Whether it is model innovation, technological innovation, or organizational innovation, its first nature must revolve around the first principle of economic common sense - consumer choice, that is, people face tradeoffs - that is, build, feedback, optimize, until entering a new, higher-generation business cycle.

That's the power of common sense.

For a few people who are sensitive enough to common sense, it is already the moment when "the little lotus shows its sharp corners, and the dragonfly has already stood on its head". Among them, the latest common-sense minority that belongs to the new cycle is a listed company in China's OTA industry that has not yet entered more public issues, but is already in a period of deep innovation.

Its story and logic is one of the most worthy of observation, induction and reference in this winter, and it is Tongcheng Travel.

01

Phenomenon: The Prosperity of Reason

In the ongoing Q3 earnings season of Chinese concept stocks, in addition to the tourism industry, it is ushering in a new round of bottom-up cyclical upswing: from a stressful recovery to the emergence of rational prosperity logic.

The most direct footnote comes from the cyclical changes in the industry's financial data:

Since the beginning of this year, travel demand has exploded in the first half of the year. In terms of the number of trips, the number of tourists in the first three quarters has improved significantly, and the number of trips during the Mid-Autumn Festival + National Day holiday in the third quarter of this year has increased by 2019.4pct compared with 1.

Chart: Domestic tourist arrivals and the trend of tourist arrivals during the Golden Week + Mid-Autumn Festival holiday, source: Choice Financial Client

In terms of income, during the Mid-Autumn Festival and National Day holidays, domestic tourism revenue increased by 2019.1pct compared with 5, and the priority of cost performance in travel decisions was advanced, and consumption decisions were extremely rational.

Chart: Golden Week tourism revenue trend, source: Choice Financial Client

Figure: The number of trips organized by travel agencies across the country, source: Choice Financial Client

The individual sample within OTAs also confirms the new cycle trend of "rational prosperity", with some OTA platforms only reaching 2019.16% of the same period in 7, while Ctrip, which is larger and more online, has a higher intelligence rate, has increased by more than 21%.

Tongcheng Travel, which started with the sinking market and gradually went up, has a more eye-catching third quarterly report:

The revenue side increased by more than 2019% compared with the same period in 60, reaching 32.99 billion yuan, and the revenue of the entire first three quarters reached 87.5 billion yuan.

Figure: Comparison of revenue of comparable platform companies in the same industry compared with 2019, source: Choice Financial Client

In terms of business, Tongcheng Travel accommodation booking revenue in the third quarter was RMB11.27 billion, 2019.62% higher than the same period in 4, transportation ticketing revenue was RMB16.8 billion, 2019.47% higher than the same period in 4, and other businesses including advertising, hotel management services, business travel, membership and attraction tickets increased by 2019.114% over 8.

Chart: Tongcheng Travel's revenue by business in a single quarter, source: corporate financial report

On the profit side, Tongcheng Travel's adjusted EBITDA reached 8 million in the third quarter, a new high in two years, a year-on-year increase of 7.147%, much higher than the revenue growth, with a stable cost structure and excellent profitability.

Chart: Tongcheng Travel's single-quarter EBITDA and profit margin, source: corporate financial report

The financial report data of the above companies are stitched together, which can further prove that the industry is indeed experiencing a new round of cycle upswing, but the logic is changing course - the "rational prosperity" led by price sinking and content precision is replacing the soaring progress of the past ten years, and the great change in the industrial order is about to happen.

02

Essence: The change of cycles

The core reason why Tongcheng Travel is used as an observation sample is that it is typical and representative as the standard-bearer of the new cycle: the latest historical process of China's tourism industry is in its latest financial report - if you understand Tongcheng Travel, you can also see the evolution of the new cycle of the tourism industry and the OTA industry to a certain extent.

Behind the company's new high performance, we not only see the short-term stimulus brought by the rebound of stressful consumption after the impact of the epidemic, but more importantly, the deep cyclical evolution of industrial logic:

(1) The repair path of scar effect: from the fourth and fifth lines, to the second and third lines, and then to the first line.

Gao Shanwen, chief economist of Essence Securities, recently wrote an article analyzing the long-term impact of the post-epidemic era on the economy: "If China's economy is divided into large cities (cities with a population of more than 300 million) and small cities (cities with a population of less than 50,<>), since the beginning of this year, especially since the third quarter, the economic recovery of small cities seems to be faster than that of large cities.

Tongcheng's better-than-expected third-quarter financial report data also showed that as of September 9, 30% of its new paying users on its WeChat platform were from non-first-tier cities.

The same is true from an industrial perspective: from the perspective of tourism and cultural consumption destinations, the number of hotel bookings in third-tier cities and below is much higher than that in first-tier cities during the May Day Golden Week.

