Online Travel Agent Tongcheng-Elong Gets Lift from T. Rowe Price

Company reports second-quarter revenue rose 78% year-on-year, as US fund manager separately discloses its purchase of a 5% stake

Key Takeaways:

• Tongcheng-Elong has rebounded from the pandemic more quickly than the larger Trip.com due to its focus on domestic China market
• Company’s shares look modestly valued compared to domestic and global peers due to its stronger growth potential over next one to two years 

By Doug Young

Online travel agent Tongcheng-Elong Holdings Ltd. (0780.HK) looks like a company on the move, with a name change on the horizon and a major new stakeholder just arriving onboard.

The company already counted two of China’s top internet companies as key stakeholders, in the form of China’s top online travel agent Trip.com (TCOM.US) with 27% of its shares; and social networking giant Tencent with another 22%. Now, a new filing to the Hong Kong Stock Exchange has revealed that T. Rowe Price, a major U.S. brokerage, has also hitched a ride with Tongcheng-Elong with its recent purchase of 5% of the company’s shares.

While both Trip.com and Tencent are long-term partners whose investments date back several years, T. Rowe Price’s recent arrival represents an important vote of confidence in a company that has bounced back from the global pandemic far faster than Trip.com or any of its global peers.

The company is reaping rewards from its focus on China’s domestic travel market, with particular attention to smaller, less-affluent cities. Domestic travel in China has returned to near pre-pandemic conditions this year, thanks to Beijing’s stringent control measures that have largely stamped out the virus within its borders.

By comparison, international names like Expedia have had a much bumpier ride as travel in their key western markets remains depressed due to continuing outbreaks. Despite being based in China, Trip.com has also fared far worse than Tongcheng-Elong due to its reliance on international travel from customers both inside and increasingly outside of China.

Tongcheng-Elong’s stronger position than its more globally focused peers is evident in its stock, which now trades at roughly double the level from its IPO price of HK$9.80 in November 2018. That includes a nearly 20% rally since mid-August, which could reflect the period when T. Rowe Price was building up its 5% stake. By comparison, Trip.com’s U.S. listed shares are up a far smaller 15% over the period since Tongcheng-Elong first listed.

The reality is that Tongcheng-Elong is quite reliant on its two major stakeholders. Trip.com supplies it with core hotel and air booking services under a long-term agreement, while it has a similar agreement for customer referrals from Tencent’s popular WeChat platform. In its interim report released on Thursday, the company said that more than three-quarters of its monthly active users came from WeChat in the latest reporting period.    

While such heavy reliance on two outside partners may seem like a potential risk, it also means the company – which is in the process of changing its name to simply Tongcheng Travel Holdings Ltd. – can focus on the more important job of marketing its services and providing a better experience for its customers.

That will become more important as other internet majors like Alibaba and Meituan mount their own aggressive campaigns for a bigger slice of China’s massive and fast-growing market for travel products and services.

At its current size, Tongcheng-Elong is a solid No. 3 in the market behind Trip.com and Qunar. Trip.com is currently valued at $21 billion. Qunar was worth about $4.4 billion at the time of its privatization from Wall Street in 2017, though presumably the figure has increased since then. By comparison, Tongcheng-Elong is currently valued at about $5.3 billion.

Valuation Upside?

In terms of valuation, Tongcheng-Elong’s current size and more positive outlook due to its domestic China focus do seem to imply the company’s shares could have some potential upside, which is what likely attracted T. Rowe Price.

Comparisons in this case are a bit tricky, since most online travel agents reported losses in some or all of 2020 as both domestic and global travel plunged in most markets at the pandemic’s height. Both Trip.com and Tongcheng-Elong have returned to profitability on the strong rebound in their home market, though Trip.com is still being hobbled by its dependence on international travel.

Still, if we double Toucheng-Elong’s profit in the first half of this year to get a rough full-year estimate, the company trades at price-to-earnings (PE) ratio of 34. By comparison, Trip.com trades at a far higher PE of 61, based on analyst profit forecasts for this year. Global giant Expedia is expected to lose money this year, but would trade at a PE of 23 based on analyst forecasts for its profit in 2022.

All that said, we’ll end with a look at some of Tongcheng-Elong’s latest results that show quite clearly why the company is well ahead of its domestic and global peers in recovering from the pandemic-induced travel downturn.

The company recorded revenue of 2.1 billion yuan ($325 million) for the three months through June, up 78% from the same period a year earlier when China’s travel recovery was just beginning. Its gross merchandise value (GMV) – the value of all goods and services sold on its platform – rose by an even stronger 96% to 43.9 billion yuan during the period.

In terms of profit, Tongcheng-Elong posted a 291 million yuan profit in the latest quarter, representing a roughly fivefold gain from a year earlier.

Trip.com has yet to release its second-quarter results. But its revenue in the first quarter fell 13% year-on-year to 4.1 billion yuan, compared with 61% revenue growth to 1.6 billion yuan for Tongcheng-Elong during that time.

Reflecting its small-town focus, Tongcheng-Elong said 86.6% of its registered users currently come from non-tier-one cities, which refers to the most affluent urban centers like Beijing, Shanghai and Shenzhen. What’s more, it said 60% of its new paying users in this year’s second quarter came from tier-three cities or smaller.

While it might be tempting to see Tongcheng-Elong as a good long-term investment, it’s probably worth noting that the company’s advantage due to its domestic focus is likely to have a relatively limited duration of perhaps another year, depending on how the pandemic develops. At the same time, the company could also come under pressure over the longer term as the Meituan and Alibaba boost their spending on travel-related services.

Accordingly, any potential upside for the company’s stock could be limited to the next year or two, which could well be the thinking behind T. Rowe Price’s recent investment that’s now worth about $250 million.

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