Tencent-backed online travel agency Tongcheng-eLong plans to use Hong Kong IPO to build brand awareness

  • Suzhou City-based company’s stock ends first trading day at HK12.40, above IPO price of HK$9.80
  • Company banking on WeChat penetration, booming online travel market and government investment in high-speed railway network to develop business
PUBLISHED : Tuesday, 27 November, 2018, 10:24am
UPDATED : Tuesday, 27 November, 2018, 12:10pm

Tencent-backed Tongcheng-eLong Holdings, China’s third-largest online travel agency, will use its trading debut on the Hong Kong stock exchange to gain brand awareness at home and abroad.

“The biggest purpose for us to list is to increase our brand awareness, as we are in the consumer industry,” Jiazhu Wu, the company’s chief strategy officer, said in an interview. “When you are a Chinese company, getting listed gives you extra credit among consumers and partners – this the most important purpose. We want our governance to be more regulated, and to attract more attention from international investors.”

Ctrip-backed travel agent Tongcheng-eLong to raise up to US$1.5 b in Hong Kong stock sale

The company, which has a 10 per cent market share, debuted at HK$10.78 a share on Monday, at a margin over its initial public offering price of HK$9.80, which was at the lower limit of its price range. The stock rose through the day to end at HK12.40.

But with more than 4 billion yuan (US$576.3 million) in cash assets, Wu said, “raising money was honestly not our first purpose.”

Wu, and the company’s chief financial officer, Julian Fan, were also quick to dismiss speculation that Tongcheng-eLong had initially hoped to raise between US$800 million and US$1 billion from the IPO, but had to lower their target to US$160 million in a weak market.

“We never announced how much we wanted to raise, we just followed the market and listened to the advice of investment bankers,” said Wu.

Chinese internet giant Tencent is the company’s largest shareholder, with a 25 per cent stake. Chinese travel website International is its second-largest shareholder and owns 23 per cent of Tongcheng-eLong.

The company was formed through a merger between leisure travel company Tongcheng Network and online hotel reservations firm E-dragon Holdings in March. It lets budget travellers book accommodation, flights and train tickets through its own app and on WeChat, the Tencent-owned social media platform.

Based in Suzhou city in China’s eastern Jiangsu province, it has monopolised the ticket and accommodation section of the WeChat wallet and runs all travel bookings on the social media platform. It has reported an average of about 200 million monthly users so far this year, through WeChat and its own application, according to Fan.

When you are a Chinese company, getting listed gives you extra credit among consumers and partners – this the most important purpose
Jiazhu Wu, chief strategy officer, Tongcheng-eLong Holdings

In the long term, the company hopes to expand internationally, first through outbound tourism and then by setting up shop in Southeast Asian countries as well as South Korea and Japan. But in the next one to two years, it will focus on dominating China’s domestic market, where 95 per cent of its business comes from.

Tongcheng-eLong is banking on WeChat’s penetration rate in China, a booming online travel market and government investment in a high-speed railway network that will increase connectivity, to develop business.

The gross merchandise volume of China’s online travel market expanded by 39.8 per cent between 2013 (US$47 billion) and 2017 (US$181 billion), according to research company iResearch. The growing number of smartphone users in the country, which is at about 800 million, is also expected to drive growth.

Meanwhile, WeChat’s penetration rate among all smartphone users stands at 83 per cent, reaching up to 92 per cent in tier 1 cities, according to data from eMarketer. But it is the potential for higher penetration in lower tier cities that Tongcheng-eLong is targeting to grow its business. And this is where it differs from shareholder

“We have a very different focus. Ctrip has a very clear international strategy, but ours is to increase our share in low tier cities, and the reason is because we have the unique resource to attract traffic from WeChat,” said Wu.

While the two companies remain at some level of competition, their target customers also vary. “The average selling price – the target customer – is totally different,” said Fan. “Ctrip’s is 400 yuan for a room a night, but for us it is 270-280 yuan, so the customer segmentation is very clear.”

Fan said Tongcheng-eLong will use the capital raised to fund acquisitions of technology companies, and to develop capabilities using artificial intelligence and big data to increase its operational efficiency.

Morgan Stanley, JPMorgan Chase and CMBI were joint sponsors of Toncheng-eLong’s Hong Kong IPO, according to its flotation prospectus.

Its listing comes at a time when IPOs in Hong Kong, such as that of online food delivery service company Meituan Dianping, have performed poorly amid the ongoing US-China trade war and concerns about a slowdown in China’s economy. Earlier this month, Alibaba Group Holding-backed online parenting company Babytree Group launched an IPO of up to US$281 million, below its original target of US$1 billion, while Tencent Music Entertainment, the conglomerate’s music-streaming arm, put its IPO plans on hold.