Tongcheng Travel Holdings Ltd

HKEX:780

Earnings Call Transcript 2020-Q2

[Kylie Yeung, executive]

Thank you. Good morning and good evening, everyone. Welcome to Tongcheng-Elong's 2020 Second Quarter Results Conference Call.

I'm Kylie Yeung, Investor Relations Director of the company.

Joining us today on the conference call are our Executive Director and CEO, Hep Ma; our CFO, Julian Fan; and our Vice President and Head of Capital Markets, Joyce Li. For today's call, our management team will provide a review of the company's performance in the second quarter of 2020. Hep will walk us through our business for the period. Joyce will then discuss our operational highlights in the second quarter. And lastly, Julian will address the details of our financial performance accordingly. We'll take your questions during the Q&A session that follows.

As always, our presentation contains forward-looking statements. Such statements are based on management's current expectations and current market operating conditions and relates to events that involve known or unknown risks, uncertainties and other factors, which may cause the company's actual results, performance or achievements to differ from those in the forward-looking statements. This presentation also contains some unaudited non-IFRS financial measures. They should be considered in addition to, but not as a substitute for, measures of the company's financial performance prepared in accordance with IFRS. For a detailed discussion of non-IFRS measures, please refer to our disclosure documents in the IR section of our website.

With that, I would like to turn the call to our CEO, Hep. Hep, please go ahead.

[Heping Ma, executive]

Okay. Thank you, Kylie, and thank you all for joining us today. I hope everyone has stayed safe and sound during this [indiscernible].

It's been more than 6 months since the outbreak of COVID-19 in late January. Unfortunately, this -- the virus continues to spread across the globe and has been impacting every walk of life as social distancing policies remain in place in many areas to [ contain ] the spread of the pandemic. China, however, stands out during the fight against the pandemic, thanks to quick response and effective control measures. The epidemic is all but contained in China despite the emergence of confirmed cases in some regions. As such, life in China has returned to normal and economic activity has fundamentally resumed. In mid of July, the government lifts the restrictions on the inter-provincial tour package; similarly, further relaxation of travel restrictions and the encouragement of domestic travel. By all means, this is beneficial to the whole travel industry.

In the past quarter, we were still faced with uncertainties and challenges as new cases were confirmed in some places and new restrictions were imposed as a result. However, we managed to deliver solid results and continued to outperform the industry average for a second consecutive quarter. This was mainly due to the following factors: our structural advantages in some regions where restrictions were relaxed as early as in late March, our flexible coping strategies to the disruptions and the prompt response to external changes. Our business maintained its recovery momentum in the second quarter and even picked up further momentum in July. In addition, both accommodation and the transportation segments saw increases in market share as our recovery surpassed the industry average.

In terms of room nights sold, our accommodation business has recovered nicely during the past quarter with an accelerating rebound month to month. Lower-tier cities have made their recovery with room nights sold registering about a 15% year-over-year growth for the second quarter. The resilience of lower-tier cities during the pandemic has endorsed our strategy to invest more resources there. As such, we will spare no efforts to enhance our market share in those cities.

As for our transportation business, both air and the train ticketing business have outpaced the industry average. Our air ticketing business saw 80% recovery in volume for the past quarter and surprisingly positive growth in July resulting from our solid market position in Southern and the Southwestern regions, where demand has steadily picked up since the virus has been effectively contained. Our train ticketing business saw faster recovery in revenue relative to volume as users continuously opted the self-services provided by our intelligent Huixing system, wherein suppliers were [ not fully released ] during the quarter.

During the pandemic, we kept exploring our traffic sources. We have seen positive growth in mini program. The traffic platforms have all joined to develop their own mini program ecosystems. As both a pioneer and veteran in mini programs, we are in the best position to work out this industry change. We have worked with multiple platforms to help them build mini program ecosystems. By providing expertise and experience, we have accelerated in both developing and operating Weixin mini program. Our pickup and other new channels have registered positive growth in the second quarter, contributing around 10% to our MAU. We're devoted to improving the online penetration of various travel sectors, especially in lower-tier cities, by cooperating with our suppliers, including hotels, bus stations and attractions. These initiatives aiming at acquiring off-line users have contributed more than 8% to our MPU for the second quarter.

In the depths of pandemic, we took on the responsibility as a market leader, focusing on protecting our users, supporting our suppliers and revitalizing the market by launching various initiatives. We opened an online self-service cancellation function to fast-track refund and changes. We launched the Safe Room initiative to ensure the safety of hotel guests. Leveraging our field traffic and core Internet technologies, we worked with local governments to revitalize the post-pandemic local economy. We helped promote tourist destinations and build tourism brands for many regions and cities free of change. We joined hands with local governments to live stream local tourist attractions and increase their market reach. We also helped distribute consumer coupons across our platforms in response to Chinese government's initiative to stimulate consumption.

