We expect Tongcheng-Elong (“TC”) to deliver 4Q20E revenue/ adj. net profit of -8%/-13% YoY, 2%/3% below consensus. As stated in our previous report, TC’s recovery pace slowed down amid China’s new COVID-19 wave since mid-Nov. We think the market has also well anticipated 1Q21E drag by epidemic uncertainty, and we suggest to move into 2021 recovery. We cut our earnings forecast by 4%/20%/13% in FY20/21/22E to factor in conservative 4Q20E & 1Q21E, but raised our TP to HK$21.0 by rolling over to FY22E multiple (18x FY22E P/E).
- Look beyond soft 4Q20 & 1Q21E. We expect TC to deliver soft 4Q20E, with revenue/ adj. net profit -8%/-13% YoY, 2%/3% below consensus. By segment, we expect hotel rev up 2% YoY in 4Q20E (in line with guidance of +2% to 7% YoY), in which hotel room night is estimated to grow 20% YoY while take rate will remain solid at 9%. ADR would still decline in 4Q20E (forecasting -20% YoY). Lower-tier cities would recover faster, with room nights up over 50% YoY in 4Q20E. Transportation would suffer more amid the recurrence of COVID-19, and we expect its rev down 15% YoY. We forecast TC’s bottom line at RMB287mn in 4Q20E, with adj. net margin at 16% ( -1ppt YoY), mainly for heavier S&M. 1Q21E might still see pressure, as government ramped up COVID-19 restrictions (e.g. “stay-in-cities” advice in CNY). Hotel would be more resilient for rising short-distance travel, while transportation recovery might be partly disrupted. We think soft 4Q20 & 1Q21E have been well priced in, and suggest to move into 2021 momentum, with faster-than-expected vaccine progress ahead.
- Prioritizing MPU and hotel growth in 2021. Despite moderate transportation, mgmt. put priority on domestic hotel recovery in 2021, and we forecast domestic room nights +40%, vs. FY19. TC would also focus more on user acquisition, through: 1) offline promotions, e.g. QR code and bus ticketing; and 2) branding, e.g. sponsorship for hot variety shows and dramas. It targets APU at 200mn in FY21E (+30%, vs. FY19), with S&M/rev ratio down 3-4ppts. Therefore, we forecast adj. net margin to be slightly lower in FY21E than in FY19, and it would pick up to 20% in FY22E.
- Maintain BUY. We cut our earnings forecast by 4%/20%/13% in FY20/21/22E to factor in epidemic impact, but raised our TP to HK$21.0 by rolling over to FY22E multiple. Valuation at 15x FY22E P/E is attractive. Vaccine progress and faster domestic recovery could be further catalysts.
