Key points to remember:
- Tongcheng-Elong rebounded from pandemic faster than bigger Trip.com due to focus on Chinese domestic market
- The company’s shares appear modestly priced against their domestic and global peers due to its higher growth potential over the next two years.
By Doug Young
Online travel agent Tongcheng-Elong Holdings Ltd. (0780.HK) looks like a business on the move, with a name change on the horizon and a major new player just arriving on board.
The company already had two of China’s largest internet companies among the key stakeholders, in the form of China’s leading online travel agent. Trip.com (NASDAQ: TCOM) with 27% of its shares; and social media giant Tencent with an additional 22%. Now, a new folder on the Hong Kong Stock Exchange revealed that T. Rowe Price, a major US brokerage firm, also hitchhiked with Tongcheng-Elong with its recent purchase of 5% of the company’s shares.
While Trip.com and Tencent are both long-term partners with investments dating back several years, the recent arrival of T. Rowe Price represents an important vote of confidence in a company that has rebounded from the global pandemic much more. faster than Trip.com or any of its global peers.
The company is reaping the rewards of its focus on the domestic travel market in China, with particular attention to smaller and less affluent cities. Domestic travel in China has returned to near pre-pandemic conditions this year, thanks to Beijing’s strict control measures that have largely eradicated the virus within its borders.
In comparison, international names like Expedia have had a much more bumpy ride as travel to their main Western markets remains depressed due to the persistent epidemics. Despite being based in China, Trip.com has fared as well as Tongcheng-Elong due to its reliance on international travel from domestic and increasingly overseas customers. from China.
Tongcheng-Elong’s stronger position than its more world-focused peers is evident in its stock, which is now trading at around double the level of its HK $ 9.80 IPO price in November 2018. This includes a rally of nearly 20% since mid-August, which could reflect the time when T. Rowe Price built up his 5% stake. By comparison, Trip.com’s US-listed shares have risen just under 15% in the period since Tongcheng-Elong first listed.
The reality is that Tongcheng-Elong is quite dependent on its two main stakeholders. Trip.com provides it with basic hotel and plane reservation services under a long-term agreement, while it has a similar deal for referrals from clients of the popular WeChat platform. Tencent. In his interim report Released Thursday, the company said more than three-quarters of its monthly active users came from WeChat in the last reporting period.
While such dependence on two outside partners may seem like a potential risk, it also means that the company – which is in the process of changing its name to simply Tongcheng Travel Holdings Ltd. – can concentrate on the more important work of marketing its services and provide a better experience for its customers.
This will become more important as other internet majors like Alibaba and Meituan launch their own aggressive campaigns for a greater share of the massive and rapidly growing Chinese market for travel products and services.
At its current size, Tongcheng-Elong is a solid number 3 in the market behind Trip.com and Qunar. Trip.com is currently valued at $ 21 billion. Qunar was worth around $ 4.4 billion at the time of its privatization of Wall Street in 2017, although that figure has presumably increased since then. For comparison, Tongcheng-Elong is currently valued at around $ 5.3 billion.
Valuation on the rise?
In terms of valuation, Tongcheng-Elong’s current size and more positive outlook due to its focus on domestic China seems to imply that the company’s shares may have upside potential, which likely attracted T. Rowe Price .
Comparisons in this case are a bit tricky, as most online travel agents reported losses throughout all or part of 2020, with domestic and global travel plunging into most markets during the height of the pandemic. . Trip.com and Tongcheng-Elong both returned to profitability thanks to a strong rebound in their domestic market, although Trip.com is still hampered by its reliance on international travel.
Still, if we double Toucheng-Elong’s profit in the first half of this year to get a rough estimate for the full year, the company is trading at a price-to-earnings (PE) ratio of 34. By comparison, Trip.com is trading at a much higher PE of 61, based on analysts’ earnings guidance for this year. Global giant Expedia is expected to lose money this year, but is reportedly trading at a PE of 23 based on analysts’ forecasts for its earnings in 2022.
That said, we’ll end with a look at some of Tongcheng-Elong’s latest results that show quite clearly why the company is way ahead of its domestic and global peers in recovering from the pandemic-induced travel slowdown.
The company reported revenue of 2.1 billion yuan ($ 325 million) for the three months through June, up 78% from the same period a year earlier, when the recovery trips to China had only just begun. Its gross value of goods (GMV) – the value of all goods and services sold on its platform – rose even more than 96% to 43.9 billion yuan during the period.
In terms of profit, Tongcheng-Elong posted a profit of 291 million yuan in the last quarter, about a five-fold gain from the previous year.
Trip.com has yet to release its second quarter results. But its first-quarter revenue fell 13% year-on-year to 4.1 billion yuan, compared to 61% revenue growth to 1.6 billion yuan for Tongcheng-Elong during that period.
Reflecting its orientation towards small towns, Tongcheng-Elong said that 86.6% of its registered users currently come from unranked cities, which refers to wealthier urban centers like Beijing, Shanghai and Shenzhen. Additionally, it said 60% of its new paying users in the second quarter of this year were from cities of tier three or below.
While it may be tempting to see Tongcheng-Elong as a good long-term investment, it is probably worth noting that the company’s advantage due to its national focus is expected to have a relatively limited duration, perhaps a year more, depending on the evolution of the pandemic. . At the same time, the company could also come under pressure in the longer term, as Meituan and Alibaba increase their spending on travel-related services.
As a result, any upside potential for the company’s shares could be limited to a year or two, which may well be the idea behind T. Rowe Price’s recent investment which is now worth around $ 250 million.