Jul 15, 2020 (Thomson StreetEvents) — Edited Transcript of Tongcheng-Elong Holdings Ltd earnings conference call or presentation Thursday, May 21, 2020 at 11:30:00am GMT

Tongcheng-Elong Holdings Limited – Investment Director of Tongcheng Network Technology

* D. S. Kim

Thank you. Good morning, and good evening, everyone. Welcome to Tongcheng-Elong’s 2020 First Quarter Results Conference Call. I’m Kylie Yeung, Investor Relations Director of the company.

Joining us today on the conference call are Mr. Hep Ma, Executive Director and CEO; Mr. Julian Fan, CFO; and Ms. Joyce Li, VP and Head of Capital Markets. For today’s call, our management team will provide a review of the company’s performance in the first quarter of 2020. Hep we’ll kick off with a short overview and walk us through our business recovery for the period; Joyce will then discuss our business highlights in the first quarter; and then Julian will address the details of our financial performance accordingly. We will take your questions during the Q&A session that follow.

As always, our presentation contains forward-looking statements. Such statements are based on management’s current expectations and current market operating conditions and relate to events that involve known or unknown risks, uncertainties and other factors which may cause the company’s actual results, performance or achievements to differ from those in the forward-looking statements. This presentation also contains some unaudited non-IFRS financial measures. They should be considered in addition to, but not as a substitute, for measures of the company’s financial performance prepared in accordance with IFRS. For a detailed discussion of non-IFRS measures, please refer to our disclosure documents in the IR section of our website.

It is now a pleasure to introduce our CEO, Hep. Hep, please go ahead.

Thanks, Kylie. And thank you all for joining our 2020 first quarter earnings call.

The beginning of 2020 was quite tough and the year ahead will remain challenging worldwide as the COVID-19 pandemic continues to evolve globally. With many countries being locked down and people being access to social distance. However, we are glad to see gradual economic recovery in the domestic market, thanks to the effective control made by the Chinese government and the dedication of medical staff.

We are also optimistic about further business recovery in China as the central and the local governments are determined to revive the post virus economy. In March, the central government published a policy to expand and upgrade consumption after the virus. At the same time, many local governments issued coupons and other stimuli to encourage post epidemic consumption.

During the recent Labor Day holiday, dozens of local governments released the new consumer coupons amounting to billions of RMB during the holiday. These coupons could be used to repurchasing — attracting tickets and booking hotels. Moreover, some provinces introduced 2.5 days we can give residents more free time and stimulate tourism.

In the past quarter, we focused on efforts to better serve our users. And protect their benefits and interest during the disruption of COVID-19. We launched policies of low-penalty refunds and changes and opened up an online self-service function to fast-track refunds and the changes. We initiate a set loan program to ensure the safety for — of hotel guests. We offer the free 1 year Black Whale membership to all medical workers across Mainland China, in order to pay our respects to their work. By the end of March, more than 300,000 medical workers has joined our Black Whale membership, which also helped to enhance our brand awareness. All these efforts led to stronger ties with our users. And we believe this strengthened trust will help enhanced our users’ loyalty, leveraging our huge traffic and the core internet technology. We worked with local government — governments to revitalize the post-epidemic travel industry. We have to promote tourist destinations and build tourism brands free of charge for many regions and the cities which have joined our Ark Alliance initiative, which was established to help suppliers cope with the impact of COVID-19. We joined hands with local governments such as (inaudible) and (inaudible) to live stream local tourist attractions and increase their market reach.

We also worked with local governments to distribute consumer coupons across our platforms. In spite of the disruption caused by COVID-19 to the travel industry, our business is resilient to the epidemic. Thanks to our large exposure to domestic travel business, especially in lower-tier cities, our light operating model and highly efficient management. As the virus has been effectively controlled in China, we are in a good position to seize the recovery opportunities in the domestic market.

We have outperformed the industry average in all business segments in the past quarter. And it is mainly attributable to our leadership in lower-tier cities where the attractions were more direct, higher proportion of demand from business travel and the resumption of work after the Spring Festival as well as the stable traffic from our Weixin platform.

Our accommodation business recovered faster than the industry average in terms of room nights sold in the first quarter. Thanks to the aforementioned recovery of business travel and the short distance travel, room nights sold in low tier cities recovered to about 75% that of the same period last year.

Our air ticketing business also performed better-than-average in terms of volume in the past quarter as a result of our strong market position in the southwestern and the western regions. In these regions, a great number of migrant workers had to return to their workplaces which generates the large demand for flights. Additionally, business travel within provinces resumed quickly after restrictions were relaxed in these regions.

