Tongcheng Travel Holdings Ltd

HKEX:780

Earnings Call Analysis

High Growth and Resilient Travel Demand

In the third quarter of 2023, China's travel company experienced a surge in demand, resulting in notable growth in revenue, user base, and key business segments. The firm reported net revenue growth of 61% from the previous year, reaching RMB 3.3 billion, and a considerable 18.8% adjusted net margin. The accommodation reservation business saw a 38% year-over-year increase, with domestic room nights up more than 100%. Transportation ticketing revenue jumped 70%, while the 'Other' category, including advertising and hotel management, rose by 103%. The company's effective cross-selling strategies and innovative marketing campaigns contributed to these exceptional results and increased user engagement. With industry indicators proving the resilience of travel demand, the company continues to optimize operations and diversify its revenue streams.

Robust Performance and Strategic Positioning Yield Record Results

The company's earnings call revealed outstanding quarterly performance, with substantial top and bottom line records. A year-over-year revenue surge to RMB 3.3 billion, representing a 61% rise from 2022 and a 60% increase over 2019, underscores the company's success. The robust growth is attributed to effective marketing strategies and efficient operations, which buoyed net profit margins significantly, yielding an adjusted net profit of RMB 621 million at an improved 18.8% margin.

Specialized Segments Drive Growth Amid Industry Revival

The company has capitalized on the rebounding travel demand, with notable growth across its service offerings. Accommodation reservations grew by 38% year-over-year to RMB 1.1 billion, while transportation ticketing rose by 70% to RMB 1.7 billion, signaling an effective capture of summer travel enthusiasm. Even 'other business' segments like advertising and hotel management experienced triple-digit percentage growth, displaying the company's ability to scale and diversify successfully.

Effective Cost Management and Optimized Operations

Despite aggressive market investments, the company managed to enhance profitability. Selling and marketing expenses increased by 36%, yet as a percentage of revenue, these costs declined due to improved operational leverage. The focus on cost management, operational efficiency, and maximizing return on sales and marketing spend is evident in the improved gross margin of 74.5% and boosted EBITDA margin of 26.4%, signifying a strong financial discipline.

A Positive Outlook Fueled by Changing Consumer Tastes

The company's long-term view remains optimistic, as consumer trends towards experiential consumption are expected to drive the travel industry's growth. Leveraging their established strengths, they plan to outperform the market with rapid growth and robust profitability into the foreseeable future, also emphasizing ESG initiatives for broader societal benefits.

Focused Strategies for User Growth and Monetization

The management detailed strategic initiatives aimed at enhancing user value rather than simply expanding user count. Efforts will target a higher frequency of purchases and greater Average Revenue Per User (ARPU). Enhancing cross-selling efforts, optimizing sales strategies for offline-acquired users, and promoting value-added services are pivotal to this strategy. They also plan to amplify the Black Whale membership program to bolster user loyalty and increase overall ARPU.

Diversification and Geographic Expansion Targets

The company is not only deepening its penetration in the domestic market but is also setting its sights on expanding outbound travel and international market shares. By augmenting its product offerings and enlarging its franchise network, the company is poised to capitalize on the potential for outbound travel recovery. The acquisition of Tongcheng International Travel Service indicates a strategic intent to become a significant player in the international packaged tour business, promising new revenue streams even as it strives for enhanced online and offline customer integration.

Continued Competitive Edge and Margin Improvement Prospects

The company appears well-placed to retain market leadership, with strategic positioning in lower-tier cities and investments in emerging travel trends. The management remains confident in competitive stability and anticipates margin improvements, projecting an adjusted net margin of 20% or higher. Operational leverage and digitalization are key factors expected to drive margin progression. Nonetheless, the expanding packaged tour business implies a possible future impact on margins due to the typically lower margins in offline business models.

Financial Strength and Market Resilience

With a strong balance sheet featuring RMB 8.3 billion in cash and equivalents, the company stands on solid financial ground. Moreover, market data reinforces resilient travel demand, with domestic tourist numbers and transportation volumes surpassing 2019 levels. The management's anticipation of enduring market momentum and vigorous growth in 2024, particularly in outbound and international travel, reveals a bullish stance on the industry's prospects.

