Securities Analysis

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Source: Company, CMBIS Company, Source: estimates Earning Earning Table Net gearing(%) Net PE PB Yield ROE Revenuemn) (Rmb netincome Adj. EPS Adj. CHG EPS (YE 31 (YE fingertip your at Travel PLEASE PLEASE READ THE ANALYST CERTIFICATION AND IMPORTANT DISCLOSURES ON LAST PAGE

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16 Securities Analysis

Equity Research 16 Jan 2019

Table of contents

Investment Thesis...... 3 Focus charts ...... 4 Company Overview...... 7 China 3rd largest OTA surfing on the Super App era ...... 7 Investment Summary ...... 10 Leveraging Tencent traffic to achieve cost-effective user reach ...... 10 Merger synergy to strengthen user engagement and cross -selling...... 14 One-stop shop enhancing monetization and grasping long-tail needs ...... 16 Reshaping travel via tech-driven innovations and social community ...... 18 Industry Analysis ...... 20 Riding on China’s massive and evolving online travel market...... 20 Online transportation ticketing: a Rmb830bn market with 14% CAGR in 2017- 22E ...... 21 Online accommodation reservation: a Rmb182bn market with a CAGR of 16% in 2017-22E...... 22 Market is relatively concentrated in China ...... 23 Competitive Landscape...... 25 Online travel market: blue ocean with major dominators ...... 25 Key players comparison: each with an ace card...... 26 Tongcheng-Elong vs. Ctrip: “Coopetition” ...... 28 Financial comparison in global OTA portfolio ...... 29 Financial Analysis ...... 31 Revenue breakdown ...... 31 Income Statement...... 33 Balance Sheet ...... 35 Cash Flow and Working Capital ...... 36 Valuation...... 37 Key investment risks...... 39 Appendix 1: Regulations...... 41 Foreign investment in Value-added Telecommunication Services ...... 41 Control on internet privacy and information security ...... 41 Regulation on pricing and air ticketing transaction...... 42 Regulation on insurance business ...... 42 Appendix 2: Company background ...... 43 Appendix 3: Snapshots of subsegments ...... 46 Financial statements – The Group ...... 48 Financial statements – Tongcheng Online Business ...... 50

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16 Jan 2019

Investment Thesis China 3rd largest OTA surfing on the Super App era. Tongcheng-Elong Holdings Limited (“Tongcheng-Elong”) ranked Top 3 among Chinese OTAs with 9.8% market share (by GMV) in 2017, and delivered the highest YoY growth in FY15-17 in terms of no. of online transportation ticketing and accommodation reservation transactions in China, according to iResearch. Backed by large and engaged user base, extensive relation with TSPs and tech-driven innovations, we forecast Tongcheng-Elong to deliver 30%/ 37% revenue/ net profit CAGR during FY18-20E, thanks to robust MAU growth, rising paying ratio and re-purchase rate with merger synergy and services expansion.

Leveraging Tencent traffic to achieve cost-effective user reach. Powered by unique access to Weixin & QQ and long-term exclusive cooperation with Tencent (until 2021), Tongcheng-Elong can effectively reach and retain a vast and engaging user base, in our view. Noted that Tongcheng-Elong ranked Top 1 among Weixin mini programs in Oct 2018, according to Aladdin index. We estimate its MAU to grow at 18% CAGR in FY18-20E and reach 240mn in FY20E, driven by 1) Tencent-based traffic; 2) tapping into large addressable market in lower-tier cities; and 3) increasing diversified marketing efforts.

Merger synergy to strengthen user engagement and cross selling. We forecast a 25% MPU CAGR in FY18-20E, driven by ramp-up of MAU and paying ratio expansion. Backed by enriched product offerings and integrated portals after the merger, we see high visibility for Tongcheng-Elong to leverage its cross-selling capability to strengthen user engagement, stimulate re-purchase rate and enhance monetization. We expect 34% order CAGR in FY18-20E, driven by merger synergy to boost higher paying ratio, order/MPU, and cross-sell MPU ratio.

One-stop service offerings enhancing monetization and grasping long-tail needs. Positioned as one-stop shop fulfilling all kinds of travel needs, Tongcheng-Elong will capture more revenue opportunities with innovative ancillary services, in our view. We expect its GMV to grow at 32% CAGR in FY18-20E, and blended ASP will be slightly diluted with deeper penetration into lower-tier cities. We forecast flat commission rate in FY18-20E, due to mature business and benign competition.

Expect 30%/37% revenue/ net profit CAGR in FY18-20E We forecast a 30% revenue CAGR in FY18-20E, thanks to robust MAU growth, rising paying ratio and re-purchase rate. We expect its gross margin to continuously trend up from FY18E, mainly due to strategic shrinking pre-purchase accommodation business and synergy effect. Coupled with operating leverage, we forecast net profit to grow 54%/49%/25% YoY in FY18/19/20E, with net margin up to 20% in FY20E (vs. 14% in FY17).

Initiate with BUY We use DCF valuation as our primary method since it is suitable to apply DCF valuation to OTA companies with healthy cash flows in the long run. Based on DCF valuation, we set the TP to be HK$18.59, representing 21.5x FY19E P/E, and 0.6x FY19E PEG, in line with industry average, and 16% discount to Ctrip. Trading at 13.9x FY19E P/E, the company’s valuation is attractive in our view, and incoming catalysts may originate from: 1) user growth from Spring Festival; 2) merger synergy; 3) potential positive earnings surprise; and 4) upcoming inclusion into HK-China stock connect.

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16 Jan 2019

Focus Charts Figure 1: Snapshot of Tongcheng-Elong

Top 3 Transportation ticketing Highest Largest OTA in China1 Financial yoy growth in China4 Accommodation ~10% Rmb5.2bn Market share in China1 Other businesses Combined revenue in 2017 Tongcheng-Elong … Rmb713mn Rmb102bn -同程艺龙- Combined adj. net profit in 20175 2 Online Travel 2017 GMV 116% Tongcheng revenue CAGR 15-17 160mn 17.5mn ~720k ~450k 57% 10 years+ eLong revenue CAGR 15-17 MAU3 MPU3 6 6 Mgmt’s experience Flight routes Bus routes 75.3% >1.2mn GMV from repeat orders Hotels6

Leading position Sizable Users Rich Experience One-stop shop Strong Financials

Source: Company, CMBIS, all notes refer to Figure 14

Figure 2: Comprehensive suite of services throughout the trip

Air ticket Voyage ticket • Commissions from suppliers on air tickets Air ticket • Commissions from suppliers on and travel insurance voyage tickets and travel insurance • Service fees from users on ancillary value- added travel products and services Train Voyage Train ticket ticket ticket Accommodation reservation

• Service fees from users an ancillary • Commissions from accommodation suppliers value-added travel products and • For repurchased room rights, record revenue services on a gross basis and record the repurchase • Commissions from suppliers on travel price as cost of revenue insurance Bus Other ticket business Bus ticket Other business Accommodation • Fees from Tongcheng Holdings for selling • Service fees from users an ancillary value- reservation its travel products and services added travel products and services • Advertising service fee • Commissions from suppliers on travel • Service fees on other value-added services insurance

Source: Company, CMBIS

Figure 3: Powerful platform suite to capture traffic Figure 4: Tapping into vast user base of Tencent

1,058mn Weixin MAU1 Mobile-optimized 803mn QQ MAU1 WAP Tencent-based LY.com eLong.com Platforms Weixin & Mobile QQ

123.6mn Proprietary Tongcheng- PC Websites Mobile Apps 2 LY.com Elong MAU LY.com eLong.com eLong.com

Source: Company, CMBIS Source: Company, Tencent’s financial report, all notes refer to Figure 27

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16 Jan 2019

Figure 5: Tongcheng-Elong ranked Top 1 among Weixin mini programs

Source: Aladdin index, data cited in Jan 2019

Figure 6: Tongcheng-Elong ranked Top 3 in China’s Figure 7: 30% revenue CAGR in FY18-20E online travel market (by GMV), 2017 12000 127% 140% (Rmb mn) 40% 35.6% 120% 35% 10000 100% 30% 8000 80% 25% 6000 20% 60% 14.2% Top 3 4000 44% 33% 15% 26% 40% 9.8% 15% 2000 10% 20% 4.4% 5% 0 0% FY15 FY16 FY17 FY18E FY19E FY20E 0% Others Accommodation reservation Company A Company B Tongcheng-Elong Company C Transportation ticketing YoY growth Source: iResearch Source: Company, CMBIS estimates, all notes refer to Figure 75

Figure 8: MAU to grow at 18% CAGR in FY18-20E Figure 9: FY19E revenue breakdown

300 45% (mn) 240 40% Others 250 3% Transportation 35% 204 ticketing 200 30% 62% 172 Accommodation 25% reservation 150 121 35% 20% 100 89 100 15% 10% 50 5% 0 0% FY15 FY16 FY17 FY18E FY19E FY20E MAU YoY growth Source: Company, CMBIS estimates, all notes refer to Figure 21 Source: CMBIS estimates

Figure 10: Orders to grow at 34% CAGR in FY18-20E Figure 11: GMV to grow at 32% CAGR in FY18-20E 300 100% 1200 45% (mn) (Rmb bn) 983 40% 250 1000 80% 35% 762 200 800 30% 60% 25% 150 600 544 20% 84% 40% 100 400 15% 20% 10% 50 200 78% 5% 0 0% FY15 FY16 FY17 FY18E FY19E FY20E 0 0% FY18E FY19E FY20E Transportation ticketing Accommodation reservation Base Synergy YoY growth_Synergy YoY growth Source: Company, CMBIS estimates Source: Company, CMBIS estimates Note: estimated orders was calculated by MPU * Order per MPU.

Figure 12: Big data powered user profiling

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16 Jan 2019

Data Source Profiling Input Precise Modeling Result

Proprietary Data Scale Data fields AI model Achieve • Mobile apps on both • Age • Data processing • Precise targeting and Android and iOS systems recommendation 160 mn1 • Gender • Feature generator • Proprietary websites, MAUs • More effective user ly.com and elong.com • Location • Large-scale modeling acquisition training • Credit • Weixin-based mini 1 • Cross selling programs 17.5mn • Online prediction MPUs • Transaction data • Maximize engagement • Machine learning Third-party • Behavioral data • “Rail & Flight” and “Hotel” … portals in Weixin Wallet • “Rail & Flight” and “Hotel” portals in Mobile QQ Wallet Enhancing

1 Obtain target data 2 Target Modeling 3 AI-powered recommendation Sedan ground transportation • Age • Business trip to be recommended Booked a five • Transaction Purchased a -star hotel in • Less price sensitive Cross-selling business class downtown • Gender • Context info (LBS, opportunities of VIP air ticket lounge and airport • Credit… current interests, time) pick-up ads

Source: Company, CMBIS Note: the average MAU and MPU of Tongcheng and eLong in 1H18.

Figure 13: Travel-focused social community

Social community UGC-based Interactive features Detailed product description Incentivize users to keep active

• Connecting users to share • Tweeting, following and • Users’ reviews serve as • Reward repeat buyers and active experience within social commenting functions inspire endorsement and verification for users with virtual currencies to community. KOLs to post travel notes. TSPs. exchange for various gifts.

Source: Company, Platform interface, CMBIS

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16 Jan 2019

Company Overview China 3rd largest OTA surfing on the Super App era

A leader and innovator in China’s OTA industry Tongcheng-Elong is an OTA leader in China, with combination of two industry pioneers - Tongcheng ang eLong, which founded in 2004 and 1999, respectively. Before the merger in Mar 2018, Tongcheng and eLong excelled themselves in transportation ticketing and accommodation reservation respectively. Following the merger, Tongcheng-Elong achieved greater economies of scale and solidified its market leadership with complementary resources.

In 2017, Tongcheng-Elong ranked Top 3 among Chinese OTAs with 9.8% market share (by GMV), and delivered the highest YoY growth in FY15-17 in terms of no. of online transportation ticketing and accommodation reservation transactions in China, according to iResearch.

Figure 14: Overview of Tongcheng-Elong

Leading position Sizable Users Rich Experience One-stop shop Strong Financials

Source: Company, CMBIS Note: (1) In terms of GMV in 2017, according to iResearch; (2) Calculated using combined GMV; (3) The average MAU/MPU of Tongcheng and eLong in 1H18, without eliminating duplicate users; (4) In terms of the number of online transportation ticketing and accommodation reservation transactions in China; (5) Calculated as sum of eLong’s adjusted profit and Tongcheng’s profit, excluding adjustments made related to the Merger; (6) As of Jun 30, 2018

Figure 15: Tongcheng-Elong ranked 3rd in China's Figure 16: Tongcheng-Elong ranked 3rd in China's online transportation ticketing market in 2017 online accommodation reservation market in 2017

47.6% 40% 36.9% 50% 45% 35% 40% 30% 35% 25% 30%

20% 25% Top 3 18.1% Top 3 15% 20% 11.2% 9.6% 15% 12.3% 10% 10% 6.1% 5% 1.3% 5% 0% 0% Company A Company B Tongcheng-Elong Company C Company A Company B Tongcheng-Elong Company C

Source: iResearch, measured by GMV Source: iResearch, measured by GMV

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16 Jan 2019

Figure 17: Tongcheng highly focused on transportation Figure 18: ELong highly focused on accommodation ticketing in 2017 reservation in 2017

Others Others Transportation 5% 4% Accommodatio ticketing n reservation 2% 4%

Transportation Accommodatio ticketing n reservation 91% 94%

Source: Company Source: Company

Tapping into large and engaged user base from Tencent-based platforms Tongcheng-Elong always stands at the frontier of industry revolution and is currently cooperating with Tencent to be the sole operator of “Rail & Flight” and “Hotel” portals of Weixin and Mobile QQ wallet. According to iResearch, Weixin and QQ are two of the biggest supper apps in China. The mutually beneficial partnership enables Tongcheng-Elong to reach an extensive and diversified user base in a cost-effective manner.

