Bottom line: Tongcheng’s new fund raising and Ctrip’s launch of an offshore hotel investment fund reflect the huge amount of investor dollars flowing into China’s online travel market, which will keep competition intense for the next 1-2 years.
Two of China’s leading online travel sites are in the headlines with major new initiatives, led by a massive fund-raising and even larger promotional spending plan by aggressive up-and-comer Tongcheng. The other major headline has industry leader Ctrip (Nasdaq: CTRP) setting up a fund to invest abroad, as it looks for new growth outside its overheated home market.
The pair of stories point to the huge potential for China’s domestic travel market, but also the fierce state of competition. Such conditions spotlight the need for consolidation, which seems to show signs of coming from time to time, only to collapse due to the fiercely independent nature of the company founders who are also usually their chief executives.
We’ll begin with Tongcheng, which has just completed a massive new fund-raising worth 6 billion yuan, or nearly $1 billion. (Chinese article) That sum isn’t record-breaking for Chinese Internet companies in the current market, where we’ve seen several deals in the $1-2 billion range. But it’s still quite large, and comes close to the $1.1 billion that Ctrip itself raised last month through a bond offering.
Participants in the new funding include social networking leader Tencent (HKEx: 700), as well as real estate giant Wanda Group, which provided more than half of the money. Reports also point out that Ctrip’s name was absent from the list in this latest round, despite its contribution of $200 million to a funding last year. That could indicate that Tongcheng isn’t interested in selling more of itself to Ctrip, which reflects the kind of independence among company leaders that I mentioned above.
In discussing the funding, Tongcheng’s CEO also disclosed that he’s launching a massive promotional campaign that has the absurdly high figure of 100 billion yuan ($16 billion). (Chinese article) A more detailed look at the reports shows that figure was derived after Tongcheng said it would offer 1,000 yuan each to 100 million users.
I seriously doubt that Tongcheng has so many active users, and even if it did it knows that many probably won’t use the promotion. That means it will probably only have to offer a small fraction of the 100 billion yuan figure. Still, the scale and large sums of money involved reveals just how fierce the competition has become, and the big cash piles that many companies now have means the situation probably won’t ease anytime soon.
Buying Overseas Hotels
Meantime, Ctrip, spurned by many of its potential acquisition targets at home, may be putting its own huge cash pile to work with plans to set up a fund for overseas purchases. (Chinese article) In this case the initiative will see Ctrip team up with several partners to set up an online platform in the 2-year-old Shanghai Free Trade Zone (FTZ) for investment in the global hotel market. The platform appears to be a variation on the P2P business model that brings together private investors with investment projects.
It’s a bit unclear from the reports if Ctrip will contribute its own money to the fund. But I would expect that it probably will, since it has quite a large amount of cash in its coffers, including the $1.1 billion that it raised last month through the bond offering.
This particular initiative looks interesting, as it will take Ctrip into the financial services realm that has become quite hot lately, by offering investors a relatively unique product from the overseas real estate space. I don’t know if hotel ownership is a direction that Ctrip itself should be pursuing, as it’s quite different from the travel services that it traditionally engages in. But if it can find good managers for the fund, it’s quite possible it could get some healthy returns from a global hotel market where activity has become quite brisk among Chinese buyers over the last year.