Tongcheng Travel Holdings Limited (780) Earnings Call Transcript

Good day, and thank you for standing by. Welcome to Tongcheng Travel 2025 Second Quarter and Interim Results Announcement Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I'd now like to hand the conference over to Ms. Kylie Yeung, Investor Relations Director. Please go ahead, Ms. Yeung.

Thank you. Good morning and good evening, everyone. Welcome to Tongcheng Travel's 2025 Second Quarter and Interim Results Conference Call. I'm Kylie Yeung, Investor Relations Director of the company. Joining us today on the conference call are our Executive Director and CEO, Mr. Heping Ma; our CFO, Mr. Julian Fan; and our Chief Capital Officer, Ms. Joyce Li. For today's call, our management team will provide a review of the company's performance in the second quarter. [indiscernible] Will brief us on the company's strategy. Joyce will discuss our business and operational highlights and then Julian will address the details of financial performance accordingly. We'll take your questions during the Q&A session that follows. As always, our presentation contains forward-looking statements. Such statements are based on management's current expectations and current market operating conditions and relate to events that in most known or unknown risks, uncertainties and other factors which may cause the company's actual results, performance or achievements to differ from those in the forward-looking statements. This presentation also contains some unaudited non-IFRS financial measures. They should be considered in addition to, but not as a substitute for measures of the company's financial performance declared in accordance with IFRS. For a detailed discussion of non-IFRS financial measures, please refer to our discussion -- disclosure documents in the IR section of our website. Now let me introduce our CEO, Hope, will be presenting in Mandarin, and our colleague will provide the English translation afterwards. Hope please go ahead.

[Interpreted] Thank you, and good evening, everyone. Welcome to our 2025 2nd quarter earnings call. In the second quarter of 2025, China's travel industry maintained its trajectory of high-quality development with robust market demand driving strong growth across the sector. During the May Day holiday, sustained consumer enthusiasm through [ due ] improvements in both the scale and quality of the industry. Even the changing market environment, we proactively seized market opportunities, actively propelled our domestic and international expansion strategy and strategically deepen our industrial chain exploration. For our domestic business, we focus on the mass market, consolidating our position through diversified product offerings and acute user insights. For our outbound business, we actively expanded the supply of our outbound growth engine. Regarding our industry chain deployment, we assertively explore the potential of the travel industry chain to capture more growth opportunities and drive the company's future development. Over the past quarter, the company delivered a steady year-over-year growth in both revenue and adjusted net profit, reaffirming our ability to accurately capture market demand and execute strategies with operational excellence. With the summer travel season underway, consumer demand has continued to diversify with an increasing focus on experience-oriented consumption. Building on this trend, we spare no effort to seize new growth opportunities, enhance our products and services and strive to address the diverse needs of our user segments. Leveraging our profound industry expertise, extensive product offerings and advanced technology, we will continue to drive product upgrades and technological innovation, enhancing user experience while propelling technological advancement across the industry. facing new opportunities and evolving landscape in the industry. As China's leading integrated travel platform, we will proactively respond to market dynamics and refine our operational strategies. With our robust organizational capabilities, we're positioned to navigate challenges and embrace opportunities, thereby achieving long-term sustainable development while generating greater value for our stakeholders. Next, I will hand over the call to Joyce. She will share with you our business and operational highlights of the second quarter of 2025. Joyce, please go ahead.

