CITIC Securities: An OTA sector with high travel demand and strong determinism in terms of recommended configuration fundamentals

The Zhitong Finance App learned that CITIC Securities published a research report saying that travel demand has been hot since 2024, and it is one of the most prosperous tracks in the consumer industry where domestic demand is the main focus. In the context of the summer vacation “best in history” base last year, demand remained steady, and transaction volume was generally positive. However, due to the general restoration of supply-side sub-industries compared to the previous year, prices declined year-on-year during the rebalancing of the supply and demand pattern, and negative increases during the peak season were more obvious, so it is expected that the Q3 industry's revenue and profit growth rate will slow month-on-month compared to Q2. Looking ahead to Q4 and next year, CITIC Securities is optimistic about the continued steady performance of travel, considering the weakening of base pressure, stabilizing supply patterns, and a clear trend of increasing the share of service sector consumption in the medium term. It is recommended to configure an OTA sector with strong fundamentals. It is expected that the business cycle will gradually usher in the hotel, human resources, and catering sectors, as well as high-quality individual stocks in scenic spots and gaming.

Overview: The overall demand boom during the summer season is maintained, and the trend of volume increase and price reduction continues as the supply and demand pattern is rebalanced, and the performance of specific companies is divided.

Since 2024, the travel chain has shown a trend of volume increase and price reduction. Leisure passenger traffic has maintained steady growth, and business travel has been pressured to a certain extent by the impact of a weak macro-environment; the increase in domestic airline capacity and supply of new hotels combined with last year's pulsating recovery led to a high price base, and the downward pressure on hotel and airline prices has increased month-on-month since 24Q2. The increase in the number of summer travelers was better than pre-holiday market expectations, but prices for air tickets, hotels, etc. declined slightly. At the end of June, flight managers predicted that during the summer travel season (July-August), civil aviation passenger traffic would be 135 million, an increase of 7.0% year on year; actual summer civil aviation passenger traffic would be 142 million, an increase of 12.4% year on year. Flight managers predicted that the average price of economy class tickets would drop slightly by 3% year on year; the actual average price of summer domestic air tickets without tax (economy class) was 787 yuan, down 17% year on year, down 1% from the same period in 2019; the average price of international air tickets (economy class) was 2303 yuan, down 25.37% year on year, down 12.1% from the same period in 2019. Influenced by the base figure, the year-on-year growth rate of tourist arrivals and revenue has gradually slowed down over time since the beginning of the year. Looking at key holiday travel data, the number of domestic tourists and tourism revenue during the 24Q1 Spring Festival holiday increased by 34.3% and 47.3%, respectively. The 24Q2 May Day holiday increased 7.6% and 12.8% respectively, the Dragon Boat Festival holiday increased 6.3% and 8.1% respectively, and the 24Q4 National Day holiday increased 5.9% and 6.3% respectively. The implicit expectation of current market transactions is that as pressure on the 24Q4 base decreases, the performance of travel chain-related companies has improved month-on-month, and leading companies are expected to continue to perform better than the industry. CITIC Securities believes that considering the background of the Q4 base and current demand trends, there is a high probability that Q4 will improve month-on-month, but Q4 is a low travel season, and the 2025 Spring Festival holiday will be a more important observation point.

OTA: Leading OTAs continue to lead the travel industry in a stable pattern of increasing online rates.

Leading OTAs benefit from the competitive landscape, quantitative growth continues to outperform the industry. Prices on the upstream tourism resource side are under pressure. As the competitive pattern of OTA platforms stabilizes, bargaining power has increased, and the monetization rate has increased, partially offsetting the impact of falling prices in the industry. According to flight manager data, the total number of passengers carried by civil aviation in 24Q3 was 202 million, up 12.4% year on year, up 15.4% from the same period in 2019; domestic passenger traffic was 181 million, up 8.1% year on year, up 18.5% from the same period in 2019, and 21 million international/regional passengers were transported, up 71.5% year on year, down 5.9% from the same period in 2019. According to Ctrip statistics, the average one-way ticket price in August/September 2024 was 982/766 yuan respectively, down 7.0%/15.3% year on year and 6.4%/1.4% compared with the same period in 2019. According to Hotel Home data, domestic demand for overnight hotel rooms increased by about 5% year on year in 24Q3, the average ADR of hotels across the country decreased by 6% year on year, and middle and high-end hotels fell by about 7%. In 24Q3, Ctrip's domestic flight and alcohol reservations are expected to increase by medium to high single digits, about 15%, respectively; outbound air ticket and hotel transactions are expected to return to 110% to 115% in the same period in 2019. The total domestic and international ticket sales volume of Tongcheng 24Q3 are expected to increase by about 30% year on year, domestic hotel reservation volume will increase by about 10% to 15% year on year, and adjusted net profit will increase by about 30% year on year. OTA leaders themselves have strong operating ability and stable performance. It is recommended to continue to pay attention to allocation opportunities under market fluctuations.

