Trip.com: Increasing Risks After Delayed Q4 Report And Rising Coronavirus Numbers

Summary

• Analysts are only forecasting a 20% decline in TCOM revenues, but we believe the impact of the coronavirus could be much worse.
• Although some work has resumed, leading to slightly higher demand for travel, tourism is still at a standstill.
• The coronavirus is spreading quickly internationally and could also cause a fall in demand for TCOM's international travel services.

In late January, we warned investors that Trip.com (NASDAQ:TCOM) could be hurt very badly by the spreading coronavirus as millions of flights and other travel bookings would be canceled.

Source: Seeking Alpha

So far, TCOM is down around 8% since our article. However, with the situation in China has gotten much worse, so we believe investors are still overly optimistic about TCOM's prospects.

Excessive optimism

With the coronavirus outbreak worsening, many analysts have cut TCOM's estimates. However, after looking at these revisions, we can't help but feel that these analysts are way too optimistic.

Source: Seeking Alpha

For example, Q1 revenue estimates have been cut from around $1.3bil to around $1.1bil, which is a decline of just 18%. Meanwhile, the Chinese Tourism Academy has forecasted that domestic tourism revenue will plummet 69% and number of trips could plummet 56% in Q1 2020.

For Q1 2020, domestic tourism revenue is expected to plummet 69 percent year-on-year, as Chinese consumers have been quarantined to their homes due to the respiratory virus amid efforts to combat it, said the report released by the China Tourism Academy (CTA). The total number of trips could fall by 56 percent year-on-year, the report also said.

Source: globaltimes.cn

An independent survey by Bespoke investment also showed that nearly 90% of shoppers planned to travel less or much less. Also, TCOM management recently announced that they were delaying the announcement of their Q4 results to get more clarity regarding the coronavirus outbreak. We believe this signals that pretty bad news might be coming.

Source: bespoke investment

Admittedly, things seem to be getting better in China as the recent daily increases in cases have started to slow, stabilizing to below 1,000 new cases per day in the last 1-2 weeks.

Source: BBC

Work has resumed in many provinces, with resumption levels greater than 50% for Beijing, Shanghai, Jiangsu, etc. According to data from Alibaba's travel app, demand in air tickets jumped 70% and train ticket orders surged 40% as of Tuesday compared with a week ago period as people started traveling to their hometown to resume work.

However, do note that, even with the recovery of business travel, demand for tourism remains low, with order growth for tourist tickets remaining flat according to Alibaba's app data. With Trip.com only generating 3.2% of its revenues from corporate travelers, this would mean that the majority of its revenues are still depressed.

We are also worried that releasing people from quarantine too early could lead to re-emergence of the virus, which would once again cause a sharp drop in tourism. This seems like a pretty possible scenario, given the fact that there have been reports of people testing positive a second time.

International issues

Outside of its China business, Trip.com has also expanded outside of China through investing in or acquiring several travel companies like Skyscanner (Europe), MakeMyTrip (India), Trip.com (US).

The problem? The coronavirus is now rapidly spreading outside China, and the number of cases internationally has seen exponential growth over the past few days, with South Korea, Italy, Japan, and Iran being most affected.

Source: Economist

This has led to governments taking drastic measures, including banning flights from countries at risk and screening everybody at the airport. This, as well as worries about catching the coronavirus, has led to a massive decline in tourism, including cruises and air travel. According to Komonews, 200k flights have been cut by airlines due to coronavirus travel restrictions and according to IATA, the drop in air travel will cost the airline industry $29.3bil.

This is bad news for Trip.com, which has said in its Q3 call that international air ticket volumes had been growing at "triple digits" and that they were expecting international business to become 40-50% of the business over the next few years.

In the third quarter of 2019, excluding certain area in the Greater China destination, our revenue growth for overseas hotels accelerated to 50% year-over-year in the third quarter. We are confident to reach 40%, and 50% of international business will contribute to the total revenue would be 3- to 4-year target.

Source: Q3 2019 call

What this means is that, even if volumes in China recover over the next few quarters, as long as world travel remains low due to the coronavirus, TCOM is going to show depressed revenue and profit growth. Considering the infectiousness of the coronavirus, we believe world travel could remain low for multiple quarters before recovering to previous levels.

Valuation

At its current share price, TCOM trades at a market cap of $17.9bil and an EV of $19.3bil. This represents an EV/Operating income ratio of around 32x, which we believe is much too high for a company that is growing at only 10-20% and is facing substantial headwinds from the coronavirus situation.

If the coronavirus fades quickly, which we believe is very unlikely, our bear case wouldn't mean much, and the stock would likely rebound. This is a risk to consider before shorting the stock.

Takeaway

Overall, we believe TCOM should be avoided at all costs and perhaps could even be a good short as long as the coronavirus remains loose around the world. With competitors like Expedia (EXPE), Booking Holdings (BKNG) dropping around 20% so far, it certainly is odd how TCOM stock has fallen less than these peers, especially considering TCOM is arguably the most exposed to the coronavirus. We don't expect this resilience to continue over the long run.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.