As far as our train ticketing business is concerned, the Huixing system played a key role in serving our users’ need when supply was dramatically hard to control the spread of the virus. This intelligent assistant provided the users with available, affordable and achievable routes and was widely used in the first quarter, contributing almost 50% of the revenue generated from ground ticketing.

In summary, our leadership in lower-tier cities, a higher proportion of demand from business travel and the resumption of work as well as stable traffic sources on the Weixin platform enabled us to outperform our peers in the first quarter. Our total revenue for the period decreased by 43.6% year-over-year to around RMB 1 million, yet our effective cost control landed us in a profitable position. As soon as the COVID-19 outbreak accorded in net general [resulted] to adopt a cost saving mode. We cut back our spending on subsidies and advertisement as well as structurally controlled our operating and administrative expenses for the period under review.

Our adjusted net profit recorded RMB 78 million, making us one of a kind in the OTA industry under such a challenging environment. In late April, we announced a campaign to upgrade our brand, so as to be more focused on our target users and the role we can play in their travel life. We changed our brand name to ly.com, which directly defines our business. This will increase our brand recognition and association in the travel industry. We adopted a completely new image, a combination of an airship and a fish, which we believe coincides with younger generation’s attitude to explore new ground and never give in. Now younger generations make up a great majority of China’s travel demographics and more than 50% of our users aged from 18 to 35, mainly living in lower-tier cities.

We also introduced a new slogan of “Together, let’s go!” Inviting people to embark on adventures with us after the virus. With this brand — with this new brand, we are making greater efforts to meet our target users’ needs by leveraging our in-depth knowledge and insight of lower-tier markets.

In the short run, China’s travel demand is affected by the virus, but we believe travel is a basic need for people, no matter what we’re looking for, now or in the future. Though the virus has posed challenges to the China industry, it also brings opportunities to industry leaders like us. In the past few months, we have seen great resilience in lower-tier cities under the disruptive forces of COVID-19. And we see these markets as the future of the online travel business with great potential to increase digitalization. We will move swiftly and aggressively to dig further into lower-tier cities to strengthen our leadership in these markets.

As a technology-driven enterprise, we are dedicated to improving our users’ travel experience, empowering our partners’ business and building a more efficient travel ecosystem by continuously investing in and embracing new technologies. We are now closely monitoring the market dynamics, assessing the changing situation and accordingly adjusting our marketing budget with our flexible operating mode and a strong market position in lower-tier cities. We are very upbeat about our business recovery for the year ahead.

We are also confident that our cost-effective traffic channels, highly integrated supply chain and a solid financial position will equip us to navigate and emerge from this challenge.

In closing, I’d like to thank our users for staying with us during this difficult time; our partners for joining hands with us to get through this stressful situation; and our employees for their selfless efforts to support our users and the suppliers. The darkest hour has passed and we are heading towards a brighter future.

Now I will hand over the call to Joyce, who will walk you through our business highlights of the first quarter. Joyce, please.


Joyce Li, Tongcheng-Elong Holdings Limited – Investment Director of Tongcheng Network Technology [3]


Thank you, Hep, and thank you, everyone. As we all know, the COVID-19 pandemic first occurred in early 2020, has done great damage to our economy and the travel industry in particular as people around the world are being locked down at home and subject to social distancing measures. However, as the Chinese government act promptly and effectively contained the virus, the domestic market is revitalizing.

Despite the headwinds caused by the COVID-19, we moved swiftly to see the domestic recovery opportunities stemming from the resumption of work and related business travel in late February and March. In the past quarter, we continued to leverage Weixin cost effect to traffic as well as exploring new traffic sources. Based on our extensive knowledge and experience from operations of our Weixin-based mini program, we conduct our first mini program live stream in early March. We continue to conduct live stream sales of products on our Weixin mini program on our Member’s Day in an effort to enhance our brand recognition among users and increase our customer retention.

We also explored live stream of tourist attractions on third-party short video platform to help attract traffic for tourist destinations as well as acquiring traffic for our own platform.

Furthermore, we joined hands with the Huawei app store and together launched a campaign for our native app. We established a reciprocal cooperation with a widely recognized short video platform to try new business formats of travel plus live stream by leveraging on the respective advantage of both sides. In the future, we will deepen collaborations in contact marketing, scenario marketing and the short video promotions, which we believe will elaborate our brand recognition as well as broaden our user acquisition channels.