Chart: Hotel bookings in different cities during this year's May Day holiday, source: 2023 China Consumer Trends Insights White Paper

(2) Cyclical evolution of consumption preferences: non-urban residents have obvious growth advantages.

In the third quarter of this year, the wage income of urban residents increased by 2019.22% compared with the same period in 94, while the growth rate of non-urban residents was 38.47%; The per capita consumption expenditure of urban residents increased by 19.31% and that of non-urban residents by 38.97%. The increase in expenditure on education, culture and entertainment was only 10.43 percent for urban residents and 33.76 percent for non-urban residents. In all three cases, non-urban residents showed a clear growth advantage.

Figure: 2019Q3, 2023Q3 resident income structure growth rate, source: Choice financial client

This means that the huge market potential outside the Fifth Ring Road is gradually being released.

Because of this, most Internet companies and platform companies regard the sinking market as a source of a new round of growth, and enterprises that have been deeply involved in the sinking market, such as Mixue Bingcheng, have gradually become international large enterprises, and even more so than Pinduoduo, an e-commerce upstart who grew from the sinking market, and has grown into a trillion-dollar market value enterprise.

(3) The cyclical evolution of industrial ecology: from the pursuit of high added value to the era of "egalitarianism".

We can use a historical perspective to examine the changes in the consumption cycle, and Japan, which also has a similar economic form in East Asia, also has typical changes in the consumption cycle. That was the era of average consumption that began in the 20s of the 90th century.

At that time, Japan's GDP growth slowed down, but it remained relatively high for a long time. However, the growth rate of household consumption support has declined rapidly, and there has never been a growth rate of more than 1% for two consecutive years.

The main reason is that in the consumer market, the penetration rate of white goods and automobiles has exceeded 80%, and the consumption expectations of household residents have turned from the era of material scarcity to surplus, and supply has taken the lead in entering equality. On the one hand, Japanese consumers are gradually moving past the material satisfaction of the era of poverty, and on the other hand, the slowdown in growth has led to a trend towards cost-effective consumption, so they no longer pursue high value-added products and turn to the "average era".

Our consumer market is gradually entering the era of average consumption, which is also one of the core characteristics of the current round of tourism industry cycle change.

In the OTA industry, the company that continues to cultivate low-tier cities on a large scale is Tongcheng Travel, whose fate gears are deeply bound to the new cycle of "rational prosperity" of the tourism industry, and have reached a new historical window period that has begun to rotate at a high speed again.

03

Logic: The power of common sense

Truth be told, the new cycle of the travel industry and the OTA industry is still in its infancy. A deeper evolution of the logic of industrial competition and the pattern of order is being further brewed. At present, the Tongcheng companies show stronger cyclical adaptability, and the tension and industrial competitiveness of the times they present are not formed overnight, but the process of gradual evolution and finally resonance with the cyclical process according to the power of common sense.

Sorting out this process, the top-down underlying logic can be preliminarily summarized as follows:

(1) The cyclical evolution of industrial platform logic: consumer choice and price discovery ability reshape the industrial competition pattern.

In the past 10 years, the exponential prosperity and growth of the tourism industry has mainly come from the digital transformation of the industry by the Internet and mobile Internet, but the underlying logic is still the national income level, especially the consumption support given by the continuous rise of the first- and second-tier high-income groups. In the meantime, the main competitive logic of the OTA industry is the entry war, traffic war, scenario war, and financial leverage war.

In the following years, as the global economic cycle fell into the haze of recession and the impact of the sudden epidemic, the negative macro situation gradually covered thousands of industries. As a result, a large-scale inflection point of the economic cycle was completely formed during this period, and greatly suppressed consumption, especially optional consumption. There is also a basic consensus that the reshaping of consumption expectations will not only be a relatively long process, but also that the logic will be completely new.

Taking the history of Japan's Sankei as a mirror, in the process of reshaping the consumption cycle in the downward cycle of the economy at a large level (more than 10 years), it mainly follows the path of stock transformation, industrial upgrading, and incremental reproduction, and the main factor is the right of consumer choice.

The main logic of realizing consumers' right to choose is that consumers' purchasing power will become the first nature of the industry, guiding the supply side to reconstruct the competitive order and pattern. In this process, the industrial platform that can realize the ability of price discovery will lead the supply and demand sides to make more cost-to-value adaptation, and eventually become the leader of the new economic cycle and the new pattern of industrial competition.

In the field of commodities, the most typical representative of the current realization of this capability is Pinduoduo.

In the field of tourism services, the typical representative of this ability is Tongcheng Travel.

(2) The cyclical evolution of industrial innovation logic: embracing the power of common sense: reconstructing the order of supply and demand with the first article of economic common sense, and carrying out model, technology and organizational innovation.

