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Only around 8% of Chinese have passports versus 46% of Americans. China’s low passport penetration rate along with China’s growing middle class mean Chinese travel companies have a powerful secular tailwind backing them.
As one of the leading travel companies in China, Trip.com Group Ltd (NASDAQ: TCOM) – formerly known as Ctrip.com International – has benefitted from this trend, with its share price rising from US$10 in 2012 to US$60 in 2017.
Through M&A, the use of AI and big data, and spot-on execution, Trip.com has consolidated the China market and become one of the leading online travel portals.
Recently, it has pivoted internationally by changing its name from Ctrip to Trip.com and by focusing more on growing outside of China. Whereas China accounted for around 65% of sales in the second quarter, management hopes that its international operations will generate up to half of total sales within three to five years.
While there are many reasons to be bullish on Trip.com, its shares are well below their mid 2017 highs of around US$60 per share. Adding to investor concern is the action of Baidu Inc (NASDAQ: BIDU), which sold a third of its Trip.com shares to fund its own share buyback programme.
Given that Trip.com shares were well off their year highs when Baidu sold, some analysts questioned why Baidu decided to sell Trip.com shares rather than use other methods to fund its buyback.
It’s important for an investor to analyse the risks of any stock. So here are three main risks I see for Trip.com going forward.
1. China’s slowing economy
As a leisure trip facilitator, Trip.com’s results are impacted by economic conditions in China. Currently, China’s economy is slowing. After many years of growing at around 8-10%, China’s GDP growth is now around 6%.
With less people sure of their jobs, many are not spending as much on discretionary items, such as travel, or are not taking vacations at all. Given that China accounts for the majority of Trip.com’s revenue, the soft macro conditions in China pose a major headwind.
2. Meituan Dianping’s growth
Super app Meituan Dianping’s (SEHK: 3690) growth in the travel sector has been astonishing. Having just started in travel in 2014, Meituan Dianping surpassed Trip.com in terms of hotel bookings last year and it’s still growing fast.
In the quarter ended June 30, Meituan-booked domestic hotel room nights rose almost 30% year-on-year. Meanwhile, Trip.com’s net sales rose 19% year-on-year for the same period.
Although Meituan Dianping gets more of its business in smaller cities and cheaper hotels, it could be more of a threat to Trip.com as it becomes more popular in China’s affluent cities where the latter has a stronghold.
Because users are within Meituan Dianping’s online ecosystem much more frequently, it has reams of data to improve its travel offerings and to potentially capture more of the market. Although Trip.com has mitigated some of the competitive threat from Meituan by expanding internationally, its China sales growth will likely not be as strong as it used to be.
3. Hong Kong protests curtail tourism
Given its proximity and its developed nature, Hong Kong has been one of the top travel destinations for mainland Chinese. In 2018, almost 50 million mainland Chinese visited the city.
Due to the protests, traffic from the mainland has fallen off a cliff with the number of visitors from mainland China falling 55% year-on-year during Golden Week, for example.
Given that Trip.com facilitated many of those Hong Kong trips, its results have suffered and it could continue to suffer until the protests end.
Although Trip.com still has a lot going for it, it will need to execute well given the weaker macroeconomic conditions in China, intense competition from Meituan, and the disruption to travel due to the Hong Kong protests.
The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Hong Kong contributor Jay Yao doesn’t own shares in any companies mentioned.