And in spite of the disruptions caused by the pandemic, we remain keenly focused on our long-term strategy, which is important for us to emerge as a stronger company in the future. We continued to implement our strategy to further penetrate lower-tier cities and [ break ] every recovery opportunity there during the past quarter. The resilience and huge potential we have seen in lower-tier cities demonstrate that we are on the right track to register growth. At the same time, we continuously pushed forward with our initiative to enhance organizational efficiency. The success of a company depends not only on the [ validity ] of its strategy but also on the execution. In the first half of the year, we focused on integrating our strategic goals and [ pushing them ] among team members so that they can gain a better understanding of our mission and vision of the company and strengthen their commitments to the company. This will increase the implementation efficiency and bring long-lasting positive impacts on the company.

On the other hand, this formidable virus also made me rethink our brand in the long run. As I mentioned in our first quarter call, we announced a campaign in late April to upgrade our brand so as to emphasize our focus on younger generations and on lower-tier cities. The redesign of our brand emphasizes our ambitions to better understand our target users and satisfy their ever-changing needs. In the short run, the road ahead remains challenging with uncertainties. But from a broader perspective, I'm quite confident about the future of our business.

On the macro front, the Chinese government plans to increase investments in intercity transportation infrastructure as well as pushing forward with the integration of transportation, tourism and IT sectors so as to stimulate domestic consumption, which we believe will grow the overall size of transportation and tourism markets and correspondingly benefit OTA platforms. And furthermore, the pandemic has accelerated migrating to the Internet in lower-tier cities as a result of social distancing. This [ then presents ] great opportunities in lower-tier cities for Internet enterprises with leading positions like us.

We have been seeing this crisis as a stepping stone to greatness since the beginning of the outbreak. During the pandemic, we kept our eyes wide open for external changes to act rapidly to any change and seized every opportunity for recovery. And now we are on our way to even greater success.

Now I will turn over the call to Joyce. She will walk you through our operational highlights in the second quarter.

Well, Joyce, please?

[Joyce Li, executive]

Thank you, Hep.

This coronavirus has been [ badly controlling ] China at outset. There remained a resurgence in some areas in second quarter. However, we overcome all these difficulties and delivered quite strong results for the reporting period along with graceful recovery curve. During the past quarter, our traffic on Weixin platform remained stable and has impacted growth since May. Based on our structured partnership with Tencent and our in-depth insights in user needs, we further deepened cooperation in Weixin to build a world-class travel ecosystem. Users can have quick access to our train ticketing service by keying "train ticket" at [ Weixin searching ] portal. This will surely help us to have more traffic from [ Weixin ] platform [ as tool users demand multi basis ].

On the other hand, we've reached extensive cooperation with China's major handset vendors in terms of live promotions and traffic acquisition. We've provided travel benefits for users of these vendors, while in return, the vendors [ then will get ] platform traffic towards our brands and help us find these users. Furthermore, users can get a direct access for that information in our hotel booking service by typing hotels within this platform, which will help shorten user decision-making process and hence facilitate transaction conversion.

Along with increased investments in our quick APPs as well as partnership with live-stream platforms, as Hep mentioned above, our MAU in quick APPs registered positive growth in the second quarter.

In the second quarter, our average MAU improved quickly with a slight year-over-year decrease of 3.3% to 175.6 million, mainly benefiting from the increase in searching volumes as a result of a rebounding consumer confidence and eagerness for outdoor activities. However, travel restrictions in certain areas and [ shortage of ] suppliers of travel products resulted in pent-up demand and delay of travel plans. Consequently, our average MPU declined by 32.9% to 18.6 million for the quarter. Meanwhile, our total GMV experienced a year-over-year drop of 45.8% to RMB 22.4 billion.

We've been proactively engaged in promoting digitalization of several travel sectors in lower-tier cities as increased, intense penetration is one of the main drivers for our business growth. We've cooperated with certain hotels [ and locate their working gaps ] to book rooms on our platform so as to transform their booking traffic from offline to online. This initiative has generated around 5% of our room nights sold in the second quarter. We see [indiscernible] as a potential growth engine for our business considering significantly low online penetration rates.

We joined hands with bus operators and placing vending machines at bus stations to acquire off-line traffic. So far, our daily volume has achieved more than 250,000, and we'll [ sit at around ] 5,000 machines across China. During the pandemic, vending machines contributed about 55% of the bus station volumes on our platform. We also initiated cooperations with tourist attraction operators to build [ self-service-plus offices ] by placing vending machines within attraction areas.