Thank you. Over the past quarter, China's travel market continued to show its vitality. And it was marked by a growing appetite for experiential travel with younger consumers seeking unique and immersive experience, both domestically and internationally. Capitalizing on this tailwind, we advanced our growth strategy with discipline and focus and delivered another quarter of strong results, underscoring the entrenched strength of our platform and the unwavering dedication of our team in a dynamic market environment. As a key growth driver for the company, our accommodation business maintained robust growth momentum in the second quarter and recorded new highs in its daily room nights sold. Growth was fueled by increasing diverse range of travel scenarios such as weekend gateways, concerts and sports events in addition to traditional holidays and business trips. During the quarter, we intensified our efforts to expand our presence in lower-tier cities by targeting high-value users, which reflect increased market share and further solidify our competitiveness in these regions. In the meantime, we reinforced our value for money proposition for targeted users through our membership program, enabling our users, especially high-tier members to seamlessly redeem their points as cash on our platform, which significantly increased purchase frequency. As for our international accommodation business, it remains focused on deepening its cooperation with global suppliers and strengthen its presence in regions which are popular among Chinese travelers. Over the quarter, Hong Kong, Macau, Japan and Southeast Asia countries remain the most popular destinations on our platform. After years of rapid expansion, our transportation business has solidified its position as a key player in the industry, achieving a prominent market share, especially in the Southwestern region. Over the last quarter, our transportation sector continued to display its resilience and posted steady growth. In the air ticketing business, we focused on expanding our reach among younger users by launching a variety of interactive activities that would further strengthen our influence within this key demographic. In the meantime, our growth strategies for international air ticketing segment has paid off, successfully increasing mind share and strengthen user loyalty among our target audience. In addition, consistent efforts were made to improve the monetization capabilities for international operations, ensuring a balanced and sustainable growth trajectory between volume and revenue. During the second quarter, our international air ticketing volume reached a historical high, delivering nearly 30% year-over-year growth. In the train ticketing business, we remain steadfast in prioritizing user value by continuously enhancing and refining our intelligent Huixing system designed to provide more accessible, efficient and user-centric travel solutions tailored to meet diverse user needs. Throughout the quarter, monetization capabilities of the segment further improved, supported by our refined and targeted operational strategies. The hotel management business is one of the key initiatives where we have been investing to seek a segment growth driver for the company. Following years of strategic expansion, we have built a wide ranging portfolio of hotel brands, spanning from economy to upscale, supported by robust operational enablers such as CMS, centralized reservation system and a hotel supplies platform. In the past quarter, our hotel management business sustained its healthy expansion trajectory with the total number of hotels in operation exceeding 2,700 by the end of June and nearly 1,500 in the pipeline. According to the 2024 list of the top hotel groups in China released by the China Hospitality Association, we have ascended to #8 in terms of room count, underscoring our leadership and influence in the industry. In April, we announced the acquisition of a 100% stake in Wanda Hotel Management. While the deal is still in process, we are confident that the addition of Wanda Hotel Management will further diversify our brand metrics, strengthen our market presence and accelerate the sustainable growth within the segment. We remain fully devoted to expanding our asset-light hotel management business through franchise-based partnerships with an aim to achieve leadership in China's hotel industry. Traffic growth has been the cornerstone for our success. Over the past decade, we