Trip.com Group Ltd Q3 FY2023 Earnings Call

Thank you. Thank you, Maggie. Thank you, everyone. Good day and welcome to Trip.com Group’s third quarter of 2023 earnings conference call. Joining me today on the call are Mr. James Liang, Executive Chairman of the Board; Ms. Jane Sun, Chief Executive Officer; and Ms. Cindy Wang, Chief Financial Officer. During this call, we will discuss our future outlook and performance, which are forward-looking statements made under the safe harbor provisions of the U.S. Private Security Litigation Reform Act of 1995. Forward-looking statements involve inherent risks and uncertainties. As such, our results may be materially different from the views expressed today. A number of potential risks and uncertainties are outlined in Trip.com Group’s public filings with the Securities and Exchange Commission. Trip.com Group does not undertake any obligation to update any forward-looking statements, except as required under applicable law. James, Jane, and Cindy will share our strategy and business updates, operating highlights, and financial performance for the third quarter of 2023, as well as outlook for the fourth quarter of 2023. After the prepared remarks, we will have the Q&A session. With that, I will turn the call over to James. James, please.

Thank you, Michelle. Thank you everyone for joining us on the call today. We are pleased to see the global travel market showing strong recovery in the third quarter. The Chinese travel market in particular has experienced a significant rebound, driven by high demand during the summer season. Our business has consistently performed well, breaking previous records in hotel and air bookings. Additionally, outbound travel is rapidly recovering, thanks to improvements in international airlift and travelers’ robust desire for international experience. So, we anticipate a continuously strong demand for outbound travel in the coming year and are committed to enhancing our partner offerings to meet this demand. We also accelerated our global business growth by expanding and scaling our global OTA platform. While globalization remains a crucial aspect of our business, Trip.com Group recognizes the significance of AI innovation in our long-term strategy. The pandemic has accelerated the digitization of the travel industry and advancements in AI technology have transformed consumer expectations. In response to this trend, we have developed our unique AI technology, which is specifically designed for the travel industry. This, combined with our extensive travel knowledge, enables us to create a reliable database of accurate travel data and provides actionable recommendations for travelers. Moving forward, we will continue to enhance our capabilities and integrate AI into all aspects of our business, providing personalized booking experiences and tailored recommendations. In conclusion, travel is unique in that it is an inherently human-centric experience with insatiable demand. We will continue to push forward with our globalization and AI innovation to pave the way for the Company’s accelerated growth. With that, I will turn the call over to Jane for operational highlights.

