Will hardy investors take a journey deep into troubled-sector territory to look at the travel industry? The return of domestic tourists and business travel in early-Covid countries like China may make the trip worthwhile.
Chinese online-booking agency Trip.com (TCOM) is hoping investors will sniff out value in a sector where valuations have not rallied to the tune of the rest of the market. The company, previously known as Ctrip.com, is in talks with investors to take it private and delist from Nasdaq, Reuters reports this week, citing unnamed sources. That likely means the investment banks are helping Trip.com drive up the price.
The move has not worked particularly well. Although the shares leaped 11% in pre-market trade on Tuesday, they swiftly settled back. This week's leak via Reuters has therefore resulted in a limited 2.3% lift in the stock, likely because there are few other takers and there has been no indication on what price the company would accept.
TCOM shares remain down 18.1% so far in 2020, although they have rallied 27.0% since their March lows. That leaves the company looking at a market capitalization of US$16.3 billion.
The parties involved in a potential take-private include private equity, domestic tech companies and financials, according to the report, based on info from "four people with direct knowledge of the matter". That means people involved in the deal.
Keen to branch out of its home market, the company ditched the "C for China" from its name. An additional incentive for going private would be to distance itself from U.S. capital markets, where Chinese listings are under mounting political pressure.
The talks "are at an early stage and are subject to change," Reuters says. Trip.com has declined to comment. Of the six privatizations of U.S.-listed Chinese stocks so far this year, the average premium has trimmed from 42% in 2019 to 22% in 2020.
Web-browser operator Sogou (SOGO) said this week that its largest shareholder Tencent Holdings (TCEHY) has made a preliminary offer to buy the remaining 62% of the company that it does not already own. That would value the company at around US$3.5 billion, up from a current market cap of US$3.3 billion.
China's largest Web-browser operator Baidu is also in talks to go private, according to a Reuters report in May. Both Trip.com and Baidu (BIDU) have also discussed a secondary listing in Hong Kong, a step already taken by some of the largest U.S.-listed Chinese companies, including JD.com (JD) and NetEase (NTES) .
Trip.com is thought to favor a take-private deal because its valuation has descended so significantly during the Covid-19 pandemic. Its Q1 sales fell 42%, producing a US$754 million loss, and it expects full-year revenue to drop around 70%.
The company, founded in 1999, listed on Nasdaq in 2003. A privatization of a US$16.3 billion business would be the largest on record for a U.S.-listed Chinese company. Since listing, it has produced an annualized gain of 17%, ahead of the 12% annual gain produced by Nasdaq.
Chinese travel is recovering faster than in the rest of the world, since the country claims to have curbed the coronavirus faster, too. Air transport traffic is 70% of the total recorded the same time last year as of July 23, according to China's air-travel regulator.
China's tourism ministry has announced that tour groups are now able to travel between Chinese provinces. The ministry has also raised the cap on the maximum number at tourist attractions from 30% of capacity to 50%. Outbound travel restrictions on international trips remain.
Reflecting the lack of a recovery in international travel, Nomura expects Trip.com's Q3 revenue to fall 51%, adjusted down from an earlier forecast of a 30% drop, and decline another 30% in Q4.
If Chinese regulators eventually lift restrictions on outbound travel, Nomura predicts Trip.com's 2021 revenue could grow 68%, with domestic travel up 15% from pre-pandemic levels. But that's assuming it can build its international business back to around 35% of the 2019 level, which at this stage seems far from sure. Even if Chinese regulators allow overseas trips, there's no guarantee Chinese visitors will be welcomed in other countries.
Travel stocks are a complete gamble, since no one can predict when cross-border traffic may return to anything close to normal.
Shares in Singapore Airlines (SINGY) on Thursday fell to their lowest level since 1998, when they cratered in the wake of the Asian financial crisis. The carrier - which relies entirely on international travel - predicts that passenger numbers will likely remain at under half their pre-pandemic levels for the rest of its fiscal year, which ends in March 2021.
Passenger volumes are down 99.6%, leaving the carrier relying on cargo to survive. The Singapore government has secured S$19 billion (US$13 billion) in funding for the airline, one of the biggest bailout packages offered to carriers worldwide. But even that may not be enough.
"SQ" posted a Q1 loss of US$814 million on sales that were down 79.3%. That prompted the airline's stock to slip 5.1%, leaving it down a whopping 46.5% so far this year. The stock fell off a cliff at the start of March, and three rallies have only led into greater losses as 2020 drags on.
The vast majority of its 220 planes are grounded, and it is joining fellow long-haul specialists Qantas Airways and Cathay Pacific in writing down the values of their long-distance fleets.
Businesses with hefty domestic operations, like Trip.com, should be the first travel companies to record a widespread uptick in travel. It will take brave investors to test the waters at this stage, but reward may well result from that risk.