Scenic area: In the future, the scenic area sector will show a trend of overall growth and differentiation in performance between scenic spots.

Combined with traffic travel data and holiday travel data, passenger flow is still growing steadily. The overall passenger flow base in the scenic area sector is expected to be relatively stable, but since the passenger flow base in the 23Q3 scenic area sector is not low, and negative disturbances compounded by the 24Q3 weather still exist, it is expected that Q3 Huangshan Travel, Mount Emei A, Jiuhua Travel, Sante Ropeway, Changbai Mountain and other natural scenic spot companies will maintain a year-on-year growth rate; China Youth Travel and Tianmu Lake leisure and scenic spot companies are expected to show year-on-year passenger flow performance Slightly weaker than a natural scenic spot company; it is expected that Songcheng Performing Arts will show a trend of differentiation between old and new projects. Among them The number of Q3 games in the Hangzhou, Sanya and Lijiang projects declined year-on-year, while the Xi'an and Foshan projects continued to maintain strong performance. Due to the base effect and differences in weather conditions in various regions, it is judged that the scenic area sector will show an overall trend of growth and differentiation between scenic spots in the future.

Gaming: Competition in the industry is stabilizing, and short-term preferences have operational efficiency advantages and alpha opportunities to revise profit expectations.

From a valuation perspective, after the significant rise driven by recent policy expectations, the current EV/EBITDA valuation of the Macau gaming industry is ~10x, which is still below the industry average valuation (about 13-14x). Combined with the stable horizontal data of the industry (especially large leaders) in the leisure sector, it is believed that this round of growth has not significantly exceeded fundamentals. Judging from the Q2 review, the management of each operator expected the competitive environment to stabilize for the rest of 2024 at the performance briefing, but it is expected that the reinvestment ratio of each company will remain high, and the significant decline is still expected to take 1-2 quarters. Overall, operators tend to invest in refurbishing/improving property quality through capex, and it is expected that a more orderly competitive environment will contribute to a moderate increase in EBITDA profit margins.

Tax exemption: The weak economy is hit by the typhoon, and the inflection point is lagging behind.

According to Haikou Customs, the 2024 summer duty-free sales volume on Hainan's outlying islands was 3.87 billion yuan, down 34.3% year on year. The number of shoppers fell 20.7% year on year, and per capita consumption fell 17.2% year on year. Under the relative slump in volume and price, summer duty-free sales were poor. In September, it was also adversely affected by typhoon weather. Under the negative effects of operating leverage, China's 24Q3 performance was under pressure. According to the performance report, the 24Q3 company's revenue was 11.756 billion yuan/ -21.5%, and net profit to mother was 638 million yuan/ -52.4%. According to the Civil Aviation Administration, passenger traffic on summer international+ regional routes increased 70% year over year and returned to 92% in the same period in 2019. It is expected to drive the airport duty-free business to continue to grow, while the profitability of core airport duty-free shops is expected to continue to increase year over year. According to Haikou Customs, the average daily duty-free sales of the outlying islands during the National Day holiday were 112 million yuan, down 33% from the previous year, and the sales situation is still weak. Against the backdrop of the current macroeconomic environment and continued growth in outbound travel, the inflection point for duty-free business has not yet emerged. It is expected that the Q4 base pressure will ease and the peak season in Hainan will arrive, there will be an improvement from month to month. Currently, the duty-free shop policy in the city has been introduced. The company benefits from the first-mover advantage of the layout, and it is recommended to continue to track the implementation of the duty-free business in the city.

Hotels: The increase in hotel supply is slowing down, price pressure remains, and same-store performance is expected to pick up in Q4.