Thanks, James. Good morning, everyone. As a quick overview, our net revenue in Q3 grew by about 100% year-over-year and has surpassed the 2019 level by 31%. The strong travel demand and positive momentum in travel bookings from the second quarter continued into the third quarter. Our business performance achieved new record levels with hotel bookings up over 97% compared to last year and air bookings increasing by about 70% year-over-year. In the domestic Chinese market, travel demand remains robust. Over the last three quarters, Chinese consumers have increasingly prioritized travel spending over other discretionary expenses. The positive trend observed in the second quarter persisted through to the third quarter. Our domestic hotel reservations grew by over 90% year-over-year and 70% compared to 2019. Long-haul hotel bookings recorded the highest year-over-year growth rate at 133%, while short-haul hotel bookings were also 66% higher than last year's figures. While Chinese travelers continue to explore their home country, their interest in traveling abroad is growing, supported by steady improvements in supply. In Q3, while the overall Chinese outbound market recovered to about 50% of pre-pandemic levels, Trip.com Group’s outbound hotel and air ticket reservations rebounded to 80% of the pre-pandemic level, leading the market by approximately 30%. APAC regions like Hong Kong, Macau, Thailand, Singapore, Korea, and Japan remain top outbound destinations due to higher flight capacity recovery and easier visa processes. Travel to long-haul destinations such as Europe has also seen the fastest growth compared to the previous quarter. An increasing number of overseas partners are preparing to welcome Chinese travelers. Notably, hotels in more than 15 popular destinations, including Dubai, Paris, and Kuala Lumpur, have tailored services like Chinese language support and payment options. These positive trends have bolstered consumer confidence in traveling abroad. We anticipate further growth in Chinese outbound travel next year. Transitioning to our global business, we continue to witness resilience in global travel demand, particularly in the APAC region, which is crucial for growth. Air ticket bookings on our global OTA platform have nearly doubled year-over-year and are 80% above 2019 levels. Our overall hotel bookings on the global platform also reached a new record high, more than doubling the 2019 level. Following the country's strategy to enhance inbound tourism and favorable policy rollouts, we have seen triple-digit growth in inbound travel through our global platform. Travelers around the world are increasingly choosing international destinations, driving global travel momentum and presenting excellent opportunities for travel companies with global offerings. With these positive trends, our global business continues to thrive, with a focus on fostering organic growth in the mid to long term. Our global OTA platform has seen significant growth, contributing nearly half of our total overseas business. We see substantial potential for further expansion to serve users globally, along with a significant upside for profitability. In Q3, 60% of our global bookings were made directly through our global mobile app. In our APAC market, 70% of orders were booked through our mobile app, surpassing the global booking percentage. To take advantage of this opportunity, we have created a comprehensive roadmap that utilizes our strengths and resources to drive sustained growth. Our strong presence in APAC markets, combined with our dedication to customer service, allows us to provide exceptional product and service offerings to our users. Recognizing the vast potential in the APAC region, we are committed to further improving our brand awareness to solidify our market position. We've achieved notable market share growth in critical areas such as Hong Kong, Korea, and Southeast Asia, and our robust product offerings provide a one-stop shopping service, positioning us to seize upcoming opportunities. We are applying the same strategic approach to expand globally by leveraging our product and service capabilities. In terms of accommodation, we have improved our product capabilities by balancing our traditional strengths in long-haul services with newly developed expertise in short-haul offerings, adapting to changing travel needs in the post-pandemic era. Our focus remains on positive product innovation aimed at delivering great value to both our customers and partners. Furthermore, partners can join our TripPlus program, allowing them to connect with our loyal customer base through our branded membership. Additionally, we are expanding our user base by increasing our presence in lower-tier cities. Through these efforts, we aim to provide the best possible value to our customers and partners. As the demand for travel continues to rise, the application of AI in travel is expected to enhance efficiency and offer highly personalized solutions tailored to individual travelers' needs. This vision represents the next phase of the travel industry and highlights the significant role of AI in making travel more convenient, personalized, and memorable for everyone. To date, we have launched a series of AI tools to refine the travel booking experience. Our AI travel assistant, TripGenie, has improved the user interface by utilizing natural language processing and providing actionable results. Since its launch earlier this year, we have seen significant improvements in order conversion rates and user retention. We've also achieved remarkable self-service rates thanks to our AI chatbot, which effectively handles numerous inquiries with high accuracy in text and voice, enhancing the service. This streamlined approach leads to improved self-service resolution. As the travel industry continues to recover, we are committed to sustainability as part of our long-term growth strategy. We focus on being environmentally friendly, community-conscious, and family-oriented. For environmental sustainability, we offer travel products designed to support and strengthen the communities we serve. We have made significant strides in incorporating sustainable options across various product lines, including flights, car rentals, and corporate travel, with over 16 million users opting for our low-carbon products. We are also advancing low-carbon hotel standards to support sustainable travel initiatives. Trip.com Group has engaged nearly 1,000 hotel partners and launched its Low-Carbon Hotel standard initiative, promoting eco-friendly practices and fostering a sustainable travel ecosystem in collaboration with these hotels. Regarding community-friendly initiatives, we are actively building travel retreats across the country to cultivate travel talents, enhance local service quality, create job opportunities, and contribute to global prosperity. On the family-friendly front, we have implemented a subsidy program to alleviate childbirth expenses, supporting our employees in achieving work-life balance. Through our ongoing efforts in these areas, we take pride in our positive impact on society. In summary, we are encouraged by the strong travel demand across all business segments, expecting outbound travel to remain a key driver for growth in the short term. Looking ahead, our global business, supported by enhanced offerings and improved profitability, will play a critical role in the long term. Given these promising prospects and efficiency gains from our AI initiatives during the quarter, we feel optimistic about the market and confident in the opportunities ahead. Now, I will turn the call to Cindy.

