China's Travel Site Tuniu Hurt by Economic Woes, Stronger Rivals

Bonnie Cao

Investors are packing it in on Tuniu Corp., the once-high-flying Chinese online tour company that doubled in value within a month of its 2014 U.S. debut.

The Tuniu’s American depositary receipts have given back almost all of those gains, and now its two biggest rivals are joining forces amid the country’s deepest economic slowdown in 26 years. Since the stock hit a peak on Dec. 18, it has slumped 39 percent, the second worst performance in the Bloomberg China-US Equity Index, which slid 9 percent. The shares’ 50-day volatility is hovering around the highest since February 2015.

Small companies like Tuniu, with a market value of $1.3 billion, are the most vulnerable in an downturn, so investors are more apt to abandon them when the going gets rough, according to 86Research Ltd. and JL Warren Capital LLC.

The rivals that agreed to a partnership in October, Ctrip.com International Ltd. and Qunar Cayman Islands Ltd., are valued 15 and four times as much and together have an estimated 80 percent of the Chinese hotel and air-ticket markets. Ctrip also has purchased a majority stake in Elong Inc., an online trip-booking service. During Tuniu’s rout, Ctrip fell about 9 percent and Qunar lost 21 percent.

“It would be hard for a niche independent to compete with Ctrip,” Jeff Papp, a senior analyst in Lisle, Illinois at Oberweis Asset Management, which oversees about $1.9 billion and invests in Chinese ADRs, said by e-mail.

The downturn has tightened the fists of many of Tuniu’s potential customers, including luxury shoppers, as shown by slowing mainland retail sales in January and February, said Junheng Li, founder of JL Warren Capital, a New York-based research firm focused on Chinese equities.

“In this kind of environment, instead of going all the way to Europe to buy luxury bags, Chinese consumers are now spending less money going to neighboring countries,” Li said. “People don’t realize domestic consumption hasn’t recovered. And Tuniu is definitely not an isolated case. ”

Tuniu’s gross margin fell to a record low of 4.2 percent in last year’s fourth quarter due to the company’s “competitive pricing strategy and the higher costs associated with the new regional service centers,” it said in a February press release.

Burning Cash

“It seems that they want to grow bigger by burning cash, but as a small cap, the optimal way is probably to bundle with a big player such as Ctrip,” said Henry Guo, a San Francisco-based analyst at Investment Technology Group. Now, however, “chances for a Ctrip acquisition are diminishing as Tuniu becomes more and more aggressive,” he said.

Tuniu has been unprofitable since at least 2012 and posted a record net loss of 550 million yuan ($85.3 million) last quarter, data compiled by Bloomberg show. The company in February announced sales projections for the next quarter that were more than 10 percent lower than analysts predicted.

Terrorist attacks in Europe have “negatively impacted” sales, Conor Yang,
the company’s chief financial officer, said in an e-mailed reply to questions. Tuniu is “confident that the effect will be temporary and that outbound demand to Europe will recover in the near future,” he said. “We believe that the synergy extracted between our core business and complementary travel services will differentiate Tuniu from its peers.”

Confident Investors

Some investors remain confident in Tuniu’s growth, given that it’s in one of China’s faster-growing industries. Goldman Sachs Group Inc. estimates that the online travel market will more than triple to $200 billion by 2020.

“We are still positive on China’s online travel companies because the growth of the industry will outpace the economy,” said Kevin Carter, founder of the Emerging Markets Internet & Ecommerce ETF, which invests in Tuniu, Ctrip and Qunar.

Tuniu’s management is considering a share buy-back plan to shore up its stock, Morgan Stanley analysts led by Amanda Chen said in a March 16 report. The company plans to add 120 service centers in 2016 to the 180 that it operates now, the report said.

Tuniu declined to comment the trading in its shares.