CGS: Maintains Same-Page Rating for Travel Service, Target Price HK$23

CGS research report states that it maintains a same-page rating for Travel Service (00780) for 25/26 years, maintaining a target price of HK$23 (corresponding to 15x/12x P/E and 25e/26e non-IFRS P/E), with an upward space of 17%. The company is currently trading at 13x/11x 25e/26e non-IFRSP/E. Travel Service's 2Q25 revenue increased by 10% to HK$46.7 billion, slightly higher than market expectations of 0.6%, mainly due to hotel revenue and other revenue exceeding expectations; Non-IFRS net profit was HK$7.7 billion, exceeding market expectations of 3.3%, corresponding to a 16.6% non-IFRS net profit rate, driven by the improvement in marketing efficiency.

CGS's main views are as follows:

Domestic hotel business outperforms industry performance

1) Accommodation: 2Q25 ADR increased year-on-year, outperforming the industry, reflecting changes in user consumption habits. The company has continued to deepen its cooperation with global suppliers and strengthen its layout of popular tourist destinations for Chinese outbound travelers. International hotel ADR continues to maintain relatively fast growth. Performance during the summer season shows that the company's hotel ADR continues to grow year-on-year, with tourism demand showing resilience. The company expects 3Q25 hotel occupancy to increase by 10-15% year-on-year, with a low single-digit increase in ADR, outperforming the industry average.

2) Transportation: 2Q25 international air ticket volume increased significantly over 30%, with international air ticket revenue accounting for more than 6% (a year-on-year increase of 2 percentage points). Due to strong summer travel sentiment last year, according to high-frequency data from Ctrip, domestic air passenger traffic increased by only 3% year-on-year during the period from June 20th to August 16th. The company's international air ticket growth rate is similar to that of the industry, but its outbound air ticket growth rate continues to remain high, with a rate increase. The company expects 3Q25 transportation revenue to increase by 9%.

Outbound business and hotel management are the dual engines for future growth

1) Outbound business: The company has been actively laying out its outbound business since the end of 2023, and it is expected to reach a proportion of around 6-7% by year-end. It is expected that international business will break even this year. With further optimization of supply chains and product offerings, the company believes that there will be more opportunities for outbound demand to be met, driving business growth.

2) Hotel management business: The company sees good prospects in hotel chain development. After investing and acquiring brands, as of June 30th, 2025, the company's hotel management platform has operated over 2,700 hotels, with another 1,500 hotels under preparation. In the list of China's hotel industry association for 2024, the company ranked 8th. Travel Service's hotel management business accounted for 25% (approximately HK$1.9 billion) of other businesses in 2Q, driving a 28% year-on-year increase in other business revenue.

Core OTA profitability continues to improve

In 2Q25, the company's core OTA operating profit was HK$10.7 billion, with an OPM of 26.7% (compared to 24.3% in the same period last year). The company expects marketing efficiency to improve, operating leverage to be released, and international business to enter a harvest period, leading to continued profitability improvement. The company maintains its profit guidance for 25/26 years at around HK$33-34 billion.