Thanks, Jane. Good morning, everyone. For the third quarter of 2023, Trip.com Group reported net revenue of RMB 13.7 billion, representing a 99% increase from the same period last year, and a 22% increase from the previous quarter, primarily due to the strong recovery in the travel market. Accommodation reservation revenue for the third quarter was RMB 5.6 billion, representing a 92% increase year-over-year and a 30% increase quarter-over-quarter, which is 36% higher than the 2019 levels. Both domestic and outbound hotels have seen robust growth and outpaced the industry. Overall hotel bookings have achieved a record high and have grown over 60% above the pre-pandemic level. Transportation ticketing revenue for the third quarter was RMB 5.4 billion, representing a 105% increase year-over-year and an 11% increase quarter-over-quarter, which is 44% higher than the 2019 level. This is mainly due to the robust recovery of outbound air and strong growth in domestic and global air businesses. Packaged tour revenue for the third quarter was RMB 1.3 billion, representing a 243% increase year-over-year and an 84% increase quarter-over-quarter, recovering to 81% of the 2019 levels. Domestic packaged tours have outgrown the 2019 levels while recovery in outbound packaged tours was still lagging behind. Corporate travel revenue for the third quarter was RMB 591 million, representing a 60% increase year-over-year and remained flat quarter-over-quarter, which is 76% higher than the 2019 levels, with air ticket bookings increasing by double digits above 2019 levels and hotel bookings threefold the 2019 levels. Excluding share-based compensation charges, our total adjusted operating expenses were 19% higher than the previous quarter and 20% higher than the same period in 2019. Adjusted product development expenses for the third quarter increased by 23% from the previous quarter and increased by 29% compared with the same period in 2019. Adjusted G&A expenses for the third quarter increased by 9% from the previous quarter and increased by 21% from the same period in 2019. This is mainly due to increases in personnel-related expenses. The increase was mainly related to performance-based bonuses in recognition of the exceptional performance achieved in the quarter, while the total headcount of our product development and G&A teams was significantly lower than during the same period in 2019. Adjusted sales and marketing expenses for the third quarter increased by 17% from the previous quarter and increased by 11% compared with the same period in 2019. The sequential increase was due to increased marketing activities that were in line with the higher seasonality. Adjusted EBITDA was RMB 4.6 billion for the third quarter compared with RMB 1.4 billion in the same period last year and RMB 3.7 billion in the previous quarter. Adjusted EBITDA margin was 34% for the third quarter compared with 21% in the same period last year and 33% in the previous quarter. Diluted earnings per ordinary share and per ADS were RMB 6.84 or US$0.94 for the third quarter of 2023. Excluding share-based compensation charges and fair value changes of equity securities investments, exchangeable senior notes, non-GAAP diluted earnings per ordinary share and per ADS were RMB 7.26 or US$1 for the third quarter. As of September 30, 2023, the balance of cash and cash equivalents, restricted cash, short-term investments, held-to-maturity time deposits, and financial products was RMB 79 billion or US$10.8 billion. Given the rapid business growth this year has significantly strengthened the group’s cash flow and we believe the Company’s share price is undervalued. As of November 20, 2023, we repurchased US$120 million of our shares and reduced our share count by 0.5% versus last year. Our Board of Directors has also approved a regular capital return policy, which is scheduled to commence in 2024. We are proud of this accomplishment as it reflects both our commitment to returning capital to shareholders and our confidence in the long-term outlook of the travel industry and our own business. To conclude, we are pleased with the continued momentum in the travel market and our team’s solid execution in the third quarter. We are well-prepared and remain key to drive long-term growth and maximize returns for shareholders. With that, operator, please open the line for questions.

Our first question comes from Brian Gong from Citi. Please proceed, Brian.

Congrats on decent third quarter results. And thanks for sharing the exciting progress of generative AI adoption at Trip.com. I have a quick question on this. Could you elaborate on how the adoption of AI technology differs between our international platform, Trip.com, and our domestic Ctrip within the group? Thank you.

Thanks for your question. We implement a consistent AI adoption strategy across all markets, focusing on improving productivity and efficiency in marketing, engineering, and customer services. Our goal is to offer users a smart AI assistant that can simplify and enhance their trip planning and research experiences. Through natural language interfaces and actionable recommendations, we aim to help users plan their trips more effectively. Successful practices from each market will be shared and promoted across others, ultimately becoming a global standard within our organization. Thank you very much.