The 3 off-line initiatives will help accelerate digitalization of the travel industry by empowering our partners while promoting noncontact booking to ensure safety during the pandemic. We believe they will also bring us a sizable amount of additional paying users in the coming future. In August, our MPUs have produced a positive growth, many thanks to the 3 initiatives, which have contributed more than 10% to our MPU in this month.

In the reporting period, we continued to innovate our products by further digging into users' underlying needs with every step of their travels. We enriched our scenario-based insurance products by taking external changes into consideration. Our COVID-19-related insurance and hotel cancellation insurance were among the most popular. We also offer these ancillary hotel items if they have concerns over safety and security problems at hotels.

We continuously pushed forward with our cross-selling strategy within the reporting quarter. Due to safety concerns and the low air ticketing prices in the second quarter, some of the users were more willing to [ hitchhike with the trends ]. This willingness facilitates our cross-sell from train ticketing to air ticketing. As a technology-driven enterprise, we're devoted to enhancing our user travel experience as part of our strive to transform from OTA to ITA. Our intelligent Huixing systems provided users with accessible and affordable travel solutions when tickets are not available. It continued to demonstrate its -- their value for users in the second quarter when suppliers remained in shortage. Meanwhile, we continued to optimize algorithms by integrating our insights on users' underlying needs so as to build a more user-friendly system and create more value for our users.

In the past quarter, we adopted real-time communication technology and provided customer service through real-time video [indiscernible], becoming the first OTA in China to adopt this technology for customer service. On [ the air ] side, we're also dedicated to empowering our suppliers' business in order to build a more resilient and highly efficient ecosystem. In 2019, we developed a revenue management system for small airlines. And now, more small airlines are adopting these systems given its lower costs.

[ As of that, through our ] mini program, we'll have accumulated extensive experience and a core technology in operating mini programs. In the second quarter, we also worked with certain airports to help develop mini programs by providing our expertise. We also cooperated with the tourist attraction operators and helped enhance the digitalization of industry, especially when crowd control measures such as requirements for reservations and a limitation for daily visitors were implemented during this time.

With that, I'll hand over the call to our CFO, Julian, who will give you more details of our financial results for second quarter.

Julian, please.

[Lei Fan, executive]

Thank you, Joyce.

I would like to review the results for the second quarter of 2020 and then discuss the forecasts for third quarter.

For the second quarter of 2020, Tongcheng-Elong reported a net revenue of RMB 1.2 billion, representing a 24.6% year-over-year decrease from the same period of last year and a 19.4% quarter-over-quarter increase, in the high end of our guidance range.

The year-over-year decrease of our MAU narrowed to 3% with an absolute number of 176 million in the second quarter mainly due to the exploration of new traffic channels, such as Weixin mini programs and other quick APPs, as Joyce mentioned. MAU has already turned to positive growth since May. Our MPU in the second quarter was 18.6 million, representing a 33% year-over-year decrease and a paying ratio of 10.7% compared with 15.2% for the same period of last year and 9.7% for the first quarter of 2020. The paying ratio dropped for 2 reasons. One, restrictions and control measures imposed by the government weighed more on the supply end than the demand end; and two, [ the hunger for ] leisure travel [ a little bit surged ] of travel products for summer vacations. But the paying ratio has already recovered to 11.5% in June. We are very glad to see that the MPU acquired from our off-line initiatives, such as hotels front desk QR code scanning and bus ticketing vending machines, reached 1.5 million in the second quarter or more than 8% contribution to our total MPU.

GMV was RMB 22.4 billion in the second quarter of 2020 with a 46% decrease year-over-year compared with the same period last year and a 23% increase quarter-over-quarter. The gap between MPU and GMV decline was mainly driven by the significant decrease in hotel ADR and transportation ATV. The plunge was caused by the industry headwinds and our lower-tier cities strategy.

Accommodation reservation revenue decreased to RMB 384 million, dropped by 30.6% in the second quarter of 2020 and increased by 68% from the first quarter of 2020. Domestic room night sales was almost flat year-over-year in the second quarter, of which those sales in lower-tier cities achieved about 15% growth mainly because, one, we invested more in online marketing resources since May; two, [indiscernible] cross-selling rates increased to 10% compared with 7% to 8% last year; three, off-line user acquisition initiatives started to ramp up and contributed more Than 5% of total room nights in the past quarter, as Joyce mentioned earlier. ADR saw considerable decrease mainly because of the short-term impact of the headwinds faced by the hotel industry during the pandemic. Meanwhile, the take rate of accommodation business increased year-over-year as we remained disciplined in giving out subsidies in the past quarter.

