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Elevator pitch
I assign an investment grade rating to Tuniu Corporation (Nasdaq: Round). My view on TOUR as a potential investment is mixed. On the one hand, Tuniu reported its first quarter of GAAP profitability in the first quarter of 2024 and its potential buyback. The return is at a high single digit percentage level. On the other hand, the actual top line for the second quarter and the full year may be lower than expectations due to multiple factors such as a high base last year and lower travel spending per capita.
Company description
On its investor relations website, Tuniu calls itself an “online leisure travel company in China” offering “bundle tours” and “travel-related services.”
TOUR offers at a glance
Tuniu Company Fact Sheet
Overview of Tuniu’s travel and network coverage
Tuniu Company Fact Sheet
In the last fiscal year or fiscal year 2023, TOUR derived 76% and 24% from The top line of packaged tours and other travel offers, respectively as revealed on 20-F filing. The company also generated its revenues entirely from its home market, China, in the previous year.
Reaching a profitability inflection point and well-executing buybacks is a positive
I’m impressed with TOUR’s underlying performance and shareholder capital return last quarter.
Tuniu generated positive GAAP net income attributable to shareholders and non-GAAP net income attributable to shareholders of CNY13.9 million and CNY19.7 million, respectively, for the first quarter of 2024. In contrast, TOUR suffered from Headline net losses and normalized net losses of -RMB7.0 million and -RMB5.4 million, respectively in the fourth quarter. These numbers were obtained from the company’s first quarter results press release. In its results statement, Tuniu said its non-GAAP earnings were adjusted for “stock-based compensation expense, amortization of acquired intangible assets, impairment of goodwill and impairment of property and equipment.”
TOUR has achieved positive normalized or non-GAAP net income for four consecutive quarters spanning the second quarter of 2023 and the first quarter of 2024. Importantly, the first quarter of 2024 was the first quarter to achieve GAAP Positive or main net profit of Tuniu. It would be fair to say that TOUR has reached an inflection point in terms of its profitability.
In its Q1 2024 results summary, Tuniu noted that it focused more on “more profitable products, such as our in-house packaged tourism products” and used “automation systems” to “improve operational efficiency.” In other words, TOUR was able to boost its profitability by improving its revenue mix and relying on technology to achieve cost savings.
While TOUR did not provide guidance on the bottom line, the company stressed in its most recent quarterly earnings call that it will “do everything possible to achieve continued profitability.” Also, current consensus financial projections were obtained from Standard & Poor’s Capital IQ We note Tuniu recording a positive headline and normalized earnings of CNY9.4 million and CNY11.3 million respectively for the full fiscal year 2024.
Separately, Tuniu’s improved performance has given the company confidence in returning excess capital through share buybacks. The company does not pay dividends.
In mid-March, TOUR launched a new $10 million buyback plan, which has no expiration date. In the two-and-a-half months between mid-March and the end of May, Tonio spent $2.9 million on stock buybacks.
Assuming Tuniu continues to repurchase its own shares at a pace similar to or greater than $2.5 million per quarter, TOUR will likely be able to complete its current stock repurchase program within a year. This means the potential one-year stock buyback return is an attractive 7.6% based on my calculations.
To sum things up, TOUR posted positive GAAP earnings for the first time in the company’s history, and it’s off to a good start implementing its buyback program.
But guidance points to a slower pace of revenue growth in the second quarter
On the other hand, Tuniu’s higher growth forecast for Q2 2024 is less favorable than the actual expansion in Q1 revenue.
TOUR’s revenue jumped +71% year-on-year to CNY108.0 million in the first quarter of this year. But the company expects its top line to expand by a relatively more modest +17% year-on-year to CNY117.4 million, at the midpoint of its guidance.
I’m concerned about Tuniu’s actual Q2 2024 and full-year 2024 performance, considering a number of factors.
The first factor is that a high base can impact TOUR’s top performance for subsequent quarters of the year. The company’s revenues in RMB or local currency were up +52% year over year in 1Q 2023. But Tuniu’s revenues were up +171%, +129%, and +266% in 2Q2023, 3Q2023, and 4Q From 2023, respectively. On an annual basis.
The second factor is that Tuniu’s non-core or non-packaged travel business has been growing at a slower pace than its core packaged tour business. In Q1 2024, TOUR’s revenues derived from packaged tours and other travel services expanded +107% YoY and +9% YoY, respectively.
Looking ahead, Tuniu noted in its first-quarter earnings report that “revenues from our core business, packaged tours, will achieve a higher growth rate than total revenues” in the second quarter of 2024. This, in turn, suggests that its other, non-core travel-related businesses may continue The business is in modest performance for the second quarter of the year and beyond.
In its 20-F filing, TOUR highlighted that non-essential travel offerings include “attraction ticket sales, visa application services, hotel reservation services, airline ticket services, train ticket services, car rental services and insurance services.” Although more recent data is not available, Tuniu was the leader in the package tour market in mainland China boasting a 20% market share a decade ago. It’s reasonable to believe that TOUR will find it difficult to compete in other non-core travel segments, which explains why revenues from its other travel-related offerings are growing much more slowly than its core packaged travel business.
The third factor is that an increasing number of Chinese travelers may choose to travel alone instead of signing up for tours to save costs, which will be negative for Tonio. May 6, 2024, Reuters The article noted that travel spending on a per capita basis during China’s Labor Day holiday in the first week of May this year was 11.5% below pre-pandemic levels. This suggests that Chinese travelers’ travel budgets may have shrunk, which may translate into lower demand for package tours.
Concluding thoughts
In my opinion, a Hold rating for TOUR is warranted, after considering its improving profitability, shareholder capital return and revenue growth outlook. Tuniu’s ratings are also roughly at the same level as its peers, and this provides support for the Hold rating as well. The market currently values TOUR at 13.9 times (Source: Standard & Poor’s Capital IQ) Forward consensus FY2024 P/E multiple. In comparison, peers Tongcheng Travel (OTCPK:TNGCF) (780:HK) and TripAdvisor (TRIP) are now trading at consensus forward Earnings of 13.4x and 13.5x respectively according to Standard & Poor’s Capital IQ Data.