Why Tongcheng Travel? Because in the past period, the development and evolution process of Tongcheng Travel itself is the same as that of Pinduoduo, and its underlying logic is: embrace the power of common sense - take the first consumer choice of economic common sense as the anchor, take the construction of price discovery ability as the core comparative advantage, reconstruct the order of supply and demand, and carry out model, technology and organizational innovation.

The Austrian economist Menger proposed that the essence of value is subjective, and the price is generated by human exchange. The price discovery ability is the most important value recognition of all commodity trading platforms, and it is the first ability that integrates brand recognition, supply and demand consensus and industrial chain capabilities.

In the process of industrial cycle change, the industrial platform that can effectively realize the price discovery function has three basic characteristics:

1. It has the most extensive customer base in the industry.

　　2、拥有最广谱价格区间的产品或服务供给能力。

　　3、在前两点基础上，不断优化模式、技术与组织创新能力，寻求并进化出实现服务与交易意愿最优解的能力。

　　在旅游服务领域，当前正表现出以上3点基本特征典型代表之一，恰是同程旅行。

Regarding the first point, this is the common gene of Pinduoduo and Tongcheng Travel, which has the customer base of the broadest group of people outside the Fifth Ring Road, and is based on high-frequency rigid consumption content (one is agricultural products, the other is ticketing), and it continues to evolve and expand from the bottom up.

According to the latest data, as of September 2023, 9, Tongcheng Travel has about 30% of the total number of registered users living in non-first-tier cities in China, making it the largest deeper in the OTA industry, and most similar to Pinduoduo's customer portrait before the outbreak of the contrarian trend.

Regarding the second point, it is also the basic outline of Tongcheng travel:

In the third quarter of this year, the revenue contribution of "other" businesses such as hotel management services, business travel services, membership services and attraction ticket services increased steadily. The proportion reached 14.9%, an increase of 111.8% over the same period, a record high, and exceeded 10 billion yuan for the first time.

The rapid growth of other businesses is mainly due to the rich product line of Tongcheng Travel, from accommodation to transportation, to the leisure and vacation market segments, and the "one-stop travel platform" covers travel scenarios such as business travel and leisure vacation. up to cooperation with airlines and airports for customized services; The unit price is only double digits, and Luoyang Rail has created a "Luo Yi Xing" City Pass WeChat applet to facilitate citizens to travel, and the supply side has a rich layout.

Regarding the third point, based on the first and second points, relying on a wide range of customer groups and equally abundant supply, Tongcheng Travel has evolved the ability to achieve the optimal solution of service and transaction intention, which makes it objectively one of the most price discovery platforms in the OTA industry.

Since the beginning of this year, Tongcheng Travel has completed a strategic contract with the People's Government of Yangcheng County, Shanxi Province, Guoyu Ancient City and Xicheng Mountain Scenic Area at the destination end, and jointly created a new business card for Yangcheng cultural tourism. It has reached a strategic cooperation with Chimelong Tourism Resort, integrated the advantages of the platform and full-link marketing resources, jointly launched a new phase of "Super Destination", and jointly launched the "Asian Games City Slow Travel Plan" with Chao News and Loong Airlines, bringing people a series of gameplay experiences that combine travel and Asian Games.

On the travel side, Tongcheng Travel signed a strategic cooperation agreement with Henan Airport Group to carry out in-depth cooperation in intermodal product innovation, brand building of airport business express, optimization of "first ride" service, airport informatization and construction of frequent passenger service platform. It has reached a strategic cooperation with Tianjin Airlines to carry out all-round cooperation in the development of high-quality travel services, the creation of high-quality routes, and the promotion of convenient travel services.

There are countless cases of cooperation similar to the active adaptation of supply and demand.

This is a typical endogenous prosperity, precisely because of the emergence of price discovery capabilities on the Tongcheng travel platform, so that more and more resources on both sides of supply and demand are spontaneously and benignly matched: the platform provides users with a broader price discovery space for each price band, and more and more users come to the platform to complete service transactions; As a result, Tongcheng Travel's price discovery ability continues to evolve in a positive cycle, bringing the supply side of tourism services into a cycle of higher-quality development.

In the third quarter of this year, Tongcheng's GMV reached 711.4420 billion, monthly paying users increased to 2.25 million, and annual paying users reached <> million, all hitting new highs, making Tongcheng Travel the largest online travel platform in China.

Chart: Tongcheng Travel's single-quarter GMV trend and monthly paying subscribers, source: corporate financial reports

In short, the essential reason why an OTA platform has more potential to become a real leader in the new cycle is that it has the most competitive price discovery ability - which is not only a sign of Tongcheng's maturity, but also the core comparative advantage that it has built over several years of development, and it is also the center of its investment value.

There are three barriers to building price discovery capabilities: genetic barriers, time barriers, and consumer voting barriers (cognitive and trust barriers). No matter what it is, it is difficult for players in the same industry to imitate it in a short period of time.