Transportation ticketing revenue for the second quarter of 2020 was RMB 726 million, representing a 22.5% decrease from the same period of last year and a 6% increase from the first quarter of 2020. The year-over-year decrease was mainly driven by a drop in air and ground ticketing volumes, especially the supply chain control, in first-tier cities in the past quarter, as we mentioned ago. The take rate of transportation business increased year-over-year. Along with the non-ticketing, we have the take rate increase because more users were willing to purchase insurance and use our Huixing service to find an available itinerary during the coronavirus period. Furthermore, we have achieved a significant progress in bus ticketing volumes from the off-line vending machines. With such great progress, we are very confident to accelerate the online penetration for bus ticketing sector in the following quarters.

Other business, including advertisement, attraction ticketing and paid membership cards, decreased by 10% to RMB 90 million in the second quarter, mainly impacted by the shrink in attraction ticketing volume during COVID-19 period.

Gross margin was 72.3% for the second quarter of 2020 compared with 64.7% in the same period last year and 65.1% in the previous quarter.

Adjusted EBITDA decreased by 39% year-over-year to RMB 267 million in the second quarter. Adjusted EBITDA margin decreased to 22% from 28% year-over-year.

Adjusted net profit decreased by 43% year-over-year to RMB 196 million in the second quarter. Adjusted net margin decreased to 16% from 22% in the same quarter last year. If we exclude the cancellation and refund losses and other one-off credits, the adjusted net profit would be around RMB 310 million, with adjusted net margins of 26% correspondingly.

Excluding share-based compensation charges, costs was RMB 329 million in the second quarter, with 41% savings year-over-year, in line with our -- well with the GMV and revenue declines. Costs accounted for 27% of revenue in the second quarter compared with 35% of revenue in the same period last year and in the previous quarter as well. Excluding share-based compensation charges, total non-IFRS OpEx accounted for 67% of revenue in the second quarter compared with 48% in the same period of last year.

Sales and marketing spending was RMB 361 million (sic) [ RMB 369 million ] with 9% saving year-over-year. We put more marketing investments with no heavy [indiscernible] in May and June to capture more market share during the domestic rebound. Sales and marketing spending accounted for 30% of revenue in the second quarter compared with 24% in the same period of last year and 28% in the previous quarter. Service development and general administrative spending was RMB 347 million with an 11% year-over-year decrease. Due to the impacts of the COVID-19, we recorded RMB 98 million impairment losses mainly on investee companies and receivables. The losses on receivables were caused by cancellations and refunds.

By the end of the second quarter, our total head count was 4,545, dropped by 19% year-over-year and 10% quarter-to-quarter.

Amortization of intangible assets from Tongcheng-Elong acquisition was included in the OpEx I mentioned above and was at the same level for the absolute amounts year-over-year, 35.8% of revenue in the second quarter of 2020 and 4.4% in the same period last year.

As of June 30, 2020, the balance of cash, cash equivalents, restricted cash and short-term investments was RMB 6.1 billion.

Now let's turn to our expectations for the third quarter of 2020.

Quarter 2 results demonstrated a clear rebound trend for the travel industry and our company, especially the situation in lower-tier cities. Room nights sold in lower-tier cities on our platforms have achieved a more than 20% year-over-year growth in June and July, while ticketing volume on our platforms reached over 250,000 per day with over 25% growth in June and July. In the past September month, we start to invest in more marketing dollars in some new initiatives such as hotel front desk QR code scanning and bus ticketing vending machines so as to aggressively acquire off-line users. We will keep our robust and flexible operations strategy so that we will capture every single rebound opportunity during the second half of this year.

Based on where we are in this quarter and considering the impacts of the coronavirus, especially on international travel, we expect our quarter 3 net revenue to decrease by 5% to 10%. However, if we exclude the impacts of the international business, which has been down to 0, and the impacts of prepurchased products, which have been sharply cut this year for risk control the like-for-like net revenue growth for our domestic business in quarter 3 should be in the range of 0% to 5%. That means our domestic business will enjoy a positive growth in quarter 3 which we believe will beat the industry again.

Excluding share-based compensation and amortization from Tongcheng-Elong merger, the company expects the non-IFRS net profit or adjusted net profit will be in a range of RMB 300 million to RMB 400 million. This forecast reflects our current and preliminary view, which is subject to change.

In second half of 2020, we will persist within our key strategies and further penetrate lower-tier cities. We will more aggressively seize the market share in every product line, especially in accommodation and bus ticketing business. We will [ seeking ] cooperation with TSPs for broader user acquisition and efficiency improvements for the whole travel ecosystem. We are very confident to outpace the market again and maintain #1 profitability in the following quarters.

Operator, we are ready to take the questions now. Thank you.

[Operator]

[Operator Instructions] We have our first question coming in from the line of Brian Gong from Citigroup.