Figure 19: Tongcheng-Elong surfing on the Super App Era

PC Era Mobile Era Super App Era

• Search engine operators and • Users shifted to mobile • Super apps consolidating Market trends navigation websites • OTA developed self-operated user traffic on mobile devices dominated user traffic mobile apps

• Pioneered in search engines • Sourced location based • Sole operator of “Rail & marketing products in significant volumes Flight” and “Hotel” portals on Innovation and offered on mobile platforms Weixin and Mobile QQ wallet at competitive pricing

• Increased user traffic and • Large and loyal mobile user • Reached vast user base of Achievement enhanced brand awareness base Tencent through our Tencent- based platforms

Standing at the forefront of industry revolution to caputure growth opportunities

Source: Company, iResearch

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16 Jan 2019

Not only ticketing, but more… Tongcheng-Elong built a one-stop shop fulfilling users’ evolving travel needs. Its comprehensive product offerings cater to travelers’ needs throughout journeys, including transportation ticketing (air, train, bus, and voyage), accommodation reservation, and other ancillary services. As of Jun 30, 2018, Tongcheng and eLong aggregately offered: 1) over 6,000/714,500 domestic/international airlines routes; 2) around 453,000 bus routes; 3) over 300 voyage routes; and 4) over 1.2mn hotels and alternative accommodation options.

Figure 20: Comprehensive suite of services throughout the trip

Source: Company, CMBIS

Delivering strong financial performance Leveraging their innovative business models and longstanding relationships with a wide array of TSPs, Tongcheng and eLong have been rapidly expanding. In 2017, Tongcheng and eLong’s combined revenue/combined adjusted net profit reached Rmb5.2bn/Rmb713mn, combined revenue at a CAGR of 80% during 2015-17.

We forecast Tongcheng-Elong to deliver 30%/ 37% revenue/ net profit CAGR during FY18- 20E, mainly attributable to: 1) robust MAU growth and rising paying ratio, boosted by Tencent-oriented traffic; 2) increasing user engagement and cross sell from merger synergy; and 3) enhanced monetization with one-stop shop solutions.

Figure 21: Tongcheng-Elong’s MAUs Figure 22: Tongcheng-Elong’s revenue

12000 127% 140% 300 (mn) 45% (Rmb mn) 120% 240 40% 10000 250 35% 204 100% 8000 200 30% 172 80% 25% 6000 150 121 20% 60% 100 89 4000 44% 100 15% 33% 26% 40% 10% 2000 15% 50 20% 5% 0 0% 0 0% FY15 FY16 FY17 FY18E FY19E FY20E FY15 FY16 FY17 FY18E FY19E FY20E Others Accommodation reservation MAU YoY growth Transportation ticketing YoY growth Source: Company, CMBIS estimates Source: Company, CMBIS estimates Note: the average MAUs of Tongcheng-Elong were combined with MAUs of Note: revenue data are calculated from the combined business of Tongcheng Tongcheng and eLong, without eliminating duplicate users. and eLong. Data in FY15 and FY16 are combined by CMBI.

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16 Jan 2019

Investment Summary Leveraging Tencent traffic to achieve cost-effective user reach

Unique powerful access to boost robust MAU CAGR of 18% in FY18-20E Tongcheng-Elong exceled itself with unique access to two of the largest Super apps (Weixin & QQ) in China. We believe Tencent-based traffic could be its powerful engine to reach and retain a vast, diverse, and engaging user base. Apart from Tencent portals (“Rail & Flight” and “Hotel” portals of Weixin and Mobile QQ), Tongcheng-Elong operates complementary channels, including 1) Weixin-based mini programs; and 2) proprietary mobile apps and websites.

Tencent channel to contribute 76% of MAU in FY20E. We expect MAUs of Tongcheng-Elong to increase at a CAGR of 18% during FY18-20E, to reach 240mn in FY20E, driven by: 1) continuous user acquisition from Tencent-based platforms (123.6mn MAUs of Tencent-based platforms in 1H18); 2) deeper penetration into lower-tier cities; and 3) increasing marketing efforts for proprietary apps. Coupled with booming industrial demand of traveling and speed-to-market product innovations, we see high visibility for Tongcheng-Elong to attract and retain diverse users onto its ecosystem.

Figure 23: Powerful platform suite to capture traffic

Mobile-optimized WAP Tencent-based LY.com eLong.com Platforms Weixin & Mobile QQ

Proprietary PC Websites Mobile Apps LY.com LY.com eLong.com eLong.com

Source: Company

Figure 24: Expecting 18% MAU CAGR in FY18-20E Figure 25: MAU breakdown 300 (mn) 300 (mn) 45% 240 240 40% 250 250 204 35% 204 58 200 MAU in FY15 and 172 200 30% FY16 without 160 172 52 channel breakdown 25% 150 121 45 150 37 121 20% 100 100 89 89 100 42 100 15% 183 76% 152 10% 124 127 50 50 80 5%

0 0% 0 FY15 FY16 FY17 FY18E FY19E FY20E FY15 FY16 FY17 1H18 FY18E FY19E FY20E MAU YoY growth Non-Tencent channel Tencent channel

Source: Company, CMBIS estimates Source: Company, CMBIS estimates Note: the average MAUs of Tongcheng-Elong were combined with MAUs of Note: the average MAUs of Tongcheng-Elong were combined with MAUs of Tongcheng and eLong, without eliminating duplicate users. Tongcheng and eLong, without eliminating duplicate users.

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16 Jan 2019

Long-term and exclusive cooperation to tap into super apps’ engaged user base Tencent-channel MAU at 20% CAGR in FY18-20E. We expect Tencent–channel MAU to enjoy higher growth, with 20% CAGR in FY18-20E (vs. 14% CAGR for non-Tencent channel), supported by: 1) long-term and exclusive cooperation with Tencent; 2) still low penetration into large base of Tencent’s super apps; and 3) effective user acquisition with low TAC.

Exclusive cooperation to continue until at least 2021. Pursuant to a certain agreement, Tongcheng-Elong is the sole operator of the Tencent portals till 31 Jul 2021 and will be considered for cooperation in priority after that. This long-term, exclusive and mutually beneficial cooperation gives Tongcheng-Elong a stable access to two super apps’ vast user base. In addition, we expect a user who opens transportation ticketing or accommodation reservation portals on a social network app is highly likely to use the corresponding service in the end, so the portals will also boost Tongcheng-Elong’s user conversion rate to achieve cost- efficient user acquisition.

Figure 26: Strategic and mutually beneficial relationship with Tencent

Weixin Wallet Platform Weixin Mini Program

Value Proposition Better serve Tencent users’ Increase user activeness Tencent travel needs and engagement

Source: Company, Weixin App, CMBIS

Figure 27: Tapping into vast user base of Tencent Figure 28: Cost-effective user acquisition S&M Expense/Rev ratio (%)

80 76 120 100 70 100 60 1,058mn Weixin MAU1 80 50 803mn QQ MAU1 43 60 40

30 40 25 20 123.6mn 20 Tongcheng- 10 2 Elong MAU 0 0 2015 2017 2015 2017

Tongcheng eLong

Source: Company, Tencent’s financial report Source: Company Note: (1) As of 2Q18, Tencent’s financial report (2)The average MAUs of Tencent-based platforms of Tongcheng-Elong combined in 1H18, without eliminating duplicate users.

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16 Jan 2019

Enhancing presence in China’s non-first-tier cities by cooperating with Weixin Benefiting from its attractive demographic features of users. We expect Tongcheng-Elong to benefit from its promising users, most of them in non-first-tier cities and at 19~35 age. According to iResearch, resident of non-first-tier cities is a highly sought-after demographic in China’s travel market, given their travel spending represented 89.7% of China’s total travel spending in 2017 and is expected to grow at a CAGR of 11.7% in 2017-22E (vs. 6.3% for first- tier-cities). As of Jun 30, 2018, 85.3% of Tongcheng and eLong’s registered users resided in non-first-tier cities in China, thus we expect Weixin’s strong presence across China (especially non-first-tier cities) to empower Tongcheng-Elong with easier access to expand user reach.

Figure 29: Attractive geographic features of users Figure 30: Age distribution of users

• Contributed 89.7% of travel • More willing to spend on travel and 85.3% spending in China in 2017 69.4% demand quality and customized of the registered of users products users from non- • 17-22 CAGR of 11.7% outpaced belonged to 19- first-tier cities in 6.3% of first-tier cities 35 age group as • Larger opportunity to build lifetime China as of Jun of April 30, 2018 30, 2018 • Increasing demands for quality loyalty and relationship with these travel products users as their spending power grows

Source: Company, date cited in 1H18 Source: Company, date cited in 2017

Bullish on its mini program ramp-up to diversify traffic 2018 might see a peak MAU growth, since we noticed that Tongcheng-Elong ranked Top 1 among Weixin mini programs in Jan 2019, according to Aladdin index (阿拉丁指数). We are bullish on the user upside from Tongcheng-Elong’s proprietary mini program, as it offers excellent user experience and is not dependent on the agreement with Tencent. If market concerns Tongcheng-Elong’s overreliance on Tencent traffic, then the eye-catching performance of its proprietary mini program could be a notable case to reflect its self- development capacity beyond Tencent portals.

Figure 31: Tongcheng-Elong ranked Top 1 among Weixin mini programs

Source: Aladdin index, data cited in Jan 2019

Figure 32: Index comparison of key OTA Weixin mini programs Growth index Aladdin index Tongcheng-Elong(同程艺龙) 179 9825

Ctrip (携程) 52 8111

Tuniu(途牛) 553 5412

Meituan(美团) 548 5889 Source: Aladdin index, data cited in Jan 2019

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16 Jan 2019

Backed by collaborative marketing with Tencent and multiple distribution channels We believe diversified traffic acquisition channels also play a vital role in stimulating the user growth. Collaborative marketing efforts with Tencent should be the key focus for Tongcheng- Elong, in our view. We expect its diversified marketing campaigns to help convert more Weixin users to its users. Coupled with multiple distribution channels with interactive ad formats, we see high visibility for Tongcheng-Elong to enhance its conversion rate.

Figure 33: Collaborative marketing with Tencent and multiple distribution channels

. Collaborative marketing . Marketing and promotional campaign events with Tencent activities across various . Marketing and promotional media formats activities across various media formats Users receive discounts by . Leveraging the impact of App stores inviting friends on Weixin to social media and increasing Smart phone OEMs register on our referrals from existing users mini programs Other super apps

Increase awareness of our Tencent-based platforms Enhance brand equity Acquire traffic for proprietary mobile apps

Source: Company, CMBIS

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16 Jan 2019

Merger synergy to strengthen user engagement and cross-selling

The combination of two industrial pioneers is expected to bring out greater economies of scale, solidified market leadership, and a more comprehensive product offerings, in our view.

Growing user base due to strengthened market awareness and integrated portals After the merger, we believe Tongcheng-Elong will bear the initial fruits from synergies in users, business, portal and brand awareness. Apart from solidifying its market leadership, the integration of Tongcheng and eLong’s Tencent portals is expected to eliminate users’ confusion and enhance its ability to tap into Tencent’s traffic.

Figure 34: Post-merger integration process

Business Units Portal Brand Integration Integration Integration

Reorganization of business units to Integration of the transportation and Launched new brand of “Tongcheng-Elong” streamline operation and enhance accommodation booking functions on “Rail & and increased brand awareness efficiency Flight” and “Hotel” portals Source: Company, CMBIS

Enriched product offerings to boost both paying ratio and re-purchase rate Expecting 25% MPU CAGR in FY18-20E, driven by ramp-up of MAU and paying ratio expansion. Thanks to the complementary product offerings of Tongcheng and eLong, the combined business expands its product and service offerings effectively and creates more transaction scenarios. We expect its paying ratio to slightly trim to 12.3% in FY18E due to MPU expansion lagging behind MAU acquisition, but to pick up from FY19E. As such, we expect its MPU to reach 32.8mn in FY20E, at a 25% CAGR in FY18-20E.

Figure 35: Increasing paying ratio (MPU/MAU) Figure 36: Average MPU estimates

32.8 16% 35 (mn) 160%

14% 30 140% 26.4 12% 120% 25 21.1 10% 100% 20 8% 15.6 80% 15 6% 60% 9.2 10 4% 40% 3.9 2% 5 20%

0% 0 0% FY15 FY16 FY17 FY18E FY19E FY20E FY15 FY16 FY17 FY18E FY19E FY20E Base Synergy Base Synergy YoY growth_Synergy Source: Company, CMBIS estimates Source: Company, CMBIS estimates

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16 Jan 2019

Business integration to revel significant cross-selling potential Cross-sell MPU share to trend up. We expect its cross-sell MPU as of total MPU up to 32% in FY20E, in the synergy-case scenario. The business integration greatly enhanced Tongcheng- Elong’s capability to offer one-stop travel solutions and reveal significant cross selling opportunities, especially between transportation ticketing and accommodation reservation. We expect the acceleration of cross-selling to increase user stickiness, and further boost order per MPU.

Expecting 34% order CAGR in FY18-20E, mainly on rising MPU and order/MPU. We assume its order per MPU of single-product/ cross-sell MPU to be 1.5/3, based on industry average. As such, we forecast its order per MPU to reach 2.5 in FY20E, in the synergy-case scenario (vs. 2.2 in base case), thanks to strengthened presence of both platforms. Coupled with solid MPU growth, we forecast its order to grow at 34% CAGR in FY18-20E.

Transportation orders to ramp up in FY18E, but natural shift to accommodation via cross-selling. We expect its orders in transportation ticketing to climb up quickly after integration, for transportation ticketing as the first step of one tour. After that, we believe more existing users from transportation ticketing will shift to arrival-based services, such as accommodation reservation. As such, we expect higher order mix of accommodation reservation in the long run.

Figure 37: Cross-sell MPU as of total MPU Figure 38: Order per MPU of Tongcheng-Elong

50% 3.0

2.5 40%

2.0 30% 1.5 20% 1.0

10% 0.5

0% 0.0 FY18E FY19E FY20E FY18E FY19E FY20E Base Synergy Base Synergy Source: CMBIS estimates Source: CMBIS estimates

Figure 39: Total orders of Tongcheng-Elong Figure 40: Order allocation estimates

1200 (mn) 45% 100% 983 40% 1000 35% 80% 762 800 30% 60% 25% 600 544 20% 40% 400 15%

10% 20% 200 5%

0 0% 0% FY18E FY19E FY20E FY18E FY19E FY20E Accommodation reservation Transportation ticketing Base Synergy YoY growth_Synergy Source: CMBIS estimates Source: CMBIS estimates Note: estimated orders was calculated by MPU * Order per MPU.