Earnings Call Transcript 2023-Q3

[Operator]

Thank you for standing by, and welcome to the Tongcheng Travel 2023 Third Quarter Results Announcement. [Operator Instructions]

I would now like to hand the conference over to Ms. Kylie Yeung, Investor Relations Director. Please go ahead.

[Kylie Yeung, executive]

Good morning and good evening, everyone. Welcome to Tongcheng Travel's 2023 Third 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, Mr. Hep Ma; our CFO, Mr. Julian Fan; and our VP and Head of Capital Markets, Ms. Joyce Li.

For today's call, our management team will provide a review of the company's performance in the first quarter. Hep will brief us on the company's performance. Joyce will discuss our business and operational highlights, and then Julian will address the details of 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 relate 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.

Now let me introduce our CEO, Hep. Hep, please go ahead.

[Heping Ma, executive]

Thank you, Kylie. Good evening, everyone. Welcome to our earnings call for the third quarter of 2023. 2023 is prosperous year for China's travel industry, with travel demand being immensely unleashed since the beginning of the year. In the past quarter, we were thrilled to observe the travel market rebounding and attaining a remarkable momentum during the summer travel season with various user groups showing great, great enthusiasm to travel. We once again surpassed the market and maintain rigorous growth across all our business segments, mainly owing to our relentless efforts to implement our expansion strategies while persistingly exploring untapped markets and improving our brand influence.

During the quarter, our user base has reached unprecedented heights with revenue and business volume witnessing a substantial year-over-year growth, demonstrating the immense growth potential of our business and our outstanding execution capability. The upward market trend and our splendid business performance in the last 3 years -- 3 months have further magnified my confidence for the further development of our company. Entering the first quarter, which is a traditional low season for the travel industry. We still see resilient travel demand under various scenarios. We will persistently serve into the advice and needs of our users and grasp opportunities to fuel our business growth and gain more market shares. The China travel market is undergoing rapid change and travel demand is becoming more diversified and dynamic.

We adhere to our deep-seated belief in the flourishing of China's travel industry. As we embark on the next year, we will continue to enrich and improve our products and services to cater to our users' comprehensive needs and make their travel easier and more joyful. We will also continue to optimize our internal efficiency and enhance our core competencies, which will enable us to sustain an outstanding growth. Moreover, we aspire to strengthen our market position by fortifying our cooperation with our TSPs and business partners. But not least, we will diversify our revenue strength by expanding our business scope and uncovering new opportunities promoting sustainable development.

With that, I will hand over the call to Joyce for more details of our operational highlights in the third quarter. Joyce, please go ahead.

[Joyce Li, executive]

Thank you, Hep. We once again had a fully thriving quarter with the traveling season gone higher and demand being further unleashed. Driving our end market presence enhanced runway, our business maintained a secured growth and saw all-time high for the third consecutive quarter. As for our accommodation business, we're still focused on our travel market, especially the lower tier cities and made a consistent effort to providing users with a value-for-money hotel product and services. Over the past quarter, the business continuously showed its vitality and set another record high, both in volume and revenue, with the room nights still recording around 100% growth compared with the same period of 2019.

Amidst the soaring travel sentiment, we consistently explored various hotel stay scenarios such as days surrounding music festivals and a concert as well as e-sports events, start to better accommodate users newly surging needs. Meanwhile, we carry out more precise operations and marketing activities upon our deeper understanding of users' fundamental preference and needs. As a result, our 15-day cross-sale rate further increased, which contributed greatly to the growth of our room nights solds. Moreover, efforts were stepped up to build our international business. On supply end, we continue to bring more international hotel suppliers while on the consumer end, we launched more market campaigns to strengthen interaction with the users.

For the first time, we had an iconic singer's overseas concert tickets available on our platform, which greatly enhanced exposure of our international products and services. Besides, we value user experience and have built up efforts to develop a comprehensive value-added product services to facilitate hotel booking and space. On the backdrop of the fully unleashed travel demand, our transportation business, again, saw unprecedented high in volume and revenue for the third quarter in a row, thanks to the increased market share and extended offers of the product and services.

