The third quarter of this year marked a significant period for the global tourism industry, and Tongcheng Travel (HK: 0780) experienced a remarkable surge in its financial performanceThe company reported record-breaking revenues and net profits, with a year-on-year revenue increase of 51.3%, reaching RMB 4.99 billionMoreover, its operating profit grew by an impressive 63.1%, amounting to RMB 980 millionWhile at first glance, these financial metrics appear impeccable, a deeper analysis reveals areas where the company lags behind its main competitor, Trip.com.

Despite the considerable gap in outbound travel value when compared to Trip.com, internationalization emerges as the only viable opportunity for Tongcheng to increase its market value by over 30%. The challenge, however, lies in overcoming the growth bottleneck, which is evident when scrutinizing user engagement and activity levels.

The data indicates that the growth rate of active users has been disappointingly low

In Q3, the average number of monthly paying users showed a mere 5% annual increase, and in Q2, there was even a decreaseAlthough, with a substantial user base of 46.4 million, such single-digit growth can be deemed acceptable, it should raise eyebrows, especially since Tongcheng integrated its vacation segment into its financial reports at the beginning of 2024. This change should theoretically correlate to dramatic improvements across various performance indicators such as user activity, transaction volume, purchase frequency, cross-selling rates, and average revenue per user (ARPU).

An analysis of the data related to the vacation segment brings to light why some analysts view the improved figures as indicative of a bottleneck: for instance, the annual growth rate of transaction value was only 2.4%, while the purchase frequency per user increased from 5.5 times a year in 2019 to 8 times in 2024, with cross-selling rates estimated to rise from 10% in Q3 2023 to 12% in Q3 2024. While ARPU did see a substantial increase of 54% by the end of September 2023, it appears that profitability gains are primarily derived from enhancing cost efficiency.

When placed side-by-side with Trip.com, the operational discrepancies become more evident

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Trip.com reported revenues of RMB 15.9 billion and operating profits totaling RMB 5.01 billion in Q3, while Tongcheng's revenue stood at RMB 4.99 billion, approximately one-third that of Trip.com, and its operating profit at RMB 980 million was merely one-fifth of Trip.com’s figureDelving deeper, Tongcheng’s revenue from accommodation services amounted to RMB 1.38 billion, only 20% of Trip.com’s share; transportation ticketing revenue reached RMB 2.03 billion, equating to 36% of Trip.com's revenue; and their vacation segment garnered RMB 980 million, 63% of Trip.com’s performance in the same area, which indicates a fair showing in that domain.

So, why does the disparity in profitability between Tongcheng and Trip.com exceed the differences in transaction volume? Numerous factors contribute to this gap, but the crucial element is undoubtedly Trip.com's robust international earnings capability

While domestic competitors might engage in fierce market competition for Chinese travel destinations, Trip.com capitalizes on outbound travelers from China efficiently, unlike others dependent on foreign users.

This scenario leaves Tongcheng with a clear challenge: to boost its average revenue per user (ARPU), internationalization will be essentialShould Tongcheng excel internationally while Trip.com refrains from aggressive competition abroad, it could see significant profitsConversely, if Trip.com opts to engage in fierce competition internationally, this would diminish its profit margins, enabling Tongcheng, yet again, to capitalize on these shifts and possibly yield even greater returns.

However, currently, Tongcheng's internationalization poses no significant threat to Trip.comOne might envision how enticing the prospects could be, yet Tongcheng’s international ventures aren't enough to significantly challenge Trip.com's dominance

Estimating the revenue generated from outbound Chinese sources, while Trip.com hasn’t disclosed its international earnings from Q3, previous reports indicate that around 35% of its total revenues stemmed from international sources, roughly equating to RMB 5.57 billion.

By comparison, Tongcheng’s international revenue in Q3 only constituted approximately 5% of its core online travel platform revenue, translating to 4% of total revenue, about RMB 200 million, which is a meager 3.6% of Trip.com's equivalent earningsThis signifies that Tongcheng's grasp over outbound Chinese tourism remains fairly preliminary.

When observing the revenue stemming from international sources—excluding the Chinese market—Trip.com's international travelers accounted for around 9% of the total revenue, corresponding to approximately RMB 1.43 billionConversely, Tongcheng's international traveler revenue can be considered negligible in comparison

This situation aptly illustrates that the "Tongcheng Travel" brand holds limited significance in attracting international clientele, and management has yet to replicate Trip.com's successful strategy of establishing financially independent divisions to entice foreign customers.

Nonetheless, even without deploying the Tongcheng brand, there are identifiable capabilities and resources at their disposal to attract international clientele, as has been demonstrated through various initiatives and investmentsHowever, the geopolitical landscape serves as a double-edged swordFor Trip.com, it poses significant risks, while for Tongcheng, it may offer unexpected advantages.

A look at equity investments in emerging companies reveals an intriguing dynamicTrip.com stands uncontested as the titan of China's global tourism strategy, underscoring its acquisitions of companies such as Skyscanner in November 2016, Travelfusion in January 2015, and MakeMyTrip in January 2016. Each of these ventures harbors substantial influence across their respective domains.

This extensive portfolio is, however, accompanied by scrutiny from international regulatory bodies, particularly given Trip.com's market capitalization nearing $40 billion, prompting closer examination of its investment activities, acquisitions, and growth strategies

If we shift perspectives slightly, reimagining the acquisitions initiated by Trip.com under the current geopolitical climate would likely result in untenable outcomes, with many deals falling through amidst regulatory hesitations.

Conversely, even though Tongcheng is backed by Tencent, it boasts a market valuation of only $6 billion—about one-eighth that of Trip.com—thus sidestepping the intense regulatory spotlight often faced by larger entitiesThis situation, while not constituting a deliberate advantage for Tongcheng, presents an accidental yet rewarding opportunity.

In this milieu, Tongcheng appears to be strategically investing heavily in the Japanese market, focusing on hotel management brands to establish a foothold in the region closest to China, which provides the highest Average Order Value and the most diverse destination offeringsThis approach—banking limited resources for a concentrated breakthrough—seems to be the most pragmatic path forward.

Apart from Japan, there are also noteworthy initiatives from Tongcheng's overseas operations including their rebate platform, Azgo, launched in Singapore, and HopeGoo in Hong Kong

Both platforms emphasize performance marketing over traditional brand marketing, further diversifying their strategy.

Tongcheng's unique position combines a strong domestic presence with relatively feeble international endeavorsFrom the perspective of price-to-earnings ratios, they share parity with Trip.com, leading investors to speculate on the potential of this travel company—capable of generating over three million daily active users around China's National Day—to harness outbound travel from Japanese destinations or even initiate strategic challenges overseas by leveraging equity investments.

The question of whether it will be easier for Trip.com to reach a 30% increase in market value through the Trip.com brand or for Tongcheng to achieve similar growth through internationalization will undoubtedly become a compelling topic for 2025. This scenario encapsulates not only the competitive dynamics of the travel industry but also highlights the ongoing evolution and adaptation required by firms looking to thrive in an increasingly interconnected world.