Next, we have Alex Poon from Morgan Stanley. Please go ahead.

Congrats on a very strong quarter. For my question, could you share some details about the travel performance after the Golden Week? And how should we interpret the momentum into Q4 and into 2024? Thank you so much.

Sure. Quarter-to-date, China hotel RevPAR numbers and domestic air passenger volume were slightly below those of 2019, which reflects a normal seasonality post the summer. We continued to outpace the industry average growth with our domestic hotel bookings surpassing 2019 levels by around 60%, and our outbound hotel and air reservations recovering to around 80% of the 2019 levels. Our global OTA platform maintained triple-digit growth over 2019, despite tough comparables. Looking into the next year, 2024, our users’ short booking windows make it challenging for us to forecast the 2024 industry momentum. However, we are confident in our ability to consistently outpace market growth. For the China market, we expect robust growth in the outbound travel business due to further recovery of outbound flight capacity, along with steady growth in domestic business. For the global market, we anticipate our global OTA platform, Trip.com, to maintain high-speed growth, while Skyscanner and other overseas brands continue to grow healthily, despite recent headwinds in the EMEA region. Thank you.

Next, we have Natalie Wu from Haitong International. Please go ahead.

Congratulations on a very solid quarter. My question is regarding the outbound. We all acknowledge that outbound will continue to be the strongest driver in the short term. I’m just wondering if the recovery pace of outbound flight recently seems to be a little bit slower than the market has initially expected. So just wondering, is there any reason behind it? Is it due to insufficient consumer capacity? So just wondering, when does the management anticipate the full recovery of the outbound business? Thank you.

Yes. So we’re confident in the recovery of outbound travel. If you look at our demand and supply side, the demand already exceeded 2019 levels. However, on the supply side, there are two major hurdles. The first one is the visa application process takes a little bit longer for certain regions, such as Europe and the United States. However, after the APAC meeting, I think there will be improvements in the visa application side. The second one is flight capacity. As of Q3, the flight capacity only recovered 50%. We hope that going forward the flight capacity will further improve. So, with the visa application process being improved as well as increased flight capacity, we believe next year, outbound will grow even stronger compared to this year. Thank you.

Next, we have Simon Cheung from Goldman Sachs. Please go ahead.

I have two questions. I think in the consumer space, the trade-down seems to be a buzzword for everyone. Wondering whether you have observed a similar trend for this trade-down, whether it’s for corporate travel or leisure travel. By the same token, to the extent that I think outbound travel is a higher-ticket item, how do you feel this trade-down trend would affect the pace of outbound travel going forward? That’s the first question. And then, the second question is, I think you have been able to preserve your sales and marketing expenses as a percentage of your revenue quite steadily at around 20% for quite a few quarters. I remember in the last couple of quarters, you’ve been talking about maybe having to spend a bit more going forward. How are you thinking about this in the near term? And correspondingly, we’ve been hearing all these growing competitions; would you be able to share any comments on that front as well?

For the first question regarding the leisure segment, we have not observed any signs of declining consumption. The average travel spending on our platform remains above 2019 levels for both new and existing users. In the business segment, corporate travelers are also spending more than they did in 2019. In the long term, we are confident in China's travel demand due to the expansion of air, rail, and highway networks, along with investments in other travel infrastructure, which provide a solid foundation for the industry’s growth. On the demand side, leisure travel spending is shifting from cyclical trends to a more stable growth pattern, driven by rising disposable income and a shift in spending from goods to services and experiences. Furthermore, online travel agencies are expected to benefit from increased online penetration. Although business travel is closely linked to economic activity and may face challenges due to economic uncertainties, we see many opportunities as more companies adopt managed travel services to optimize their travel expenses. Regarding the second question, we have seen significant improvements in our marketing efficiencies this year, primarily due to better conversion rates and cross-selling efforts. We have also experienced considerable savings because of the strong release of pent-up demand. We anticipate a rise in marketing spending as a percentage of revenue in Q4 due to the typical seasonal downturn and as part of our strategy to normalize marketing expenses to drive future growth. Long term, we remain committed to a marketing investment approach focused on return on investment, aiming to balance efficiency gains with the long-term investment requirements in overseas markets and opportunities in lower-tier cities in China. In terms of competition with content platforms, the competitive landscape in the Chinese market has remained stable, with some seasonal variations in marketing intensity among competitors. Online travel agencies and content platforms have distinct core strengths; content platforms are good at creating engaging content and highlighting trending products, but most lack robust back-end systems for booking fulfillment. On the other hand, online travel agencies excel in managing supplier relationships and providing reliable services. Therefore, while we are aware of market competition, our focus remains on strengthening our core competencies. Thank you.