As for our air ticketing business, we remain focused on building a more diverse user profile by aggressively bringing more users. As such, we were delighted to see increasing contribution from business travelers and younger users in this segment. At the same time, our international business had made good progress over the last quarter with its volume surpassing 2019 level, way better than the overall industry recovery. Additionally, we have launched airport pickup and drop-off service to provide outbound travelers with convenience and comfort.

For the third quarter, our air ticketing volume increased by more than 30% from 2019 level and set another record high for the third consecutive quarter. In terms of the train ticketing business, its revenue maintained robust growth and increased significantly for 2019 level as we consistently focused on enhancing user value as well as user experience. By constantly iterating our international Huixing system, we provided users with customized travel solutions, which facilitates their travel. Upon emerging needs for short-haul travel, we have boosted our bus-ticketing business and the car-hailing business so to better serve users' needs. During the last quarter, we further enhanced the monetization capability of the 2 businesses.

Empowering supply chain along the travel industry has been one of the company's core strategies and also our momentous attempt to seek sustainable growth for the company. Our hotel management business continued to expand its footprint across the country over the last quarter with more than 1,200 franchise hotels in operation as of the end of September. By leveraging our huge traffic, advanced technology and brand influence, we aim to manage more hotels and further increase our presence in the hotel industry. As for our packaged tour business, we remain focused on reestablishment of its supply chains, both at home and aboard.

Meanwhile, we have started rolling out our plan to build online and offline channels to better reach out to our targeted users. We believe this business will enjoy a decent recovery for the coming year adding to the growth of the company. Under a sensational traveling season, we spare no effort to strengthen interaction with users at multiple fronts. As always, we maintained strategic partnership with Tencent and further starting to drive scenarios to expand our reach to users. During the quarter, we furthered our cooperation with QQ Browser and provided its users with easy access to our travel products on Weixin mini-program. We also co-launched top training topics on travel to facilitate users' decision-making.

Moreover, we work with Tencent Docs and push travel guide tailor-made for some holidays and National Day targeting younger users. Meanwhile, we stepped up efforts to further diversify our traffic sources. For the past quarter we strengthened our cooperation with major handset vendors. In August, we signed a strategic agreement with Huawei to provide its users with our travel products and services. Now while users have easy access to our services, such as hotel bookings as well as train and air ticketing. We also initiated cooperation with handset vendors to have our standalone apps pre-installed on mobile phones in an attempt to reach out to a wider range of users. Most recently, our standalone app was selected as Editors' Choice by App Store for a second time signifying the increasing popularity of our app.

In addition, we have also provided our products and services on Alipay mini-program as part of our attempt to diversify traffic channels. As for our online user acquisition initiative, in particular, public transit, they remained effective instrument for us to grow user base and expand our presence in lower tier cities. As such, both our MPUs and APUs had another record high in the third quarter. Our MPUs increased by around 20.1% year-over-year and resulted in RMB 44.2 million for the quarter breaking the record for a third quarter in a row. Our 12-month rolling paying users as of the end of September also climbed to a record high of RMB 225 million from last quarter's RMB 280 million, demonstrating the excellence of our execution capability.

As a leading OTA in China, we aim to build a creative product platform that echoes with the younger generation. For the past years, we've been quite innovative in our marketing campaigns. We were the first OTA that integrated e-sports games into our user engagement program. This year, we again throughout of the [indiscernible] campaign in an attempt to extend the ultimate boundary of travel experience. We worked with the local tourism bureaus to organize music festivals as well as open door marketplace. We also joined hands with the Luoyang Museum and co-launched a special show featuring hand costumes or hanfu, which stirred the phenomenal discussion among younger people more intriguingly.