have cultivated profound and enduring partnership with Tencent. Through Weixin ecosystem, we have reached a broad and diverse user base across China and it remains a vital channel for our user engagement and interaction. During the last quarter, we continued to improve our operation efficiency within ecosystem while enhancing our engagement with users. At the same time, our stand-alone app continues to be a core pillar for acquiring new users. By targeting younger demographics, we launched a series of entertaining marketing campaigns centered on trending social events, further reinforcing our mind share among target users. As a result, its DAU during the quarter continued to exhibit strong growth, reaching a record high before the May Day holiday. Additionally, we intensified our effort to explore social media platform for us to reach younger experience-driven travelers. Through collaborations with influencers and the creation of high-quality engaging content, we amplified our brand visibility and broadened our user reach. By delivering tangible value and exclusive benefit to our users, we are deepening user loyalty while simultaneously enhancing user value on our platform. In the second quarter, we made a significant upgrade to our service, particularly for high-value users. We set an exclusive hotline and a dedicated customer service team to enhance responsiveness to user inquiries and ensure proper and efficient resolution of their issues. In the meantime, we expanded user privileges and benefits such as exclusive discounts and free cancellations. These efforts continued to be a marked improvement in user retention and loyalty. Additionally, we capitalized on high-impact culture events such as Su Super League, and amateur football tournament within Jiangsu province that has drawn nationwide attention and ignite a widespread enthusiasm for sports, so as to deepen engagement with the younger cohorts, further enhancing our brand appeal to experience-driven travelers. Through effective and innovative user engagement, our 12-month annual paying users for the quarter maintained healthy growth momentum and climbed to a new high of more than 250 million by the end of June, representing a 10% year-over-year increase. Meanwhile, the cumulative number of passengers served our platform reached 2 billion, suggesting a stable user purchase frequency of 8 times per year. Furthermore, our MPUs for the second quarter also displayed solid growth of 9% and rose to 46.4 million. On top of that, our 12-month rolling ARPU further increased to RMB 33 in the quarter -- RMB 73 in the quarter, representing a 40% year-over-year growth. We remain fully dedicated to transforming our business through the adoption of bounded technologies such as generative AI. Back in March, we launched our AI-powered itinerary planner DeepTrip, which combines the supply chain capabilities on platform with the reasoning capabilities of DeepSeek. Over the past quarter, we advanced its application in some business scenarios to improve our operational efficiency. For tailor-made tours, we integrated DeepTrip into the workflow to streamline the consulting phase, which enable users to access comprehensive destination information more easily, thus reducing consulting time and enhancing user experience. Meanwhile, we leveraged DeepTrip to deliver marketing activities to users inquiring about travel itineraries that facilitate their decision-making process. Furthermore, we continue to iterate its functions based on deeper user insights. By allowing users to upload self-developed travel itineraries, DeepTrip provides instant access to relevant travel resources, significantly reducing search time and supporting quick reservation. In customer service, generative AI now handling more than 60% of our online consultations ready to accommodation reservation and more than 70% of Internet phone consulting workload with further enhanced accuracy and efficiency. Besides, we've also deployed several AI agents to assist our customer service staff, reducing the handling time by 10%. Looking ahead, we will continue to explore AI application in our business process and accelerate the transformation of our operations. All this highlights of our commitment to leveraging technology to drive growth, improve user experience and optimize operational efficiency. I will stop here and give the call to our CFO, Julian. He will share with you the detailed financials in the second quarter. Julian, please.

