Key Takeaways:

  • Tongcheng-Elong has rebounded from the pandemic far more speedily than the bigger Journey.com because of to its aim on domestic China current market
  • Company’s shares appear modestly valued compared to domestic and global peers due to its stronger advancement opportunity around following 1 to two years 

By Doug Youthful

On the web journey agent Tongcheng-Elong Holdings Ltd. (0780.HK) seems to be like a firm on the transfer, with a name modify on the horizon and a major new stakeholder just arriving onboard.

The organization by now counted two of China’s top rated net corporations as vital stakeholders, in the type of China’s prime on the net travel agent Trip.com (NASDAQ: TCOM) with 27% of its shares and social networking large Tencent with yet another 22%. Now, a new submitting to the Hong Kong Stock Trade has disclosed that T. Rowe Price tag, a significant U.S. brokerage, has also hitched a experience with Tongcheng-Elong with its current purchase of 5% of the company’s shares.

While both of those Excursion.com and Tencent are lengthy-phrase associates whose investments day back numerous a long time, T. Rowe Price’s the latest arrival represents an crucial vote of self-assurance in a organization that has bounced again from the world pandemic significantly more quickly than Journey.com or any of its worldwide peers.

The organization is reaping benefits from its target on China’s domestic journey market place, with distinct attention to scaled-down, less-affluent cities. Domestic vacation in China has returned to in close proximity to pre-pandemic ailments this 12 months, many thanks to Beijing’s stringent management measures that have mostly stamped out the virus inside of its borders.

By comparison, global names like Expedia have experienced a much bumpier experience as vacation in their crucial western markets continues to be depressed because of to continuing outbreaks. Regardless of getting primarily based in China, Excursion.com has also fared much even worse than Tongcheng-Elong owing to its reliance on international travel from prospects the two within and significantly exterior of China.

Tongcheng-Elong’s more robust position than its much more globally centered peers is obvious in its stock, which now trades at about double the amount from its IPO selling price of HK$9.80 in November 2018. That contains a almost 20% rally given that mid-August, which could mirror the period when T. Rowe Price was building up its 5% stake. By comparison, Excursion.com’s U.S. outlined shares are up a considerably more compact 15% over the period of time considering that Tongcheng-Elong 1st shown.

The fact is that Tongcheng-Elong is rather reliant on its two key stakeholders. Trip.com supplies it with core lodge and air scheduling solutions below a very long-term arrangement, whilst it has a identical arrangement for consumer referrals from Tencent’s well-liked WeChat platform. In its interim report launched on Thursday, the organization explained that a lot more than 3-quarters of its month to month energetic customers came from WeChat in the latest reporting period.    

Whilst this sort of hefty reliance on two exterior associates may perhaps seem to be like a probable hazard, it also means the company – which is in the procedure of transforming its name to only Tongcheng Vacation Holdings Ltd. – can concentrate on the more crucial position of marketing and advertising its companies and delivering a better encounter for its shoppers.

That will turn out to be much more vital as other world wide web majors like Alibaba and Meituan mount their have aggressive strategies for a even larger slice of China’s substantial and quickly-developing marketplace for journey products and solutions.

At its latest size, Tongcheng-Elong is a strong No. 3 in the sector powering Excursion.com and Qunar. Vacation.com is at the moment valued at $21 billion. Qunar was worth about $4.4 billion at the time of its privatization from Wall Avenue in 2017, while presumably the figure has improved due to the fact then. By comparison, Tongcheng-Elong is now valued at about $5.3 billion.

Valuation Upside?

In conditions of valuation, Tongcheng-Elong’s latest dimensions and extra beneficial outlook due to its domestic China concentrate do appear to be to suggest the company’s shares could have some prospective upside, which is what likely captivated T. Rowe Rate.

Comparisons in this circumstance are a little bit tough, since most on the internet vacation agents noted losses in some or all of 2020 as both of those domestic and global journey plunged in most markets at the pandemic’s height. The two Vacation.com and Tongcheng-Elong have returned to profitability on the robust rebound in their residence market, though Journey.com is even now remaining hobbled by its dependence on worldwide vacation.

Nevertheless, if we double Toucheng-Elong’s gain in the initially 50 percent of this 12 months to get a tough full-calendar year estimate, the firm trades at rate-to-earnings (PE) ratio of 34. By comparison, Excursion.com trades at a far greater PE of 61, based on analyst revenue forecasts for this 12 months. World-wide large Expedia is predicted to lose income this yr, but would trade at a PE of 23 based mostly on analyst forecasts for its profit in 2022.

All that reported, we’ll stop with a glimpse at some of Tongcheng-Elong’s most recent final results that clearly show really obviously why the corporation is very well ahead of its domestic and international friends in recovering from the pandemic-induced vacation downturn.

The enterprise recorded revenue of 2.1 billion yuan ($325 million) for the a few months through June, up 78% from the exact period of time a 12 months earlier when China’s journey recovery was just starting. Its gross merchandise value (GMV) – the worth of all items and solutions offered on its system – rose by an even more powerful 96% to 43.9 billion yuan in the course of the period.

In conditions of earnings, Tongcheng-Elong posted a 291 million yuan gain in the latest quarter, symbolizing a about fivefold get from a 12 months earlier.

Trip.com has nevertheless to release its 2nd-quarter results. But its revenue in the initial quarter fell 13% calendar year-on-year to 4.1 billion yuan, in contrast with 61% profits development to 1.6 billion yuan for Tongcheng-Elong in the course of that time.

Reflecting its compact-city aim, Tongcheng-Elong stated 86.6% of its registered people at this time come from non-tier-a person metropolitan areas, which refers to the most affluent city facilities like Beijing, Shanghai and Shenzhen. What is additional, it explained 60% of its new paying people in this year’s 2nd quarter came from tier-three metropolitan areas or smaller.

Even though it may possibly be tempting to see Tongcheng-Elong as a good very long-expression financial commitment, it’s in all probability value noting that the company’s benefit due to its domestic focus is very likely to have a rather confined length of perhaps a different year, dependent on how the pandemic develops. At the identical time, the organization could also come beneath pressure around the lengthier term as the Meituan and Alibaba enhance their spending on vacation-connected providers.

Appropriately, any potential upside for the company’s stock could be constrained to the following year or two, which could perfectly be the pondering guiding T. Rowe Price’s latest financial investment that is now well worth about $250 million.