We rolled out our first immersive [ Script-Q ] game in Xi'an, which also won great popularity among younger generations. Through those innovative campaigns, we aim to build a strong and entertaining brand personality. Starting from this year, we'll be more focused on enhancing user value [indiscernible] acquiring new users. During the past quarter, efforts were stepped up to enhancing user loyalty. We introduced more exclusive benefits to our Black Whale members, such as movies and music festivals. Also for the first time, we offered our high-value users free concert tickets with exclusive concert benefits to further enhance their experience. As of the end of September, the cumulative number of Blackwell members approach 40 million, more than double the number of last year. Customers' concern has been engraved in our corporate culture, and we are devoted to providing users with a supreme travel experience.

Our intelligent “Huixing” system remains the pivot to satisfy users' travel needs. It provides users with customized and accessible travel solutions based on their preference and demand. Meanwhile, consistent efforts were made to increase automation in our customer service so as to further enhance efficiency and user satisfaction. Moreover, our attempt to apply AIGC in our customer service have made some concrete progress in the past quarter. Our AI model now can detect user demand and help accelerate feedback as well as providing human-like responses, which have greatly enhanced user experience. On the other side, we are committed to empowering the travel industry through our profound internet expertise and advanced technologies.

We have built a comprehensive portfolio of hotel PMS brands with the individual hotels, chain hotels as well as alternative accommodations. In the past quarter, we launched a new PMS solution that is tailor-made for e-sports hotels. Meanwhile, we consistently push ahead with our cooperation with airports during the quarter. So far, we've had nearly 100 domestic airports onboard. In fact, in July, we signed a strategic agreement with the Henan Province Airport Group with an aim to improve the digitalization of the airport services. As part of the cooperation, we help Henan Airport Group to build Weixin mini-program so that various passengers could get easy access to brand service such as luggaging [ trolleys, ] airport transportation and hotels.

In addition, we joined hands with a county government in Shanxi Province to help build an intelligent travel platform on which tourists can easily find local tourist attraction, accommodation, transportation, and entertainment facilities in an effort to facilitate development of the local tourism industry. As a socially responsible enterprise, we are fully conscious of social obligations and are set to contribute to the travel industry as well as to the society. In early September, we joined hands with hotels in Guangdong Province, and offered the resting areas as well as emergency suppliers to those trapped by a severe typhoon in the region. On top of that, our MSCI ESG rating was given AA grade for the second consecutive year, the recognition of our excellent ESG performance. Looking ahead, we will continuously push forward with initiatives that contribute to sustainable development of the travel industry as well as of the society.

I will stop here and hand over the call to our CFO, Julian. He will share our detailed financial results for the third quarter of the year. Julian, please go ahead.

[Lei Fan, executive]

Thank you, Joyce. Good evening, everyone. Over the past quarter, China's travel industry has sustained its revival pace with various travel cravings fully unleashed. People are eager to take part in different types of travel during summer. We have witnessed a robust travel enthusiasm throughout the entire quarter and continued to outperform the industry, largely owing to our superb capabilities to grab market opportunities and accommodate users' needs and their different travel scenarios. While persistently strengthening our core businesses, we also strive to discover a new shore, new businesses to drive future growth.

In the third quarter of 2023, we attained remarkable outcomes and set new records for both quarterly top line and bottom line. We reported net revenue of RMB 3.3 billion, representing a 61% year-over-year increase from the same period of 2022 or a 60% year-over-year increase from the same period of 2019. We implemented targeted and efficient marketing campaigns and advertisements to seize prime opportunities during this quarter. Despite increasing our investments in the market and meet the upward trend to capture opportunities, we still registered remarkable bottom line growth with a robust net profit margin, mainly attributable to our effective marketing strategies and efficient operations. Our adjusted net profit amounted to RMB 621 million, with an 18.8% adjusted net margin.

Our accommodation reservation business registered excellent growth and achieved RMB 1.1 billion for the third quarter of 2023, representing a 38% increase from the same period in 2022 or a 63% increase from the same period of 2019. Our domestic room nights registered more than 100% growth versus 2019. This was primarily driven by our cross-selling strategies to penetrate untapped markets while fortifying our edge in certain regions with established foothold. By effectively executing our cross-selling strategies, we leveraged our transportation business and channeled substantial traffic to our accommodation business to accelerate room night growth and improve user stickiness and user value.

