Dilok Klaisataporn
A series of newly disclosed acquisitions by Tongcheng Travel Holdings Ltd. (OTCPK:TNGCF; 0780.HK) shows the online travel agency is trying to diversify its service offerings, as part of a bigger business expansion strategy. Such services – especially a new outbound travel service – should help it to better capture rising travel demand following Beijing’s decision last month to pivot away from its “zero Covid” policy which has wreaked havoc on the travel industry for the past three years.
Tongcheng announced in a regulatory filing last week that it signed deals to invest a combined 1 billion yuan ($145 million) in five companies in 2022. Among those, the most notable was a 200 million yuan acquisition of packaged tour operator Tongcheng International Travel Service, which was spun off from the company in 2016 as a result of a wider restructuring. The pair signed the agreement on Dec. 29, though it has yet to close.
Tongcheng International had about 200 employees by the end of September, working out of seven directly operated and 11 franchise stores. Its revenue tumbled to just 29.5 million yuan in 2021 from 104 million yuan in 2020 as China severely limited international travel into and out of the country and incurred net losses at 46.7 million yuan in 2021 and 212 million yuan in 2020. Investment bank Jefferies said in a report it expects the deal to close in the first quarter of this year, and be consolidated into Tongcheng’s financial afterwards.
This deal marks Tongcheng’s return to the outbound travel business, which it dropped during a broader reshuffle in the online travel sector that saw industry leader Trip.com ((TCOM, OTCPK:TRPCF); 9961.HK) and internet giant Tencent ((OTCPK:TCEHY, OTCPK:TCTZF); 0700.HK) become major Tongcheng shareholders about five years ago. The return looks well timed to tap into an expected rebound of China’s outbound travel market as the country gets set to reopen its borders from Jan. 8, ending three years of near-closure.
Tongcheng disclosed it also made investments in a fintech travel-related service, in Central China’s Hunan Airlines, and in other offline packaged tour services. It said the investments will allow it to “tap into the full ecosystem of tourism-related business by accessing the upstream and downstream supply chain businesses.”
Investors were mildly excited about the investment spree, bidding up the company’s shares by 6% over the three trading days after the announcement last Thursday. But the stock’s longer-term performance is more impressive. Its Wednesday close of HK$19.80 is roughly double its HK$9.80 IPO price from 2018. By comparison, most Hong Kong and U.S.-listed Chinese internet companies now trade well below their IPO price after investors reduced their holdings over the last two years over concerns about regulatory crackdowns in China and a clash between the U.S. and Chinese securities regulators.
Analysts are quite bullish on Tongcheng, forecasting its revenue will grow 36% and its profit will nearly triple this year as China’s travel sector recovers, according to Yahoo Finance. But even with that big profit increase, the company’s stock still trades at a high forward price-to-earnings (P/E) ratio of 28. Trip.com’s shares trade at an even higher forward P/E ratio of 35. By comparison, one of their few publicly traded domestic rivals Tuniu (TOUR) trades at a ratio of just 8, and even global giant Expedia (EXPE) trades at just 10 times.
Growth strategies
China’s recent shift from zero Covid should provide a timely boost for Tongcheng, whose businesses have stagnated during the pandemic due to frequent travel restrictions. The company’s revenue fell 19% in the first half of last year, compared to a 27% increase for 2021. It also fell into the red for the period, reversing a 1.3 billion yuan profit in 2021. For the three months through September, Tongcheng’s revenue grew slightly by 5.6% to 2 billion yuan, while it reported a net loss of 94 million yuan, according to its third-quarter results released in November.
Many analysts expect Tongcheng to quickly recover its growth momentum. Jefferies said it expects the company to reach breakeven in the fourth quarter of 2022, compared to a previous estimate that it would continue losing money. The investment bank maintained its “buy” rating and had a target price of HK$21 for the company.
Tongcheng’s recent diversification plan falls under its bigger strategy of lowering its reliance on Trip.com and Tencent, which hold 26% and 22% of its shares, respectively.
Tongcheng’s third-quarter results showed that 80% of its traffic during the period came through its mini-app on Tencent’s WeChat platform. While the company will continue investing in its Tencent partnership, it will also seek to diversify its traffic sources “by exploring more online and offline traffic channels,” it said. For example, the company said it has worked with China’s major smartphone makers to pre-install its mobile app on their products. Meantime, Tongcheng also gets its hotel and air ticket reservation services from Trip.com.
Like many other Chinese internet companies, Tongcheng said it will also focus on the more cost-effective business of getting more money from its existing customers over the more expensive business of acquiring new users. For the three months through September, Tongcheng had 281.5 million monthly active users, though just 36.8 million – or about 13% – were paying users.
The company said it plans to use cross-selling techniques with other partners to squeeze more money from its existing users. For example, it has added ride-hailing services on its platform that can be cross-sold to buyers of its train and air tickets once they arrive at their destinations.
Its diversification drive comes as competition heats up in China’s online travel market following a quiet period dating back to the industry reshuffle in 2016. The company faces much bigger rival Trip.com, as well as Qunar, and internet giants like Alibaba (BABA) and Meituan (OTCPK:MPNGF, OTCPK:MPNGY) are also becoming more active. Aggressive marketing spending as competition heats up could negatively impact Tongcheng’s margins and profits, according to the Jefferies’ report.
Still, one of Tongcheng’s strengths is its focus on smaller, less-affluent cities. The company’s registered users residing in non-first-tier cities in China at the end of last September accounted for approximately 86.7% of its total. Analysts believe that Tongcheng’s strength in that market gives it a comparative advantage over larger rivals like Trip.com, which focuses mainly on big cities like Beijing and Shanghai.
At the end of the day, the retirement of Covid restrictions will be like a tide that lifts all ships from China’s long-suffering travel industry. But it will inevitably lift some ships more than others, and Tongcheng is trying to position itself to become a primary beneficiary through its more diversified product offering as the Chinese travel market recovers.
Disclosure: None
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