Our average MAU for the period under review recorded moderate year-over-year decrease of around 25% to CNY 148.4 million, negatively impacted by the travel ban imposed by the Chinese government, yet positively show up by increasing searching volumes, our demand from resumption will start to pick up in later February, and the people longed for outdoor activities for being locked down for a relatively long time.

Since outbreak of the coronavirus in late January, travel bans were imposed and the supply and the transportation segment was sharply reduced. Our business volumes correspondingly experienced a year-over-year decline in first quarter. Our average MPUs for the period decreased by 36% year-over-year to CNY 14.8 million, while total GMV dropped by 49% year-over-year to CNY 18.2 billion. Still, we value our users and make every effort to cater to their ever-evolving travel needs. We made more efforts to improve the quality of product services and enhanced return on efficiency during the critical period. Moreover, we continue to innovate our value-added products and services.

To make our users’ travel show during the epidemic period, we launched a COVID-19 wage insurance and have further upgraded our airport pickup and drop-off services, which were well-received and recognized by our users. We pushed forward with our [core] strategy in the first quarter. We’re seeing users were deeply concerned about being infected with COVID-19 by [taking churn], we tactically had to guide our users taking flights. This effort to some extent, assist in recovering our air ticketing business in later February and March.

Further penetrating our lower-tier cities has been and will be our core strategy in the foreseeable future. During the reporting period, around 56% of new registered users reside in Tier 3 or below cities, once this number was only 44 in the same period last year. Benefiting from our extensive penetration in low-tier cities, our (inaudible) in Tier 3 and below cities for the first quarter recovered approximately 75% of the level in the same period last year, as Hep has mentioned, surpassing industry average. Penetrating low-tier cities will also bring economic benefits to the local government and the residents, especially to remote regions with great yet underdeveloped tourism resources. We worked with several local governments to help integrate and promote their tourism resources by applying our capabilities in big data, innovation and marketing. This was not only beneficial to local tour industry, but also added value to local economy.

As Hep has mentioned above, we launched a brand upgrade campaign, ly.com, to build a closer connection with our target users. By redesigning our image, we aim to be perceived as useful, an adventurer, undertake study in (inaudible) users. We drove out a variety of marketing activities across different channels with our new image, both online and offline. In particular, we launched an event called [Your Delight to Travel] to getting younger users directly involved in finding their dream travel destinations. Upon these efforts, the searching volume of our new brand name in the Weixin search portal has tripled in the month of April. As a company dedicated transforming from OTA to an ITA, we’re proactive in bringing technology innovation and industry evolution. In recent years, we’ve been continuously investing in our operating system, which provide users with available, affordable and achievable travel solutions.

When supply in the railway sector will sharply [reduce] the (inaudible) coronavirus outbreak. This (inaudible) system was widely used and recognized by users with the trouble needs, demonstrating its exceptional value for users. During the past quarter, we continued to optimize product display for users and to further integrate into the resources of suppliers. Actually, we will constantly improve our algorithm of the system, start to promptly and efficiently respond to our users’ needs and to create more value for them.

Moreover, given the considerable low online penetration rate in bus ticketing with the huge growth potential in sector. By providing technology and expertise in online travel, we joined hands with Hubei’s largest bank operator in an effort to boost the digitalization in the province by sector, which we believe not only better the traveler experience. But also, and most importantly, will enhance efficiency in this traditional sector. In the past quarter, we also joined hands with Huawei to provide users with a more simple, convenient and intelligent services. By connect channel system with the Huawei Ability Gallery, users can easily access to their latest train ticket and booking information anytime without opening up [operation] program, apps and other quick apps. We also plan to synchronize booking information of flights, bus, hotels and attraction tickets in the near future to better serve our users. Besides, users can directly book our product services by this system. We believe this cooperation will help diversify our traffic sources and help increase conversion rates. On the other side, we’re devoted to empowering our PMS business to attribute a more efficient and resilient ecosystem. Our PMS helps individual hotels efficiently organize, schedule and manage their daily operations. Our intelligent hotel marketing system provides hotel partners with a [varied] traffic attraction solutions. Our big data assistant tourist attraction in growing identity verification of tourists as well as tracking their travel routes in the past 14 days.

With that now, I will turn the call to Julian, who will share financial results for the first quarter of 2020.


Lei Fan, Tongcheng-Elong Holdings Limited – CFO [4]


Thank you, Joyce. I would like to review the results for the first quarter of 2020, then discuss the recovery trends for the second quarter. For the first quarter of 2020. Tongcheng-Elong reported a net revenue of RMB 1.01 billion, representing a 43.6% year-over-year decrease from the same period of 2019, In line with our guidance range. Due to the impact of the coronavirus, our MAU dropped to 25% year-over-year with a CNY 148 million absolute number in the first quarter. Our MPU in the first quarter was CNY 14.8 million representing a 36% year-over-year decrease and a paying ratio of 10% compared with 11.6% for the same period of last year.

