16 Jan 2019 Securities Analysis Tongcheng-Elong (780 HK) Travel at your fingertip China 3rd largest OTA surfing on the Super App era. Tongcheng-Elong ranked Top 3 among Chinese OTAs with 9.8% market share (by GMV) in 2017, and BUY (Initiation) delivered the highest YoY growth in FY15-17 in no. of online transportation ticketing and accommodation reservation transactions in China, according to iResearch. Backed by a large and engaged user base, extensive relation with TSPs Target Price HK$18.59 and tech-driven innovations, we forecast Tongcheng-Elong to deliver 30%/ 37% Up/downside +54.9% revenue/ net profit CAGR during FY18-20E, thanks to robust MAU growth, rising Current Price HK$12.00 paying ratio and re-purchase rate with merger synergy and services expansion. Sophie Huang Leveraging Tencent traffic to achieve cost-effective user reach. Powered by Tel: (852) 3900 0889 unique access to Weixin & QQ and long-term exclusive cooperation with Tencent Email: [email protected] (until 2021), Tongcheng-Elong can effectively reach and retain a vast and Equity ResearchEquity engaged user base, in our view. Noted that Tongcheng-Elong ranked Top 1 Gary Pang among Weixin mini programs in Oct 2018, according to Aladdin index. We Tel: (852) 3900 0882 estimate its MAU to grow at 18% CAGR in FY18-20E and reach 240mn in FY20E, Email: [email protected] driven by 1) Tencent-based traffic; 2) tapping into large addressable market in lower-tier cities; and 3) increasing diversified marketing efforts. China Internet Sector Bearing initial fruits from merger synergies with cross-selling. We forecast Mkt. Cap. (HK$mn) 23,671 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 Avg. 3mths t/o (HK$mn) NA 52W High/Low (HK$) 13.4/8.9 merger, we see high visibility for Tongcheng-Elong to leverage its cross-selling Total Issued Shares (mn) 2,076.4 to strengthen user engagement, stimulate re-purchase rate and enhance Source: Bloomberg monetization. We expect 34% order CAGR in FY18-20E, in which merger synergy to boost higher paying ratio, order/MPU, and cross-sell MPU ratio. Shareholding Structure Tencent 22.9% One-stop shop to enhance monetization and grasp long-tail needs. By Ctrip 22.4% Huafan Runhe 8.0% offering one-stop shop fulfilling all kinds of travel needs, Tongcheng-Elong will Source: Bloomberg capture more revenue opportunities with innovative ancillary services. We expect its GMV to grow at 32% CAGR in FY18-20E, and blended ASP will be Share Performance slightly diluted with deeper penetration into lower-tier cities. We forecast flat Absolute Relative 1-mth 11.6% 9.2% commission rate in FY18-20E, due to mature business and benign competition. 3-mth NA NA On top of that, we believe its tech-driven innovations and sociality-focused 6-mth NA NA initiatives can reshape travel by improving user stickiness and efficiency. Source: Bloomberg Initiate with BUY. Based on DCF valuation, we set the TP to be HK$18.59, 12-mth Price Performance representing 21.5x FY19E P/E, and 0.6x FY19E PEG, in line with industry HK$ 14.0 average, and 16% discount to Ctrip. Trading at 13.9x FY19E P/E, the company’s 12.0 valuation is attractive in our view, and incoming catalysts may originate from: 1) 10.0 user growth from Spring Festival; 2) merger synergy; 3) potential positive 8.0 earnings surprise; and 4) upcoming inclusion into HK-China stock connect. 6.0 Earning Table 4.0 2.0 (YE 31 Dec) FY17PF FY18E FY19E FY20E Revenue (Rmb mn) 5,226 6,022 8,016 10,103 0.0 Nov-18 Adj. net income (Rmb mn) 713 1,096 1,577 2,045 Adj. EPS (Rmb) NA 0.53 0.76 0.99 Source: Bloomberg EPS CHG (%) NA NA 43.9 29.7 PE (x) NA 20.0 13.9 10.7 Auditor: PwC PB (x) NA 3.0 2.6 2.3 Yield (%) NA 0.0 0.0 0.0 Website: www.ly.com ROE (%) NA 11.8 8.0 11.2 Net gearing (%) Net cash Net cash Net cash Net cash Source: Company, CMBIS estimates, Notes refer to Figure 83 PLEASE READ THE ANALYST CERTIFICATION AND IMPORTANT DISCLOSURES ON LAST PAGE 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 PLEASE READ THE ANALYST CERTIFICATION AND IMPORTANT DISCLOSURES ON LAST PAGE 2 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