Trip.com Group Limited (HKG:9961)

Earnings Call: Q2 2021

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Sep 23, 2021

Thank you for standing by, and welcome to the trip.comgroup2021Q2 Earnings Conference Call. All participants are in a listen only mode. There will be a presentation followed by a question and answer session. I would now like to hand the conference over to Michelle Chi, Head of Investor Relations, please go ahead. Thank you. Thank you all. Good morning, and welcome to Trip.com Group's 2021 Q2 earnings conference call. Joining me today on the call Are Mr. James Liang, Executive Chairman of the Board Ms. James Sung, Chief Executive Officer and Ms. Cindy Wang, Chief Financial Officer. During this call, we will discuss our future outlook and performance, which are Forward looking statements made under the Safe Harbor provisions of the U. S. Private Securities Litigation Reform Act of 1995. Forward looking statements involve inherent risks and uncertainties. As such, our results may be materially different from the views A number of potential risks and uncertainties are outlined in CryptoComm's Group's Public filings with the Securities and Exchange Commission, Ship.com Group, does not undertake any obligation to update any forward looking statements, Exact as required under applicable law, James, Jim and Cindy will share our strategy and business update, Operating highlights and financial performance for the Q2 of 2021 as well as some other color for the Q3 of 2021. After the prepared remarks, we will have a Q and A session. With that, I will turn the call over to James. James, please. Thank you, Michelle. Thank you, everyone, for joining us on the call today. Overall speaking, the Chinese domestic cargo market was encouraging this quarter. We have witnessed a strong recovery momentum With pent up demand unleashed following the relaxation of travel restrictions, despite the regional and the temporary impact Overall travel activities in the country continue along the growth trajectory. The vaccination rate in China is still ramping up. More than 1,000,000,000 Chinese citizens are non fully vaccinated. With a larger vaccinated population, we are confident to anticipate a more stable momentum in travel demand. During the past quarter, we continued to dive deep into the Chinese domestic market to meet the evolving needs and demands of domestic travelers. We continue to make good progress in major focus area such as Content, product, service, technology and supply chain. Jane will share more details on this in her section. We're delighted to embrace the recent regulatory changes in our domestic market as we believe they will favor ship.comgroup has now benefited from an organized and regulated environment to cultivate our growth in an efficient manner Over the past 22 years, we proactively communicate with the authorities and abide by the rules. We believe the new regulations will benefit all players in the industry. ChipTao Gong Group also pledged and training 10,000 rural tourism talents for the industry. We believe rural tourism is a golden key We'll open the door to rural revitalizations. Chen Dao Pan Group's cascade retreats We will serve as an example and benchmark for future development of rural tourism as well as attracting younger generations to return And to create social values in their hometown. On the international front, many countries also embarked on the transition Towards normalcy. As we see rising vaccination rates and more favorable policies in place to market with strong China outbound travel in the past years. Following our local focused global vision strategy, The size of air ticket booking markets in Europe is close to that in the Asia Pacific. In Europe, we see a lot of potential in the global air ticket booking market. By focusing emphasis on both globalization And the best development such as dual circulation strategy will help fortify the Hong Kong Group resilience in the face of pandemic challenges. Going forward, we will continue to be adaptive and responsive to the changing market conditions and evolving demands of post pandemic travelers. As we have mentioned in the previous quarters, we will continue to leverage our content to inspire travelers and to leverage our supply chain to provide users with the most appealing product choices. All these offerings are backed by our ever improving product capabilities and service quality. It is our mission to bring forth the most enjoyable booking experience. We can see the value as we exceed the needs and demands of our customers. With that, I'll turn the call over to Jane for operator comments. Thanks, James. Good morning, everyone. I would like to start with a brief overview of our performance in the past quarter and updates Our strategic focuses. 