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16 Jan 2019

One-stop shop enhancing monetization and grasping long-tail needs

Innovative ancillary services to enhance monetization Ticketing to boost GMV, ancillary services for profitability. Apart from commission on ticket bookings and accommodation reservation, sales of value-added ancillary services could be major revenue contributor, in our view. Tongcheng-Elong offers a comprehensive suite of ancillary services to cover customers’ needs throughout the journey, including but not limited to express ticket booking, meal delivery, VIP lounge, insurance and car hire.

For transportation ticketing, we expect high-margin ancillary services to deliver 31% revenue CAGR in FY18-20E, accounting for 94% of total transportation revenue in FY19E.

Figure 41: One-stop travel shop beyond just booking of tickets Pre-departure On the road Arrival

 Information  Transit to destination  Hospitality  Value-for-money  Relaxing  Refreshing  Change of schedule  Convenient  Social

• Express ticket booking: monitor • Lounge: access to lounge at • Accommodation: a large and ticket availability and automatically airports and train stations diversified offerings catering to purchase tickets at specified time users’ budgets and preferences slots and price ranges • Meals: order ahead and have meals delivered on board directly to seats • Attraction ticketing: book value- • Ticket delivery: deliver ticket to for-money ticket package online doorstep by courier • Pickup: airport/train station pickup service • Car hire: online taxi/car booking • Reservation transfer: transfer accommodation reservations to • Social: share review and personal other users travel experience online • Travel solution: cross sell accommodation and transportation solutions

One-stop shop fulfilling all kinds of travel needs…

Source: Company, Company website

Figure 42: Offering superior user experience

 One-stop shop for travel  Customer review and travel products and services experience sharing  Innovative ancillary value-  Integration into Tencent’s added products and Informative Social social ecosystem services to address users’ needs

 Customer review and travel  Automated online support experience sharing and live customer service Customized Customer  Integration into Tencent’s service  Systematic analysis of social ecosystem users’ feedback

Source: Company, CMBIS

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16 Jan 2019

Expecting GMV/Rev to grow at 32%/30% CAGR in FY18-20E. GMV driven by robust orders. Thanks to robust order growth, we expect its GMV to grow at 32% CAGR in FY18-20E, driven by 32%/28% GMV CARG from transportation/ accommodation. For transportation ticketing, we expect international air ticketing and other transportation ticketing to enjoy above-average growth, primary due to: 1) booming demand of cross-border tourism, and 2) deeper penetration into lower-tier cities. For accommodation reservation, we expect Tongcheng-Elong to continue to strategically shrink its pre-purchase accommodation business, given its low-inventory advantage of commission model.

We expect Tongcheng-Elong to deliver 30% revenue CAGR in FY18-20E, backed by 32%/28%/10% sales CAGR from transportation/accommodation/others. Blended ASP will be slightly diluted with deeper penetration into lower-tier cities, in our view. We forecast flat commission rate in FY18-20E, due to mature business model and benign competition.

Figure 43: GMV of Tongcheng-Elong’s key business Figure 44: Revenue of Tongcheng-Elong 300 90% 12000 140% (Rmb bn) (Rmb mn) 80% 250 10000 120% 70% 100% 200 60% 8000

50% 80% 150 6000 84% 40% 60% 100 30% 4000 61% 40% 20% 50 2000 20% 78% 10% 48% 0 0% 0 0% FY15 FY16 FY17 FY18E FY19E FY20E FY15 FY16 FY17 FY18E FY19E FY20E Transpotation ticketing Accomodation reservation Transpotation ticketing Accomodation reservation YoY growth Others YoY growth Source: Company, CMBIS estimates Source: Company, CMBIS estimates Note: revenue data are calculated from the combined business of Tongcheng and eLong. Data are combined by CMBI.

Figure 45: Blended ASP Figure 46: Commission rate

400 10% (Rmb) 350 9% 8% 300 7% 250 6% 200 5%

150 4% 3% 100 2% 50 1% 0 0% FY18E FY19E FY20E FY18E FY19E FY20E Transportation ticketing Accommodation reservation Transportation ticketing Accommodation reservation Blended ASP Blended commission rate Source: Company, CMBIS estimates Source: Company, CMBIS estimates Note: Blended ASP is calculated by estimated GMV/ Orders of Note: Blended commission rate was calculated by estimated revenue/ GMV transportation ticketing and accommodation reservation. of transportation ticketing and accommodation reservation.

One-stop travel shop to grasp long-tail needs and stimulate re-purchase We expect Tongcheng-Elong to continously unlock its service boundary, with more speed-to- market products, such as group forming and alternative accommodations (e.g. B&B, short- term rentals). By discovering and fulfilling all kinds of travel needs, Tongcheng-Elong will capture long-tail users’ needs, achieve higher spending per user and stimulate re-purchase, in our view.

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16 Jan 2019

Reshaping travel via tech-driven innovations and social community

Enhancing proposition in value chain via tech-driven innovations We view Tongcheng-Elong as a tech-driven community, to leverage its data to better identify, reach, analyze and serve the users by enhancing product design, pricing and user experience. Compared with other peers, Tongcheng-Elong exceled itself in both breadth and depth of data in OTA spectrum, as well as cutting-edge technologies (e.g. search algorithms, natural language processing, big data analytics, AI).

Vast data sources with multi-dimensional data depth provided by transactions and partnerships. We believe Tongcheng-Elong’s massive user base positions it well in effectively expanding user coverage with lower TAC. With multi-channels data sources (e.g. proprietary mobile apps, Weixin-based mini programs), Tongcheng-Elong can collect valuable data of user’ behaviors and consumption patterns in their everyday lives, such as travel frequencies. Tongcheng-Elong tags, profiles such data and constructs dynamic social graph to enable continual analyses.

Strong data analyzing and AI technology to serve users and TSPs. Leveraging its low- latency and indexed data, combined with machine learning, Tongcheng-Elong can efficiently and accurately analyze large user data, from in-depth user profiling to user-oriented products innovation, personalized matching, precise recommendation, cross-selling etc. We see high visibility for Tongcheng-Elong to improve its operational efficiency, maximize profitability and enhance user experience through its sophisticated data insights and data analytics capabilities (e.g. a machine-learning key word database to record search history and improve search experience).

Figure 47: Big data powered user profiling

Data Source Profiling Input Precise Modeling Result

Source: Company, CMBIS Note: the average MAU and MPU of Tongcheng and eLong in 1H18.

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16 Jan 2019

Empowering TSPs with enhanced techs. Tongcheng-Elong increases its proposition to TSPs by utilizing its data and technology capabilities to assist product development and marketing. This strengthens proposition in the online travel value chain.

Figure 48: Enhancing proposition to TSP via product innovations

Enhance operational efficiency Expand user reach for TSPs Offer Innovative products

• Improved accomodation inventory • Marketing campaigns and initiatives • Self-design products and services management through Weixin public accounts and offerings on mobile apps Weixin-based mini programs • Optimized transportation routing and • More customized travel products and pricing strategies • Co-branded promotions through services leveraging SaaS solutions and Tencent's marketing channels integration

Source: Company, CMBIS

Travel-focused social community to increase stickiness and ad income Tongcheng-Elong is seeking to create a travel-focused social community, where users can share their travelling experience, seek travel partners or ask travel-related questions. We expect Tongcheng-Elong to develop destination- and transportation-oriented social community, and further satisfy users’ need of sense of belonging and status. Tongcheng-Elong may also analyze the posted content to enhance customized servicing capability. Coupled with UGC-based interactive features, we expect these efforts will further increase user stickiness and increase ad income.

Figure 49: Travel-focused social community

Social community UGC-based Interactive features Detailed product description Incentivize users to keep active

Source: Company, Platform interface, CMBIS

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16 Jan 2019

Industry Analysis Riding on China’s massive and evolving online travel market

Travel market in China: fast-growing and continuously moving online China has a massive and rapidly-growing travel market driven by both demand and supply. According to iResearch, China’s domestic/overseas travel spending were Rmb4.6tn/Rmb0.7tn in 2017, and are expected to grow at a CAGR of 11.6% and 7.3% in 2017-22E. The proliferation of Internet and mobile phones is constantly moving China’s travel market online, creating a dynamic ecosystem of TSPs and OTAs.

Figure 50: China’s online travel industry chain

Midstream product combination Upstream resource supply Downstream product marketing and distribution

UGC Airline corporations Travel agencies Social media Portal website Railway corporations Wholesalers Search engine On- Hotel suppliers Mobile App line Agents users Others Tourist attraction suppliers Distributors Online distributing Other product suppliers Online direct selling

Offline users

Source: iResearch

Key value proposition of OTAs in China’s online travel industry According to iResearch, online travel market mainly comprises online transportation ticketing (air, train, bus, and voyage), accommodation reservation, and other travel related products booked online. The same source suggests that China’s online travel industry reached Rmb1,172.6bn in 2017 in terms of GMV with an expected CAGR of 16.0% in 2017-22E, and that 68.6% of the 2017 GMV was generated by OTAs. We believe that OTAs enhance their value to users and TSPs by offering quality user experience, full spectrum of products, and technology-based services.

Figure 51: China’s online travel market size by GMV Figure 52: China’s OTA market size by GMV 1800 (Rmb bn) 3500 (Rmb bn) 45% 46% 50% 43% 41% 45% 1600 3000 37% 40% 1400 2500 32% 35% 1200 26% 30% 2000 1000 25% 20% 1500 800 20% 14% 600 1000 11% 15% 10% 400 500 5% 200 0 0% 2013A 2014A 2015A 2016A 2017A 2018E 2019E 2020E 2021E 2022E 0 2013A 2014A 2015A 2016A 2017A 2018E 2019E 2020E 2021E 2022E GMV Penetration rate Source: iResearch Source: iResearch

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16 Jan 2019

Figure 53: Drivers, trends, and evolutions of China’s online travel industry

Increasing travel demand Growing travel supply Increasing demand of quality service, user • Greater consumption pow er w ith • Expanding transportation Quality service experience, and price rising disposable income, infrastructure including railroads transparency. Customers grow ing middle class, and and flight routes also expect ancillary increasing travel spending in • Rising number of TSPs value-added services. non-first-tier cities. providing quality travel services • Increasing urbanization rate. • Innovative products (e.g. short- • Increasing demand for high term rentals) offered. OTAs are expanding to quality travel products and services One-stop OTAs other tan transportation and accommodation and Proliferation of Internet Low online penetration to offer rich platform of travel review s.

• China has the w orld’s largest • The online penetration rate of number of Internet users, and China’s travel market rose the user base is still grow ing from 10.6% in 2013 to 31.5% Online travel companies rapidly. in 2017. use technology to • The proliferation of • Developed countries such as enhance user experience Technology focused smartphones further fuels the US has a penetration rate and help TSPs’ sourcing, online travel booking. of 45.0% in 2017. distribution and managing.

The PC Era The Mobile Era The Super App Era

Source: iResearch

Online transportation ticketing: a Rmb830bn market with 14% CAGR in 2017-22E

Online transportation ticketing is the biggest segment of the online travel market. According to iResearch, 1) this segment is mainly driven by the prevalence of mobile platforms, which accounted for 86.6% of GMV in 2017; 2) OTAs dominates by contributing 61.9% of 2017 GMV.

Online air ticketing: the largest sub-segment with fairly high growth potential According to iResearch, online air ticketing accounted for 60.5%/58.7%/57.9% of total online transportation ticketing, in terms of GMV in 2015/2016/2017 and its GMV is projected to grow at a CAGR of 12.4% during 2017-22E. As OTAs offers more comprehensive flight options and smarter ticket booking experience, Chinese airlines are establishing online stores within OTA platforms to boost direct sales.

Online train ticketing: fast-growing and highly concentrated during holidays According to iResearch, online train ticketing (39.7% of online transportation ticketing in 2017) is expected to grow at 16.7% CAGR during 2017-22E, outpacing other transportation sub-segments. OTAs face strong competition from China Railway’s official online platform (12306.com) in this sub-segment but gain competitive advantage by offering reliable services during peak seasons.

Online bus ticketing: fragmented market with great opportunity for OTAs According to iResearch, China’s online bus ticketing (2.1% of online transportation ticketing in 2017) is highly fragmented, but OTAs have been instrumental in moving bus ticketing online by cooperating with bus service providers.

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16 Jan 2019

Figure 54: China’s online transportation ticketing Figure 55: China’s OTA transportation ticketing

1200 (Rmb bn) 2500 (Rmb bn) 70% 60.9% 58.9% 56.4% 53.1% 60% 1000 2000 48.0% 50% 40.8% 800 1500 33.2% 40% 600 30% 1000 24.3% 400 15.7% 20% 11.9% 500 10% 200

0 0% 2013A 2014A 2015A 2016A 2017A 2018E 2019E 2020E 2021E 2022E 0 2013A 2014A 2015A 2016A 2017A 2018E 2019E 2020E 2021E 2022E GMV Penetration rate Source: iResearch Source: iResearch

Online accommodation reservation: a Rmb182bn market with a CAGR of 16% in 2017-22E

The online accommodation reservation market in China shows strong momentum, mainly driven by: 1) low online penetration rate, as only 31.6% of China’s accommodation reservation is made online (vs. 37.4% in US), according to iResearch; 2) Popularization of alternative and independent accommodations, such as long-term rentals and bed-and- breakfast properties; and 3) prevalence of internet and mobile phones.

According to iResearch, China’s online accommodation reservation segment grew from Rmb56.8bn in 2013 to Rmb181.9bn in 2017 at a CAGR of 33.8%, and is expected to increase further at a CAGR of 16.3% during 2017-22E. Mobile platforms are the main drivers of this growth, accounting for 85.0% of the total GMV in 2017.