Taking the evolutionary logic of Tongcheng Travel as a reference, the core enlightenment it brings to the current involution and breakthrough proposition of the entire Internet industry is that following the common sense of basic economics and removing path dependence is the premise of all innovations, otherwise it is a pseudo-innovation that needs for a while.

In the long run, the ability to innovate in this path is the core ability of enterprises to seize increments. Based on this, looking at Tongcheng Travel and the OTA industry in which it operates, we can now have a clearer understanding of the outline of its new cycle in the next 10 years.

04

Future: High-quality supply is the core essence

The restructuring of industrial resources according to consumer choice and price discovery ability is a new competitive anchor for the OTA industry in the next 3-5 years, but this is only the beginning of a new cycle.

The Scottish economist James Mill once proposed: "Production, distribution, exchange are only means." No one produces for the sake of production' All this is an intermediate, intermediary activity for the purpose of consumption. ”

Based on this, the French economist Say put forward the famous Say's law, the essence of which is that "supply creates its own demand". Applied to the industry, if we push it backwards, if there is a shortage of demand, it may be caused by external environmental factors in the short cycle, but in the long term, it must not produce high-quality supply that can stimulate demand.

In a word, having the ability to discover prices can make companies the most competitive targets in the current cycle transition window. However, in the long term, high-quality supply is still the core essence.

From the current perspective, behind the new demands of the concrete tourism industry, the shrinkage of consumer demand is essentially a deep-seated high-quality supply gap:

According to Tencent's 2023 China Consumer Trends Insights White Paper, niche uniqueness, leisure, surprise and depth have become the new trends.

Chart: New Trends in Tourism Consumption, Source: 2023 China Consumer Trends Insights White Paper

First of all, at the entrance end, the requirement is that the OTA platform has enough service scenarios, only if it is convenient enough, users will choose to use, niche unique, comfortable and relaxed, and deep in the local (like the locals) The requirement is that the OTA platform can achieve full coverage of user needs, unknown surprises, hotels and hotels on the supply side, and even scenic spots, the entire industry chain needs to have the ability to provide high-quality services in order to make users feel satisfied.

What should the model of high-quality supply look like? The entire industry is constantly thinking and acting to solve this problem.

Taking Tongcheng Travel as an example, its current three-dimensional engine - that is, full-service scenario penetration, full coverage of user needs, and in-depth empowerment of the industrial chain - is precisely for the high-dimensional layout of new demand on the supply side.

On the full-service scenario side, Tongcheng Travel itself relies on WeChat, which is almost the largest traffic pool at the entrance end, to occupy the natural advantages of the service scene, and on top of this, it has also been exploring cooperation with Tencent from breadth and depth. In terms of breadth, we will continue to explore new scenarios in Tencent's ecosystem, and cooperate with QQ Browser and Tencent Docs. In terms of depth, Tongcheng Travel has officially upgraded its WeChat Mini Program "Chengchebei" to "City Pass", which will combine Tongcheng Travel's business resources such as train tickets, air tickets, hotels, taxis, and vacations, and is committed to providing high-quality daily travel and local entertainment services.

On the scene side of niche demand, Tongcheng Travel relies on "Travel +" to deepen its layout. In the third quarter of this year, in terms of travel + music, Tongcheng has co-organized music festivals with Gexian Village, and became the official travel partner of Jay Chou's "Carnival World Tour 2023 - Bangkok Station"; "Travel + Museum" and Luoyang Museum create a younger and more energetic way to play... These actual actions indicate that most of the users' novel, niche, and unique needs can find corresponding product supply on the Tongcheng travel scene side.

Empowering the industrial chain, Tongcheng Travel continues to pass on its digital intelligence capabilities and brand building capabilities to the industrial chain, and provides SaaS solutions to more mid-to-high-end and chain hotels, small and medium-sized independent hotels, B&Bs and cluster industries through hotel PMS brand matrices such as Travel Intelligence Cloud, Zhuzhe, Golden Swan, and Cloud Shopkeeper, so as to optimize the industrial chain and hotel digital intelligence service capabilities. Since the beginning of this year, the number of room nights in domestic hotels of Tongcheng Travel has increased by more than 2019% compared with the same period in 100.

The wider entrance of service scenarios brings the improvement of penetration rate and convenience, the high-quality supply of user experience, the broadening of demand scenarios, the tapping of young users and in-depth users, and the high-quality supply of user choice, while the empowerment of the industrial chain and the improvement of upstream and downstream digital and intelligent service capabilities are the high-quality supply of user satisfaction. Looking to the long-term future, OTA players represented by Tongcheng Travel have sown high-quality seeds and are waiting for new increments to blossom and bear fruit in the new cycle.