Consolidation In Focus With Ourgame Plunge, eLong Jump

eLong shares soar

Big stock moves for veteran online travel agent eLong (Nasdaq: LONG) and newly listed mobile game firm Ourgame (HKEx: 6899) are shining a spotlight on the need for consolidation in many of China’s online sectors, where these smaller players lack the resources to thrive over the longer term. Shares of eLong suddenly soared more than 20 percent in the latest session on trading volumes not seen for years, which will inevitably lead to speculation of a looming buyout offer. Meantime, Ourgame shares tanked 17 percent on their first trading day in Hong Kong, as investors yawned at the chance to buy into yet another mid-sized Chinese gaming firm.

Despite their big difference in age, both eLong and Ourgame share a similar background as mid-sized players in their respective spaces. Even after its big stock jump, eLong’s market value still stands at a relatively modest $770 million, far less than industry leader Ctrip’s (Nasdaq: CTRP) $8.7 billion, and less the much younger money losing Qunar’s (Nasdaq: QUNR) $3.2 billion. Likewise, investors have valued Ourgame at a very mid-tier $375 million, well below industry leaders Tencent (HKEx: 700) and NetEase (NYSE: NTES), with respective values of $140 billion and $10 billion.

Let’s start with a look at eLong, which is one of China’s oldest US-listed online travel agents. Shares of eLong jumped 22 percent in the latest trading session in New York, as volume soared to more than 10 times the company’s daily average. The company hasn’t issued any news, which means the big jump could well be due to speculation over a looming buy-out offer.

Such privatizations have been numerous over the last 2 years, mostly aimed at this kind of mid-tier player whose shares have stagnated in recent years due to lack of investor interest. In this case, the online travel space has become a bit overheated in the last couple of years, with the rapid rise of a new field of players including Qunar, Tongcheng and recently listed Tuniu (Nasdaq: TOUR).

US travel giant Expedia (Nasdaq: EXPE) has long been a major eLong shareholder, and held a controlling 82 percent of the company’s voting shares as of the end of last year. Accordingly, investors are probably betting that Expedia may be gearing up for a privatization bid, which would allow it to make changes to eLong out of the public eye to improve its laggard performance.

Next let’s look briefly at Ourgame, which has become one of a growing number of tech companies to seek listings in Hong Kong rather than in New York. Such companies may have believed they would be better appreciated by Hong Kong investors, who are more familiar with Chinese companies and the China market than their peers in distant New York.

But that theory may not be too accurate, following Ourgame’s dismal trading debut after it previously said it planned to raise about $120 million through the listing. (Chinese article) Ourgame priced its shares at HK$4.25, and then saw them move steadily downward during their first day and end down 17 percent at HK$3.53. The dismal debut mirrors a similar performance for rival Forgame (HKEx: 484), whose shares have lost about half their value since their Hong Kong debut last October.

All of this shows that these mid-tier players in the travel, gaming and other tech spaces are most likely to languish due to weak longer-term growth prospects, regardless of where they list. Gutsy investors could still make some money off these companies if they can correctly figure out which ones could become buy-out targets. But that’s a tricky game, and if I were an investor I would probably just avoid these names and focus on the sector leaders.

Bottom line: eLong’s big share jump could presage a buyout offer from controlling stakeholder Expedia, while Ourgame shares are likely to stagnate following their weak debut.

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