Thank you, Joyce. Good evening, everyone. Over the past quarter, consumer demand continued to diversify with a wide array of travel scenarios emerging to energize the Chinese travel market. Against this backdrop, we closely monitor industry dynamics, accurately captured user needs and continuously enhance our products and services to improve user experience and strengthen user engagement. This operational excellence translated into solid momentum for our core OTA business, which once again outpaced the industry. In the second quarter of 2025, we delivered outstanding results for both top line and bottom line. We reported net revenue of RMB 4.7 billion, marking a 10.0% year-over-year increase from the same period of 2024. During this quarter, our adjusted net profit rose to RMB 775 million, reflecting an 18.0% year-over-year growth with adjusted net margin expanding to 16.6% compared to 15.5% in the same period of last year. This uplift was principally fueled by efficient marketing initiatives and optimized operations for our -- of our core OTA business. Despite extreme weather conditions in some regions that significantly impacted Chinese travel industry in June. Our core OTA business maintained steady growth, achieving a 13.7% year-over-year increase to RMB 4.0 billion during the second quarter of 2025. Our accommodation reservation business achieved RMB 1.4 billion for the second quarter of 2025, representing a 15.2% increase from the same period in 2024. We actively tapped into emerging accommodation reservation scenarios to capture market opportunities, driving sustained year-over-year growth in hotel room nights sold during the second quarter. Amid vigorous outbound travel demand, we enhanced the marketing investment efficiency of our international accommodation business, achieving an effective balance between business expansion and profitability improvement. During the second quarter, our users demonstrated preferences for high-quality hotel products, which drove a year-over-year growth in our ADR as well, continuously outperforming the industry trend. Concurrently, the blended take rate maintained its upward trajectory through more precise and disciplined marketing strategies. These combined factors collectively contributed to the outstanding growth of our accommodation revenue. Our transportation ticketing revenue for the second quarter reached RMB 1.9 billion, marking a 7.9% year-over-year increase compared with the same period of last year. During the past quarter, we continued to refine our VAS offerings to improve monetization and remain committed to enhancing the efficiency of our user subsidy strategies. Additionally, our international air ticketing business maintained strong growth momentum, now accounting for more than 6% of our total transportation ticketing revenue with a year-over-year increase of almost 2 percentage points, demonstrating the effectiveness of our global expansion strategy. Other business segments continued to expand with revenue reaching RMB 755 million in the second quarter, marking a growth of 27.5% year-over-year. The performance was principally attributable to the exceptional development demonstrated by our hotel management and Black Whale membership business. Our tourism business achieved a revenue of RMB 662 million, representing an 8.0% decrease from the same period in 2024. This decline was primarily attributable to our strategic reduction of prepurchase visits to mitigate operational risk. Furthermore, persistent safety concerns in Southeast Asia regions continue to exert downward pressure on travel demand. In terms of the profitability, our gross profit increased by 10.6% year-over-year to RMB 3.0 billion, with gross margin rising slightly to 65.0% for the second quarter of 2025. Our operating profit for the core OTA business achieved RMB 1.1 billion with 26.7% margin in the second quarter of 2025, increasing from 24.3% year-over-year. This improvement demonstrates the market effectiveness of our initiatives to enhance the ROI of our sales and marketing investments and the operational efficiency. The operating profit for the tourism business achieved RMB 4.4 million with 0.7% margin. Our adjusted EBITDA increased by 29.7% and reached RMB 1.2 billion with a 25.4% margin compared to a 21.5% margin in the same period last year. Adjusted net profit grew by 18.0% to RMB 775 million with a 16.6% margin compared to a 15.5% margin in the second quarter of last year. Service development and administrative expenses in the second quarter of 2025 increased by 2.1% from the same period of 2024. Excluding share-based compensation charges, service development and administrative expenses in total accounted for 15.4% of revenue in the second quarter compared with 15.9% of revenue in the same period of last year. Selling and marketing expenses in the second quarter of 2025 increased by 2.4% for the same period of 2024. Excluding share-based compensation charges, selling and marketing expenses accounted for 32.8% of revenue in the second quarter compared with 35.1% of revenue in the same period of last year. As of June 30, 2025, the balance of cash, cash equivalents, restricted cash and short-term investment was RMB 13.5 billion. The Chinese travel market saw robust growth in the first half of 2025 with innovative and diversified consumption scenarios infusing sustained vitality into the market. As we entered July, travel demand continued to heat up and the market is poised to usher in the peak summer travel season. Notably, tourist preferences are shifting beyond traditional leisure-focused itineraries towards deeper experiential engagement and cultural immersion. Such changes catalyze emerging travel scenarios, unlocking new growth drivers for our business expansion. Looking ahead to the second half of the year, we are well positioned to deliver steady year-over-year growth in both top line and bottom line. driven by our acute operational capabilities and disciplined strategic execution. We remain highly committed to growing our core OTA business by expanding its market share and enhancing its brand awareness. While solidifying our domestic market position, we will further expand outbound business to seize global opportunities. In parallel with business expansion, we will rigorously monitor the ROI of our sales and marketing investments, striking an optimal balance between revenue growth and profit margin expansion to fortify the foundation for long-term sustainable development. Furthermore, we will uphold our strategic focus across the industry chain, advancing our hotel management business to capture new opportunities, new growth opportunities. Finally, we remain dedicated to elevating our ESG performance, striving to deliver greater value to society and all stakeholders. With that, operator, we are ready to take questions now.