The paying ratio dropped for several reasons. One, restrictions and control measures by the government weighed more on the supply end than the demand end which led to a drop in our MPU. Two, the uncertainty of the travel needs caused by policy changing from time to time in the first quarter benefited our search volume but negatively affected the actual conversion rates. Three, the hunger for leisure travel boosted search volumes for travel products in the long run.

GMV was RMB 18.2 billion in the first quarter of 2020 with a 49% decrease year-over-year compared with the same period of 2019. The difference of year-over-year declines between MPU and GMV was mainly driven by: one, the hotel ADR dropped significantly which aligns with the whole industry trends; two, user purchase frequency and cross-selling rates dropped under the coronavirus as the demand mainly came from resumption to work and short distance travel.

Accommodation reservation revenue decreased to RMB 229 million, dropped by 53% in the first quarter of 2020. Room nights dropped by around 40% year-over-year. Geographically speaking, room nights sold in high-tier cities dropped by over 45% compared with only 25% decrease in lower-tier cities.

ADR also endured heavily negative impact, which was partially a result of a relatively long-term impact of our lower-tier city penetration strategy and a partial reason of the short-term impact of the hotel industry headwinds during the virus. The industry headwinds will fade and the negative impact on revenue caused by decreasing ADR will be largely offset by aggressive room net growth in the second half of 2020.

Meanwhile, the take rate of our accommodation business increased year-over-year as we were more disciplined in giving out our subsidies in the past quarter. Transportation ticketing revenue for the first quarter of 2020 was RMB 687 million, representing a 45% decrease from the same period in 2019, mainly driven by the decrease of air and ground ticketing volumes, especially the supply chain control in the past quarter as we mentioned above.

The take rate of transportation business increased year-over-year, along with an increase of the nonticketing (inaudible) attach rate. Because more customers would like to purchase insurance and use our Huixing service to find available itinerary during the coronavirus period.

We have already achieved a very good return for our ITA preparations such as Huixing system over the past 2 years. Other business, including advertisement, attraction, ticketing and membership card business increased by 153% to RMB 89 million in the first quarter. The increase was primarily contributed by the IPA-related business, such as hotel PMS and membership card business. The advertisement business contributed more than RMB 25 million in this quarter.

Gross margin was 65.1% for the first quarter of 2020 compared with 72.1% in the same period of last year and 70.6% in the previous quarter. Adjusted EBITDA decreased by 74% year-over-year to RMB 159 million in the first quarter. Adjusted EBITDA margin decreased to 16% from 34% period-over-period.

Adjusted net profit decreased by 83% year-over-year to RMB 78 million in the first quarter, exceeding the high end of our guidance range. Adjusted net margin decreased to 8% from 25% in the same quarter last year. In the first quarter of 2020, we booked over 40 million cancellation and refund losses and 18 million fair value decrease for full impairment on the historical investment in the private company. Excluding those one-off disposals, the adjusted net profit would be around CNY 136 million with a 13.5% adjusted net margin correspondingly. Excluding share-based compensation targets, cost was RMB 348 million in the first quarter with a 28% saving year-over-year and 39% saving quarter-to-quarter, aligned with the volume and revenue decline. Costs accounting for 35% of revenue in the first quarter compared with 27% in the same period of last year and 29% of revenue in the previous quarter. Excluding share-based compensation charges, total non-IFRS OpEx of accounted for 63% of revenue in the first quarter compared with 48% in the same period of 2019.

Sales and marketing spending was RMB 283 million, with 36% savings year-over-year and 61% savings quarter-to-quarter due to tight marketing activities control under cost saving modes. Sales and marketing spending accounted for 28% of revenue in the first quarter compared with 25% in the same period of last year and 37% in the previous quarter.

Service development and the general administrative spending was RMB 353 million, with 15% year-over-year savings and a 25% saving quarter-to-quarter. By the end of the first quarter, our total headcount was 5,063, dropping 8% year-over-year and 6% quarter-to-quarter. Amortization of intangible assets from Tongcheng-Elong acquisition was included in the OpEx I mentioned above and was at the same level for the absolute amount year-over-year but to 6.9% of revenues in the first quarter of 2020 and 3.7% in the same period last year. As of March 31, 2020, the balance of cash and tax equivalents, restricted cash and short-term investment was RMB 5.4 billion.

