We are optimistic about Tongcheng Travel, as spending in China's service sector continues to outpace that in the retail goods sector. In our analysis of the China travel market, we believe Tongcheng is undervalued compared to Trip.com, primarily because it lacks an ADR secondary listing and has lower brand recognition, even though both companies offer similar domestic travel options. Our fair value estimate suggests a price/earnings ratio of 27 times, while Tongcheng's shares are currently trading at a high-teens P/E. We also note that Tongcheng has limited exposure to international revenue, which is on the rise and is expected to triple its contribution to total revenue, reaching 15% in the next three years; this growth is anticipated to outpace that of Trip.com. Furthermore, we expect Tongcheng to experience operating leverage, as strong revenue growth leading into 2025 should enhance its operating margins.
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