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Mizuho analyst James Lee reiterated a Buy rating on the shares of Trip.com Group Ltd (NASDAQ:TCOM) with a price target of $55.00.
For China, the analyst says top-line growth remains uncertain due to macro, but outbound travel is the rare silver lining in an otherwise subdued outlook. As a result, the analyst chooses Trip.com as the top pick.
Heading into FY24, the analyst expects capacity of outbound flights to finally converge with demand, leading to strong rebound in revenue and profitability.
With flight and hotel prices being higher post-pandemic, the analyst expects margin multiples to expand.
The analyst also notes that outbound margins are two times those of domestic travel.
TCOM will benefit from China's outbound travel as the growth of flight capacity starts to meet with pent-up demand, says the analyst.
Outbound will be a key driver, as the analyst sees airline capacity improvement, an increasingly easing visa environment, and supportive policies together to drive outbound travel growth back and beyond pre-COVID level in FY24.
Better FY24 outlook during 4Q23 earnings and incremental supportive visa policy releases on outbound and inbound travel are seen as main catalysts for TCOM.
The $55 price target is based on 20x 2025E EBITDA, a modest premium to Booking Holdings Inc (NASDAQ:BKNG) as China's travel market is expected to grow faster than other markets, says the analyst.
If the company can win lower-tier markets in room nights, and successfully grow its outbound business with strong room night growth, the analyst believes investor sentiment will turn constructive.
In such a scenario, the analyst opines that the stock would deserve a higher multiple at 30x of EBITDA.
If the company's take rate has to be pushed down further to maintain market share in higher-star hotels due to competition, EBITDA growth could slow further, adds the analyst.
Price Action: TCOM shares are trading lower by 1.81% at $35.89 on the last check Wednesday.