Next, we have Alex Yao from JP Morgan. Please go ahead.

First of all, congrats on a rock-solid quarter. Year-to-date, you guys have delivered very impressive margin improvement relative to the historical level. Can you talk us through how you achieved the current margin structure? For example, can you break down the margin structure across domestic outbound, and international between now and the same period of 2019? As we look into 2024, apparently, the outbound, which is a higher-margin business, will likely outgrow the domestic business. How should we think about the margin structure into ‘24 and beyond? Thank you.

Thank you, Alex. In general, because we have very strong brand awareness and market share in the China market for both the domestic and outbound segments, we have very healthy margins serving the China market. In the international market, we are growing very fast, but at the current stage, we are still in the investment cycle. But at the same time, we will balance the investment versus improving towards a more healthy margin for the international market. Yes, you are correct. Moving into 2024, we think the outbound travel percentage, as a portion of total revenue contribution to the whole group, will definitely go forward. Outbound is traditionally a healthier or higher-margin business for us. But I think the margin level we achieved this year has some special factors impacted, especially in the first half of this year. The strong rebound was, to some extent, out of our own expectations. So in terms of readiness in both the service as well as sales and marketing, we had comparatively limited preparation to serve the much higher-than-expected outbound market rebound. To be honest, our operating margins, especially high operating margins for the first half of this year, are even higher than the normalized levels. Next year, as the business moves toward a more normalized level, we should make enough investments in both service and sales and marketing efforts. Our marketing expenditure will increase slightly to fuel future growth of the business. Our margin levels will trend down a little bit compared to the first half of this year. However, other factors, such as the increase in outbound travel and continuously improved margins in the international market, will also help balance the total operating margin moving into next year. In the long term, I believe we will definitely achieve the guidance we've previously given to our shareholders, targeting to maintain margin levels around 20% to 30%. We have already achieved that level this year, and we are fully confident about continuously maintaining a healthy margin moving forward. Thank you.

Next, we have Jiong Shao from Barclays. Please go ahead. Thank you.

I have two questions, if I may. First, congratulations on the impressive results. I believe you have experienced at least three or four consecutive quarters of strong performance since the lifting of COVID restrictions. Some investors are concerned that this might be purely due to pent-up demand and that growth may slow down like it has for some of your peers in the west. Can you share your thoughts on why this will not be the case and why you expect growth to continue in 2024 and beyond? It would be great if you could discuss the long-term growth drivers and expected growth rates over the next three years. Additionally, regarding the margin question you addressed earlier, your gross margins have reached 82% over the last three quarters. You mentioned investing in sales and marketing, which affects the expenses below the gross margin line. Should we expect the gross margin to remain stable, and are there any structural factors contributing to the recent increase in gross margins?

Thank you for your question. We focus on long-term growth and consider a few important benchmarks. One of them is the GDP growth rate. If the GDP growth rate is around 4% to 5%, we expect the travel industry to grow faster than that, by a few percentage points, as those who can travel typically have higher incomes. Therefore, we estimate that travel will grow at about 8% to 10%. Additionally, we plan to exceed the travel industry's growth through improved efficiencies by shifting more operations online. Our team is targeting growth that is around 3% to 4% above the GDP growth rate. Consequently, we can't commit to short-term goals, but long-term, that is what we are aiming for. We consistently plan our business three to four years ahead to ensure we make steady investments. Looking back at the three years during COVID, our engineering team made significant progress, which positioned us well to meet the pent-up demand during the industry recovery. We believe that growth over the next three to five years will be very sustainable. Regarding margins, our goal is to maintain healthy and sustainable gross margins. While it might be possible to drive higher market growth and margins in the short term, we prefer not to do so if it compromises our long-term investments. We are committed to growing our business with gross margins between 20% and 30% and will continue to invest in areas like product engineering and customer service. This is our commitment to our customers, partners, and shareholders. Thank you.