1st, overall performance overview. In the 2nd quarter, Our total net revenue increased by 86% year over year and 43% quarter over quarter, Driven by strong recovery momentum of China domestic market, despite a regional resurgence of COVID cases in Guangdong, Our domestic revenue increased by 80% year over year and has surpassed the pre COVID-twenty 19 level. Both our domestic hotel and air ticket GMV increased by about 150% year over year, And their bookings increased by double digits when we compared with the same period pre COVID in 2019. Notwithstanding the effect of Guangdong cases in June, the rest of the country was largely unaffected and has demonstrated a strong growth momentum. Domestic hotel and air ticket bookings in non Guangdong areas were up for approximately 30% compared to the same period in pre COVID 2019. Our Corporate Travel Management business and other revenues also continued to ride on the and grew by double digits compared to the same period pre COVID in 2019. As we further penetrated The 2nd tier cities, we are glad to see total hotel bookings on our Ctrip platform increased significantly, Growing by more than 50% in Q2 when we compare it to the same period in 2019, Staycation travel continues to serve as a major driver for domestic recovery, with local hotel booking growing nearly 80% Versus pre COVID in 2019 and the cross selling ratio from transportation to hotel also improved by more than 20% versus pre COVID 2019. 2nd, our major focus on domestic market. Throughout the Q2, we continued To stick with our focus on domestic market in terms of supply chain, content capabilities, Service quality and technology advancement in order to lay out a solid foundation for new growth Drivers beyond the pandemic. 1st, on supply chain, we scaled up our support For our suppliers, by providing technology support and training to hotelers to support enhancing their revenue management, market effectiveness and many other aspects. We also consistently invest In developing new products and services to empower suppliers to better capture evolving customer needs. For example, our dual membership program with airlines create value for both sides by rewarding customers for their loyalty and expanding the airline's customer base. We also cooperated with domestic Chinese airport, to improve the efficiency of connecting flights, many of them have seen significant year over year growth In passenger traffic, 2nd, in terms of the content, we are making good progress and our content strategy has begun to bear fruit. In Q2, the quantity of the content Published on our platform nearly doubled and the number of the influencers on our platform increased by approximately 50% when compared to Q1. User engagement also improved this quarter With more than 35% of our unique app visitors accessing the content platform and spending more time on our multimedia offerings. New users have shown a high level of engagement with our content platform. Our content to transaction conversion rate was also On the rise this quarter, we continue to reinforce our infrastructure and output of our 1st class Live streaming and promotion capabilities for travel industry. We are glad to have to see the top players Our StarHub benefits from the rewarding conversion rates. We also continue to expand The staff partner base to empower more market players. We continue to invest in the service quality and technology. We enhanced our service reliability and price transparency. We also have consistently invested in our R and D capabilities and continue to improve operating efficiency. We can now handle booking changes, inquiries much more efficiently. Amid the resurgence of the domestic COVID cases in August, millions of ready reservations were canceled on trip.comgroup Close to our 2020 level during the 1st wave of the outbreak, yet The amount of the phone calls handled by real person operatives has decreased by 50%. The number of the customers waiting in the line for call pickup also shrunk by 90%, which are empowered by our investment in technology. On the international front, Our global brands have enhanced our collaboration in terms of the supply chains and technology capabilities to generate strong synergy in order to better capture the recovery trends in the global markets. We are glad to see that our brands in Europe showed a strong and continuing sequential improvement In the air ticket booking over the past few months, with several countries such as Germany, France and Italy already surpassing the comparative 2019 level. Trip.combecomethe1st OTA to offer eurorailandinterrail train passes, which are very popular among millennials and Generation Z travelers in Europe. It is a great opportunity Regarding the recent regulatory changes, we fully support and abide by new policies and guidelines as they aim at fostering a sustainable digital economy in the long run. Over the past 2 decades, We have grown in a healthy and organized market environment. As the digitalization continues to drive industry evolution. Today, we are all digitally connected And the boundaries between online and off line engagement are becoming blurred. The whole travel industry has witnessed with a rising wave of online and off line integration, such digital transformation It's further accelerated by pandemic. In 2019, trip.comgroup Also, trip.comgrouponlyaccountedformere13.7percentofmarketshare of China domestic travel market and still has ample room to grow as Chinese economy grows. We anticipate to see all players to thrive in the market with fair and Transparent guidelines of the new regulation. In terms of our rural revitalization initiatives, Our first 3 trip.comgroupcountryretreats in Anhui Province, Henan Province and Hunan Province are already open for business. Large