Figure 56: China’s online accommodation market Figure 57: China’s OTA accommodation market 350 (Rmb bn) 500 (Rmb bn) 50% 43.7% 44.3% 450 41.2% 45% 300 38.7% 400 35.7% 40% 250 350 31.6% 35% 300 26.7% 30% 200 250 21.5% 25% 150 200 14.8% 20% 150 10.9% 15% 100 100 10% 50 5% 50 0 0% 2013A 2014A 2015A 2016A 2017A 2018E 2019E 2020E 2021E 2022E 0 GMV Penetration rate 2013A 2014A 2015A 2016A 2017A 2018E 2019E 2020E 2021E 2022E

Source: iResearch Source: iResearch

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16 Jan 2019

Market is relatively concentrated in China

According to iResearch, the Top 4 OTAs in China represented a market share of 35.6%, 14.2%, 9.8%, and 4.4% of China’s online travel market in terms of GMV in 2017, and Tongcheng-Elong ranked the third with a 9.8% market share.

Figure 58: Tongcheng-Elong ranked Top 3 in China’s Figure 59: Key channels of competition of China’s online online travel market in 2017 travel market in 2017

40% 35.6% 35% User Comprehensive products and 30% experience services 25% Key areas of 20% Top 3 Competition 14.2% 15% 9.8% User Size and 10% acquisition engagement 4.4% channels level of user 5% base

0% Company A Company B Tongcheng-Elong Company C

Source: iResearch Source: iResearch

The online transportation ticketing segment is highly concentrated except for bus ticketing According to iResearch, the Top 4 players made up 60% of the market in 2017. Among the three main sub-segments (air, train, and bus), the online bus ticketing market is the most fragmented. The major distribution channels in this market include OTAs, bus companies’ self- operated online channels, and electronic ticket machines at bus stations, and the intercity bus ticketing is mainly serviced through offline channels.

Figure 60: Tongcheng-Elong ranked Top 3 in China’s Figure 61: Tongcheng-Elong ranked Top 3 in China’s online transportation ticketing market in 2017 OTA transportation ticketing market in 2017

40% 36.9% 70% 59.6% 35% 60%

30% 50% 25% 40% 20% Top 3 30% Top 3 15% 11.2% 18.2% 9.6% 20% 15.6% 10%

5% 10% 1.3% 2.1% 0% 0% Company A Company B Tongcheng-Elong Company C Company A Company B Tongcheng-Elong Company C

Source: iResearch Source: iResearch

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16 Jan 2019

The online accommodation reservation segment is relatively more fragmented The online accommodation reservation segment is also concentrated on the Top 4 players, although it is relatively more fragmented than the online ticket booking segment. According to iResearch, this segment is predicted to be more concentrated in the future, as the OTAs have established a stable supply relationship directly with the service suppliers and have streamlined the online booking process.

Figure 62: Tongcheng-Elong ranked Top 3 in China’s Figure 63: Tongcheng-Elong ranked Top 3 in China’s OTA online accommodation reservation market in 2017 accommodation reservation market in 2017

47.6% 50% 60% 55.6% 45% 50% 40%

35% 40% 30%

25% 30% 18.1% Top 3 Top 3 20% 21.2% 20% 15% 12.3% 14.3%

10% 6.1% 10% 7.1% 5%

0% 0% Company A Company B Tongcheng-Elong Company C Company A Company B Tongcheng-Elong Company C

Source: iResearch Source: iResearch

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16 Jan 2019

Competitive Landscape Online travel market: blue ocean with major dominators

OTAs to gain tractions in online travel market China’s online travel market is highly competitive and dominated by a few players. Direct selling makes up a small proportion in the online travel market and OTAs play a much more major role, according to iResearch.

Battle continues, but user experience matters more than couponing However, as the MAU growth slows down, we expect both the penetration rate and market size will decelerate, leading to the fiercer market competition. As a result, the industry incumbents are expected to survive with the diversified service and product positioning, rather than simply couponing.

Tongcheng-Elong focuses on product mix and distribution business, connecting both the travel source providers, the UGC and other traffic entrances. Within product mix and distribution business, OTAs own the congenital advantage of low expenses on expansion and user acquisition in contrast with the offline distribution centers.

Figure 64: Players of online travel industry in China in 2017 Travel resources Travel product mix and distribution Media and Marketing

Comprehensive Offline distribution UGC

B2B platform Social media Single product

Accommodation

B2C OTA platform

Portal website User

Transportation Searching engine

B2C non-OTA platform Mobile app Comprehensive Vertical UGC Others Attractions

Online marketing Others

Visa/Insurance/WiFi Direct selling

Payment Travel finance Destination service Transportation information Support service

Source: iResearch, CMBIS

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16 Jan 2019

Key players comparison: each with an ace card

4 major dominators covering the spectrum There are 6 key OTA players in China, in our view. Compared to its peers, Tongcheng-Elong distinguishes itself with: 1) enormous and cost-efficient traffic from Tencent; 2) strong presence in non-first-tier cities where huge growth potential for online travel services lies; and 3) strong cooperation with both accommodation and transportation TSPs.

Figure 65: Key OTA players comparison Tongcheng-Elong Ctrip( 携程) Fliggy(飞猪) Meituan(美团) Qunar(去哪儿) Tuniu(途牛) Established time 1999 1999 20142 2015 2005 2006 Operating metrics MAU (mn) 1605 N/A N/A N/A N/A N/A MPU (mn) 17.5 5 N/A N/A N/A N/A N/A ~720k flight >3mn flight routes, ~450k bus 339,200 hotels 2mn packaged TSPs (no.) routes, 1.3mn N/A N/A routes, >1.2mn in China tours hotels hotels5 Meituan local JD, Hainan Traffic sources Tencent Baidu & Ctrip Alibaba Baidu services Airlines Non-first-tier Non-first-tier Targeted cities Non-first tier cities First-tier cities N/A N/A cities cities Transportation (45%), accommodation Accommodation, (35%), packaged Accommodation, Accommodation, Accommodation, Packaged tours Products transportation, tours (11%), transportation transportation transportation (72%), others others corporate travel management (3%) Cooperates with Strong Online travel Cost-efficient traffic Agoda for over- Middle/low-end relationships with platform from Tencent, sole seas expansion, hotels, high Features China TSPs, High stickiness, Offline business Chinese cooperator young average daily middle-age focus on young with Expedia customers, low- open times customers customers star hotels CCTV exposed Four-year loss, Limited Strong overseas Lack of off-line Limited high- Shortcomings fraud product in high user proprietary traffic competition business synergy star hotels Aug 2018 acquisition cost Transfer to social International Mobile, content, One-stop, high- Price-comparing Enhance Strategies platform expansion overseas star hotels platform profitability Credit card, Debit/credit Weixin Wallet, QQ Debit/credit Cash, debit Payment Alipay, Wechat Alipay card, third-party Wallet card, Alipay /credit card, etc. Pay payments Cross selling Customized trips, Packages Transfer route with group- Price- Content, social direct chat with Package tours (非标品) options bought goods comparison TSPs (“Wine + x”)

Financial metrics Ticker Not listed CTRP US Not listed 3690 HK Privatized TOUR US Fiscal Year End 31-Dec-17 31-Dec-17 N/A 31-Dec-17 31-Dec-17 31-Dec-17 Revenue 5,2266 26,780 N/A 10,8533 65,191 2,192 (Rmb mn) Adj. net profit 7136 2,142 N/A N/A N/A -767 (Rmb mn) Gross margin 68%6 83% N/A 88%3 74%1 53% Adj. net margin 14%6 8% N/A -8%4 N/A -35% ROE NA 2.74% N/A 7%4 N/A -19% Source: Company, Bloomberg, Financial data from peers, CMBIS Note: (1) Bloomberg estimate; (2) originally named Alitrip and changed to Fliggy in Oct 2016; (3) Meituan-Dianping’s instore, hotel & travel segment; (4) Meituan-Dianping group; (5) MAU, MPU and TSPs data were cited from 1H18, without eliminating duplicate users; (6) Tongcheng-Elong’s financial data in FY17 with pro forma adjustments

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16 Jan 2019

Differentiating on traffic channels, user targeting and business strategy Despite homogeneity of major product categories, we think these key dominators are seeking differentiation on traffic channels, user targeting and business strategy.

From the perspective of traffic support, Ctrip/ Fliggy/ Meituan-Dianping leverage traffic from Baidu & Ctrip/ Alibaba/ Meituan’s local services, respectively. In terms of demographic features of users, Ctrip makes a major presence in China’s first-tier cities and the middle-aged/ business customers, while Meituan-Dianping focuses on non-first-tier cities accommodation and leverages synergy with local services. Fliggy leverages its Alibaba-based traffic to better target younger users.

From the perspective of business strategy, Ctrip focuses more on exploring outbound travel markets, backed by Skyscanner and Travelfusion, while Meituan-Dianping prioritizes for accommodation, and Fliggy targets customized package tour for younger generation.

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16 Jan 2019

Tongcheng-Elong vs. Ctrip: “Coopetition”

Ctrip should be most comparable to Tongcheng-Elong, in our view. We believe market concerns lie on the differentiation and relationship between these two players, since Ctrip is not only the competitor but also the Top 2 shareholder of Tongcheng-Elong.

No winner takes it all in this blue ocean. Currently, Ctrip is the industry leader with much stronger positon after consolidation with Qunar in 2015. However, we view that no winner takes it all in this blue ocean, and it is still early to crown the final champion of one-stop travel shop, since: 1) each player has its own traffic support, advantages and challenges; and 2) market is still large and fast-growing, especially for lower-tier regions with increasing consumption power.

What is the relationship with Ctrip? “Coopetition” We view the relationship between Tongcheng-Elong and Ctrip as “Coopetition”. On one hand, Tongcheng-Elong maintains a mutually beneficial and complementary relationship with Ctrip, since they share part of product and services on each other’s platform (e.g. hotels). On the other hand, we had to admit that they face inevitable business competition, especially in lower-tier cities with Qunar. However, given their different traffic source and strategy priority (Ctrip focuses more on outbound tourism exploration), we see low visibility for them to battle directly.

No direct control or involvement in management and operation from Ctrip. In terms of management, Ctrip indirectly controlled ~23% of the total issued share capital of Tongcheng - Elong, as the 2nd largest shareholder behind Tencent. However, given that Ctrip (i) is not a controlling shareholder, (ii) has no direct involvement in Tongcheng-Elong’s daily operations, and (iii) has no control over the composition of Tongcheng-Elong’s Board, we view that its business is adequately delineated from that of Ctrip.

What makes it different with Ctrip? Traffic and geography In our view, compared with Ctrip, Tongcheng-Elong exceled itself with 1) unique access to Super Apps to capture traffic with lower TAC; 2) less impact from bundle sales of insuranc e since Ctrip delivered higher order mix of air ticketing; and 3) easier access to penetrate into low-tier cities with booming demand.

Based on our cross-check and Ctrip public financials, from the perspective of business strategy, we expect Ctrip to explore outbound travel markets through satisfying stronger demand for high-star hotels, longer distance destinations and richer activities bundled with local tours to leverage the tailwind driven by rising income and consumption upgrade among first-tier cities. On the contrary, Tongcheng-Elong focuses on deeply penetrate into the untapped market in lower-tier cites, to fulfill the substantial needs among the price-sensitive customers for affordable hotels, cheaper transportation and family excursions, and stimulate the development of local tourism reversely.

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16 Jan 2019

Financial comparison in global OTA portfolio

Convergent revenue growth with the booming market OTA players showed convergent revenue growth in the past five years, and most experienced growth peak in FY17, according to Figure 70. Although dominators are gaining market shares, key players are still expected to deliver solid growth. According to Bloomberg estimates, 5 listed OTA players are expected to enjoy 14% revenue CAGR on average in FY18-20E, lower than our estimates of Tongcheng-Elong (30%).

Tongcheng-Elong to see more upside of take rate According to Figure 68, Tongcheng-Elong’s monetization rate is significantly below the peers’ level, which implies more upside for Tongcheng-Elong to raise take rate and improve its revenue.

High visibility for Tongcheng-Elong to improve margin According to Bloomberg estimates, 5 listed OTA players are expected to enjoy 19% EPS CAGR on average in FY18-20E, lower than our estimates of Tongcheng-Elong (37%).

In terms of gross margin, Tongcheng-Elong lags behind the peers as well, dragged by the prepayment for hotel accommodation business. We believe Tongcheng-Elong will continue to cut the prepayment expense, thus to deliver better gross margin outlook.

On top of that, adj. net margin of Tongcheng-Elong outperforms the average level of peers, thanks to the low S&M expenses within Weixin ecosystem. We expect Tongcheng-Elong to deepen cooperation with Tencent-based platforms and maintain its user acquisition efficiency.

Figure 66: Financial metrics of Tongcheng-Elong and listed peers in FY17 Tongcheng-Elong Ctrip Booking Expedia TripAdvisor Ticker NA CTRP US BKNG US EXPE US TRIP US Currency (US$ mn) (US$ mn) (US$ mn) (US$ mn) (US$ mn) Revenue 761 4,211 12,567 10,107 1,545 Blended monetization rate 6.5% NA 15.6% 11.4% NA Gross profit 518 3,397 12,431 8,303 1,484 Gross margin 68.0% 82.5% 98.0% 82.5% 95.4% Adj. net profit 104 329 2,341 408 -19 Adj. net margin 13.6% 8.0% 18.5% 4.1% -1.2% Source: Company, Bloomberg, CMBIS Note: 1 US$ =6.92Rmb; Tongcheng-Elong’s financial data in FY17 with pro forma adjustments

Figure 67: FY17 Revenue Figure 68: Revenue growth 100 （%） 15,000 （US$ mn） 12,567

10,107 50 10,000

4,211 0 5,000 FY12 FY13 FY14 FY15 FY16 FY17 FY18E FY19E FY20E 1,545

761 343 Tongcheng

Tripadvisor -50

Booking

Tuniu Ctrip 0 Expedia

-100

- Elong Ctrip Tuniu Booking Expedia Tripadvisor Tongcheng-Elong Source: Bloomberg, Company, CMBIS Source: Bloomberg. Company, CMBIS estimates Note: Tongcheng-Elong’s financial data in FY17 with pro forma adjustments Note: Tongcheng-Elong’s financial data in FY17 with pro forma adjustments; Financial data are calculated from the combined business of Tongcheng and eLong. Data in FY15 and FY16 are combined by CMBI.