Then turning to our expectation for the second quarter of 2020. Quarter 1 was the most difficult time for the macro and the whole industry, but we have already seen a very clear recovery path since March. Lower-tier cities recovered faster than high-tier cities due to different government restrictions and control measures. For example, the room nights in lower-tier cities have already turned to positive growth since April. Meanwhile, the recovery curve is still changing week-by-week because of the uncertainty of government policy, especially in Beijing and Shanghai. Thus, in the past several months, we closely monitor the market dynamics, promptly review and assess the situation and immediately adjusted our marketing investment strategy and personnel expenditure policies as well as reallocated the resource in different marketing channels. This robust and flexible operation strategy enable us not to waste any single dollar as not to miss any single rebound opportunities during this hard time.

In April, restrictions and control measures maintain stringent in high-tier cities, especially in Beijing, which negatively affected the overall recovery in the domestic market. Based on where we are in the quarter and considering the impact of the coronavirus, now we are focusing our quarter 2 net revenue to decline 24% to 29%, excluding share-based compensation and amortization from Tongcheng-Elong merger. The company expects non-IFRS net profit or adjusted net profit will be in the range of RMB 120 million to RMB 170 million. This forecast reflects our current and preliminary view, which is subject to change.

Last, the better future is ahead of us. We will persist in our key strategies and accelerate the penetration into lower-tier cities, more aggressively seizing market share in the accommodation business, proactively testing the online penetration approach for our bus ticketing business, cooperating with our different off-line [TFPs] for a broader user acquisition and efficiency improvements for the whole travel ecosystem. We are very confident in our ability to outpace the market and maintain #1 profitability in the following quarters.

Operator, we are ready to take the questions now. Thank you.


Questions and Answers


Operator [1]


(Operator Instructions) Your first question comes from Ronald Keung from Goldman Sachs.


Ronald Keung, Goldman Sachs Group, Inc., Research Division – Executive Director [2]


Congratulations on the first quarter performance. So I guess, two questions on my side. One on the accommodation take rate and the other on just outlook for margins. Firstly, on accommodation. And Julian, you mentioned that the take rates have gone up in the first quarter. How do we see the trend in April and May, particularly, are we doing a bit more kind of promotions to stimulate people’s behavior and to encourage them to travel more? And how are we seeing sort of the industry landscape with competitors in lower-tier cities or mostly on your kind of take rate strategy? And second, as seeing your margin profile — and actually was better than our expectation, second quarter revenue and the margin. How do you think of the margin trend into the second half? And given how flexible our cost structure is as we head into next year, just what are the moving parts to our margin and the recovery path that we should expect?


Lei Fan, Tongcheng-Elong Holdings Limited – CFO [3]


Thank you, Ronald. I would like first to put some comments on the GP trends and our profitability and then explain more on our accommodation strategies later. Yes, actually, for the first quarter, we have already successfully controlled our marketing operation and administrative cost and even match to breakeven — far more than breakeven under such challenging environment. For the — I think for the second quarter, we still implemented stringent cost control in April because the recovery is below our expectation, but may gradually invest in marketing and subsidies, depending on the market recovery pace. Nowadays, generally the year — on a year-on-year basis, our costs in quarter 2 may save like 40% plus. And the service development and the G&A may save like 20%, and our sales marketing dollars may save 5% year-over-year.

For management team, we cannot decide industry recovery trends, but it’s true that the management team is doing very good, dealing with the uncertainties with a robust and flexible adjustment of operations.

On one hand, our management team reviews and assess the recovery trends and expectations every week and then adjust our product strategies and marketing strategies to capture market recovery opportunities.

During the first quarter, we continued to enhance our product and service to make our users travel, more assuring during this epidemic period. We explored live stream sales and a product on the Weixin mini program and other short video platforms to stimulate industry recovery. With these strategies and our leading position in the market, especially in lower-tier cities, we were able to capture the initial market recovery in the past quarter.