majority of the employees of these retreats come from the local areas and are receiving professional trainings and enjoy a higher than average salary from a local standard. By honing the local people skills and improving their livelihood. We hope to narrow the gap between the poor and the rich. We look forward to leading by example and encouraging more industry players to enjoy Amidst the height of pandemic, trip.comgroupmadesignificantefforts to support The supply chain and bolstered the recovery of our travel industry. We facilitate the guarantee cancellations and cover Losses for our customers in order to protect the best interest and offer financial assistance to support our business partners during a very challenging period. As of August 2021, trip.comgrouphasalsodonated3,000,000 medical masks and hundreds of oxygen concentrators To more than 25 countries and regions around the world battling COVID, We hope to inspire more companies to contribute to the common prosperity of the society. As an industry leader, we'll take on more responsibility to take care of our customers, our partners and our employees. There have been and will continue to be challenges along the way, But we are always endeavor to maximize our social impact, while increasing our company's value. We will keep on improving as we strive towards our ideals. With that, I will now turn the call over to Cindy. Thanks, Jay. Good morning, everyone. For the Q2 of 2021, trip.comgroupreportednetrevenueofrmb5.9 billion, representing an 86% increase year over year and 43% increase quarter over quarter, primarily due to a strong recovery momentum of the China domestic market despite regional and temporary impact Of the pandemic and travel restrictions in the Guangdong province, accommodation reservation revenue for the Q2 of 20 21 was RMB2.5 billion, representing a 96% increase year over year and a 55% increase quarter over quarter, recovering to 72% of the 2019 level. This was primarily due to the strong release of Panop domestic travel demand Following the lifting of restrictions, despite regional COVID outbreaks, hotel booking in the domestic China also saw double digit growth when compared with the same period in 2019. Transportation ticketing revenue for the Q2 of 2021 was RMB2.1 billion, representing an 80% increase year over year and 37% increase quarter over quarter, Recovery to 61% of 2019 level, among which Domestic air ticket booking revenue doubled year over year and increased by double digits when compared to the same period In 2019, packaged tour revenue for the Q2 of 2021 was RMB367 RMB67 1,000,000 representing a 182% increase year over year and 117% increase Quarter over quarter, recovering to 35% of the 2019 level. This was contributed by a modest recovery of the domestic China market. Domestic attraction ticketing booking tripled Year over year and nearly doubled when compared to the same period in 2019, Corporate travel revenue for the Q2 of 2021 was RMB390 1,000,000, representing a 141% increase year over year and 55% increase quarter over quarter. This segment continues to gain momentum with revenue growing by 26% when compared to the same period in 2019, mainly driven by strong growth of accommodation bookings. Revenues from other business for the Q2 of 2021 was RMB6 and RMB14 1,000,000 representing a 33% increase year over year and 2% increase Q on Q, showing an increasing of 17% when compared to the same period in 2019. This is mainly contributed by rapid growth in our travel financing services and domestic advertising business. Gross margin was 79% for the Q2 of 2021, increasing from 75% in the previous quarter, mainly driven by strong top line recovery and improved operating efficiency. Excluding share based compensation charges, our adjusted operating expenses decreased by 23% compared to the same period in 2019. Adjusted Product development expenses for the 2nd quarter stayed approximately the same in the previous quarter and achieved a saving of increased by 47% from the previous quarter, primarily due to the increase in expenses related to sales and marketing promotion activities in response to increased travel demand in this quarter. This reflects a saving of 34% when compared to the same period in 2019 As we follow more prudent value protocols, adjusted G and A expenses for the 2nd quarter stay Approximately the same as in the previous quarter, an increase by 77% year over year, primarily due to a reversal of bad debt provision in the Q2 of 2020 For the company's travel suppliers, setting at a saving of 16% when compared to the same period in 2019. Adjusted EBITDA for the 2nd quarter was RMB916 1,000,000 compared to RMB negative 2 and $16,000,000 in the previous quarter. Adjusted EBITDA margin was 16% for the 2nd quarter compared to negative 5% in the previous quarter. Diluted loss per ordinary share and per ADS were of $1.02 or US0.16 dollars for the 2nd quarter. Excluding share based compensation charges and fair value changes of equity security investments and exchangeable senior notes, Non GAAP diluted earnings per ordinary share and per ADS was RMB1.13 or June 30, 2021, the balance of cash and cash equivalents, restricted cash, Short term investments held to maturity time deposits and financial products was RMB75 