Trip.com, Tencent Under Pressure to Sell Tongcheng Stakes?

New filing shows Trip.com’s longtime stake in Tongcheng fell slightly after years of staying the same

Key Takeaways:

• A new stock exchange filing shows a slight reduction in leading online travel agent Trip.com’s longtime stake in Tongcheng, the industry’s second-largest player
• China’s online travel industry is riddled with anticompetitive cross-holdings, including Trip.com’s stakes in Tongcheng and Qunar

By Doug Young

A quiet stock exchange announcement this week showing a slight reduction in leading online travel agent Trip.com’s (TCOM.US; 9961.HK) longtime stake in rival Tongcheng Travel Holdings Ltd. (0780.HK) barely attracted any notice in Hong Kong. The sale itself was tiny, dropping Trip.com’s stake in Tongcheng to 25.99% from a previous 26.14%, according to the filing. Tongcheng’s Hong Kong-listed shares were largely unchanged after the announcement came out.

In fact, it doesn’t even appear that Trip.com actually sold any shares, since the size of the company’s Tongcheng holdings in terms of actual shares appeared to remain the same before and after the sale. And a person close to the companies later explained the reduction was due to dilution as more Tongcheng shares were added due to employee stock grants.

But in the current climate, where China’s market regulator is pressuring big internet companies to divest their holdings in other companies, the announcement still highlights that Trip.com might be under pressure to sell down some or all of its stake in its rival. At the same time, Hong Kong Stock Exchange filings show a similar reduction in the Tongcheng stake held by another internet giant, Tencent (0700.HK), whose holding dropped to 21.98% in the second half of 2020 from a previous 22.93%. The person said that stake reduction was also due to a similar dilution.

This particular story has quite a lot of history, and nicely captures the development of China’s internet over the last 10 years. It shows how the landscape has become riddled with cross-holdings by the biggest internet names over that period, many of them anti-competitive in nature. That explains why China’s market regulator is trying to break many of these ties to bring more competition to the market and also reduce influence wielded by the biggest internet names.

Tencent and e-commerce giant Alibaba (BABA.US; 9988.HK), China’s biggest internet companies by market value, have both been subject to antitrust activity over the last two years, including massive fines for their past anticompetitive behavior. Trip.com has escaped such fines so far, even though it was one of the earliest companies to engage in such anticompetitive behavior by buying major stakes in rivals such Tongcheng and Qunar, effectively neutering them as rivals in that process.

While the recent stake reduction is unrelated, Trip.com could still finally be realizing the risk it could face if the market regulator finally decides to take action against it, and could be preparing to move preemptively to avoid a major fine and potential order to completely sell its Tongcheng stake. That could present a potential problem for Tongcheng, which relies heavily on both Trip.com and also Tencent for its business.

Before we look at what the future might hold for Tongcheng, we’ll review some quick history to show how the current landscape evolved. China’s online travel market was once a vibrant place filled with competition, with Trip.com as one of the earliest players. Others included Elong, Tongcheng, Tuniu (TOUR.US) and Qunar, as well as Alibaba’s Fliggy service.

But around eight years ago things started to change when Trip.com first invested in Elong in 2014 and then in Tongcheng in 2015. It also invested in Qunar in 2015, effectively coopting three of its biggest competitors in two years through those purchases.

Tongcheng-Elong merger

Following Trip.com’s string of investments, Qunar later delisted from New York and remains active today. Tongcheng and Elong merged in 2017, in a deal driven by Trip.com and Tencent. That deal saw Tencent and Trip.com become the newly merged company’s two largest stakeholders with 22.39% and 21.84%, according to a Tongcheng presentation dated March 2020. The merged company made a Hong Kong IPO in November 2018.

Tongcheng has emerged as China’s a clear No. 2 among China’s online travel agents, behind only Trip.com. Tongcheng’s latest market cap now stands at $4.7 billion, or a little less than a third of Trip.com’s $17 billion. That ratio holds up in terms of business scale, with Trip.com and Tongcheng logging 20 billion yuan ($2.55 billion) and 7.5 billion yuan in revenue, respectively, last year.

That looks good for both Trip.com and Tongcheng, since the top two players can coordinate and don’t really need to worry about competition from each other. But obviously the market regulator probably doesn’t like such a cozy relationship.

Tongcheng’s financials from last year actually look quite good, especially compared to Trip.com’s. That’s because Tongcheng is focused on China’s domestic market, which did quite well last year after experiencing a shock in 2020 during the pandemic’s first year. By comparison, Trip.com is aiming to become China’s first global travel agent, and now gets a sizable chunk of its revenue from the global market that was still reeling from pandemic disruptions last year.

Things have changed somewhat in the first half of this year as many countries reopened for international tourism. Meantime, China moved in the opposite direction due to widespread flareups of the highly contagious Covid Omicron variant and subsequent strict control measures.

Tongcheng’s revenue fell 19% in the first six months of the year to 3 billion yuan, while the company fell into the red with a 38 million yuan loss, according to its latest financial report released in August. But we can probably assume the slowdown was temporary, and that things will return to a healthier situation once China relaxes its Covid restrictions.

That brings us back to the topic of a potential divorce between Tongcheng and its two largest stakeholders. While that may look good for consumers who will benefit from more competition, it doesn’t look so good for Tongcheng. That’s because the company is highly dependent on its two big stakeholders. Its third-quarter results last year showed that 79.6% of its traffic at the time came through its miniapp on Tencent’s WeChat platform. Meantime, Tongcheng also gets its hotel and air ticket reservation services from Trip.com.

Both Trip.com and Tongcheng currently trade at relatively high forward price-to-earnings (P/E) ratios of 23 and 21, probably because of their cozy relationship as the top two players in China’s huge travel market. By comparison, one of their few domestic rivals Tuniu trades at a ratio of just 8, and even global giant Expedia (EXPE.US) trades at just 12 times. But Tongcheng’s high valuation could become especially vulnerable if it gets the cold shoulder from Trip.com, Tencent or both, which looks quite possible in the current climate.

This story has been updated to reflect a source close to the companies’ explanation that Trip.com’s recent stake reduction in Tongcheng was due to a dilution effect

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