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16 Jan 2019

Figure 69: Net profit growth Figure 70: Gross margin

300 （%） 100 （%）

200 80

60 100

40 0 FY12 FY13 FY14 FY15 FY16 FY17 FY18E FY19E FY20E 20 -100 0 FY12 FY13 FY14 FY15 FY16 FY17 FY18E FY19E FY20E -200 Ctrip Tuniu Booking Ctrip Tuniu Booking Expedia Tripadvisor Tongcheng-Elong Expedia Tripadvisor Tongcheng-Elong Source: Bloomberg, Company, CMBIS estimates Source: Bloomberg, Company, CMBIS estimates Note: Tongcheng-Elong’s financial data in FY17 with pro forma adjustments; Financial data are calculated from the combined business of Tongcheng and eLong. Data in FY15 and FY16 are combined by CMBI.

Figure 71: Operating margin Figure 72: Net margin 60 （%） 60 （%）

40 40 20 20 0 FY12 FY13 FY14 FY15 FY16 FY17 FY18E FY19E FY20E 0 -20 FY12 FY13 FY14 FY15 FY16 FY17 FY18E FY19E FY20E -20 -40 -40 -60

-80 -60

-100 -80

Ctrip Tuniu Booking Ctrip Tuniu Booking Expedia Tripadvisor Tongcheng-Elong Expedia Tripadvisor Tongcheng-Elong Source: Bloomberg, Company, CMBIS estimates Source: Bloomberg, Company, CMBIS estimates Note: Tongcheng-Elong’s financial data in FY17 with pro forma Note: Tongcheng-Elong’s financial data in FY17 with pro forma adjustments; Financial data are calculated from the combined business of adjustments; Financial data are calculated from the combined business of Tongcheng and eLong. Data in FY15 and FY16 are combined by CMBI. Tongcheng and eLong. Data in FY15 and FY16 are combined by CMBI.

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16 Jan 2019

Financial Analysis Revenue breakdown

We forecast Tongcheng-Elong revenue to grow at 15%/33%/26% in FY18/19/20E, in which transportation ticketing services continue to be the largest revenue contributor in the long run, while accommodation reservation will benefit from cross-selling and grow substantially. We estimate revenue from transportation ticketing/accommodation reservation/others to grow at a CAGR of 32%/28%/10% in FY18-20E, and transportation ticketing to account for 61% revenue share in FY19E.

For transportation ticketing service, we expect its revenue mix to expand to 63% in FY20E from 48% in FY17, mainly driven by 34% order CAGR and stable ASP in FY18-20E.

For accommodation reservation estimates, we forecast 28% GMV CAGR, mainly attributable to 36% order CAGR but -6% blended ASP CAGR in FY18-20E, with deeper penetration into low-tier cities. Due to strategic shrinking gross-up accommodation revenue and distribution on Ctrip & Qunar platforms, we expect accommodation reservation revenue to decline 14% YoY in FY18E, but to pick up in FY19E.

Figure 73: Revenue growth estimates Figure 74: FY19E revenue breakdown

12000 127% 140% (Rmb mn) 120% 10000 Others, 3.4%

100% 8000 Transportation ticketing, 80% Accommodation 61.4% 6000 reservation, 35.1% 60% 44% 4000 33% 26% 40% 15% 2000 20%

0 0% FY15 FY16 FY17 FY18E FY19E FY20E Others Accommodation reservation Transportation ticketing YoY growth Source: Company, CMBIS estimates Source: CMBIS estimates Note: Tongcheng-Elong’s financial data in FY17 with pro forma adjustments; Financial data are calculated from the combined business of Tongcheng and eLong. Data in FY15 and FY16 are combined by CMBI.

Figure 75: Revenue breakdown estimates Figure 76: GMV breakdown of transportation ticketing and accommodation reservation

100% 2% 1% 4% 4% 3% 3% 100% 90% 90% 17% 16% 16% 25% 22% 80% 35% 35% 34% 80% 39% 47% 70% 70% 61% 60% 60% 60% 50% 50% 40% 83% 84% 84% 40% 75% 78% 30% 61% 61% 63% 30% 61% 48% 20% 37% 39% 20% 10% 10% 0% 0% FY15 FY16 FY17 FY18E FY19E FY20E FY15 FY16 FY17 FY18E FY19E FY20E Transportation ticketing Accommodation reservation Others Transportation ticketing Accommodation reservation

Source: Company, CMBIS estimates Source: Company, CMBIS estimates Note: Tongcheng-Elong’s financial data in FY17 with pro forma adjustments; Financial data are calculated from the combined business of Tongcheng and eLong. Data in FY15 and FY16 are combined by CMBI.

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16 Jan 2019

Figure 77: Orders breakdown estimates Figure 78: Accommodation reservation revenue 4000 100% (Rmb mn) 3500

80% 3000

2500 60% 2000

40% 1500

1000 20% 500

0% 0 FY18E FY19E FY20E FY15 FY16 FY17 FY18E FY19E FY20E Excess of gross-up accomodation revenue Accommodation reservation Transportation ticketing Net commissions earned from accommodation reservation Source: CMBIS estimates Source: Company, CMBIS estimates Note: The historical data in FY15-17 was only from eLong side, while estimated data for the group side. Figure 79: Revenue estimates Revenue (Rmb mn) FY15 FY16 FY17 FY18E FY19E FY20E FY18-20E CAGR Transportation ticketing 599.2 1,435.0 2,529.7 3,643.9 4,925.9 6,330.2 32% % of Total 37% 39% 48% 61% 61% 63% YoY growth 139% 76% 44% 35% 29% Accommodation reservation 977.9 2,176.4 2,463.0 2,127.4 2,814.2 3,472.1 28% % of Total 61% 60% 47% 35% 35% 34% YoY growth 123% 13% -14% 32% 23% Others 29.6 28.0 233.4 250.4 276.2 300.5 10% % of Total 1.8% 0.8% 4.5% 4.2% 3.4% 3.0% YoY growth -5% 734% 7% 10% 9% Total Revenue 1,606.6 3,639.5 5,226.1 6,021.8 8,016.3 10,102.8 30% YoY growth 127% 44% 15% 33% 26% Source: Company, CMBIS estimates Note: Tongcheng-Elong’s financial data in FY17 with pro forma adjustments; Financial data are calculated from the combined business of Tongcheng and eLong. Data in FY15 and FY16 are combined by CMBI. Figure 80: Drivers estimates FY15 FY16 FY17 FY18E FY19E FY20E FY18-20E CAGR Industry Market size by GMV*(Rmb mn) 561,800 787,100 1,012,200 1,255,100 1,472,500 1,663,500 15% Transportation ticketing 450,800 644,200 830,300 1,032,100 1,209,300 1,357,200 15% Accommodation reservation 111,000 142,900 181,900 223,000 263,200 306,300 17%

Market share by GMV* 7% 9% 10% 11% 13% 15% Transportation ticketing 5% 8% 10% 11% 13% 15% Accommodation reservation 13% 12% 12% 10% 12% 12%

Tongcheng-Elong GMV** (Rmb mn) 36,832 67,796 102,338 139,886 188,884 242,053 32% Transportation ticketing 22,554 50,525 80,038 116,697 157,977 203,943 32% Accommodation reservation 14,278 17,271 22,300 23,189 30,907 38,110 28%

Orders (mn) NA NA NA 544.2 761.7 983.1 34% Transportation ticketing NA NA NA 478 668 861 34% Accommodation reservation NA NA NA 66 93 122 36%

Blended ASP (Rmb) NA NA NA 257 248 246 -2% Transportation ticketing NA NA NA 244 236 237 -1% Accommodation reservation NA NA NA 353 331 312 -6%

Blended commission rate NA NA NA 4.3% 4.2% 4.2% Transportation ticketing NA NA NA 3.1% 3.1% 3.1% Accommodation reservation NA NA NA 9.2% 9.1% 9.1%

Revenue (Rmb mn) 1,606.6 3,639.5 5,226.1 6,021.8 8,016.3 10,102.8 30% Transportation ticketing 599.2 1,435.0 2,529.7 3,643.9 4,925.9 6,330.2 32% Accommodation reservation 977.9 2,176.4 2,463.0 2,127.4 2,814.2 3,472.1 28% Others 29.6 28.0 233.4 250.4 276.2 300.5 10% Source: Company, CMBIS estimates Note: * Market size was cited from iResearch; Revenue and GMV market share in FY15 and FY16 are combined by CMBI. ** GMV only includes business of transportation ticketing and accommodation, while revenue includes “others”

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16 Jan 2019

Income Statement

We forecast 37% net profit CAGR for Tongcheng-Elong in FY18-20E, mainly driven by 30% revenue CAGR and improving gross margin (76% in FY19E, vs. 68% in FY17). FY17P saw enhanced gross margin, mainly attributable to strategic shrinking pre-purchase in accommodation reservation business.

We expect gross margin to continuously trend up from FY18E, thanks to 1) decrease in employee benefit expenses/rev ratio as the order processing moving to online from offline, 2) decreasing spending in inventory pre-purchase, and 3) slower growth of personnel salaries due to the synergy effect.

We expect opex ratio to decrease 16ppts/3ppts YoY in FY19/20E, attributable to 1) heavy promotion in Tencent ecosystem partly offset by lower ads budgets in other channels; 2) enhanced productivity and operating leverage; and 3) lower SBC and absence of one-off expenses in FY19/20E.

As a result, we forecast adj. net profit to grow 54%/44%/30% YoY in FY18/19/20E to Rmb1.1bn/Rmb1.6bn/Rmb2.0bn, respectively.

Figure 81: Gross margin breakdown Figure 82: Margin trends

80% 90% 80% 70% 60% 60% 50%

40% 40% 30% 20% 20% 10% 0% FY17 FY18E FY19E FY20E 0% -10% FY15 FY16 FY17 Gross margin Operating margin Tongcheng eLong Net profit margin Adj. net profit margin Source: Company Source: Company, CMBIS estimates Note: The historical data in FY15-17 was only from Tongcheng and eLong Note: Tongcheng-Elong’s financial data in FY17 with pro forma side, respectively. adjustments; Financial data are calculated from the combined business of Tongcheng and eLong.

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Figure 83: Income statement Rmb mn, Dec-YE FY15 FY16 FY17 FY17PF FY18E FY19E FY20E Revenue 1,026 2,205 2,519 5,226 6,022 8,016 10,103 Cost of revenue (640) (1,033) (812) (1,671) (1,618) (1,958) (2,315) Gross profit 386 1,172 1,707 3,556 4,404 6,059 7,788 Service development expenses (399) (518) (522) (1,192) (1,807) (1,715) (1,849) Selling and marketing expenses (775) (1,883) (1,095) (1,803) (2,094) (2,793) (3,653) Administrative expenses (273) (898) (97) (298) (734) (386) (402) Fair value change on investments measured at fair value through profit or loss 18 (4) 1 1 0 0 0 Other income 49 11 13 20 0 0 0 Other gains/(losses), net 51 5 23 54 0 0 0 Operationg (loss)/profit (943) (2,116) 29 339 (231) 1,164 1,884 Fair value gain on redeemable convertible preference shares 0 (37) 98 98 990 0 0 Restructuring fee 0 0 0 0 (280) 0 0 Share of results of associates (18) (11) (2) (2) 0 0 0 Finance income 9 8 10 13 13 13 13 (Loss)/profit before income tax (958) (2,160) 134 447 492 1,177 1,897 Income taxes (expense)/credit (5) (1) 60 8 (49) (200) (322) (Loss)/profit for the year (963) (2,161) 194 455 443 977 1,574 Non-controlling interest (47) (21) (1) (1) 0 0 0 Net profit (916) (2,139) 196 456 443 977 1,574

Add: Share-based compensation 212 72 57 57 805 330 202 Sales and marketing expenses which were settled with newly issued preferred shares 0 1,045 0 0 0 0 0 Preferred shares for going private 0 742 0 0 0 0 0 Fair value changes on redeemable covertible preferred shares measured at fair value through profit or loss 0 37 (98) (98) (990) 0 0 Restructuring fee 0 0 0 0 280 0 0 Tax expenses which were seatled with newly issued preferred shares 0 0 0 0 152 0 0 Administrative expenses as deemed distribution to shareholder 0 0 0 57 108 0 0 Professional fee related to the Tongcheng-eLong Merger 0 0 0 11 0 0 0 Amortization of intangible assets from acquisition 21 24 39 231 232 270 269 Listing Expense 0 0 0 0 67 0 0 Adj. net profit (730) (240) 193 713 1,096 1,577 2,045

Margin Analysis Gross margin 38% 53% 68% 68% 73% 76% 77% Operating margin -92% -96% 1% 6% -4% 15% 19% Net margin -89% -97% 8% 9% 7% 12% 16% Adj. net margin -71% -11% 8% 14% 18% 20% 20%

Growth Analysis Revenue 115% 14% 44% 15% 33% 26% Gross profit 203% 46% 71% 24% 38% 29% Operating profit NA NA NA -168% -605% 62% Net profit NA NA NA -3% 120% 61% Adj. net profit NA NA NA 54% 44% 30% Source: Company, CMBIS estimates Note: Tongcheng-Elong’s financial data in FY17PF are calculated from the combined business of Tongcheng and eLong with pro forma adjustments; financial data in FY15, FY16 and FY17 are cited from the business of eLong. YoY growth of revenue and gross profit in FY17PF is compared to the combined data of Tongcheng and eLong calculated by CMBI.

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16 Jan 2019

Balance Sheet

Healthy balance sheet with net cash position in FY18/19/20E According to our estimates of profit before taxation and change in working capital, Tongcheng- Elong has strong operating cash inflow in supporting CAPEX in the next three years. Therefore, we believe Tongcheng-Elong can stay in net cash position in FY18/19/20E. We expect Tongcheng-Elong to hold Rmb4.1bn/Rmb6.0bn cash and cash equivalent as of 31 Dec of 2018E and 2019E.