On the other hand, our management team also adjust our call center staff roster schedule, employees’ expenditure policy to central to make sure our resources properly allocated and invested. That is why we could be far beyond industry recovery curve. Meanwhile, deliver a satisfied profitability in quarter 1 and a stronger — even stronger profitability in quarter 2. In the middle to a long run, we are — in the long run, we are very confident to realize a higher GP margin and higher net margin than last year as the recent COVID-19 allowed us to further optimize our cost structure and enhance our back-end efficiencies. And in the middle run or for the rest of 2020, the second half of 2020, we will still keep our strategy unchanged and may still invest more marketing dollars to drive the rapid growth of our accommodation business and gain share in lower-tier cities during the rebound period. And meanwhile, guarantee each investment was positive within 1 year. And at the same time, we also will allocate or invest in more resources on our ITA product research, such as Huixing, hotel PMS and air revenue management system, et cetera, to support our sustainable revenue growth in the long run. But the good thing is all of the initiatives investments won’t hurt our margin at all in the short and the long run because our cost structure is most lean after the coronavirus and as we further shaped our back-end efficiency and profitability. So that is my comment on the GP margin and NP margin. In terms of the take rate of the accommodation, as far as we know on the market situation, we don’t see any further subsidies increase in the market. So we think within this year, the subject is all of the players in this market will be disciplined to invest on subsidies. But for our accommodation strategies, in last year, our accommodation revenue has already beaten the industry growth with several multiples. This strong momentum is owing to a hyper growth of room nights volume, especially the success in low-tier cities penetration. Our success was also driven by domestic traveling market booming, online penetration rate gap narrowed down between high-tier cities and lower-tier cities. The cross-sell strategy within the company and our great cooperation with our suppliers on supply end, the hyper growth on accommodation’s room nights will continue to be our focus. So after the market is back to normal, we will continue to invest in more marketing dollars in some target areas to pursue an even faster market share penetration, both from off-line and online, but as long as the ROI is positive. So that is our strategy for accommodation in this year. Thank you.


Operator [4]


Your next question comes from Brian Gong from Citi Group.


Brian Gong, Citigroup Inc., Research Division – Assistant VP & Equity Research Analyst [5]


First of all, congratulations for the solid results, especially considering tough situation in the fourth quarter. I have two questions. First one is can management share recovery trend in April and May? I appreciate if you can break down by business travel, leisure travel and school and work return, also by hotel, airline and railway. And the second question is regarding when do you think long-haul travel can recover. That’s my question.


Lei Fan, Tongcheng-Elong Holdings Limited – CFO [6]


Okay, Brian. I will give you some comments on the recovery trends. And then I would like Joyce to share some long-term recovery trend and industry knowledge to you.

Actually, as we mentioned in our prepared remarks, the market situation is changing rapidly every week. It is very difficult for us to give concrete guidance for the next few weeks or next few months. But for April, actually, it is out of everyone’s expectations, data control measures and restrictions in high-tier cities have been in place for so long and so severe, especially in Beijing, which affected the overall recovery pace of the domestic market. Thus, the April actual performance is below our expectation. The revenue declined around 40%, just slightly better than March. However, things changed a lot in the end of April after the reopening for high-tier cities, especially Beijing. Traffic and order rebound very fast for business travelers and for short distance leisure travelers. So based on the current recovery status, we estimate a less than 30% revenue decline for May and less than 10% revenue declines for June. So yes, that’s — based on our current data knowledge, as I mentioned in the prepared remarks, we’re forecasting the quarter 2 revenue to decline 24% to 29%. And to answer your question by segment, the accommodation reservation revenue, we estimate to decline 28% to 33%. Of this, for domestic business, domestic accommodation business to decline 20% to 25%. And for international accommodation business, down to near 0. In terms of the room it lower-tier cities on nice turn to year-on-year growth since April, and we expected a total domestic room night turned to year-on-year growth in May and June. The revenue decline is driven by the ADR drop in quarter 2 as the same reason that we mentioned in the prepared remarks, the take rate is quite stable, as I explained in last question, year-over-year. And we observed a very decent in subsides investment for the whole industry. In the second quarter, we started to accelerate the off-line user acquisition in Front hotel in hotel from debt, especially in Western China and Southern China. It already contributed around 5% of our total room net and expected to achieve positive ROI within 1 year.

For transportation ticketing revenue, we expected to decline 20% to 25%, of which for domestic transportation business declined like 15% to 20%. And then for international business, still down to 0 — down to near 0. Ticketing volume recovered are behind revenue recovered due to supply chain control, as we mentioned. Monetization was increased year-over-year for both air and train, benefiting from station pickup service and our ITA applications, such as Huixing contribution.

In the quarter, we accelerated business development on bus ticketing online penetration with more investment on ticket vending machine — ticket vending machine, yes, at bus station. We believe that will be a new user acquisition channel as most of the user acquired from bus ticketing are new users to our platform. It will also be another catalyst for the growth of our MPU. Other business revenue to decline like 15% to 20% mainly impacted by attracting ticketing, year-over-year dropped. Membership card business, PMS business, advertisement business are growing in this quarter. For the — I think for the middle run, there is no change on our core strategy. But the only thing is the acceleration. Domestic business booming, lower-tier cities penetration, balance the one-stop shop product to develop, traffic monetization and the technology monetization, we believe the industry will be more consolidated and strong players will get stronger in the following year. As for the industry, for the macro trends, I’d like Joyce to share her view.


