. In 2H20E, mgmt. would focus on accommodation growth and gain share in lower-tier cities during the rebound period. We expect 2H20E adj. net margin up to 17.5%, with effective cost control and higher efficiency.
Maintain BUY. We keep positive on TC's recovery and cost saving in 2H20E. We keep our forecast unchanged, but slightly lifted our TP from HK$15 to HK$17 (16x FY21E P/E), by rolling over to FY21 multiple.