In the third quarter of 2023, hotel ADR improved compared with 2022 mainly driven by the escalating demand for accommodation reservations. The blended tax rate declined compared with 2022, mainly because we increased the couponing level to capitalize on the market revival opportunities. Transportation ticketing revenue for the third quarter was RMB 1.7 million representing a 70% increase compared with the same period of 2022 or a 47% increase compared with the same period of 2019. We registered significant growth and achieved record highs in terms of revenue mainly fueled by our spiking ticketing volume as a result of robust travel demand for different scenarios during the summer holiday. We also strived to enhance the monetization by optimizing our VAS offerings.

For our air ticketing business, we persistently increased our market share and our air ticketing volume increased by more than 30% compared with the same period of 2019. Through a strategic pivot from volume expansion to monetization optimization, we accomplished a remarkable growth in our train ticketing revenue compared with 2019 levels. Also, our bus ticketing business has demonstrated remarkable advancement in improving its monetization as well as elevating its operational efficiency. Other business once again delivered exceptional results and revenue achieved RMB 492 million in the third quarter, representing a 103% growth year-over-year or a 115% increase from the 2019 level. The growth was mainly driven by the stellar performance of our advertisement, hotel management, Black Whale membership, corporate travel, and packaged tour business.

Through prior acquisitions and efficacious expansions, our hotel management business grew considerably and added a new growth impetus to our other business segment. We are also ramping up our efforts to develop the packaged tour business, which started to contribute more to other revenue. We uphold firm confidence that this business will persistently bolster the company's growth in the future. In terms of the profitability, our gross margin was 74.5% for the third quarter of 2023, slightly dropped from the same period in 2022. In the third quarter of 2023, our adjusted EBITDA achieved RMB 870 million with 26.4% margin, which represents an increase from 22.6% year-over-year. Adjusted net profit achieved RMB 621 million, with an 18.8% margin, a substantial improvement from 12.3% in quarter 3 last year, mainly attributable to our operational leverage and effective marketing strategies.

Service development administrative expenses in the third quarter of 2023 increased by 20% from the same period of last year. Excluding share-based compensation charges, service development, administrative expenses in total accounted for 18.4% of revenue in the third quarter, compared with 21.4% of revenue in the same period of 2022. Selling and marketing expenses in the third quarter of 2023 increased by 36% from the same period of 2022. Excluding share-based compensation charges, selling and marketing expenses accounted for 38.3% of revenue in the third quarter compared with 45.1% of revenue in the same period of 2022. As of September 30, 2023, the balance of cash, cash equivalents, restricted cash and short-term investments was RMB 8.3 billion. The travel industry in China has displayed a remarkable capacity for growth in the first 3 quarters of 2023.

This extraordinary upward trend has reaffirmed the essential entity of travel pursuit. In October and November, we continue to witness the full expression of travel passion, proving the resilience of travel demand. The travel market bloomed during the recent mid-autumn and national holiday as people crowded to various tourist destinations throughout the country. According to the official government data, the number of domestic tourists during the holiday already exceeded 2019 levels and our business once again posted a better than industry performance. Heading into the fourth quarter and the year beyond, we believe that China's travel industry is posted for another robust growth. As we foresee a continuous increase in travel demand driven by diverse desires for various travel scenarios.

Nowadays, people value enjoyment, favor experiential consumption and aspire to engage in various entertainment and adventure activities to enrich their leisure time, driving additional growth for China's travel industry. In the long-term perspective, we maintain an optimistic outlook on the continuous advancement of China's domestic travel industry as well as the [ other ] market. We are confident that we will consistently outpace the market with rapid growth and solid profitability. Furthermore, we will place more advertise on our ESG performance and are committed to generating more benefits for society and our stakeholders, including our users, suppliers, employees, and shareholders.

With that, operator, we are ready to take questions now. Thank you.

[Operator]

[Operator Instructions] Our first question today will come from Alex Poon of Morgan Stanley.

