Tongcheng slows spending as budget travel frenzy fades – Tongcheng Travel Holdings (OTC:TNGCF), Trip.com Group (NASDAQ:TCOM)

Key takeaways:

• Tongecheng Travel has announced it has abandoned plans to buy a fintech company as the post-Covid “military-style” travel boom begins to fade

• The online travel agency's revenue grew 81% in 2023 as it catered to a new generation of budget-conscious travelers, but the growth rate slowed to 50% in the first quarter

By Xia Fei

As the wave of “revenge spending” by budget-conscious Chinese travelers was in full swing, Tongcheng Travel Holdings Ltd. TNGCF suddenly seems to lose some of its momentum.

The online travel agency has enjoyed strong growth for much of last year as budget domestic tourism became one of the few bright spots in an otherwise sluggish Chinese economy as pandemic restrictions eased. That has helped Tongcheng and its peers record blistering revenue and profit growth, catering to a new generation of eager but cost-conscious Chinese travelers.

But the company now appears to be taking a more frugal approach, reflecting the increasingly cost-conscious mindset of its core Gen Z customers. Last week, Tongcheng revealed that The Chinese group has abandoned its plan to acquire 55% of a Guangzhou-based fintech company for 1.15 billion yuan ($162 million). When it announced the deal in February, it said the purchase of the majority stake in Guangzhou Lvjin Technology was aimed at improving its customers' payment experience.

Tongcheng did not explain why it abandoned the deal. It’s possible that the two sides simply couldn’t agree on final terms, but Tongcheng may also have walked away from the transaction as its business loses some of its initial post-Covid momentum.

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

Another key reason for Tongcheng’s change of heart could be that Tongcheng Finance, a fintech app backed by Guangzhou Lvjin, was labeled as loan shark by state broadcaster CCTV during an investigative broadcast in March. Following this, the app was removed from most major Chinese app stores.

Investors appeared to welcome the decision to pull out of the deal. Tongcheng shares rose 8% in the two days after the announcement last week, though they gave back most of those gains on Friday. Tongcheng’s price has fluctuated wildly this year, climbing more than 55% in the first four months before plunging 37% since May, leaving the stock down nearly 8% year to date.

But investor concerns extend beyond Tongcheng’s spending spree for a potentially overvalued fintech company. Concerns about the company’s ability to maintain its growth momentum are high as its core customers, young Chinese, struggle with stagnant incomes and growing job insecurity. Tongcheng’s ambitions to expand into international markets also face uncertainty as overseas tourism has been slow to recover post-Covid. Internally, reputational damage from complaints about the company’s refund policy and Tongcheng’s heavy reliance on Tencent’s WeChat app to drive much of its business also threaten the company.

Boom in military tourism

Since China ended its strict pandemic restrictions in late 2022, a new type of budget travel, dubbed “military-style travel,” has become the latest craze among young moneyeds. To save money, they typically book the cheapest seats on older trains outside the more expensive national bullet train network and walk around cities during the day to see as many tourist hotspots as possible. In some cases, these travelers even huddle on benches at 24-hour restaurants like McDonald’s at night to avoid paying for hotels.

This trend has propelled Tongcheng's popularity as it has focused on serving Gen Z Chinese travelers and concentrated on smaller cities long overlooked by larger rivals like Trip.com TCOM. That helped boost the company's revenue by 81% to nearly 11.9 billion yuan last year, while its adjusted net profit jumped 240% year-on-year to 2.2 billion yuan. The gains were all the more remarkable given that 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, with tourism revenue last year remaining 19% below 2019 levels.

Tongcheng’s user base has also grown, thanks in large part to its close ties with WeChat and Tencent, which is a major shareholder in Tongcheng. The company’s annual number of paying users hit a new record of 235 million at the end of last year, a 54% increase from 2019, according to the company’s annual report. More than 86% of its registered users come from outside China’s four wealthiest cities: Beijing, Shanghai, Guangzhou and Shenzhen.

While 2023 was a boom year, it’s increasingly looking like a distant memory. Now, the big question for Tongcheng is whether the budget travel frenzy that fueled the company’s comeback last year will fizzle out.

So far, the numbers remain relatively impressive. The company's revenue rose 50% to 3.9 billion yuan in the first quarter of this year from a year earlier, with adjusted net profit up 11% to 558.5 million, according to its first-quarter report released in May. Significantly, the first-quarter results showed a recovery in overseas hotel room bookings, which rose more than 150% year-on-year. Such international travel has taken much longer 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 China's travel industry and the outbound travel market,” said Tongcheng CEO Ma Heping.

But there are reasons to believe the global travel recovery will slow. The Chinese are expected to make 87 million outbound trips in 2023, down 40% from 2019. Industry watchers noted that the pace of recovery slowed during this year’s Lunar New Year holiday in February, partly due to rising travel costs and visa issues, according to a Reuters report. A new survey by Dragon Trail International, a research firm, found that travel costs have become the biggest barrier to selling outbound travel for Chinese travelers this year.

Another challenge for Tongcheng is its deep connection to Tencent. As of Q2 2023, 85% of its users were on WeChat, roughly the same as 84% ​​in 2019. That gives Tencent outsized leverage in negotiations to pursue the relationship and set terms.

Finally, Tongcheng has also been embroiled in a litany of customer complaints, including from Zhou Hongyi, a prominent businessman and 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 criticized it for being “bureaucratic” in a social media post last October. Meanwhile, other users of Zhihu and Xiaohongshu, two popular social media platforms, have also complained of difficulties getting refunds or changing tickets after making a booking.

Analysts polled by Yahoo Finance set an average price target of HK$22.36 for Tongcheng, well above its Friday closing price of HK$13.34, implying they still think the stock has strong upside potential. But until Chinese consumer confidence shows signs of resilience, Tongcheng may have to tighten its purse strings, as will its core Gen Z customers.

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