[Brian Gong, analyst]

[Foreign Language] Okay, I will translate myself. Congratulations for the solid results. I have 2 questions. First is that can management elaborate more on the revenue recovery trend in recent months by segment. And what's management's expectation for the first (sic) [ third ] quarter? And the second question is regarding the market outlook in the second half. And given lots of new initiatives we are going to do for the second half, how should we look at our marketing expense?

[Lei Fan, executive]

Okay. Thank you, Brian. I would like to first comment on the latest status of the business and also our revenue forecast per segment and then provide more information on our sales and marketing strategy in the second half of this year. The summer vacation -- no. The quarter 3 actually is the traditional peak season for OTAs. But this year, for the 2 holidays, it's -- somehow, it's shortened. So at the very beginning, we think there's maybe some kind of impacts on the OTAs. But actually, now that it is end of August, we don't see any impact, any affected by the shortened 2 holidays.

Actually, for the latest status, business status, our business maintained the recovery momentum in the second quarter and even picked up further momentum in July and August. And like what I said, we don't see any impacts by our shortened 2 holidays. Our MAU continued to register positive growth in July and also August. And also for our MPU, after the, I think, 6 months consecutive declines of our MPU, our MPU has returned to positive growth in August, benefiting from our off-line user acquisition initiatives, as we mentioned in the -- which continued to, I think, contribute more than 10% of our total MPU in August. And specifically, on 25th August, which is the Chinese Valentine's Day, we have achieved an overall room nights sales growth of more than, I think, 25% year-over-year for our accommodation business; and over, I think, 40% year-on-year room night growth for lower-tier cities at that day. So volume of the room nights sold is -- on this [ crucial ] day has reached our [ normal ] high, and more than 10% of the room nights was purchased through our hotel QR code scanning initiatives. And also, in terms of the total -- I think, total volume, we believe that both room nights and our sales volume in quarter 3 will achieve at least a double-digit growth. However, the train ticket volumes actually is expected to slightly decrease by around 10% mainly because we are more user value-oriented for train ticket business, and we focus more on the [ high-value user strategic point ].

For the revenue guidance by segments, as I mentioned, both based on our current data and knowledge, we are forecasting quarter 3 revenues to decline like 10% to 5%. But if we exclude the impacts of the international business and prepurchased accommodation and air ticketing products, the like-for-like domestic net revenue growth in quarter 3 could be in a range of 0% to around 5%. By segments, accommodation reservation revenues should -- we expect it to decline like 15% to 20%. And there will be 2 factors, as I mentioned, we have to take into consideration. One is the negative impacts of the international business, which is nearly down to 0; and two is the negative impacts of the reduction for prepurchase in the quarter for risk control. If we exclude these 2 factors, domestic accommodation revenue is expected to decline like low single digits, like 0% to 5%.

In terms of the room nights, as just mentioned, we expect that total domestic room nights would be at least a double-digit growth for the whole quarter, mainly driven by higher growth in lower-tier cities room nights and market penetration. But revenue is still affected by the drop in ADR in this quarter as the same reason that we mentioned in previous quarter. The take rate will be stable year-on-year. We have invested more subsidies aligned with the market and have been more aggressive in some areas in this quarter than the first half. But our subsidies were just back to the [ quarter ] level as last year. In the third quarter, we will continue to accelerate the off-line user acquisition for the front -- hotel front desk QR code scanning business in Western China and Southern China, which will continue to contribute around 10% of our total room nights and is expected to achieve positive ROI within the future, within 1 year.

For transportation ticketing business revenue, we nowadays expected a 0% to 5% decline. But if we exclude international transportation, the domestic one will be -- grow at 0% to 5%. The domestic volume -- ticketing volume recovery pace is far better than the market average, resulting in a high market share for both air ticketing and train ticketing. Monetization increased year-over-year also for both air and train, benefiting from increased purchase, pickup service and our IT applications with Weixin, while in this quarter, we will continue to invest more to enhance the online penetration for bus ticketing because that is our major strategy along this year and are targeting an average 300,000 orders per day in September. We believe that will be a new user acquisition -- a very good new user acquisition channel as most of the users acquired from this business are new to our platform, yes. It has -- and it has already become another catalyst for our new MPU growth in our platform.

In terms of the sales and marketing investments, actually we will invest more sales and marketing in the summer vacation, but sales and marketing investments as of revenue are expected to be higher than in the last year and the last quarter as we initiated the off-line user acquisition, like what we -- what I said for the hotel front desk investments and also for the bus ticketing vending machine investments to acquire the off-line users. And we will put more efforts and put more resources in the summer vacation because that is the peak season for the OTA industry, and that is the golden time for us to acquire the users of offline and online. But at the same time, we will closely monitor the sales and marketing spending for both online and off-line channels. We will guarantee incremental investments [ we have in ] bus ticketing vending machine and QR code scanning will achieve a positive ROI within 1 year. Other than this kind of off-line marketing investments for user acquisition, we will also allocate more resources on our IT technology innovations, such as pushing our hotel PMS and air revenue management systems that we mentioned in the prepared remarks, for a long-term and sustainable revenue growth. So that is what I wanted to comment on the latest business status and also the sales and marketing strategy in the second half of this year. Thank you.