According to Hotel Home data, as of the end of September, 681,900 hotels were in operation nationwide, up 0.4% from the end of June. Among them, chain/non-chain hotels were +4.1%/+0.0%, respectively. The supply growth rate of non-chain hotels slowed by 8.1% month-on-month in 24Q2, and the chain growth rate accelerated from 2.9% in 24Q2. Under pressure on industry business data and weakening of the money-making effect of hotel investment, the chain rate returned to an upward trajectory. By the end of September, the total number of hotel rooms was 20.58 million, up 2.3% from the end of June, and the growth rate of 24Q2 guest rooms was slower than the 3.9% month-on-month growth rate of 24Q1 rooms. According to the weekly average data, the average RevPAR of the 24Q3 sample hotels was 134.8 yuan, down 9.8% year on year, and the average ADR and OCC decreased 6.2%/3.8% year on year, respectively. In terms of grade, the resilience of budget hotels is still superior to the middle and high-end. The average RevPAR for budget/mid-grade/high-end hotels decreased by 8.2%/10.9%/11.2% year-on-year, respectively. The decline for economy/mid-range hotels increased compared to 7.6%/9.6% in 24Q2, and the decline for high-end hotels was narrower than 16.1% in 24Q2. In terms of opening stores, the opening of all stores accelerated in 24Q3. According to Hotel Home data, the number of hotels listed on the OTA platform in Huazhu/Jinjiang/First Travel/Yaduo increased by about 640/200/240/130 respectively over the previous month, which is faster than 440/150/170/110 in 24Q2. As the base pressure of the hotel industry decreases and the increase in industry supply slows down in 24Q4, it is expected that the performance of the same hotel stores will pick up. Hotels are more cyclical than OTA, so it is recommended to focus on the fourth quarter's low base+valuation switching opportunities.

Catering: Demand has stabilized overall, and the pressure on the same restaurant has eased somewhat.

According to the tracking of listed catering companies, summer performance in August was better than July, and is expected to decline slightly in September, and demand is generally stable in Q3. Haidilao's overall turnover rate in July remained flat year on year, the same store turnover rate declined slightly, and the overall same-store turnover rate in August was flat, and the average single-digit year-on-year decline in September; Helens's recovery in July and August was better than in May and June, and is expected to decline after the start of school in September; the daily cup sales volume of Lucky Coffee in June-August is expected to increase month by month; the daily sales recovery rate at the same store in Naixue increased by 13 pcts month-on-month in August. The food and beverage base was low in the fourth quarter. Stimulated by policies such as consumer vouchers, the pressure on the same restaurant is expected to ease further.

Human resources: Short-term recruitment demand is still under pressure, and emphasis is placed on bottom allocation opportunities under the employment priority strategy.

According to the National Bureau of Statistics, the unemployment rate in the July/August urban survey was 5.2%/5.3% respectively, up 0.2/0.1 pct from month to month, respectively, and the unemployment rate increased slightly. According to Datayes, the number of new job postings in 24Q3 remained flat year on year, and the number of new recruitment companies increased 3% year over year. Overall, the recruitment market is undergoing a weak recovery process, and industry demand is still under pressure. CITIC Securities anticipates that the 24Q3 middle and high-end recruitment, personnel management and other businesses will remain under pressure, while the trend of flexible employment and business outsourcing will continue. On September 25, the Central Committee of the Communist Party of China and the State Council issued “Opinions on Implementing Priority Employment Strategies to Promote High Quality and Full Employment”, which covers promoting coordination and linkage between economic and social development and employment promotion, focusing on resolving structural employment conflicts, and improving employment support systems for key groups. CITIC Securities believes that in the context of the current employment environment under relative pressure, the issuance of this “Opinion” has strong practical significance. It is recommended to continue to track the progress and results of the implementation of subsequent employment-related policies, and allocate the human resources sector most directly related to employment at the bottom.

Risk factors:

The decline in economic growth exceeded expectations, and the trend of consumption downgrade exceeded expectations; the risk of changes in domestic and outbound travel policies exceeding expectations; the risk of changes in exit visa processing policies exceeding expectations; the recovery of cross-border air capacity falling short of expectations; intensifying market competition, etc.

Investment strategies.

Since 2024, travel demand has remained high. It is one of the most prosperous tracks in the consumer industry where domestic demand is the main focus. Affected by price pressure in the process of rebalancing the supply and demand pattern, the year-on-year increase in revenue and profit in the Q3 industry is expected to slow down compared to Q2. Looking ahead to Q4 and next year, CITIC Securities is optimistic about the continued steady performance of travel, considering the weakening of base pressure, stabilizing supply patterns, and a clear trend of increasing the share of service sector consumption in the medium term. It is recommended to maintain the OTA sector with strong fundamentals and certainty, while increasing the allocation cycle is expected to gradually usher in an inflection point in the hotel, human resources, and catering sectors, as well as high-quality individual stocks in scenic spots and gaming.