TRAVEL: Tuniu Hitches With HNA, Spurns Ctrip

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Bottom line: Tuniu’s new tie-up with HNA looks like a smart move that could position it as a leading provider of resort vacation packages, and could also signal the rise of a meaningful rival to industry leader Ctrip.

Tuniu travels to Hainan with HNA

Leading online travel site Ctrip (Nasdaq: CTRP) has emerged as the loser in a recent bidding war for a stake in smaller rival Tuniu (Nasdaq: TOUR), which has just announced a new alliance that will see it receive a $500 million investment from one of China’s top traditional travel companies. This latest in a recent flurry of deals from the travel space will see HNA Tourism get about a quarter of Tuniu’s shares for its investment, making it Tuniu’s largest shareholder.

HNA Tourism is a unit of HNA Group, one of China’s more dynamic state-run investors that is also parent of Hainan Airlines (Shanghai: 600221), one of the country’s best-run airlines. Based in the tourism-friendly island of Hainan, HNA certainly looks like a logical and well-connected partner for Tuniu, even though media were reporting last week that the more entrepreneurial Ctrip was in talks for a similar deal. (previous post)

The bigger picture is that China’s highly fragmented travel industry is in the midst of a much needed consolidation, following a decade of breakneck growth that has seen the emergence of several major players and also intense competition. Ctrip has become the main driver of consolidation over the last year, taking major stakes in most of its biggest rivals including its equity tie-up last month with former archrival Qunar (Nasdaq: QUNR).

While Ctrip has been profitable for the last decade due to its early arrival to the sector, the same isn’t true for nearly all of its competitors. Qunar in particular was losing massive money due to constant price wars in the space, and Tuniu itself has just announced that its net loss quadrupled in this year’s third quarter to $68 million. (company announcement)

Under their new tie-up, HNA will pay $16.50 for newly issued shares in Tuniu, representing a 5 percent premium over the stock’s last closing price before the announcement. Tuniu’s shares had already risen around 10 percent over the last 3 weeks after talk emerged that it was looking for new suitors, and the shares rose slightly in after-hours trade after it announced the HNA tie-up.

The deal will see Tuniu, which sells tour packages, gain preferential access to HNA’s big portfolio of airline and hotel products and services, with Tuniu expected to buy $100 million worth of such goods over the next 2 years. The deal should certainly help to make Tuniu a leading provider of travel packages to Hainan, which is rapidly becoming one of China’s leading resort destinations.

Joining JD

This particular deal comes after Tuniu received another $500 million investment at the time of its Nasdaq IPO in May 2014. E-commerce giant JD.com (Nasdaq: JD) was the largest investor in that group, providing $350 million for 27 percent of Tuniu. Tuniu later launched a channel on JD’s tourism site, and this latest alliance means that pair will now be joined by HNA.

Some may be disappointed that Tuniu selected HNA over Ctrip, which has become the the clear leader in China’s travel services sector following all of its recent tie-ups. In addition to its Qunar deal, Ctrip has also purchased major stakes in most of its other rivals, including Tongcheng and eLong (Nasdaq: LONG). Its growing clout has prompted anti-competitive complaints from hotel operators, who say Ctrip and Qunar recently raised their commission rates together after forming their alliance last month. (previous post)

I’ve said several times since the Qunar tie-up that Ctrip is looking increasingly like a monopoly, since it has been using its tie-ups to work in sync with its former rivals rather than in competition. In that light this new Tuniu tie-up looks healthy for the market, since it signals the rise of at least one major rival to counter Ctrip. From Tuniu’s perspective the tie-ups with JD and HNA also look like smart moves, providing it with valuable partners that can complement its core business of supplying travel packages.

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