[Chun Poon, analyst]

Congratulations on very strong results. My first question is related to the industry data recently, such as RevPAR and air passenger volume, which has showed some signs of weakness being weaker than 2019 level for the overall industry. And how should we interpret this data for the market and also from our perspective? Is it because of the normalization of pent-up demand from second quarter, third quarter? Or is the mix impact also because of the weaker macro? Any color would be very helpful. .

[Lei Fan, executive]

Okay. Thank you, Alex. For the market situations recently, actually, the domestic travel industry during the mid-autumn festival and the national holidays, as we observed continued to be very strong, although the hotel room nights rate and air ticket prices were quite high this year. I think you also feel that. According to the government data, the number of travelers reached more than 800 million during the holiday, representing an increase of more than 70% when compared with the same period last year or even an increase for 4% when compared with the same period in 2019. So I think the data is quite strong. It's already fully recovered to our 2019 level or even more than that. For the railway passengers volume increased by 21%, while the air passenger volumes saw a 13% increase when compared with the same data of 2019. .

Of course, we once again outpaced the industry growth with the room nights, registered more than 100% growth compared with the same level of 2019 in mid-autumn festival and national holiday. And also, our air ticketing volume grew by more than 30% compared with the same level of 2019, the 2019 level. So you can see that the growth engine is still very high. So the momentum is still very good compared with the summer and also the quarter 2 with the national holiday. But after -- actually, after the national holiday for the fourth quarter, as you know that the fourth quarter is a low season for travel. The demand, but still the demand remains very resilient.

As usual, we monitored an even stronger demand in the exam seasons; for example, the national exam and the post graduate administration exam. And furthermore, people are displaying a great enthusiasm to experience the beauty of autumn and engage in skiing activities for the first snow in November 2023. So that is the industry color that we would like to address. So when we saw this very strong recovery and strong demand, we are very confident that the industry and the demand, both for demand side and supply side, recovered very well. And we think the growth momentum will continue to quarter 4 and also to the next year.

[Operator]

Our next question today will come from Brian Gong of Citi.

[Brian Gong, analyst]

Just a follow-up on the performance of our platform in the fourth quarter. Not sure if you can share more like operation data post the Golden Week on our platform? And also, could you share your thoughts for next year growth, especially considering high-base in the third quarter this year? And how should we think about industry performance and our performance? And what would be our growth drivers and strategies for next year?

[Lei Fan, executive]

Yes, for the first question of the quarter 4 performance in detail after the national holiday as we said, the demand for long-haul travel is relatively lower than quarter 3 as usual because the quarter 4 is a low season for the traveling, especially for the long-haul travel. But the short-haul travel remains very robust, driven by the best season and autumn travel like we had talked in past question. For accommodation and short-term transportation are experiencing a very high growth rate compared with the same quarter of 2019. We expect that both accommodation and transportation ticketing business will continue the growing trend versus 2019, the growing trend like quarter 3 and quarter 2 versus 2019, with accommodation growth even faster than transportation business because for the short-haul travel, there is more demand for accommodation than the transportation one. .

Other businesses will display a very significant increase driven by the new initiatives in hotel chain business and packaged tour business, and also the hyper growth of our advertisement business TMC business and also the PMS business and membership program. For other operation data, in terms of the pricing and the take rate trends in quarter 4, for accommodation, the ADR may slightly drop when compared with the 2019 mainly because of the product mix change caused by the lower-tier city penetration, which is our strategic priorities. The take rates may slightly decrease when compared with the same period last year due to an aggressive couponing strategy in some regions, we will make it more accurate. So that is only happening in some areas that we would target for more market share to gain market share in quarter 4.

But it will remain relatively stable throughout the whole year. For Transportation segment, both the ATV and the take rate may improve for the same quarter in 2019, thanks to the favorable market conditions and increase in VAS contributions. For the next year's forecast, actually, because the visibility is relatively low recently because we -- our -- the booking window is very short as we have talked a lot of time. But still, we are confident that the total industry, the travel industry we will have a very nice growth next year, especially for the outbound travel and also the international travel.