Next, we have Wei Xiong from UBS. Please go ahead.

My question is regarding our pure international business, especially on the Trip.com side. I was wondering if management could share the current revenue contribution from Trip.com to the group revenue. And how should we think about this growth in the next three to five years? Also, in addition, what are our strategies to continue achieving such high growth? Thank you.

Sure. Trip.com represents approximately 6% of the total group revenue in Q3 and its revenue contribution has been steadily approaching that of Skyscanner. We expect Trip.com to surpass Skyscanner in terms of revenue contribution in the near future. With regard to the growth strategy in the next three to five years, we expect that Trip.com will maintain a robust mid-double-digit growth rate, becoming one of the primary growth drivers for the whole group. In terms of different markets in Asia, Trip.com is targeting to become the leading OTA. The combined size of its top market in the Asia Pacific region exceeds that of mainland China in terms of total gross booking. Trip.com has already established a solid foothold in this region with comprehensive local operations. Despite starting with relatively small market share, Trip.com is confident in expanding its presence through its all-in-one mobile app, competitive offerings, and high-quality services. We are continuously working to grow our brand awareness in this region. In the euro market, our near-term focus is more on air travel. The air market in Europe is about twice the size of China’s in terms of gross bookings. This represents a significant opportunity for the group to capitalize on through synergies among different brands within the group. Furthermore, we are strategically expanding our service offering into other markets while upholding our ROI return standards. Thank you.

Next, we have James Lee from Mizuho. Please go ahead.

Can you elaborate on your strategy and plans to continue gaining share in the OTA space? Where do you see the most substantial opportunity? Given those opportunities, have the foundational investments already been made to drive those share gains, or do you need to accelerate the investment pace to capitalize on those opportunities?

We look at different regions with different angles. For domestic, we strive to provide excellent products for our high-quality customers by enhancing our customer service and product innovation. For the third-tier and fourth-tier cities, we are further penetrating these cities by offering products with various incentives in service and pricing. So, we believe domestic China still has a long way to go in terms of serving 1.4 billion customers. The second opportunity is outbound customers with the supply side, which includes making the visa applications and flight capacity improvements. We can take more customers abroad and enable them to see the rest of the world. The third priority is the global customers, because the inventory we developed for our outbound customers can also be utilized by our global customers. We will be able to empower customers from overseas to travel abroad. For different segments, we see significant upside to drive our initiatives. We will ensure to make investments to address our customers’ needs, particularly in product, engineering, and services, as our customers from different regions will have diverse requests. The majority of the investments are being made, requiring us to continuously improve and meet our customers’ new requests. Thank you.

Next, we have Parash Jain from HSBC. Please go ahead.

If I may shift your focus more towards the capital return policy, it’s very welcome. I just wanted to understand how we should think about your balance sheet in two years, in the medium to long term. Would you still want to carry a net cash balance sheet? Or given the steady state of your business, given the yield difference between the China market and the rest of the world, do you think that you will probably be slightly more aggressive in terms of share buyback and return policy? And secondly, for your international business, how do you see the M&A market? Do you see any opportunity for Trip.com or Skyscanner to jumpfrog in terms of overall relevance for the group through M&A? Thank you.

Sure. Thank you. For the first question, our Board of Directors approved a multiple share buyback plan several years ago without an expiration date. As previously discussed, there was approximately US$505 million of the quote still unused before our current repurchase. In the last quarter, the rapid business growth this year significantly improved our cash flow. Additionally, we have increased our overseas cash reserves, ensuring we have sufficient funds for buybacks without affecting our regular operations. The recent share price volatility due to purely external factors has resulted in a generally low valuation, making it a suitable time for us to proceed with this buyback. Moving forward, we plan to continue the buyback without a specific timeline or price target, as long as our overseas cash reserves remain sufficient for operational needs and short-term debt obligations. Regarding your second question about the M&A strategy for the international market, we are quite confident that we already have the best assets in the international market to fuel our future growth. Therefore, we will focus on growing our market outside of China organically and maximizing synergies among the different brands within the group. Thank you.