Figure 84: Balance Sheet Rmb mn, Dec-YE FY15 FY16 FY17 FY18E FY19E FY20E Non-current assets 457 584 924 8,547 8,404 8,216 PP&E 99 101 442 750 849 945 Deferred income tax assets 0 0 62 38 38 38 Investments accounted for using the equity method 51 40 38 25 25 25 Investments measured at fair value through profit or loss 50 46 25 7,558 7,305 7,011 Intangible assets 209 348 309 128 128 128 Prepayment and other receivables 48 50 49 49 59 69

Current assets 1,800 1,722 1,844 6,170 8,473 11,215 Cash and cash equivalent 710 339 702 4,071 5,956 8,261 Trade receivables 461 883 539 903 1,202 1,515 Prepayments and other receivables 236 274 196 566 685 810 Short-term investments measured at amortized cost 225 0 0 0 0 0 Short-term investments measured at fair value through profit or loss 21 71 236 441 441 441 Restricted cash 146 154 171 189 189 189

Current liabilities 1,202 1,433 1,578 3,106 3,689 4,198 Borrowings 0 0 20 20 20 20 Other payables and accruals 659 922 1,115 1,505 1,844 2,122 Current income taxes liabilities 541 511 437 14 23 39 Trade payables 0 0 0 1,537 1,762 1,967 Contract liabilities 2 0 6 30 40 51

Non-current liabilities 7 6,405 6,522 174 174 174 Borrowings 0 0 172 172 172 172 Deferred income tax liabilities 4 4 0 0 0 0 Redeemable convertible preferred shares 0 6,399 6,348 0 0 0 Other payables and accruals 3 2 2 2 2 2

Debt Analysis Total Debt 0 0 192 192 192 192 Total Equity 1,048 (5,532) (5,332) 11,432 13,009 15,055 D/E ratio 0% 0% -4% 2% 1% 1% D/A ratio 0% 0% 7% 1% 1% 1% Current ratio (x) 1.5 1.2 1.2 2.0 2.3 2.7 Gearing ratio Net cash Net cash Net cash Net cash Net cash Net cash Source: Company, CMBIS estimates Note: Tongcheng-Elong’s financial data in FY18-20E are forecasted from the combined business of Tongcheng and eLong; financial data in FY15, FY16 and FY17 are cited from the business of eLong.

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16 Jan 2019

Cash Flow and Working Capital

Vast user base and solid cross-selling ensure strong operating cash flow Leveraging its advantage of user acquisition, we expect Tongcheng-Elong to maintain its strong operating cash inflow trend and record Rmb2,085mn / Rmb2,504mn of operating cash inflow in FY19/20E, respectively.

Figure 85: Operating cash flow projections Figure 86: Return ratio projections

3,000 (Rmb mn) 14 (%) 2,504 12 2,500 2,085 10 2,000 8

1,500 6

1,000 825 4

2 500 0 FY17 FY18E FY19E FY20E 0 FY18E FY19E FY20E ROE ROA

Source: Company, CMBIS estimates Source: Company, CMBIS estimates

Figure 87: Cash flow and working capital analysis Rmb mn, Dec-YE FY15 FY16 FY17 FY18E FY19E FY20E Cash Flow Operating cash flow (776) (410) 720 825 2,085 2,504

CAPEX (44) (57) (392) (200) (200) (200) Others 1,169 174 (150) 0 0 0 Investing cash flow 1,125 117 (542) (200) (200) (200)

Proceeds from share issuance 0 0 0 1,240 0 0 Bank borrowings(net) 0 0 190 0 0 0 Others (61) (80) (4) 236 0 0 Financing cash flow (61) (80) 186 1,477 0 0 Cash at period end 710 339 702 4,071 5,956 8,261

Working Capital Turnover Inventory days 0 0 0 0 0 0 Trade receivables days 82 111 103 64 62 55 Trade payables days 188 279 458 372 348 310 Cash conversion cycle (106) (168) (355) (308) (286) (256)

Source: Company, CMBIS estimates Note: Tongcheng-Elong’s financial data in FY18-20E are forecasted from the combined business of Tongcheng and eLong; financial data in FY15, FY16 and FY17 are cited from the business of eLong.

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16 Jan 2019

Valuation Investment Thesis

We initiate BUY with DCF-based TP of HK$18.59, implying 31.0x/21.5x/16.6x P/E in FY18/19/20E. We believe Tongcheng-Elong’s positive price drivers and catalysts originate from: 1) user growth from Spring Festival; 2) merger synergy; 3) potential positive annual result surprise; and 4) upcoming inclusion into HK-China stock connect.

(1) DCF Valuation

We use DCF valuation as our primary method since it is suitable to apply DCF valuation to OTA companies with healthy cash flows in the long run. Assuming a WACC of 14.8% and a terminal growth rate of 3%, our estimated TP is HK$18.59, representing 31.0x/21.5x/16.6x P/E in FY18/19/20E, respectively, in line with industry average of 21.1x FY19E P/E.

Figure 88: DCF valuation DCF Valuation (Rmb mn) 2020E 2021E 2022E 2023E 2024E 2025E 2026E 2027E 2028E 2029E EBIT 1,884 2,534 3,233 3,947 4,601 5,172 5,654 6,049 6,366 6,616 Tax (322) (434) (553) (676) (788) (885) (968) (1,035) (1,090) (1,133) D&A 375 394 413 430 447 462 476 487 497 506 Change in working capital 71 72 74 75 77 78 80 82 83 85 CAPEX (200) (260) (338) (439) (527) (633) (696) (766) (842) (926) FCF 1,807 2,306 2,829 3,337 3,810 4,195 4,546 4,817 5,015 5,149 FCF Growth 44% 28% 23% 18% 14% 10% 8% 6% 4% 3% PV 1,574 1,750 1,869 1,921 1,910 1,832 1,729 1,596 1,447 12,578 Terminal Value 44,904

Assumptions WACC 14.8% Tax rate 17.0% Risk free rate 3.95% Beta 1.20 Market risk return 13.0% Cost of equity 14.8% Debt/Assets 0.0% Long term growth 3.0% Debt 0 WACC ~ 13% 14% 15% 16% 17% Equity Value 1.5% 20.56 18.94 17.81 16.39 15.38 PV 28,206 2.0% 20.93 19.23 18.05 16.58 15.53 minus: Net debt(Rmb mn) (5,764) Terminal 2.5% 21.34 19.54 18.31 16.77 15.68 minus: Minority interest(Rmb mn) 5 1 growth rate 3.0% 21.79 19.89 18.59 16.98 15.85 Equity Value(Rmb mn) 33,965 3.5% 22.28 20.26 18.89 17.21 16.03 FX 0.88 4.0% 22.83 20.67 19.23 17.46 16.23 Equity Value(HK$ mn) 38,597 4.5% 23.44 21.13 19.59 17.73 16.44 No. of shares (mn) 2,076 Target Price (HK$) based on DCF 18.59 Source: Company, Bloomberg, CMBIS estimates

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(2) Peers comparison

Average FY19E P/E of OTAs and traditional travel agencies are 21.4x and 20.6x, respectively. We exclude an outlier, Tuniu (TOUR US), from OTA peers, since Tuniu is expected to achieve breakeven in FY19E, according to Bloomberg consensus. Compared with traditional travel agencies, OTAs enjoyed slightly higher multiples, thanks to: 1) higher organic earnings growth with asset-light strategies; and 2) travel market continuously moving online.

Our DCF-based multiple of 21.5x FY19E P/E, was in line with average FY19E P/E of 5 US-listed OTA peers (excluding Tuniu). With 37% FY18-20E EPS CAGR, we believe Tongcheng-Elong deserves higher P/E multiple than most of peers.

Ctrip should be most comparable to Tongcheng-Elong, in our view. Currently, Ctrip’s FY19E P/E was 25.7x, still 20% higher than our TP-based multiple of 21.5x. Since Ctrip is a clear leader in China, market might prefer to value Tongcheng-Elong with a multiple at a discount of Ctrip. However, Tongcheng-Elong is now trading at 13.9x FY19E P/E, with attractive valuation. And we think our TP is not demanding for Tongcheng-Elong, since Tongcheng-Elong exceled itself with 1) unique access to Super Apps to capture traffic with lower TAC; 2) less impact from bundle sales of insurance; and 3) easier penetration into low-tier cities with booming demand, compared with Ctrip.

Figure 89: Peers valuation Company Ticker Mkt cap Currency Price Fiscal Year PE PS EV/EBITDA FY18-20E (USD mn) End FY18E FY19E FY20E FY18E FY19E FY20E FY18E FY19E FY20E EPS CAGR OTA Ctrip CTRP US 16,258 USD 29.8 12/2017 24.9 25.7 18.4 3.6 3.0 2.6 30.8 25.1 18.8 16% Tuniu TOUR US 690 USD 5.3 12/2017 NA 71.6 29.5 2.0 1.7 1.5 NA 75.2 23.8 NA Booking BKNG US 77,180 USD 1,665.9 12/2017 18.5 16.4 14.4 5.3 4.8 4.3 12.1 11.0 9.8 13% Expedia EXPE US 17,016 USD 114.2 12/2017 20.3 17.2 14.5 1.5 1.4 1.2 9.9 8.8 7.8 18% Webjet WEB AU 1,128 AUD 11.6 12/2017 27.4 17.5 12.5 5.6 4.4 3.4 17.7 12.1 8.2 27% TripAdvisor TRIP US 7,712 USD 56.0 12/2017 32.5 30.2 25.2 4.8 4.4 4.0 17.0 15.2 13.3 14% Average 24.7 29.8 19.1 3.8 3.3 2.8 17.5 24.6 13.6 18% Average(excluding Tuniu) 24.7 21.4 17.0 4.2 3.6 3.1 17.5 14.4 11.6 18% Traditional Travel Agency UTour 002707 CH 753 CNY 6.0 12/2017 18.9 15.3 12.8 0.4 0.3 0.3 14.3 11.8 10.2 22% Tempus Global 300178 CH 777 CNY 8.5 12/2017 14.1 11.5 9.4 0.9 0.6 0.5 11.9 8.6 7.0 23% Zhangjiajie Tourism 000430 CH 312 CNY 5.2 12/2017 36.7 30.6 32.6 3.8 3.3 3.1 19.7 11.3 8.8 6% Changbai Mountain 603099 CH 355 CNY 9.0 12/2017 30.3 25.0 19.8 5.1 4.4 3.9 13.9 12.0 8.9 24% Average 25.0 20.6 18.6 2.5 2.2 1.9 14.9 10.9 8.7 19% Total Average 24.8 26.1 18.9 3.3 2.8 2.5 16.4 19.1 11.7 18% Total Average(excluding Tuniu) 24.8 21.1 17.7 3.4 3.0 2.6 16.4 12.9 10.3 18% Source: Bloomberg, CMBIS estimates Note: data updated by 15 Jan 2019

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16 Jan 2019

Key Investment Risks Privacy concerns relating to the use of user information Tongcheng-Elong collect and process certain personal data of its users, including identification information, email addresses, passwords, as well as billing information. It cannot guarantee that its security measures will prevent data breaches. As users generally are concerned with security and privacy on the Internet, any publicized security problem could negatively affect Tongcheng-Elong’s business. Users using its services could also be affected by security breaches at third parties, such as its TSPs and payment processors. Additionally, the interpretation of privacy and data protection laws and their applications to the online travel industry is unclear and in flux. As Tongcheng-Elong’s operations become increasingly globalized, complying with varying international requirements could incur additional costs.

Uncertainty in online travel industry with high sensitivity to macroeconomic conditions Tongcheng-Elong operates in the online travel industry, which is highly sensitive to business and personal discretionary spending levels and generally tends to decline during economic downturns. The global macroeconomic environment is faced with many challenges and uncertainties, including escalation of the European sovereign debt crisis since 2011, the end of quantitative easing by Fed, the sanctions against Russia over the Ukraine crisis, shadows of international terrorism spread by IS of Iraq and al-Sham, and the trade ware between the US and China. Furthermore, economic conditions in China are sensitive to global economic conditions and are subject to various uncertainties. It is unclear what the global and domestic economic condition will be in the long term.

Potential decrease in demand due to disruptions in the travel industry Tongcheng-Elong generate substantially all of its revenue from the travel industry. There are many factors that tend to reduce travel, including increased price in accommodation and transportation, work stoppage or labor unrest in airlines, increased occurrence of travel- related accidents, diseases, natural disasters, and extreme weather. And adverse changes of visa policies of foreign countries, terrorist attacks, political unrest, wars, imposition of taxes or surcharges, and regional hostilities may reduce the demand for overseas tours. Tongcheng- Elong has little or no control over the occurrence of such disruptions, which could result in a decrease in demand for its travel products and services.

Increasing S&M expenses or loss of market share due to fierce competition Tongcheng-Elong competes primarily with other OTAs and, to a lesser extent, traditional travel agencies and travel service suppliers. As China’s online travel market continues to evolve, Tongcheng-Elong may also face increased competition from both domestic and international players. Moreover, Tongcheng-Elong also face increasing competition from TSPs who aim to increase online direct sales, particularly hotel groups and airlines. In response to the increased competition, Tongcheng-Elong may need to take up aggressive promotion and advertising campaigns, which would incur substantial sales and marketing expenses. Some competitor may also have competitive advantage, and Tongcheng-Elong’s operations may be adversely affected if it is unable to successfully compete.

Uncertainty in profitability as the Company incurred loss in the past Tongcheng-Elong has incurred net losses historically and may incur losses in the future as it grows its business. In 2015 and 2016, the Group had net losses of Rmb1,065mn and Rmb331mn, and Tongcheng had net losses of Rmb335.1mn and Rmb91.1mn, respectively. The historical net losses were primarily attributable to increased selling and marketing expenses. The Company expect to continue to incur significant selling and marketing expenses in the future, and there is no assurance of its profitability.

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Failure to achieve the anticipated synergies and other benefits from the merger Tongcheng-Elong is the combined business resulting from the merger of Tongcheng and eLong in Mar 2018. The Company may fail to successfully integrate these two business, or fail to achieve the anticipated synergies and other benefits from the merger. For example, it may not be able to eliminate duplicative costs. Furthermore, substantial expense may be incurred to achieve cost savings, and it may be difficult to manage a significantly larger company with geographically separate organizations. Accordingly, the benefits from the merger may be offset by costs incurred, or delays in, integrating the businesses.