Joyce Li, Tongcheng-Elong Holdings Limited – Investment Director of Tongcheng Network Technology [7]


Brian, thank you for your question. As we have seen the recent trend of business recovery, and we think that the domestic travel market has already bottomed in quarter 1. And Hep has mentioned before, both the central government and the local government has launched policies and a series of measures to boost the local economy and the local consumption. And I think we began the encouragement to travel within the province and people start to have local travel to nearby tourist attractions and as we have mentioned on our past platform. So the accommodation recover faster than transportation during the Labor Day holiday. We believe that users may undertake longer time before they go for interprovince cross domestic leisure travel due to the government’s restrictions. And most of the domestic business travel in low-tier cities has recovered, and we expect this travel in high-tier cities will also be consumed with the loosing of the restrictions by the government. And now we all see that the damage in China is now under control. And while many other countries are still suffering from the coronavirus outbreak and continue to impose travel ban, it is expected domestic travel will grow stronger as outbound travel is almost completely halted and may remain limited for a period of time. And as much leader in the domestic market will be benefit from the recovering domestic travel, especially in low-tier cities, and we will closely monitor the market development. But for now, it is still difficult to predict the overall situation in 2020 as the condition is still changing week-by-week because there’s the uncertainties of the government policy. But as the epidemic has been effectively controlled recently, I think the travel industry is recovering now and we are optimistic about our business recovery. Except for the government policies and — we are still able to outpace the industry with our strong spending in low-tier cities and high proportion of demand from business travel and the resumption of work as well as stable and diversified traffic sources.


Operator [8]


Your next question comes from D. S. Kim from JPMorgan.


D. S. Kim, JPMorgan Chase & Co, Research Division – Head of Asia Gaming, Lodging & Leisure [9]


I actually have a simple two housekeeping ones, if I may. First, can we get a bit more details on our hotel business by region, i.e., perhaps a breakdown between low-tier versus high-tier in terms of revenue and room night? Not the growth that you provided in the release, but more the contribution in the latest quarter or last year. And perhaps if you have our estimated market share in low-tier cities versus competitors within OTA or total market. And I have a follow-up after this.


Lei Fan, Tongcheng-Elong Holdings Limited – CFO [10]


Actually, by region views, since, I think, the very beginning of last year, for the middle to low-tier cities, the growth rate is like 30% to 40% above the high-tier cities’ growth rate. And the trends, actually, even in the epidemic, if the trend is the same. For example, in last quarter, the year-over-year decline in high-tier cities, the room night declined like 45% or even higher. But for the low-tier cities, the decline trend is only 25% or it’s 75% recover year-on-year. And in the second quarter, as we estimated, the low-tier cities has already turned to positive growth since April. And also, we estimate like 20% to 30% or even more percent year-on-year growth for low-tier cities in May and June, mainly built by the localization consumption, the localization consumption and short business leisure travel. But for the high-tier cities, it’s still a year-on-year decline in April, but already turned to positive growth in May and June. So that is the geographic view for the accommodation room nights’ growth. And in terms of the market share, actually in low-tier city and middle to low-tier cities, because the online penetration rate is still very low, there’s only 20% of the online penetration. So for the total market, on the — for the OTA, the market share is still in the very beginning stage. For us, although we take like 40% to 50% of the total market share of the online part. But still, for the total market, it’s still very, very low. It’s like 10%. So it provides us a very huge space for us to catch the market share and to catch market opportunities in those markets.


D. S. Kim, JPMorgan Chase & Co, Research Division – Head of Asia Gaming, Lodging & Leisure [11]


I have — before I forget, when — I think you remarked earlier that excluding all the one-off items, our first quarter net profit would have been CNY 137 million. But then when I look at our 2Q guidance, although our revenue should be about like CNY 200 million higher, we are only guiding CNY 120 million, CNY 170 million. So will there be any more one-off items that you modeled in the second quarter or guidance? And if I may, the final question is can we talk a bit about medium-term view on China travel as they come out of the pandemic, i.e., what are the behavior or consumption patterns that you see today, in your view, to stick throughout the recovery even after that, say, do you see that domestic travel becoming much more popular 1 year, 2 year, 3 years down the road than before versus outbound travel where — any other takeaways or lessons that you have learned from the pandemic that’s going to stick even after the recovery? And that’s all for me.