[Operator]

We have our next question coming from the line of Mr. Thomas Chong from Jefferies.

[Thomas Chong, analyst]

Congratulations on a very solid set of results. I have a question about the accommodation side. Can management comment about the competitive landscape in lower-tier cities and also when we should expect the ADR go back to positive growth given that COVID is fading out? And on top of that, can you also comment about the recovery in top-tier cities versus the lower-tier cities? And then my second question is about our M&A strategies. Can you comment about our criteria in M&A? Other than complementary to our business, given that we are back to positive growth with a solid margin, will we consider doing M&A on loss-making business or those with very high potential at the beginning phase? [Foreign Language]

[Kylie Yeung, executive]

Hello...

[Lei Fan, executive]

Hello. Thomas?

[Kylie Yeung, executive]

I think we can answer the first few questions first.

[Lei Fan, executive]

Okay. Okay. So actually, there's several questions. I think first is about the competition landscape on the low-tier cities for accommodation. I would like Joyce to give some comments on this, and I will put more comments on the accommodation revenue growth trends in the second half year and our M&A strategies as well. Joyce, please.

[Joyce Li, executive]

Thank you. Thank you, Thomas, for your questions. I'd sort of like to address first about the current market competition. I think, during the pandemic, we all see that the market players will be more cautious. But now, we are already on right track of the recovery. We have already [ hold on ] opportunities, and we already have the markets reopened. And then we have seen there's a good chance to accelerate our online penetration rate, especially in the low-tier cities. And also, given the situation globally, I think the Chinese domestic market will definitely go first. And we are seeing that the company are already in a good position to enjoy that uptrend. Besides, the company has launched a cost-saving model for the past half year's and gave us more flexibility to capture the growth momentum in the second half of the year. So now, we are quite confident of continued output in industry.

As for the accommodation side, the low-tier cities strategy and [ hyper ] growth in hotel business is our -- of our most important strategies in the coming years. We have been cultivating this industry for over 20 years, so we're not afraid of any macro change or competition. And we'll continue to grow the market and ensure [ we also price competitive products for our users ]. And as Julian has mentioned, we will increase our booking level to -- more aggressively to gain market share as currently the booking level is relatively low compared to last year. And I think that with our more aggressive development in low-tier cities, [ we're acquiring users with our ] off-line user traditional channels, such as [indiscernible], so I think we have well positioned to capture the massive growth potential here. Now I'm going to ask Julian to address the ADR trend for accommodation...

[Lei Fan, executive]

Yes. In terms of the ADR trends in quarter 3 and quarter 4 and also you asked if -- asked me about the -- when the accommodation revenue could return to positive growth, actually for the ADR, for the second half year of ADR, we expect the ADR to decline year-over-year in quarter 3 as well because of the industry headwind that's still there and our lower-tier cities strategy. But the good thing is the decline trend will be narrowed down when compared with the first half of this year as the macro getting better -- the macro economy is getting better. And for the take rate trend, for the accommodation take rate trend in quarter 3, like what I've said, particularly our accommodation will be flat year-over-year since we may invest more on subsidies to aggressively penetrate the market and increase our market share, especially in some area of low-tier cities. Meanwhile, the increase in subsidies will be offset by higher VAS revenue contribution in quarter 3. So that is another strategy of one stop shop, another one-stop-shop strategy for accommodation side. If you remember, last year actually, the accommodation VAS did take less than 3% of total revenue -- accommodation revenue. But in previous quarter, in quarter 2, it has already take like 6% of total accommodation revenue. And this quarter, we may target a like [ 7% ] to 8% of the total [ revenue ] contribution for the accommodation. So that is the take rate. And for the revenue on accommodation side, we think, we hope it will return to positive growth in quarter 4 in this year.

And in terms of the M&A strategy, [ actually ], after the coronavirus, there's a lot of assets that are undervalued, especially for some kind of a hotel management company. So that is also another strategy, the hotel hyper growth strategy for the company. We feel -- we always keep an eye on the hotel management company area because in China market, we have mentioned a lot of times that single hotels take like 80% or even more in the market. So the market is very fragment, not like Europe and U.S. U.S., the hotels management company, the hotel chains, will take like 70% of total hotel volumes in U.S. But that will develop in China in next 5 years. We are very confident this trend will happen. So in terms of the M&A strategy, merger and acquisition strategy, we may keep an eye on the undervalued or valuable hotels management team or hotel chain companies in the second half and the following 2 years. So thank you.

