Tongcheng Slows Spending As Budget Travel Frenzy Fades

Key Takeaways:

• Tongecheng travel announced it scrapped its planned purchase of a fintech company as a post-Covid ‘military-style’ travel boom starts to fade
• The online travel agent’s revenue rose 81% in 2023 as it catered to a new generation of frugal travelers, but the growth rate slowed to 50% in the first quarter

By Xia Fei

Just when it was flying high on a wave of “revenge spending” by budget-conscious Chinese travelers, Tongcheng Travel Holdings Ltd. TNGCF suddenly appears to be losing some of its lift.

The online travel agent was soaring for much of last year, as low-budget domestic tourism emerged as one of the rare bright spots in China’s otherwise dull economy with the end of pandemic-era restrictions. That lifted Tongcheng and its peers to sky-high revenue and profit growth as they catered to a new generation of enthusiastic but cost-conscious Chinese travelers.

But the company now appears to be adopting a more frugal approach, mirroring the increasingly cost-conscious mindset of its core Gen Z customers. Last week, Tongcheng revealed that it had scrapped its planned 1.15 billion yuan ($162 million) acquisition of 55% of a Guangzhou-based fintech company. When it first announced the deal in February, it said its purchase of the majority stake in Guangzhou Lvjin Technology was aimed at enhancing its customers’ payment experience.

Tongcheng didn’t elaborate on why it abandoned the deal. While it’s possible the two sides simply couldn’t agree on final terms, Tongcheng may also have backed off from the transaction as its business loses some of its initial post-Covid momentum.

The deal was a big bet for Tongcheng as the cost amounted to 22% of the company’s cash at the end of last year. What’s more, Guangzhou Lvjin appears to be rapidly losing value. The company was worth 2.8 billion yuan in December 2022, meaning it had lost about a quarter of its value in about a year and half.

Another key reason behind Tongcheng’s change of heart may have been the labeling of Tongcheng Finance, a fintech app backed by Guangzhou Lvjin, as a loan shark by state-run broadcaster CCTV during an investigative program in March. Following that, the app was removed from most major Chinese app stores.

Investors appeared to welcome the decision to walk away from the deal. Shares of Tongcheng rose by 8% in the two days after the announcement last week, though they gave back most of those gains as of Friday. Tongcheng’s price has gyrated wildly this year, rallying over 55% in the first four months before plunging 37% since May, leaving the shares down nearly 8% year-to-date.

But the investor worries go beyond Tongcheng’s splurging on a potentially overvalued fintech firm. Concerns about whether the company can sustain its growth momentum loom large, as young Chinese who are its core customers wrestle with stagnating income and rising job insecurity. Tongcheng’s ambition to expand into international markets also faces uncertainty as outbound tourism has been slow to recover post-Covid. Internally, reputational damage over complaints about the company’s refund policy and Tongcheng’s heavy reliance on Tencent’s WeChat app for driving much of its business also loom as clouds over the company.

Military-Style Tourism Boom

Since China ended its strict pandemic-related curbs at the end of 2022, a new type of budget travel, dubbed “military-style travel,” has become the latest fashion among penny-pinching youth. To save money, they typically book the cheapest seats on older trains outside the pricier national high-speed rail network, and zip through cities by foot during the day to check out as many tourism hotspots as possible. In some cases, these travelers even curl up on benches at 24-hour restaurants like McDonald’s overnight to forego paying for hotels.

That trend propelled Tongcheng’s popularity, as it zeroed in on serving China’s Gen Z travelers and focused on smaller cities long ignored by bigger rivals like Trip.com TCOM. That helped lift the company’s revenue by 81% to nearly 11.9 billion yuan last year, while its adjusted net profit jumped by a whopping 240% year-on-year to 2.2 billion yuan. The gains were all the more remarkable because last year’s revenue far exceeded Tongcheng’s pre-pandemic level of 7.39 billion yuan in 2019. Its strong gains also defied the broader market, as tourism revenue last year remained 19% below 2019 levels.

Tongcheng’s user base also swelled, in large part thanks to its deep ties with WeChat and Tencent, which is a major Tongcheng shareholder. The company’s annual paying users reached a fresh record of 235 million by the end of last year, up 54% from 2019, the company’s annual report shows. More than 86% of its registered users come from outside of China’s four richest cities: Beijing, Shanghai, Guangzhou and Shenzhen.

While 2023 was a bumper year, it’s increasingly looking like a distant memory. Now, the bigger question for Tongcheng is whether the budget travel frenzy that powered the company’s comeback last year will peter out. 

So far, the numbers continue to look relatively impressive. The company’s revenue increased 50% to 3.9 billion yuan in the first quarter this year from a year ago, with adjusted net profit up 11% to 558.5 million, according to its first-quarter report published in May. Significantly, the first-quarter results showed a recovery in overseas hotel room bookings, which rose by over 150% year-on-year. Such global travel has been much slower to recover than domestic travel, and is still well below pre-pandemic levels.

“With the resumption of international flights and the simplification of visa policies by a number of countries, the group is optimistic about the Chinese travel industry and the outbound travel market,” said Tongcheng CEO Ma Heping.

But there are reasons to expect the global travel rebound will slow. Chinese people took 87 million trips abroad in 2023, still 40% down from 2019. Industry observers noted the recovery pace slowed during this year’s Lunar New Year holiday in February, in part because of rising travel costs and problems securing visas, according to a Reuters report. A new survey by Dragon Trail International, a research firm, found that cost of travel has become the primary barrier to selling outbound trips for Chinese travelers this year.

Another challenge for Tongcheng is its deep bond with Tencent. As of the second quarter of 2023, 85% of its users came via WeChat, roughly the same as 84% in 2019. That gives Tencent outsized power in negotiations for continuing the relationship and setting its terms.

Lastly, Tongcheng has also been embroiled in a litany of complaints from customers, including high-profile businessman Zhou Hongyi, the outspoken CEO of 360 Security Technology, one of China’s leading online security companies. After being unable to change flight tickets, Zhou called Tongcheng’s service the “worst” and berated it for being “bureaucratic” in a social media post last October. Meantime, other users on Zhihu and Xiaohongshu, two popular social media platforms, also complain of difficulty getting refunds or changing tickets after making bookings.

Analysts polled by Yahoo Finance have an average target price of HK$22.36 for Tongcheng, well above its Friday close of HK$13.34, implying they still believe the stock has strong upside potential. But until Chinese consumer confidence shows signs of more resilience, Tongcheng may need to tighten its purse strings just like its main Gen Z clients.

This article is from an unpaid external contributor. It does not represent Benzinga's reporting and has not been edited for content or accuracy.