Trip.com Group Limited

Moat: 2/5

Understandability: 3/5

Balance Sheet Health: 4/5

Trip.com Group Limited is a global online travel agency (OTA) providing a range of travel-related services, including accommodation, transportation, tours, and attractions.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Business Overview & Moat Analysis Trip.com Group, formerly known as Ctrip, operates a global online travel agency. It offers a comprehensive suite of travel products and services, including accommodation, transportation, packaged tours, and destination activities. While it has a strong presence in China, Trip.com’s international ambitions have become more prominent. Currently, the company has three revenue streams: accommodation, transportation, and other revenue. The company is still not profitable overall.

  • Economic Moat: Trip.com’s moat can be best described as a narrow one with some potential for improvement. Their strengths include a strong brand recognition in China and a vast network of partnerships with hotels and airlines, which helps to establish some scale advantages. They also benefit from the network effect to a certain extent because more users also mean more potential customers for travel partners, giving the company negotiating power.

    However, the moat is not wide enough due to the intense competition in the global online travel space. There are a number of other big players in the market which also command large market share and have a very good brand and customer base. They are constantly spending heavily to acquire and retain market share.

    Ultimately, for Trip.com, a moat will be built on building more partnerships with travel suppliers in more regions, creating unique offers or products, and brand strength. This is what will propel the company to obtain and maintain high returns on its investment, while keeping a barrier to entry against competitors. As of right now, they still haven’t completely achieved that.

    • Moat Rating: 2 / 5. A narrow moat, but the company has an opportunity to strengthen that over time.

Legitimate Risks That Could Harm the Moat and the Business

  • Geopolitical Risks: Geopolitical tensions and conflicts, particularly between China and other countries, could significantly impact international travel demand, affecting their most important regions, and could also lead to instability in their local operations. This can include sanctions, travel restrictions, and other economic disruptions that might hinder their operations.
  • Regulatory Risks: As a company that mainly resides and operates in China, regulatory changes can present an issue. Changes to data, labor, and travel regulations can all make operations much more difficult and increase the costs associated with running operations. It would also severely affect operations if there was to be any changes in the licensing they use for operation in China and other regions.
  • Competition: The travel industry is extremely competitive. They are competing with well established multi-national companies. They need to ensure that they can maintain strong competitive advantages to prevent any serious erosion in market share. Failure in maintaining and strengthening advantages can lead to loss of profits.
  • Macroeconomic Conditions: Slowdowns in regional and global economies can impact travel demand, reducing revenues. Major macroeconomic shifts, such as inflation, interest-rate increases, rising oil prices, or another pandemic could all result in decreased travel and decreased demand for Trip.com’s services. It may also reduce their ability to take on more debt or refinance existing debt.
  • Technological Disruption: New technologies may disrupt the market. Changes to the way that people book or search for travel plans, or changes in digital and mobile infrastructure, will require the company to spend more in R&D and to be innovative to maintain a competitive advantage. Failure to do so would mean potential losses to market share and revenue.
  • Brand Damage: Negative press or a major controversy may hurt the company’s brand reputation, which can affect bookings. Furthermore, the reliance on third party travel providers means that any incidents on third-party transportation may adversely affect perceptions of Trip.com, despite not having any direct responsibility.
  • Data Breaches: In the online world, data breaches are a big risk, and could lead to reputational damage and also liability issues and may compromise private user data.
 *  **Business Resilience**: Even though a lot of risks can occur, the company is still quite resilient, having a strong presence in China, with a lot of new markets and new lines of services they are investing into. The company is also looking to expand operations globally to ensure they do not rely too heavily on China, thereby diversifying their income streams. Their strong relationships with the local governments in China also protect them from regulatory risks.
  
 * In summary, the business resilience is high, but there are many legitimate risks that can hurt both the short and long term performance.

Financial Analysis Trip.com’s financial performance offers some areas of concern, as it continues to invest heavily to drive future growth.

  • Revenue: Trip.com’s revenues have increased dramatically year over year in 2023 because of increased demand in both local and international travel. Total revenue was RMB43.4 billion in 2023, a 123% increase YOY. This is because in 2022 China’s travel restrictions were still in effect, which severely affected their bottom line. Now, in 2023, China has removed most of their restrictions and their core business has exploded in demand.

  • Notably, while revenues are still dependent on the Chinese market, revenues from domestic business have risen significantly, and also shows that they have successfully diversified their income streams.

  • Operating Expenses: The cost of revenue is roughly in line with revenues, and other operating expenses have almost doubled. Sales and marketing expenses increased by 114%, while product development expenses and general administrative expenses increased by 43 and 30 percent respectively. This is very significant as this has led to the company to be profitable in its operating income, for the first time in years.
    • As they increase their operations, they will continue to spend significantly, however the ability to translate this into profitability may take sometime.

  • Profitability: The company has turned a profit in 2023, the company achieved positive operating income in 2023, a massive turnaround from the negative one in 2022. They still report a loss on the net income level, but their operational performance is great. It may take a few years before they are able to turn this to a net profit.

  • Cash Flow: Free cash flow has increased by 154%, which is a good sign. This has lead to improved cash reserves. They now have RMB70.4 billion in cash and short term investments.
    • One thing of concern is that capital expenditure has also massively increased by nearly 580%. So the amount of new capital expenditure projects are also increasing.

  • Balance Sheet Health: 4 / 5 Trip.com’s balance sheet is generally healthy, with strong liquidity. They have also been showing improvements in profitability, and thus more positive operating cash flows. However, the increase in CapEx is a thing that investors should keep in mind. Their high cash reserves are also a good sign. The debt levels are not too high.

  • Recent Concerns/Problems and Management Stance:

    • A key concern is related to increasing spending, while their ability to be profitable has still not been realized. They need to be able to show returns for this spending.

    • Furthermore, their operations and revenue are still highly dependant on China, exposing them to economic and regulatory risk. Their plan is to diversify internationally which would protect them from that risk and should be monitored for success.

    • Management seems very confident and believes their expansion plans will have the best chance of ensuring that they are able to be a market leader, and also they are confident that their investments and spending are worth the risk. They see future profits stemming from those plans.
  • Understandability The business operations of Trip.com are easy to grasp, its core services are travel bookings, and the way the company earns revenue is transparent. The financial statements are somewhat more complicated, owing to the large amount of non-operating earnings and various methods of valuation they use.
    • Understandability Rating: 3/5