Disruption of user acquisition with any deterioration in relationship with Tencent Tongcheng-Elong has extensive collaboration with Tencent in several areas, particularly in integrating its platform into Tencent’s Weixin and Mobile QQ. According to iResearch, Weixin and Mobile QQ are two of the largest super apps in China in terms of user base. Tongcheng- Elong currently operate the “Rail & Flight” and “Hotel” portals on Weixin and Mobile QQ and certain other portals on Mobile QQ, and it also operates its Weixin-based mini programs. In 2017, a majority of its MAUs and a significant majority of its MPUs were generated through its Tencent-based platforms. If its collaborative relationship with Tencent, particularly regarding its Tencent-based platforms, is terminated or curtailed, its business and prospects will be adversely affected.

Penalties or operational disruption due to potential incompliance of PRC laws Tongcheng-Elong’s business is subject to various PRC laws and regulations, which require it, among other things, to obtain separate license for provision of value-added telecommunication business, insurance intermediary service, and transportation ticketing services. Additionally, the PRC government may promulgate new laws and regulations as well as interpretation of existing laws and regulations. If Tongcheng-Elong fails to comply with the laws and regulations, it may be subject to regulatory or administrative penalties and operational disruption. The laws and regulations may also require it to change certain aspects of its business, which could decrease the demand for its products and services.

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Appendix 1: Regulations Foreign investment in Value-added Telecommunication Services

Pursuant to the Provision on Administration of Foreign Invested Telecommunications Enterprises (《外商投资电信企业管理规定》) promulgated in Dec 2001 and last amended in Feb 2016, the ultimate foreign equity ownership in a value-added telecommunications services provider shall not exceed 50%. According to the Notice on Lifting the Restriction to Foreign Shareholding Percentage in Online Data Processing and Transaction Processing Business (Operational E-commerce) (《关于放开在线数据处理与交易处理业务(经营类电子商务)外资股比限制的通告》) promulgated in June 2015, foreign investors are allowed to hold up to 100% of all equity interest in the online data processing and transaction processing business (operating e-commerce) in china. The current effective Foreign Investment Catalogue, promulgated in Jun 2017, also imposes the 50% restrictions on foreign ownership in value-added telecommunications business. The Administration of Foreign Investment in and Operation of Value-added Telecommunications Business (《关于加强外商投资经营增值电信业务管理的通知》 ) issued in Jul 2006 requires foreign investors to set up foreign- invested enterprises and obtain a VAT license to conduct any value-added telecommunications business in China.

Control on internet privacy and information security

Under the Several Provisions on Regulating the Market Order of Internet Information Services (《规范互联网信息服务市场秩序若干规定》) used in Dec 2011, an ICP operator may not collect any user personal information or provide any such information or provide any such information to third parties without the consent of a user. Pursuant to the Decision on Strengthening the Protection of Online Information (《关于加强网络信息保护的决定》) issued in Dec 2012 and the Order for the Protection of Telecommunication and Internet User Personal Information (《电信和互联网用户个人信息保护规定》) issued in Jul 2013, any collection and use of personal information must be subject to the consent of the user, abide by the principles of legality, rationality and necessity and be within the specified purposes, methods and scopes.

Furthermore, the Administrative Provisions on Mobile Internet Application Information Services (《移动互联网应用程序信息服务管理规定》), which became effective in Aug 2016, requires owners or operators of mobile applications that provide information services to be responsible for information security management, establish and improve the protective mechanism for user information, observe the principles of legality, rightfulness and necessity, and expressly state the purpose, method, and scope of, and obtain user consent to, the collection and use of users’ personal information. The Cyber Security Law of the PRC (《中华人民共和国网络安全法》) and the Measures for the Security Review of Network Products and Services (Trial) (《网络产品和服务安全审查办法（试行）》), both of which took effect in Jun 2017, provides rules regarding cyber security review requirements.

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Regulation on pricing and air ticketing transaction

Pursuant to the Pricing Law of the People’s Republic of China ( 中华人民共和国价格法) promulgated in Dec 1997, business operators must mark the prices explicitly and indicate related particulars clearly. Business operators may not sell products at a premium or charge any fees that are not explicitly indicated. According to the Civil Aviation Domestic Transportation Market Pricing Measures (《民用航空国内运输市场价格行为规则》), the prices of first-class and business class air transportation are market-adjusted, and the price of economic class is a mix of market-adjusted price and government-guided price. Air transportation institutions must disclose the categories, standards and applicable conditions of transportation pricing in a timely, accurate and complete manner.

Pursuant to the Qualification Accreditation Measures (Amended in 2015) (《航空运输销售代理资质认可办法》), an air-ticketing agency must obtain a permit from Air Transport Sales Agency Branch for every region where the agency proposes to conduct the air-ticketing business. Pursuant to the Administration of Online Air-ticketing Transaction (Trial) (《网络机票交易管理办法(试行)》), an institution in the operation of online air-ticketing transaction business must hold a VAT License and complete a commercial website filing with the CATA.

Regulation on insurance business

Pursuant to the Provisions for the Supervision and Administration of Professional Insurance Agencies (《保险专业代理机构监管规定》) last amended in 2015, a professional insurance agency is subject to approval and must obtain Insurance Agent Operating License from CIRC. Pursuant to the Provisions on the Regulation of Insurance Brokers (《保险经纪人监管规定》), effective in May 2018, “insurance brokers” refer to institutions that provide intermediary services for the entry into insurance brokerage companies and their branches. To operate an insurance brokerage business in the PRC, an insurance brokerage company must meet the qualification requirements specified by the CIRC and obtain a license to operate insurance brokerage business with the approval of the CIRC.

According to the Interim Measures for the Regulation of Internet Insurance Business (《互联网保险业务监管暂行办法》), effective in Oct 2015, no institutions or individuals other than insurance companies and professional insurance intermediaries may engage in the internet insurance business. In addition, an insurance brokerage company or a third-party network platform engaging in the internet insurance brokerage business is required to establish information management and internet information security management systems, and obtain the permit issued by the relevant internet regulator or complete website record-filing with the relevant internet regulator. The premiums paid by insurance customers are required to be directly transferred to the special account for premium income of the insurance institution, and the third-party network platform is not allowed collect premiums on behalf of the insurance institution.

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Appendix 2: Company background Tongcheng-Elong is an innovator and market leader in China’s online travel industry. It is a one-stop shop for users’ travel needs, covering transportation ticketing, accommodation reservation, and various ancillary value-added travel products and services. According to iResearch, Tongcheng-Elong ranked Top 3 in terms of GMV in China’s online travel market in 2017, with the highest CAGR from 2015 to 2017 in the number of online transportation ticketing and accommodation reservation transactions.

Tongcheng-Elong is the combined business resulting from the merger of Tongcheng and eLong, which was completed in Mar 2018. As two independently successful businesses founded in 2004 and 1999, Tongcheng and eLong had each been a leading OTA in China with innovative business models and longstanding relationships with a wide array of TSPs. After the merger, Tongcheng-Elong achieved greater economies of scale, solidified its market leadership, and accomplished a stronger ability to provide comprehensive travel products and services offerings. It delivers travel products primarily through its online platforms, which comprise its Tencent-based platforms, its mobile apps and its websites.

Figure 90: Key milestones Year Event 1999 eLong was founded 2004 eLong Cayman’s American Depositary Shares were listed on NASDAQ 2004 Tongcheng Network was founded eLong launched 24/7 user services, and became the first OTA in the PRC to offer services around the 2008 clock 2010 eLong launched the eLong travel, a mobile app for accommodation reservation across the world 2014 Tongcheng Network launched its website “ly.com” The mobile app of Tongcheng Network was chosen at the Tencent Global Partner Conference as the 2015 Fastest Growing Travel Service Application 2016 eLong Cayman was privatized and delisted from NASDAQ Tongcheng Network was chosen by the Chinese Consumer Network (中国消费网) as one of the Top 10 2016 Examples of Innovative Services for year 2016 (2016 年度服务创新十大经典案例) Tongcheng Network was chosen by the China Tourism Association and China Tourism Academy as a Top 2016 Five China Travel Group Tongcheng Network was chosen as the China Travel Brand with Greatest Growth Potential (最具成长力 2017 中国旅游品牌) by the Hurun Research Institute Tongcheng Network spun off its offline travel business and transferred these business to Tongcheng 2017 Holdings 2018 The merger between eLong and Tongcheng Network was completed Source: Company

Figure 91: Employees breakdown Team Number of Employees % of Total User and TSP services 1,983 32.7% Sales and marketing 1,081 17.8% Product management 580 9.6% Information technology 1,898 31.3% Administrative management 528 8.7% Total 6,070 100% Source: Company

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Figure 92: Shareholder structure Name of shareholders Number of shares Equity stake Tencent 476,215,740 22.93% Ctrip 464,572,050 22.37% Huafan Runhe 166,394,430 8.01% City Legend International Limited 106,079,480 5.11% Occean General Partners Limited 98,603,720 4.75% EP II Investment Fund LP 95,662,910 4.61% Wonderful Holidays Limited 59,478,530 2.86% Sky Journey Limited 52,833,180 2.54% Travel Maps Limited 49,711,000 2.39% Emerald Joy Limited 42,687,940 2.06% Seagull Limited 38,975,960 1.88% Hua Yuan international Limited 38,702,640 1.86% Cowin Tongcheng Limited 35,084,690 1.69% Top Yield Co Stone Investment Co. Ltd 20,687,970 1.00% Other shareholders 330,731,720 15.93% Total 2,076,421,960 100.0% Source: Company

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Figure 93: Board of Directors Date of joining Date of the Group or Name Age Position Responsibilities appointment Tongcheng as Director Network Wu Co-Chairman of the Overall strategic planning Zhixiang 41 Board; executive Mar 2004 Mar 2018 and business discretion (吴志祥) Director Deputy Chairman of Jiang Hao Overall strategic planning 45 the Board; executive Jul 2015 Mar 2018 (江浩) and business discretion Director Ma Heping Overall strategic planning 40 Executive Director Jan 2006 Mar 2018 (马和平) and business discretion Liang Co-Chairman of the Provide professional Jianzhang 48 Board; non-executive Apr 2014 Mar 2018 advice to the Board (梁建章) Director Lin Haifeng Provide professional 41 Non-executive Director Jan 2014 Mar 2018 (林海峰) advice to the Board Brent Provide professional Richard 45 Non-executive Director Mar 2008 Mar 2018 advice to the Board Irvin Provide independent Wu Haibing Independent non- 45 opinion and judgment to [●] [●] (吴海兵) executive Director the Board Dai Provide independent Independent non- Xiaojing 58 opinion and judgment to [●] [●] executive Director (戴小京) the Board Provide independent Han Yuling Independent non- 62 opinion and judgment to [●] [●] (韩玉灵) executive Director the Board Source: Company

Figure 94: Award and recognitions Year Award/Accreditation Awarding Organization China Enterprise News China Annual Influential Brand (中国年度影响力 China Reform Newspaper 品牌) China International Brand Strategy Research Center 2018 Top 100 Most Influential Chinese Brands — UIBE Top 100 China Brand Influence (中国品牌影响力 ICIF China International Corporate Brand Culture 100 强) Exposition Organizing Committee Discovery Brand program Top four most influential brands among China’s 2018 Chinese Academy of Social Sciences online and offline travel brands Outstanding Brands Most Liked by Consumers 2017 (消费者点赞杰出品牌奖) China Consumer Journal China Travel Brand with Greatest Growth 2017 Potential (最具成長力中國旅遊品牌) Hurun Research Institute Red Coral Award of Asia Tourism — The Best 2017 Travel Service Provider 21st Century Business Herald / Nankai University (亚洲旅游“红珊瑚”奖—最佳旅游服务商) Tourism Industry Influential Brand Award (旅游 2017 行业影响力品牌奖) The 6th Finance Summit Top Five China Travel Groups (中国旅游集团前 China Tourism Association / China Tourism 2016 五强) Academy China Best Customer Contact Center — China Federation of IT Promotion Customer Relationship Management Professional Committee 2016 Customer Service Award (中国最佳客户联络中心—客户服务奖) CCCS Customer Contact Center Standards Committee China Travel Innovation Award (中国旅游创新 2015 People.cn 奖) Fastest Growing Travel Service Application 2015 (增速最快旅行服务应用) Tencent Global Partner Conference Source: Company

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Appendix 3: Snapshots of subsegments Figure 95: Illustration of using Weixin portals

Source: Company

Figure 96: Illustration of using Weixin-based mini programs

Source: Company

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Figure 97: Transportation-Snapshot of air ticketing

# of Air Segments Sold (mn)

421 342 49 airlines air tickets agents +64.6% 2015-2017 CAGR 35

China Global

18 6,000+ 714,500+ domestic routes air routes 226+ 2,400+ airports destinations

2015 2016 2017

Source: Company, all data cited in 1H18

Figure 98: Snapshot of accommodation reservation

Operation Snapshot

~390,000 380+ ~790,000 50,000+ hotels and alternative hotels and alternative Destinations accommodation cities coverage accommodation coverage choices choices

93.8mn reviews generated by users

Source: Company, all data cited in 1H18

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Financial statements – The Group Income statement Year end Dec 31 (Rmb mn) FY15A FY16A FY17A FY17PF FY18E FY19E FY20E Revenue 1,026 2,205 2,519 5,226 6,022 8,016 10,103 Accommodation reservation services 908 2,094 2,362 2,530 3,374 3,896 4,674 Transportation ticketing services 89 87 61 2,463 1,936 2,163 2,548 Others 29 24 96 233 250 276 301 COGS (640) (1,033) (812) (1,671) (1,618) (1,958) (2,315) Gross profit 386 1,172 1,707 3,556 4,404 6,059 7,788

Service development expenses (399) (518) (522) (1,192) (1,807) (1,715) (1,849) Selling and marketing expenses (775) (1,883) (1,095) (1,803) (2,094) (2,793) (3,653) Administrative expenses (273) (898) (97) (298) (734) (386) (402) Fair value change on investments measured at fair value through profit or loss 18 (4) 1 1 - - - Other income 49 11 13 20 - - - Other gains/(losses).net 51 5 23 54 - - - Operating profit (943) (2,116) 29 339 (231) 1,164 1,884

Finance income 9 8 10 13 13 13 13 Other income,net (18) (48) 95 95 710 - - Pre-tax profit (958) (2,160) 134 447 492 1,177 1,897

Tax (5) (1) 60 8 (49) (200) (322) Minority interest (47) (21) (1) 1 - - - Net profit Attributed to shareholders (916) (2,139) 196 456 443 977 1,574

Adj. net profit (730) (240) 193 713 1,096 1,577 2,045 Source: Company, CMBIS estimates Note: operating profit=Gross profit+ Other income+ Investment income+ Other gains/(losses),net + Selling and marketing expenses+ Service development expenses+ Administrative expenses+ Fair value change Adjusted net profit calculation refers to the Figure 83. Tongcheng-Elong’s financial data in FY17PF are calculated from the combined business of Tongcheng and eLong with pro forma adjustments; financial data in FY15, FY16 and FY17 are cited from the business of eLong.