[Operator]

We have the next question from the line of Alex Poon from Morgan Stanley.

[Chun Poon, analyst]

Congratulations on the very strong rebound and cost control. My first question is related to the value services -- value-added services mix. Can you give us -- roughly share with us what is the rough contribution of the key items of VAS like Weixin, [ Championg ] and other VAS services? And because right now, we are in this COVID situation. So as we exit this COVID headwind, how will this VAS structure change, and the impact on your take rates?

And then my second question is related to competition. There are many news flow since last year's. For example, Pinduoduo is doing ground transportation business and then air ticketing business. And then recently, hotel -- some hotels opened flagship store on their platform as well. We can see Meituan has been very strong in the lower-tier city because of the food delivery. So Pinduoduo is -- also is -- in the lower-tier cities have a lot of users. So -- and JD also has a partnership with Ctrip recently. So it looks like there are more and more distribution channels for travel products. How should we think about the competition landscape in the longer term with so many platforms entering into this space?

[Joyce Li, executive]

Thank you, Alex. First, I'd like to answer the question about market competition, then I'll take the question about the VAS. So we think that travel market is growing very fast even though COVID-19 hit so badly. But now, we already see it's rebounding quickly. And due to the low on our penetration rates, especially in China, in low-tier cities, there's still a huge market there. So we have seen that there are many players still in this market. But as I mentioned before, we have cultivated this market for over 20 years, and we have extensive user coverage through Weixin channel, through our own APP and our quick APPs. We have cultivated [ stronger clients over the years ] and not only for hotel and attraction ticketing but air, trains, all ancillary service and products, so entire traveling process. We also made the one-stop-shop purchase convenient in [ Weixin ] platform, which should also provide competitiveness for all project lines. I think these enable us to create infinite value and benefit to our users.

And as for the low-tier cities, I think we have very distinguished advantages in low-tier cities. In 2020 second quarter, we had effective penetration in low-tier cities, and about 53% of new users were from Tier 3-and-below cities, and those have increased largely compared to last year. We have already achieved hyper growth in low-tier cities since early 2018 across all product lines. And I think at the same time, the relative low user acquisition costs and the high operation efficiency allow us to achieve [ high profitability ] and also share more benefits with our users and suppliers. Moreover, I think we're now putting more energies and material resources to the off-line investments, which is very efficient and a fast way to accelerate our penetration for the entire industry. You have seen that the off-line user acquisitions are growing as well as benefits in terms of new users. So I think this will enable us to take more market share in a short period. And we didn't see any [ flat ] in the long run. I think the experience and expertise we gain in these markets will enable us to sail through the industry change.

[Lei Fan, executive]

In terms of the breakdown of the transportation VAS, the structure has changed a little. The insurance has slightly dropped. The insurance take like 25% to 28%, I think, and the express ticketing plus [ Huixing ] service increased to 28% to 30%. And the good service in travel scenarios, including coupon and delivery and the car pickup and car rental take like 10%, and other long-tail service take 5% for each. So thank you.

[Operator]

We have our next question from the line of D. S. Kim from JPMorgan.

[D. S. Kim, analyst]

Congratulations on another solid profit. Firstly, about our guidance in third quarter, we expect revenues to be CNY 700 million higher than 2Q, but our net profit is expected or guided to go up only modestly on a recurring basis because this quarter, as you said, is CNY 300 million-plus. Where is this disconnect coming from? Is it us being, again, very conservative with our guidance? Or are we planning to spend a lot of sales and marketing, which could more than offset the CNY 700 million quarter-over-quarter increase in revenues? And I have one more follow-up.

[Lei Fan, executive]

Yes. Firstly, I would like to comment something about the bottom line trends for both the gross margin and also the net margin. Yes, for, I think, the third quarter and also the following quarters, the gross margin is slightly improved year-over-year because the other processing fee in our operating costs may be reduced as it is correlated to the GMV. And the GMV will be affected due to the decline in ADR and ATV caused by the industry headwinds and our lower-tier cities strategy. In addition, also the gross margin may be benefited from the automatic level and operational efficiency enhancements of our call center. Meanwhile, the take rate may raise due to hotel VAS contribution and stable attach rate and -- in transportation business.

In terms of the net margin, we are very confident that profitability will be at the same level of last year in the second half of 2020 if there is no more wave of conflict (sic) [ COVID ] in the autumn and winter. As we further improved our back-end efficiency and profitability during the pandemic -- and our cost structure is even slimmer and healthier, which enable us to have more resources allocated to marketing spending such as off-line user acquisition. And also, it has demonstrated that off-line user acquisition was an incremental and efficient channel for our platform to accelerate the online penetration in lower-tier cities. So this, we will persist, invest our marketing dollar in this area during the rebound time from COVID-19 to quickly accumulate more new users from lower-tier cities in our platforms and accumulate cross-selling and repurchase. And so that is why we provide a CNY 100 million range of bottom line guidance. It depends on how much we will see this -- there's upside opportunity for our off-line acquisitions and depends on how much we will invest more on this incremental area for the off-line acquisitions part. But actually, we may target a high end of the bottom line guidance. Thank you.