Next, we have Thomas Chong from Jefferies. Please go ahead.

Congratulations on a solid set of results. My question is about the trend in operating expenses. Given that we have seen product development expenses increase significantly quarter-on-quarter and versus 2019, what factors actually contributed to this growth? How should investors project this pattern going forward? Thank you.

Thank you, Thomas. The product development expense primarily comprises personnel-related costs, especially from the engineering team. In Q3, the total number of employees in product development remained significantly lower than the levels in 2019. The increase in expenses was mainly due to performance-related bonuses in recognition of the outstanding achievement during the quarter. We anticipate that the absolute dollar amount of product development expenses will decrease sequentially in Q4 just because of seasonality. As Jane explained, we are aiming to grow our business in the long run. So going forward, we are continuously balancing healthy growth with controlling our total costs at a reasonable level similar to what we achieved in the past few quarters. Thank you.

Next, we have Ellie Jiang from Macquarie. Please go ahead.

I would like to understand more about our overseas product, Trip.com. Could you comment on Trip.com’s current profitability? And how will it look like in the next three to five years or in the longer run?

Sure. When considering all the markets that Trip.com is currently operating in, Trip.com has already achieved breakeven on a contribution margin basis, excluding fixed costs and shared costs at the group level. Moreover, as our business continues to scale up, profitability will consistently improve across markets. Regarding margins in different markets, in the Asia Pacific regions, Trip.com is projected to breakeven within the next two to three years on a net profit level, while in the rest of the world, our current primary focus is still to increase Trip.com’s incremental contribution to the group, which has been showing consistent improvement in the past few years. Thank you.

Next, we have Tian Hou from T.H. Capital. Please go ahead.

Management, congratulations on a good quarter. This is Tian. I have two questions. One is related to the profit level. Can you clarify whether the profit level can maintain the current levels and continue to improve? I want to understand what part of your P&L can drive up the improvement? What will be the revenue and cost and expense structure lead that improvement? That is the first question. The second question is related to your AI. My understanding is that AI at this point is more of a cost center than it is a revenue or profit center. Can management elaborate a little bit about your AI efforts? In which parts of your AI practices is it currently serving as a profit center or revenue center? Thank you.

Sure. Our CFO, Cindy, will take the first question, and I will take the second question. Thank you.

In terms of the long-term profitability of the business, we expect to overcome our current short-term high base and drive long-term margin expansion mainly through operational scalability and a favorable revenue mix. For example, in the long run, we think AI is one of the key drivers to help us continuously improve operational efficiency in the service center. In the long run, we are confident of achieving a margin that is comparable to our global peers.

For the second question on AI, we utilize AI in mainly four areas. The first one is to improve user interface. I think TripGenie helps our customers find their relevant and tailored products much easier. The second one is to improve the efficiency of our engineering team by using copilot. The third one is also to enhance efficiency for content generation and ensure all the content and recommendation lists are accurate based on reliable data. Lastly, we are also using AI to further improve efficiency for our customer service team. So, these are the four areas in which we fully utilize our AI capabilities, and we will make investments accordingly. Thank you.

May I ask one more question? I understand you feel the valuation is undervalued, and I agree with you. But isn’t there a better use of U.S. dollars? For example, the U.S. government’s short-term debt is already reaching almost 6% yield. If you buy back your own shares, how do you ensure you can generate more than 6% yield? So, I just want to compare buyback shares versus investing for a better yield: which one is the better option?

Yes. Thank you for your question. To be honest, we have always focused on the travel industry. And I think the reason that our investors invest is not because we have expertise in making investments; rather, we are experts in the travel industry. Therefore, we should consistently focus on our core business, which is travel, and invest in ourselves as the best opportunity for our shareholders. Thank you.

There are no further questions at this time. I will now hand the conference back to Michelle for closing remarks. Thank you.

Thank you. Thanks, everyone, for joining us today. You can find the transcript and webcast of today’s call on investors.trip.com. We look forward to speaking with you on the fourth quarter of 2023 earnings call. Thank you, and have a nice day.

Thank you. This concludes today’s conference. Thank you all for participating. You may now disconnect.