Balance sheet Year end Dec 31 (Rmb mn) FY15A FY16A FY17A FY18E FY19E FY20E Non-current assets 457 584 924 8,547 8,404 8,216 PP&E 99 101 442 750 849 945 Investments accounted for using the equity method 51 40 38 38 38 38 Investments measured at fair value through profit or loss 50 46 25 25 25 25 Intangible assets 209 348 309 7,558 7,305 7,011 Deferred income tax assets - - 62 128 128 128 Prepayment and other receivables 48 50 49 49 59 69

Current assets 1,800 1,722 1,844 6,170 8,473 11,215 Trade receivables 461 883 539 903 1,202 1,515 Prepayments and other receivables 236 274 196 566 685 810 Short-term investments measured at amortized cost 225 - - - - - Short-term investments measured at fair value through profit or loss 21 71 236 441 441 441 Restricted cash 146 154 171 189 189 189 Cash and cash equivalent 710 339 702 4,071 5,956 8,261

Current liabilities 1,202 1,433 1,578 3,106 3,689 4,198 Borrowings - - 20 20 20 20 Trade payables 659 922 1,115 1,537 1,762 1,967 Other payables and accruals 541 511 437 1,505 1,844 2,122 Contract liabilities - - - 30 40 51 Current income taxes liabilities 2 0 6 14 23 39

Non-current liabilities 7 6,405 6,522 174 174 174 Borrowings - - 172 172 172 172 Deferred income tax liabilities 4 4 0 0 0 0 Redeemable convertible preferred shares - 6,399 6,348 - - - Other payables and accruals 3 2 2 2 2 2

Capital and reserves attributable to equity holders of the Company 1,021 (5,538) (5,337) 11,437 13,014 15,060 Non-controlling interest 28 6 5 5 5 5 Total equity 1,048 (5,532) (5,332) 11,432 13,009 15,055 Source: Company, CMBIS estimates Note: Tongcheng-Elong’s financial data in FY18-20E are forecasted from the combined business of Tongcheng and eLong; financial data in FY15, FY16 and FY17 are cited from the business of eLong.

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Cash flow summary Year end Dec 31 (Rmb mn) FY15A FY16A FY17A FY18E FY19E FY20E Profit before tax (958) (2,160) 134 492 1,177 1,897 Depreciation and amortization 73 77 84 294 330 375 Change in working capital (39) (255) 554 29 165 71 Taxation (17) (3) 1 (49) (200) (322) Others 147 1,927 (52) 10 413 161 Net cash from operating activities (776) (410) 720 825 2,085 2,504

Purchases of property, plant and equipment (44) (57) (392) (200) (200) (200) Payments for purchases of short-term investments (917) (475) (1,673) - - - Proceeds from redemptions of short-term investments 2,103 656 1,520 - - - Other (17) (7) 3 - - - Net cash from investing activities 1,125 117 (542) (200) (200) (200)

Equity Raised - - - 1,240 - - Change of Debts - - 190 - - - Others (61) (80) (4) 236 - - Net cash from financing activities (61) (80) 186 1,477 - -

Net change in cash 288 (373) 364 2,101 1,885 2,304 Effect of exchange rate changes on cash and cash equivalents 10 2 (1) - - - Cash at the beginning of the year 413 710 339 1,970 4,071 5,956 Cash at the end of the year 710 339 702 4,071 5,956 8,261 Cash at balance sheet 710 339 702 4,071 5,956 8,261 Source: Company, CMBIS estimates Note: Tongcheng-Elong’s financial data in FY18-20E are forecasted from the combined business of Tongcheng and eLong; financial data in FY15, FY16 and FY17 are cited from the business of eLong.

Key ratios Year end Dec 31 FY15A FY16A FY17A FY18E FY19E FY20E Sales mix (%) Accommodation reservation services 88.5 95.0 93.8 60.7 61.5 61.0 Transportation ticketing services 8.7 3.9 2.4 34.8 34.1 33.9 Others 2.8 1.1 3.8 4.5 4.4 4.0 Total 100.0 100.0 100.0 100.0 100.0 100.0

Growth(%) Revenue NA NA NA 15.2* 33.1 26.0 Gross profit NA NA NA 158.0* 37.6 28.6 Operating Income NA NA NA NA NA 61.8 Adj. net profit NA NA NA 53.8* 43.9 29.7

Profitability(%) Gross Margin 37.7 53.1 67.8 73.1 75.6 77.1 PreTax Margin - (1.7) 3.9 8.2 14.7 18.8 Tax Rate (0.5) (0.0) (45.0) 10.0 17.0 17.0 Adj. net margin (71.2) (10.9) 7.6 18.2 19.7 20.2

Balance sheet ratios Current ratio (x) 1.5 1.2 1.2 2.0 2.3 2.7 Debtors turnover days 82 111 103 64 62 55 Creditors turnover days 188 279 458 372 348 310 Inventory turnover days ------Net debt / equity ratio (%) Net cash Net cash Net cash Net cash Net cash Net cash

Returns (%) ROE (87.4) 38.7 (3.7) 11.8 8.0 11.2 ROA (40.6) (92.8) 7.1 4.4 6.2 8.7

Per share data Adj. EPS (Rmb) - - - 0.53 0.76 0.99 DPS (Rmb) ------BVPS (Rmb) - - - 5.51 6.27 7.25 Source: Company, CMBIS estimates Note: Tongcheng-Elong’s financial data in FY18-20E are forecasted from the combined business of Tongcheng and eLong; financial data in FY15, FY16 and FY17 are cited from the business of eLong. *YoY growth in FY18E is compared to the combined business of Tongcheng and eLong in FY17PF.

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Financial statements – Tongcheng Online Business Income statement Year end Dec 31 (Rmb mn) FY15A FY16A FY17A Revenue 581 1,435 2,707 Transportation ticketing 510 1,348 2,468 Accommodation reservation 70 82 101 Others - 4 138 COGS (228) (530) (859) Gross profit 352 905 1,849

Service development expenses (164) (372) (515) Selling and marketing expenses (581) (515) (671) Administrative expenses (57) (91) (133) Other income 4 2 8 Other gains/(losses).net 1 (2) 32 Operating profit (446) (73) 570

Finance income 2 3 3 Pre-tax profit (444) (70) 572

Tax 108 (21) (81) Minority interest - - - Net profit Attributed to shareholders (335) (91) 491 Source: Company Note: operating profit=Gross profit+ Other income+ Investment income+ Other gains/(losses),net + Selling and marketing expenses+ Service development expenses+ Administrative expenses+ Fair value change

Balance sheet Year end Dec 31 (Rmb mn) FY15A FY16A FY17A Non-current assets 964 873 719 PP&E 94 146 208 Land use right - 16 16 Intangible assets 713 570 422 Deferred income tax assets 152 140 66 Prepayment and other receivables 6 1 8

Current assets 674 2,467 2,106 Trade receivables 130 418 227 Prepayment and other receivables 296 1,059 388 Short-term investments measured at fair value - 35 205 Restricted cash 6 7 18 Cash and cash equivalent 243 947 1,268

Current liabilities 373 1,221 1,380 Trade payables 95 323 490 Other payables and accruals 273 888 851 Contract liabilities 5 6 37 Current income taxes liabilities 0 4 2

Non-current liabilities - - -

Minority Interest - - - Equtiy for common shareholders 1,266 2,119 1,445 Total Equity 1,266 2,119 1,445 Source: Company

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Cash flow summary Year end Dec 31 (Rmb mn) FY15A FY16A FY17E Net income (444) (70) 572 Depreciation and amortization 105 205 213 Others 1,244 237 519 Net cash from operating activities 905 372 1,304

Capex (800) (114) (130) Other 131 (498) 312 Net cash from investing activities (670) (612) 182

(Distribution to)/contribution from owners (111) 944 (1,165) Net cash from financing activities (111) 944 (1,165)

Net change in cash 124 704 321 Cash at the beginning of the year 119 243 947 Cash at the end of the year 243 947 1,268 Cash at balance sheet 243 947 1,268 Source: Company

Key ratios Year end Dec 31 FY15A FY16A FY17A Sales mix (%) Transportation ticketing 87.9 93.9 91.2 Accommodation reservation 12.1 5.7 3.7 Others 0.1 0.3 5.1 Total 100.0 100.0 100.0

Growth(%) Revenue NA 147.2 88.7 Gross profit NA 157.0 104.3 Operating Income NA (83.6) NA Net profit NA (72.8) NA

Profitability(%) Gross Margin 60.6 63.1 68.3 PreTax Margin (76.4) (4.9) 21.1 Tax Rate 24.4 (29.6) 14.2 Net margin (57.7) (6.3) 18.1

Balance sheet ratios Current ratio (x) 1.8 2.0 1.5 Debtors turnover days 40.8 69.7 43.5 Creditors turnover days 75.8 144.0 172.8 Inventory turnover days - - - Net debt / equity ratio (%) Net cash Net cash Net cash

Returns (%) ROE NA NA 34.0 ROA NA NA 17.4 Source: Company

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Disclosures & Disclaimers

Analyst Certification The research analyst who is primary responsible for the content of this research report, in whole or in part, certifies that with respect to the securities or issuer that the analyst covered in this report: (1) all of the views expressed accurately reflect his or her personal views about the subject securit ies or issuer; and (2) no part of his or her compensation was, is, or will be, directly or indirectly, related to the specific views expressed by that analyst in this report. Besides, the analyst confirms that neither the analyst nor his/her associates (as defined in the code of conduct issued by Th e Hong Kong Securities and Futures Commission) (1) have dealt in or traded in the stock(s) covered in this research report within 30 calendar days prior to the date of issue of this report; (2) will deal in or trade in the stock(s) covered in this research report 3 business days after the date of issue of this report; (3) serve as an officer of any of the Hong Kong listed companies covered in this report; and (4) have any financial interests in the Hong Kong listed companies covered in this report.

CMBIS Ratings BUY : Stock with potential return of over 15% over next 12 months HOLD : Stock with potential return of +15% to -10% over next 12 months SELL : Stock with potential loss of over 10% over next 12 months NOT RATED : Stock is not rated by CMBIS

CMB International Securities Limited Address: 45/F, Champion Tower, 3 Garden Road, Hong Kong, Tel: (852) 3900 0888 Fax: (852) 3900 0800

CMB International Securities Limited (“CMBIS”) is a wholly owned subsidiary of CMB International Capital Corporation Limited (a wholly owned subsidiary of China Merchants Bank)

Important Disclosures There are risks involved in transacting in any securities. The information contained in this report may not be suitable for the purposes of all investors. CMBIS does not provide individually tailored investment advice. This report has been prepared without regard to the individua l investment objectives, financial position or special requirements. Past performance has no indication of future performance, and actual events may differ materially from that which is contained in the report. The value of, and returns from, any investments are uncertain and are not guaranteed and may fluctuate as a result of their dependence on the performance of underlying assets or other variable market factors. CMBIS recommends that investors should independently evaluate particular investments and strategies, and encourages investors to consult with a professional financial advisor in order to make their own investment decisions. This report or any information contained herein, have been prepared by the CMBIS, solely for the purpose of supplying informa tion to the clients of CMBIS and/or its affiliate(s) to whom it is distributed. This report is not and should not be construed as an offer or solicitation to buy or sell any security or any interest in securities or enter into any transaction. Neither CMBIS nor any of its affiliates, shareholders, agents, consultants, directors, officers or employees shall be liable for any loss, damage or expense whatsoever, whether direct or consequential, incurred in relying on the information contained in this report. Anyone making use of the information contained in this report does so entirely at their own risk. The information and contents contained in this report are based on the analyses and interpretations of information believed to be publicly available and reliable. CMBIS has exerted every effort in its capacity to ensure, but not to guarantee, their accuracy, completeness, timeliness or correctness. CMBIS provides the information, advices and forecasts on an "AS IS" basis. The information and contents are subject to change without notice. CMBIS may issue other publications having information and/ or conclusions different from this report. These publications reflect different a ssumption, point-of-view and analytical methods when compiling. CMBIS may make investment decisions or take proprietary positions that are inconsistent with the recommendations or views in this report. CMBIS may have a position, make markets or act as principal or engage in transactions in securities of companies referred to in this report for itself and/or on behalf of its clients from time to time. Investors should assume that CMBIS does or seeks to have investment banking or other business relationships with the companies in this report. As a result, recipients should be aware that CMBIS may have a conflict of interest that could affect the objectivity of this report and CMBIS will not assume any responsibility in respect thereof. This report is for the use of intended recipients only and this publication, may not be reproduced, reprinted, sold, redistributed or published in whole or in part for any purpose without prior written consent of CMBIS. Additional information on recommended securities is available upon request.

For recipients of this document in the United Kingdom This report has been provided only to persons (I)falling within Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 (as amended from time to time)(“The Order”) or (II) are persons falling within Article 49(2) (a) to (d) (“High Net Worth Companies, Unincorporated Associations, etc.,) of the Order, and may not be provided to any other person without the prior written consent of CMBIS.

This report is intended for distribution in the United States to "major US institutional investors", as defined in Rule 15a-6 under the US, Securities Exchange Act of 1934, and may not be furnished to any other person in the United States. Each major US, institutional investor that receives a copy of this research report by its acceptance hereof represents and agrees that it shall not distribute or provide this research report to any other person.

PLEASE READ THE ANALYST CERTIFICATION AND IMPORTANT DISCLOSURES ON LAST PAGE 52