1,000,000,000 or US12 $1,000,000,000 Turning to the Q3 of 2021, We would like to share some recent colors of our businesses. The growth momentum of the China domestic market continues to carry over to July, especially for regional and local travel. Our domestic hotel bookings have grown by more than 20% and domestic air revenues has grown by double digits when compared to 2019. As cross province travel was disrupted in August, domestic China hotel occupancy rate And air ticket bookings decreased by more than 50% compared to the same period in 2019. Local staycation travel was less affected and our local hotel reservations maintained about 30% growth compared with 2019. During September, the COVID situation was generally under control in most parts of China and the domestic situation is gradually recovering. In the past mid autumn festival, Our domestic hotel reservations reached double digit growth compared to the same period in 2019, and domestic air ticket business was on track to fully recovery. Due to uncertainties over Changing COVID related travel restrictions, travel booking window has shrinks and travel radiance has shortened Significantly, we expect to see more travel booking for national holiday in the following weeks. On the other hand, while outbound travel is still muted, Europe and the U. S. Markets have seen a significant improvement and our global brands start to recover sequentially. During challenging times, We will be adaptive and responsive to the changing market conditions and strive to grow our market share while continuing to maintain With that, operator, please open the line for questions. Thank Your first question comes from Ronald Keung of Goldman Sachs. Please go ahead. Thank you. Thank you, James, James, Cindy and Michelle. My question is more on the international recovery. Just want to hear what is our strategy for international, Particularly, how we see the recovery trajectory. Firstly, for Pure International that you've shared some encouraging signs for Sky Skender and I believe trip.com. And then how we think about the outbound, which at this point will has been slower than the pure international. We are still pushing ahead with our local focus, global vision strategy. China domestic travel market is generally riding on our growth trajectory despite short term COVID interruptions. We believe the continuing growth in domestic markets will gradually make up for the muted outbound travel. At the same time, thanks to the rising vaccination rates and the relaxed travel restrictions, overseas markets have seen promising recovery. Our overseas brands such as Skyscanner and trip.com showed quick sequential improvements in recent weeks. Europe and APAC together accounts for about 60% of the world's total air traffic. We therefore have a huge growth potential in these Overseas Markets. Currently, we've already exhibited strong competitiveness in domestic China and Asian Air markets. Meanwhile, our overseas brands will continue to upgrade products and services offering to strengthen our competitors in our European markets. Our focused efforts will enable us to gain additional market share and lay solid foundation for sustainable growth beyond COVID in the long run. With the vaccination rate continuing to rise globally, we have full confidence in the resumption of international travel. In the lead time, our team continued to enhance the fundamentals in terms of price product, service And app user experience for overseas users. With that, we will be best positioned to capture the pent up travel demand Thank you. Your next question comes from Alex Yao of JPMorgan. Please go ahead. Thank you, management. I have a couple of questions on the content operation. How do you guys incubate The content supply ecosystem and then what's the progress on advertising monetization on content operation? Thank you. Thank you, Alex. We have been making quite good progress on our content ecosystem development By following our 3 step strategy. 1st, we have further enriched the content offerings on our platform. Our total content bookings in 2nd quarter nearly doubled compared with the previous quarter. And the number of sites KOLs also increased nearly 50% sequentially in the 2nd quarter. And second, we are encouraged to see better user engagement through content platform. For example, in the Q2, we are glad to see an average of 35% of our app unique visitors Viewed content related channels with the peak value reached over 40% during the holiday. Meanwhile, our diverse content formats are gaining increasing traction from new users. And the third, our content to transaction conversion was on the rise as we continue to improve infrastructure development. We are happy to see that over 180 leading travel business have signed up TravelStarHub channel, which is our new travel marketing hub launched in April. Top staff players have seen their conversion rates improving. As we are the leading travel transaction platform in China and many of our users have already got strong travel desire And when they come to our platform, our strong product development capabilities make content to transaction conversion More easier and frictionless. We have built technology and product team for our content strategy, which were mainly leveraging our