TRAVEL: China Lodging, Tongcheng in Domestic Travel Buys

Bottom line: New acquisitions by China Lodging and Tongcheng reflect consolidation in China’s travel industry, which is likely to accelerate in 2016 as the nation’s economy slows.

China Lodging goes upmarket with new buy

Two smaller acquisitions from the travel realm are in  the headlines as we close out 2015, with China Lodging (Nasdaq: HTHT) and Tongcheng both buying domestic companies. The first deal will see China Lodging, operator of the HanTing budget hotel chain, purchase a smaller operator called Hotel Home. The other comes in the related travel services space, and has Tongcheng buying a smaller rival called Shanghai MCTS.

Neither of these deals looks extremely exciting as both are quite small, but both do reflect a recent wave of consolidation that is sweeping China’s fragmented travel industry. Industry veteran Ctrip (Nasdaq: CTRP) is emerging as the clear leader and top consolidator in the travel services space. The hotel space is a bit less clear, with China Lodging, Homeinns (Nasdaq: HMIN) and Jin Jiang (HKEx: 2006; Shanghai: 600574) all jockeying for position in that space.

Let’s begin with China Lodging, which also goes by the name Huazhu and looks set to become the only remaining US-listed Chinese hotel company with the imminent privatization of rival Homeinns. According to the latest reports, China Lodging will buy 85 percent of Hotel Home for an undisclosed amount. (Chinese article) Hotel Home is a relatively small company, operating around 30 properties in central and western China.

By comparison, China Lodging has a much larger stable of hotels, numbering more than 2,500. The reports say Hotel Home should help China Lodging expand not only geographically, but also into higher-end 4- and 5-star hotels. China Lodging is far better known for its budget offerings that include names like HanTing, as well as Starway and Joya hotels.

I started becoming relatively bullish on China Lodging about a year ago, when it formed a major tie up with French hotel giant Accor (Paris: AC), operator of the Sofitel and Novotel brands. (previous post) That tie-up looked quite well conceived, giving China Lodging access to Accor’s expertise and also the rights to develop some of the French company’s brands in the China market. I expect we’ll see China Lodging continue to make more small acquisitions and work on building up its property portfolio, positioning it to become a top player as consolidation continues into 2016.

Shanghai Operation Center

Next there’s Tongcheng, which is just one of many Chinese many travel services companies to get major investments by Ctrip over the last 2 years. The latest reports say Tongcheng itself will acquire MCTS, a Shanghai-based company offering tour packages and other services to residents of China’s commercial capital. (Chinese article)

No price is given in the reports, though MCTS does appear to be a traditional travel agent that was set up in 2005 and was trying to make the transition to become a more national player by offering its services over the Internet. We’ve seen a few other similar deals involving larger companies with national resources buying up this kind of traditional travel agent focused on a specific city or province.

In this case Tongcheng will partner with MCTS to set up an operations center in Shanghai, which also happens to be Ctrip’s home. Tongcheng is partly owned by Ctrip through a $200 million investment by the latter in the former announced in 2014. Ctrip has also formed similar equity tie-ups with most of China’s other major online travel services providers in the last 2 years, including a major equity swap with former archrival Qunar (Nasdaq: QUNR) in October. (previous post)

While neither of these latest deals is particularly large, they do highlight the fragmented nature of a Chinese travel industry that is quite young but also growing very rapidly. I expect we’ll see lots more similar deals in the new year, with the pace of consolidation likely to accelerate as a slowing Chinese economy pressures smaller companies to find larger partners with deeper resources.

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