[Operator Instructions] We will now take our first question from the line of Wei Xiong from UBS. Sure.

I have 2 questions. First is regarding our accommodation business. Could management provide more color regarding the volume growth, ADR and take rate and how these metrics are trending? And also considering the domestic hotel market, still faces the oversupply issue and our ADR and take rate seems to be quite resilient. Could management elaborate what are the drivers behind? And how should we think about the industry outlook next year? And second, we can see the company keeps exploring new business opportunities beyond the Core OTA business. I wonder how do we balance the strategic resource allocation between Core OTA and pursuing a diverse business portfolio. And in terms of future M&A plans, which areas are we paying close attention to? And what are the key criteria to evaluate such opportunities?

Thanks for the question, Wei. I will address the first question, and I think Joyce will throw some more colors on the second one. Yes, as you mentioned, we have achieved a very successful execution for the accommodation in the first half year and achieved outstanding results as well. But for the hotel industry, I think as you know, of the industry information, the domestic ADR has largely stabilized year-over-year in the past quarter, the quarter 2. Our domestic ADR already turned positive in the second quarter as well and expected to continue to grow in the coming quarters. This kind of improvement is driven by 2 factors. One is the -- of course, the recovery of ADR across the industry since quarter 2. And the second one is more important, the shift in user behavior, in our platform, as users increasingly prefer high higher-quality products, which have resulted in a shift from a 2-star below hotels to 3-star over [ both ] hotel bookings. For example, in quarter 2, the proportion of our 3-star hotel bookings on our platform increased by 4 percentage points year-over-year. Given the trend, we expected that the growth in ADR will be a positive factor contributing to accommodation segment revenue growth for the second quarter and also for the second half of this year. Meanwhile, we have adopted a more disciplined and targeted approach for user subsidies. We have already done this for at least 1 year. This approach has helped us to maintain our net take rate at a decent level, ensuring a balanced focus on both expansion of top line and profitability. So our outstanding performance in accommodation business in the first half of 2025 demonstrated that the pricing pressures of the industry have rather limited impact on our revenue as ADR on our platform remains relatively resilient, thanks to our extensive exposure in the mass market and also our ability to swiftly seize the market opportunities. And the second question, I think, Joyce, please.

Sure. Thank you, Wei, for the question. You would say that as a company still in the growth space, the capital allocation remains a focus on both organic and inorganic expansion to strengthen our competitive position and long-term value creation. So I believe that investing business pension, product innovation and platform development to deliver sustainable shareholder value over time. I would like to emphasize that our OTA business remains the foundation and strategic focus of our operations, while we continued to deepen our OTA capabilities in the domestic market, expanding our outbound business. For domestically, we'll continue to invest in new technologies, introduce innovative product services, expanding into new markets and enhancing operational efficiencies. And we are also expanding into business that is complementary to our corporation such as outbound travel and hotel management. To achieve this, we posing organic growth opportunities, including strategic investments in other companies on mergers and acquisitions . In terms of our M&A strategy, we will remain selective and focused on evaluating strategic investment and acquisition opportunities that enhance our Core OTA traffic user base and overseas supply chains with a valuable and synergy effects. And the offline tourist attractions are now our primary focus. They are small in scale and are made solely for the purpose of value transformation. So in terms of the criteria, I would say that the first investments will be highly selective and based on our strategic logic, financial discipline and the long-term shareholder value creation. Thank you.

Our next question comes from Brian Gong from Citi.

First one is, I think you might notice that during the summer break, year-on-year growth on domestic airlines ticketing in volume which seems a little bit slow. And what reasons could result in a low growth in management's view? And do you think the travel demand is weakening? How should we think about the fourth quarter overall travel demand? And the second question is, can management share more details on our performance on outbound travel during the summer break, and also the overall outbound travel demand?