existing infrastructure, and we will carefully evaluate the future investment For the long term for this long term opportunity. Thank you. Thank you. Your next The question comes from Alex Poon of Morgan Stanley. Please go ahead. Thank you, management, for taking my question. My question is regarding our margins. Can management Break down the non GAAP operating margin of 11.7% in 2nd quarter into China Business, Skyscanner and trip.com separately. And assuming our China business revenue stays around the same level, can our China margin continue to improve On the same revenue level? And for Skyscanner, at what level of revenue of 2019 level Skyscanner margin can go back to 20% margin level in 2019. Thank you. Thank you, Alex. With regard to the margin, we think we are still Very healthy 20% to 30% normalized margin level. But at the second quarter, For the domestic travel business, since it's almost fully recovered, so we have already maintained a very Healthy margin for the domestic business, while for the international parts, for example, Skyscanner, They are still suffering some losses, but as we already see some pent up demand and the normalized travel demand, especially starting from Europe and U. S. Market, We've already seen very healthy sequential increase for our pure international business. I think as you all have, the travel demand will recover or gradually recover, our international Business, including Skyscanner, will go in back to a normalized margin level. Thank you. Thank you. Your next question comes from Thomas Chong of Jefferies. Please go ahead. Hi, good morning. Thanks management for taking my questions. I have a question regarding the hotel business. Can management comment about the competitive landscape in the lower tier cities? And how we should think about the overseas accommodation as well In the second half? Any qualitative color would be great. Thank you. Yes. For the hotel platform, we further penetrate into the 2nd tier and lower tier cities. Many of the contributors work well together. Our transportation business also cross sell into our lower tier cities Very significantly, the cross sell ratio during this year have increased compared to pre COVID level by 20%. We also have seen Generation Z have used our product significantly coming from All the cities around China. Into the overseas hotels, with the recovery In Europe and United States, we have seen the vaccination rate also increases. And recently, U. S. Have announced open to many of the European countries. And with that, our air transportation Our business unit will further increase the volume, which will also help us to lift Our sales for overall products, our competitiveness in providing the comprehensive product offerings As well as a high service level with app usage will enable us to gain market share in the Our growing market overseas. Thank you. Thank you. Your next question comes from Yulin Zhang of Haitong International. Please go ahead. Thanks, James, James, Cindy and My question is regarding the regulation. Could you share with us any thoughts on the regulatory environment And any potential regulatory pressure to your sector or your company, for example, on your collaboration with hotels, your take rate and your cross sell rate, etcetera? Thank you. Thank you. We believe the tightened regulations will bring positive impact To the Internet industry, especially in the long run, in terms of submitting mail practices, encouraging innovations and fostering a sustainable and healthy environment. Trip.comgrouphaslong That is stated by an organized and regulated environment to cultivate our own growth in an efficient manner in the past 22 years. We strongly support the proposed regulations in the market, which we believe we will event which will Eventually creates value to all the stakeholders. In terms of different potential regulation risks, at this moment, we are not considered to have a significant impact to our existing business practices. And going forward, Thank you. Thank you. Your next question comes from Brian Gung of Citi. Please go ahead. Yes. Thanks management for taking my question. So my question is about competitive landscape. With recent regulatory change and there's been some regional resurgence of cases, do you see any material change on competitive landscape And any behavioral changes for our key competitor? Thank you. Yes. I think we fully support the new rules and regulations. As Cindy said, our company Have grown in the past 2 decades in a very healthy and regulated environment. And going forward, we believe the new policy and the regulation We're further fostering a very healthy growth in the industry. So I think everyone is these rules and regulations very carefully, and we believe in a new environment that will enable everyone to operate in a very transparent and a fair environment, which we have confidence in. Thank you. Thank you. Thank you. There are no further questions at this time. I'll now hand back to Michelle Chi for closing remarks. Thank you. Thanks, everyone, for joining us today. You can find the transcript and webcast of today's call on investors. Trip.com. We look forward to That does conclude our conference for today. Thank you for participating. You may now disconnect.

• Earnings release