Time for online travel agency shares to shine as Chinese tourism booms
With money managers looking for value targets in Chinese stocks after the equity rout, online travel agencies could be the major beneficiaries of China’s 10-year travel boom with higher growth and a leaner business model, according to Macquarie Research.
China’s online travel industry has hit an inflection point in 2015 as leisure travel takes off and competition stabilises. In 2014, leisure travel accounted for 53 per cent of global tourism revenue.
While China’s travel market has been mainly driven by business travel in the past decade, the mainland is quickly catching up with global patterns given its rising middle class and improvements in travel, according to the report.
“Rising disposable incomes, currency appreciation and easing restrictions on foreign travel have made China the world’s top spender in international tourism,” said Macquarie analysts led by Wendy Huang, who highlights Ctrip and Qunar as two leaders in the online travel agency industry to benefit from the trend. Ctrip and Qunar took 49 per cent and 27 per cent of China’s online travel market last year, respectively.
“We forecast China’s online travel market revenue to expand at 27 per cent between 2014 and 2018, compared with 13 per cent for the overall travel market,” it said.
According to the CEIC data, China’s outbound tourism spending almost tripled to US$140 billion in 2014 from US$48 billion in 2010. Outbound visits from China also more than doubled to 117 million in 2014 from 57 million in 2010, and are set to overtake that of inbound visits for the first time in 2015.
Mobile transactions are seen as a key earnings driver for online travel agencies. Mobile internet users in China reached 557 million in 2014, with mobile travel booking penetration hitting 24 per cent.
For example, mobile contribution to total online bookings reached 70 per cent for Ctrip and 60 per cent for Qunar in the first quarter this year.
“We expect both Ctrip and Qunar to continue to leverage mobile to attract more leisure travellers and last-minute bookings and promote high-frequency travel product such as attraction ticketing,” the report said.
“Looking forward, we should see more head-to-head competition between Ctrip and Qunar in lower-tier cities, lower-end hotels, open platform and leisure travel products.”
One of the investor concerns about the sector was that the profitability of the online travel industry had deteriorated significantly over the past five years due to increasing competition. Online travel industry margins have shrunk significantly ever since eLong started a hotel coupon war in 2009. Notably, Ctrip’s loss margin widened from 43 per cent in the first quarter to nearly 100 per cent in the second quarter.
Yet Macquarie expects Ctrip’s gross margin, for example, to reach 7 per cent this year and grow to 13 per cent in 2016. For Qunar, Macquarie expects it to turn profitable in the fourth quarter next year. The management of both Ctrip and Qunar have suggested that margins over the long term could reach between 20 and 30 per cent.
