Raising Trip.com FVE to USD 42.50; Q1 Guidance Sees Faster Recovery, Higher Steady-State Margin

We raise our Trip.com fair value estimate to USD 42.50 (HKD 339) from USD 36 (HKD 287) after its first-quarter 2023 guidance showed faster-than-expected recovery for both domestic and international revenue. We are more bullish about an accelerated recovery for China’s travel industry in 2023 and expect it to now recover to 95% of 2019 levels, and that international revenue will account for 20% of total revenue, driven by Trip.com’s overseas business and continued outbound flights. The recovery acceleration and increase in short-term revenue also leads to higher steady-state operating margins, which accounts for about 60%-70% of the valuation increase. We believe long-term operating margins can be greater at 20%-30% (including stock-based compensation) versus prepandemic levels of 19%, after Trip.com was able to reduce its operating expenses and indicated that it can maintain lower spending levels in the long term.