Lei Fan, Tongcheng-Elong Holdings Limited – CFO [12]


For the bottom line guidance in quarter 2, actually, because of the things changed time to time, especially in April and also in May, so actually, we only can do the estimation a little bit conservative. So CNY 120 million to CNY 170 million is a little bit conservative for us. And we have to make sure we can achieve this one. And also, there’s also some kind of onetime disposals in the quarter 2 and also included in our guidance. Yes, our guidance. So that is about the — our bottom line guidance. In terms of the industry change or the long-term industry opportunities, Joyce can give you some examples.


Joyce Li, Tongcheng-Elong Holdings Limited – Investment Director of Tongcheng Network Technology [13]


Okay, thank you D. S. As Heping Ma has mentioned, we conjured from the data on our platform, we already see the bottom up in the quarter 1. So in a still longer term, we believe that’s a great chance for the travel market in China [to go by], increasing our penetration rates of different travel products, especially in low-tier cities as users find it convenient to change, follow-up and cancel their orders through online booking. And on the other hand, I think the coronavirus will (inaudible) hotel churn rate. It may be accelerated as the individual hotel finds it difficult to face the challenge alone. So they could gain better support from hotel channels to overcome the difficult situations. As for the pandemic, the (inaudible) changing consumer consumption concepts, I think the consumers have higher requirements for the core to product services. There might be a market consolidation or revolution within industry that we operate, creating opportunities for stronger and more competitive (inaudible). And also due to the coronavirus right now, I think it’s also a chance for another boost in the domestic travel. And besides that, we think the pandemic will also bring new trends to the travel business, such as more [advanced] booking, increasing the popularity of the QR code scanning transactions, more leveraging on content social sharing platforms, et cetera. And I think we are well positioned and we have sufficient resources to capture these trends. And I think as our (inaudible), we will have more investments in (inaudible) low-tier cities on penetration, especially in the accommodation segment, as Julian has mentioned. And we will also have more investment in (inaudible) hotel management pilot (inaudible) recommend of the hotel chain in China.


D. S. Kim, JPMorgan Chase & Co, Research Division – Head of Asia Gaming, Lodging & Leisure [14]


Congrats again on the strong result, and I hope to see you even more in the coming quarters as you may have suggested.


Joyce Li, Tongcheng-Elong Holdings Limited – Investment Director of Tongcheng Network Technology [15]


Yes, looking forward to see you then.


Operator [16]


We will now proceed with the last question for today. Your last question comes from Thomas Chong from Jefferies.


Thomas Chong, Jefferies LLC, Research Division – Equity Analyst [17]


Congratulations on the strong bottom line ahead of expectations. I have a question about the second half story for Tongcheng-Elong. Given the fact that the month-on-month trend continues to improve, and we are seeing positive year-on-year growth as we come to the month of June for the hotel business and transportation is supposedly to recover better than hotels, should we expect any time in the second half that we are experiencing positive growth? Any color on that?


Lei Fan, Tongcheng-Elong Holdings Limited – CFO [18]


Thomas, yes, actually, just like what we mentioned, it’s very difficult to provide a concrete or guidance in the long run. Actually, we — it’s very difficult to forecast like one quarter later. But for our second half business strategy or the company’s focus will not change, and our strategy is also matched with the recovery trend. We will continue to dig into the traffic on Weixin platform and endeavor to further increase our penetration on Weixin in this year. We will continue to do that. And we will further penetrate into lower-tier cities’ market as we have been doing very well in the past few years. But expect an acceleration on online penetration rate in low-tier city will reinforce our determination to seize these market opportunities. We will further improve our products and service with the technology as we aim to be pioneer to transform to an ITA. For example, we will upgrade the Huixing system in terms of the algorithms, layout, supply and consolidation. And meanwhile, we are trying to explore new traffic channels and sell travel products through live streaming, et cetera. We are also trying to acquire users through off-line, such as bus and tourist attraction ticketing, vending machines and hotel QR code scanning.

Leveraging on our industry-leading position, I think the long-term partnership and cooperation with suppliers, the excellent product technology and innovation capabilities and we have solid cash position, strong organization management and flexible management, efficiency — high back end efficiency, we will not only to overcome this challenge but also to seize opportunities presented by the challenge. Thank you.


Kylie Yeung, Tongcheng-Elong Holdings Limited – IR Director [19]


Thank you, we are closing the call now. If you wish to check out our presentation and other financial information, please visit the IR section of our company website. Thank you, and see you next quarter.

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