I think for this year, those 2 areas have not recovered fully for 2019, but next year, we all expected -- we will outlook a better recovery for our bonds and also for international. And we will invest more resources both for the sales and marketing dollar and our research and products in this area to catch more market share next year. So we are very confident that we will take more market share and our growth rate will several multiples in the market next year. But if you ask for the exact forecast, we think we can talk about this next January or February when we can see the market more clear.

[Operator]

Our next question today will come from Wei Xiong of UBS.

[Wei Xiong, analyst]

Congrats on a solid results. I have 2 questions. First is that we have been achieving solid user growth this year. So could management share your thoughts on the user growth strategy for next year. Do we have a user growth target? And how could we further improve the monetization per user, especially for lower-tier markets and for the new users? And my second question is, as we're trying to diversify the revenue streams with new initiatives such as outbound business and the off-line travel agency, how should we think about the revenue and margin implications of these new businesses as we gain scale over time?

[Lei Fan, executive]

I will address the first question, and then I think Joyce could give you more color on our new initiatives. As you know, our APU for the past 12 months has already reached a very high for 200 --more than RMB 225 million. So actually, the new user acquisition, as we talked a lot of times, it's not our strategic priority for this year and also for next year. Our strategic priority in the short term is to enhance the user value rather than solely pursuing the growth of the user base. As we have already got a substantial amount of paying users. .

So we would like to invest more promotion on our existing users and drive improvement in frequency and ARPU for this year and also for the short and long range. One thing is, we will proceed in investing in targeted promotions and improving our ability to provide precise recommendations to our existing users, thereby enhancing cross-selling from our transportation business to accommodation business. This would lead to higher revenue per order and better take rate for our overall business.

And second, we aim to further engage with users who were previously acquired from off-line scenarios, such as those who we acquired from the hotel QR code scanning or smart but ticketing [ value ] machine equipment. To achieve this, we plan to optimize our sales marketing strategy by offering targeted promotions that motivate these users to make direct online purchase because we can earn take rate on online scenarios, but there's no take rate on the offline scenario. And what is more, we will also continue to invest in promoting our VAS products. That is very important. And also VR services that are tailored to our users' travel needs.

For instance, we will continue to encourage the use of our “Huixing” system, which offers intelligent travel solution combo to our users and, at the same time, improves our monetization. We also launched new promotions for our innovative products and services in different scenarios to enhance user value. Furthermore, we continue to promote our Black Whale membership program to foster greater loyalty among our users with an aim to increase our overall ARPU and purchase frequency next year. And for the new initiatives, I think, Joyce, please.

[Joyce Li, executive]

Yes. Thank you, Wei Xiong for the question. First, I will address our view on the outbound business, as Julian has mentioned. We believe that the outbound travel will recover faster next year. And for this year, as with recovery on international travel, the capacity continue to be the bottleneck for outbound travel recovery. And at the end of September, the international flight capacity has recovered to over 15% of 2019 level. So there is ample room to grow next year. In preparation for our international business development, we have made an increased effort to enrich our suppliers for the international market. This includes partnership with major international OTAs, hoteliers, international airlines and [indiscernible] over TSP. And to cater to needs of the potential outbound travelers, we also continue to exploring and innovating new product services.

To these opportunities in outbound travel rebound, we also launched more marketing campaigns, as I mentioned, between the international travel projects to strengthen interaction with users. So our international air ticketing volume in quarter 3 have registered nearly 10% growth when compared to 2019 level. And as we have made a significant growth in user base in the past few years, we believe that these users, given their anticipated future demand for outbound trouble will also form the foundation for our expansion into international markets.

Looking ahead, our focus will be to further develop international air ticketing, hotel bookings and packaged tour business. While Hong Kong, Macau, Southeast Asia, Japan, Korea, these countries remained the primary destination for our outbound users, we are also keen on exploring the untapped potential for travel demand to Europe and America. We also will put more emphasis on development of international business, which will become an important growth driver for the company in the next few years. And in terms of the packaged tour, we have already completed acquisition of Tongcheng International Travel Service earlier this year, which is a platform business, and we act as intermediary between the package tour providers and the customers.

