Tuniu (NASDAQ:TOUR), a late entrant to the China online travel agent sector (OTA) was listed on the NASDAQ at a loft valuation despite widening losses. I think that the China OTA sector's high valuation is unjustified, given the intensifying competition and downside risks.
I think that Tuniu's revenue reporting method makes the scale of the business look bigger than it actually is. Tuniu made RMB 1950m revenue in 2013, surpassing eLong (NASDAQ:LONG)'s RMB 1010m. According to the prospectus (link), organized tours contribute to 96% of total revenue. Tuniu recognizes revenue from organized tours on a gross basis. In other words, Tuniu's reported revenue on organized tours includes the commissions payable to suppliers and related costs. Hence the gross profit of RMB 120m more accurately reflects the scale of the business. In contrast, the bulk of eLong's revenue is commission received from the booking of hotel rooms and airline tickets.
|2013 (RMB m)||Tuniu||Ctrip||eLong|
|Net profit or loss||-79632||906||-168|
Increased marketing may lead to market share gain but greater amount of losses. Tuniu made a net loss of RMB 63m in 1Q14, compared to net loss of RMB5m in 1Q13. The one-off IPO expense has surely weighed on the cost base. But the need to reinvest into marketing to grab market share may lead to further losses in my view. Tuniu will continue with its television advertising campaign till May 2014 and expects the sales and marketing expenses in 2Q14 to substantially increase year-on-year, according to the prospectus. I expect other OTAs to increase their marketing efforts to attract customers in a weak consumption environment. In the worst case, a price war may happen.
|Sales and marketing costs as % of revenue (2013)||6%||24%||65%|
There is huge growth potential in China's OTA sector but I expect market consolidation to happen. Online leisure travel is only 8% of China's overall leisure travel industry in 2013 according to iResearch. The various OTAs have their own specialties but there is no guarantee that they will not cannibalize one another by diversifying into other categories. Currently, Ctrip (NASDAQ:CTRP) and eLong are the specialists in hotels and ticketing. Tuniu is the specialist in tour packages. LY.com (unlisted) is focused on domestic and short-haul travel. Qunar (NASDAQ:QUNR) is different from all of the OTAs mentioned here as it profits mainly from advertising. I believe that Ctrip's investment in Tuniu shows that Ctrip wants to keep Tuniu at bay and is positioning itself as a market consolidator.
|China's online leisure travel market (RMB million)||7.5||13.7||21.2||30.3|
|Online penetration rate (as % of China's overall leisure travel industry)||2.80%||4.70%||6.10%||7.70%|
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.