Wanderlust: PE taps into China's tourism boom

For Tony Jiang and Alex Zhang, tapping into China's fast-growing travel and tourism industry is a hedge against the broader economic slowdown. Combining the former's investment experience at The Carlyle Group and the latter's operational expertise as co-founder of Plateno Hotels Group, they decided the time was right to create a fund that would capture opportunities presented by the evolving industry.

This was the genesis of Ocean Link, an independent PE firm formed earlier this year with seed capital of $400 million. It has since won backing from General Atlantic and Ctrip, China's largest online travel company, which also see the financial and strategic rationale in being part of the growth story.

Ocean Link is raising renminbi and US dollar-denominated vehicles that will invest in online and offline industry verticals spanning hotels and resorts, attractions, travel agencies, transportation services, and related business solutions providers. It will consider early and late-stage opportunities, but the investment thesis is rooted in private equity: using domain expertise to identify deals and add value during the holding period.

There are other early-mover specialist GPs in China, notably CMC Capital Partners, which is seeking to harness growth in media and entertainment much like Ocean Link is in travel and tourism. And then there are strategic players such as HNA Group, an airline operator that has expanded into complementary verticals to sustain its business. For any dedicated industry fund in China, the question is whether there are sufficient opportunities, particularly when generalists are also targeting the space.

"Being sector-focused is something that makes a lot of sense nowadays," says Ocean Link's Jiang. "I wouldn't be surprised if other Chinese GPs choose specific industries to focus on. For us, we really looked at the size of the market and resources that we have in the industry before deciding to focus on travel and tourism."

Ctrip and the rest

China's travel and tourism industry was worth RMB5.4 trillion ($803 billion) last year, accounted for 7.9% of national GDP, according to the World Travel & Tourism Council (WTTC). Already the second-largest market globally after the US, it is expected to grow 7% a year over the next decade - enough to surpass the US by 2024. The industry also has a track record in delivering returns for VC and PE investors, with a handful of companies achieving public listings in the US.

"It's a big enough sector to have several leading players. Look at travel booking sites Ctrip and Qunar, car rental player eHi Auto Services, and budget hotel chains like 7 Days Inn and Home Inns. China has a few travel-related success stories," says J.P Gan, managing partner at Qiming Venture Partners and a Ctrip board member. "Now many Chinese companies are buying assets overseas, from the Waldorf Astoria Hotel to football teams in Europe. Those are essentially travel-related businesses that benefit from the rapid growth in Chinese outbound tourism."

These travelers spent $215 billion on their trips in 2015, up from $140 billion a year earlier, WTTC's data show. They are also venturing further overseas into Europe and the US, having started with markets closer to home in Southeast Asia and North Asia. Goldman Sachs project that spending by outbound Chinese tourists will reach $450 billion by 2025.

Ctrip, which is investing substantially to develop its outbound travel business, is characteristic of the industry's evolution. Neil Shen, who now leads Sequoia Capital China, was one of four entrepreneurs who founded the company in 1999. He previously told AVCJ that they thought the hotel-booking segment was ripe for disruption because the traditional call centers were backward. But Ctrip grew faster than anyone anticipated, broadening its geographical coverage and product offerings to cover hotel reservations, air ticketing, leisure travel, corporate travel and packaged tours.

Organic growth was complemented by investments elsewhere in the travel ecosystem. Ctrip took stakes in the likes of eHi, ticketing site operator Tongcheng Network, and vacation-rental platform Tujia. Last year it tabled a bid for Qunar, which also specializes in flight and hotel bookings. This was initially rejected, but under pressure from shareholders, Qunar eventually agreed to an all-share merger with Ctrip. Together they will control 64% of domestic online hotel bookings and 83% of flight bookings by 2017, Goldman Sachs says.

Ocean Link initial activities have involved supporting Ctrip's industry consolidation efforts. In June, it offered to take Qunar private in a deal worth about $4.4 billion. Prior to that, it partnered with Ctrip and Tencent Holdings on the $622 million privatization of hotel-booking site eLong.

"The hotels and air tickets online booking space is very well consolidated, and I don't think there will be any more opportunity in this area. There is also the packaged tour market, which is highly competitive," says Jixun Foo, managing partner at GGV Capital, an investor in Qunar and Tujia, as well as the latter's US counterpart Airbnb.

It remains to be seen if US-listed Tuniu can achieve dominance in the packaged tour space. Industry participants question the sustainability of the business model, given that most young Chinese are FITs - filly independent travelers - who prefer self-planned travel over group package options. Tuniu, which also counts Ctrip as a shareholder, has entered into several partnerships to strengthen its position: last year it received $148 million from Hony Capital and JD.com, and then $500 million from HNA.

While Tujia appears to have created a standalone market for itself, other existing online segments are likely to see further consolidation driven by major players. At the same time, in the offline hospitality space, state-controlled and private enterprises are aggressively buying tourism assets. Jinjiang international, a Hony portfolio company, acquired Europe-based Louvre Hotels and PE-backed 7 Days Group.

"Consolation is a major theme," says Ocean Link's Jiang. "We are looking at more consolidation of the traditional sub-verticals in the travel industry, as well as looking at emerging online players."

New experiences

Given that only about 6% of China's population currently have passports, outbound travel is an obvious growth opportunity. On the domestic front, new tourism projects will drive demand for travel accommodations and entertainment activities. In May, Wanda opened Wanda City, the first of 15 planned theme parks in China that it hopes will challenge The Walt Disney Company. Other developments include the CMC-backed cultural hub Shanghai DreamCenter.

Meanwhile, Club Med - now controlled by a Fosun International-led consortium - is an example of how financial investors can help overseas operators expand in China. Ocean Link is also targeting this theme, but it has done so by chasing small deals beyond the reach of mainstream PE. One is Ruby Hotels, a Europe-based hotel chain aimed at "lean luxury" travelers that is being primed for expansion in Asia.

"Alex and I have the backgrounds to offer investment and operational expertise in a particular sector. Now we have chosen General Atlantic and Ctrip as strategic partners to support us. This combination makes deals happen, in particular those [less viable] for typical PE firms or strategic investors. That's the strength and strategy we have," says Jiang.

For example, as Ctrip continues to upgrade its services, Ocean Link can contribute to and profit from this process through its deal-sourcing. With Chinese consumers increasingly willing to pay a premium for special experiences the options could be vast. GGV's Foo notes that start-ups could emerge just helping people absorb information and make choices - such as an app that caters to an individual's particular tastes and saves reading pages of reviews on TripAdvisor.

This view is echoed by Queen's Road Capital's founder Fritz Demopoulos, who previously co-founded Qunar. He sees potential in the still highly fragmented special tours and activities market, typically packaged under healthcare and education. Berlin-based GetYourGuide, which is backed by KKR and Highland Capital Partners, already fills this niche internationally.

This and plenty of other niches are waiting to be tapped in the Chinese-speaking market, although Demopoulos notes that investors should still pick their targets carefully. "It's true that the profit margin for that kind of product is much higher than traditional hotel booking platforms," he says. "But can it scale to reach a level as hotel and flight platforms? We believe it will, but we still don't know."

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• Topics
• Greater China
• Consumer
• Expansion
• Early-stage
• Technology
• China
• TMT
• Venture
• General Atlantic
• The Carlyle Group
• Ocean Link
• GGV Capital
• Qiming Venture Partners