[D. S. Kim, analyst]

That's what I wanted to hear. And secondly, my question, follow-up question, is, could you elaborate a bit about our new channel strategy? I mean you have some fair bit of explanation there. But is this strategy because of our view that Tencent penetrates -- the Weixin penetration is largely nearing its end? Or we just seek diversification to accelerate growth further? And how big do you think is the total addressable market within Weixin for us? And where are we today in terms of penetration, both MAU or MPU, whichever you feel is more relevant?

[Joyce Li, executive]

Thank you, D. S. Our MAU has already [ surpassed growth ] since May and MPU has also surpassed its target. In the very long run, we're still very confident for the expansion in our MAU and MPUs. Of course, we believe there is still room for us to further penetrating the Tencent ecosystem, and we put extra efforts in the other channels, including the quick APPs and off-line user acquisition, this quarter. And so we want to diversify our traffic sources. We will try every effort to grasp every chance to access our potential users. And we have already said that in the past quarters off-line initiatives, including the bus ticketing vending machines and hotel QR code scanning, have very successfully already contributed more than 8% MPU and 5% room nights and continuing to accelerate month by month.

So currently, we are very optimistic about MPU growth with our improving products and services, effective sales and sales and marketing strategies and enhanced user engagement and stickiness. And I think at the same time, the user value growth is also very important as the user volume growth [ as now ]. And we'll also strive to achieve the high user value by providing the one-stop shop services, increasing the cross-sell rates and the user [ future frequency ], et cetera.

[Lei Fan, executive]

Yes. And D. S., I would like to put more comments on the traffic strategy on different channels. In [ WeChat channel, Weixin channel ], we have already accumulated like 200 million of MAU already. So our focus -- strategic focus is to improve the conversion rates, improve the conversion rates to transfer the MAU to MPU and then transfer the MPU to the user value. So that is what we do on the WeChat channel. But for the other additional incremental traffic channels like Baidu mini programs, like [indiscernible] mini program and [indiscernible] other quick APPS and also our off-line user acquisitions, for those area, the strategic focus for our company is to fast accumulate the off-line and online MAU active users in other areas other than WeChat. So it's different. For the WeChat, our focus is on the user value and conversion. And for other channels, the focus is on the user volumes, also the active user rate. Thank you.

[Operator]

We have the next question from the line of Ronald Keung from Goldman Sachs.

[Ronald Keung, analyst]

My questions have been asked. I think I'll focus on 2 kind of follow-ups on the details. Can you share with us on the ADR trends that -- how much was a like-for-like decline? And how much was really our further kind of deepening into lower-tier or lower-end hotel rooms? I just want to hear how that kind of ADR decline ratio, how much is -- if it's a like-for-like basis. Second, could you share some of the cross-sell trends and how that has trended? And as we expand into the bus ticketing, is there any kind of early kind of data that could touch those how these bus ticketing customers are and their behavior?

[Lei Fan, executive]

Thank you, Ronald. For the ADR decline trend, in the quarter 1 -- I think, the year-on-year decline, that's 30% in quarter 1. And year-on-year decline like 25% in quarter 2 and a 20% decline in quarter 3. And with -- I think in quarter 2, it will be further narrowed like 10% because nowadays, for the low-tier cities room nights proportion, it's already take like 60% of our total room nights. It's really high nowadays. And also, after the macro economy recovery, the -- for the total hotel industry, the ADR will be recovered as well, aligned with the market.

And also, for the cross-selling rate, nowadays we just focus on the [indiscernible] cross-sell rate, like 10%. That means after you book our train ticket, air ticket and bus ticket. How many users will book our accommodation and attraction ticketing within 2 weeks? Nowadays, it's 10%. And for the industry top level, we think there is still a doubling space for us to target, like 20% or even 25%. So still, we may put more resources on the cross-selling couponing or cross-selling investments to make it faster to getting it near to the industry top. Thank you.

[Operator]

There are no further questions at this moment. I would like to hand the conference back to our hosts for any ending remarks.

[Kylie Yeung, executive]

Thank you. We are now closing the call now. If you wish to check out our presentation and other financial information, please visit the IR section of our company website.

Thank you and see you next quarter.

[Operator]

Thank you, ma'am. Ladies and gentlemen, that concludes our conference for today. Thank you all for your participation. You may disconnect your lines.