Now we are currently enriching our products mainly by sourcing quality products from our TSPs. For online channels, we are building up brighter sales channels such as our own app, private domains and other online channels. And for offline, we also run this business in franchise model and we also build a team for telemarketing. We are currently seeking franchisees to join us. We have already provided support to franchise regarding the brand image, product, technological infrastructure, service and staff training, et cetera. Currently, we have already signed contracts with franchisees to open about more than 40 stores. We target to be more aggressive in expanding our franchise network next year.

So the revenue contribution from this package tour business dues more at this moment, but it's improving month by month. During the middle autumn festival and a national holiday in early October, domestic package tour business has recovered more than 60%, with immense risk increase when compared with the same period in 2019. While although packaged tour business also only recovered to around 20%, but the price increased by nearly 35%. To enhance the user experience, we have worked on the seamless integration of online and offline services. For customers, they can easily get access to the information of the offline stores as well as products and services provided by the travel agency throughout our online platform.

[Operator]

[Operator Instructions] Our next question today will come from Leo You of CLSA.

[Yang You, analyst]

Congratulations on another strong quarter. I have 2 questions, if I may. First is on the competitive landscape, especially on next year. So how would be our strategy to defend and grow market share and to compete against short video platforms, especially they are quite aggressive in expanding the calendar date based accommodation booking business, so how would our strategies be? And the second is the margin outlook of next year. So we're still having a quite active sales and marketing spending. And when we have a larger business scale next year, how would we see the room for margin improvement?

[Joyce Li, executive]

Thank you, Leo. I'll take the first question in terms of the competitive landscape. So even now we think the market competition is still very healthy and stable. Although we have already increased the couponing level in such markets during the peak season, our take rates remained quite stable in the third quarter. So currently, with our flexible cost structure, flat operating model and dynamic pricing strategies, we are capable to maintain price competitiveness of our products and services. I would believe that the [indiscernible] was not necessary as the market positioning and the user base are clearly differentiated as we have mentioned several times before.

So through our strategic approach, and our consistent efforts to expand into the lower-tier cities in recent years, we have already successfully established a strong foothold and strengthened the competitive advantage in these regions. These lower-tier cities still have ample room, relative low online penetration rate from the hotel booking and will provide immense potential for us. We'll be more aggressive to [indiscernible] with an aim to be the leading travel brand in lower-tier cities otitis. And in addition, we think that the Chinese travel industry continues to exhibit a booming future marketed by the sustained upward trend.

By the rising disposal income and a growing appetite for international and domestic exploration, the travel side shows a lenience and extension, which provides lucrative opportunities for players in the market. And on the other hand, we haven't observed any new entrant that could potentially present a significant competitive challenge to the well-established major OTAs in China. So therefore, we believe that the market competition will remain stable in the next quarters.

[Lei Fan, executive]

For the margin outlook actually, I think, in the short to medium term, we are very confident that our adjusted net margin of our current business will continue to improve for 20% or even higher in the long run. Because of the reasons, one is that we will cultivate more valuable paying users and emphasize on improving user value, the ARPU improvement, as we mentioned. And we will also improve the ROI of offline user acquisition and reduce our investment in some offline channels or other distribution channels, which have lower ROI, as we mentioned. And we will keep converting those offline users to online. And also, the scaling effect will continue and benefit the cost structure in the following years. When we have higher revenue scale, there will be operating leverage still on our COGS, sales, service and development and also the G&A spending.

And lastly, I think we will further optimize and improve our operational efficiency with the help of automation and digitalization or AIGC, the application of AIGC. On the other hand, we have to mention that if the revenue contribution of our packaged tour business that we just acquired, as Joyce mentioned, increase in the future, our overall margin will be somewhat impacted to a certain extent because although the packaged tour business drives very huge revenue growth, but this business is the offline business model. So the net margin is relatively lower than our current business, the online business model business. So that is what I would like to mention for the margin side in the short term and long term.

[Operator]

At this time, we will conclude our question-and-answer session. I'd like to turn the conference back over to Mr. Yeung for closing remarks.

[Kylie Yeung, executive]

Thank you. We are 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.