Okay. Thank you. The question, Brian. Yes, as you mentioned, the China travel market continued to demonstrate its resiliency in the past few months. For hotel industry, actually, the decline. As we mentioned, the decline in ADR has been narrowed down over the past few months, signifying a more stable demand and supply industry environment for accommodation. But for domestic air travel industry, air ticket price stabilized, whereas the industry volume growth normalized from mid- to high single-digit growth in April and May to drop to low single digits in June. Especially in the summer vacation, after experiencing 2 exceptional strong summer holiday season in 2023 and 2024, driven by pent-up demand released after, I think, COVID-19 pandemic. The industry has already returned to a normalized growth trajectory in the summer air tickets. Recently, at the same situation in June. However, we expect that our OTA business and both for accommodation and transportation, will once again outpace the overall market in several multiple growth because of the successful execution of our strategic priorities, which include improvement in user value or ARPU expansion into outbound travel as well as robust growth of our Hotel Management business. So -- our business continued to outperform the industry throughout the summer holiday period, like what I mentioned, with particularly strong growth in the accommodation segment, I think, while the hotel ADR has shown and continues to increase since quarter 2, it has consistently outpaced the industry average ADR trend in quarter 3 for our platform like what I mentioned in the past quarters. This success can be attributed to our ability to adapt to shifting user demand as users increasingly prioritize higher quality accommodations when they travel. And we have effectively captured this trend. Our Transportation Ticketing business continue -- also continue to outpace the industry growth with improving monetization during the summer holiday. Besides our targeted and effective marketing initiatives allowed us to engage our covers as well with improved efficiency, enable us to capture market opportunity and strengthen our competitive position in the Outbound Business segment. I think Joyce will give you more color on the outbound. And I would like to address the domestic one first. We remain positive about the future China's travel industry as we look ahead to the second half of 2025. Traveler preferences are evolving, prioritizing unique and meaningful travel experience over spending money on traditional physical group products. At the same time, people are now seeking more unique experiences. Beyond just visiting popular destination, they are keen on traveling for specialized activities like concerts, music festivals and sporting events in this summer. This shift clearly positions travel as more than just a treat. It is becoming an integral part of more than lifestyle choices. Besides the Chinese government continue to recognize tourism as a key driver for economic growth, actively rolling out policies that support its long-term sustainable development. Altogether, these changes underscore the tremendous opportunities available in China's travel market. Looking forward to the next few quarters, over the second half of this year, we plan to firmly adhere to our strategy of capturing new business opportunities while focusing on steady growth with healthy profitability. One of our priorities will be still increasing the ARPU by improving cross-selling efforts encouraging more frequent purchases and providing more comprehensive value-added products and services to address long-term needs. At the same time, we will adopt a more disciplined approach with our sales and marketing spending making sure it delivers optimal returns for every dollar. For Outbound Travel performance, I think Joyce may give you more information.

In terms of our outbound business, in the past few quarters, we have achieved significant growth in both international air ticketing and combination volumes, driven by the competitive pricing strategies and market initiatives. Notably, as mentioned, in the second quarter, our international air ticketing volume reached a record high, achieving nearly 30% year-over-year growth. Now with a deeper understanding of our outbound traveler's behavior, we have shifted our focus towards executing more precise and efficient promotional strategies. Building on this progress, we have implemented a margin improvement program for our bond business, focusing on marketing and promotional effects with a strong access on ROI. As such, with respect to the outbound business to break even and turn profitable this year. Currently, the revenue for our outbound air ticketing business has already accounted for over 6% of our total transportation ticketing revenue. We're also starting to explore the opportunity of cross-selling from our outbound air tickets to commendation that drive both revenue and profit growth. And at the same time, we will continue to enhance our outbound travel offerings through strategic partnerships with leading global OTAs, hotels, airlines and private overseas CSPs. Additionally, we will also plan to increase our investment in research and development to strengthen the service capabilities and ensure a seamless booking experience for outbound travelers. Anticipate rapid growth in the Outbound segment with its contribution to total revenue projected to continue to improve within this time frame. We are confident that this segment will become a major growth driver of the company, offering higher margins than our domestic business in the long run. Thank you.

Our next question comes from J. We Li from Citic.