Tencent invested US$84.4 mn for 16% stakes into elong, a leading online travel service provider in China, and is the second largest shareholder of eLong. Expedia has acquired approximately 8% of the outstanding shares for US$41.2 mn and now holds 56% of the outstanding shares.
eLong and Tencent said they plan to deepen their cooperation in the future, including forming a business partnership to develop online travel products and distribute eLong’s hotel supply to Tencent’s huge active user base in China. eLong’s hotel supply portfolio now covers over 150,000 hotel properties worldwide, including more than 19,000 hotels in China, and more than 130,000 internationally through its seamless connection with Expedia.
“We are not surprised on Tencent interest in the online travel, given firstly Tencent’s previous experience to provide airticket and hotels during Expo period; secondly, Tenpay has around 32% market share in the Online B2C online travel payment market,” wrote Wallace Cheung, analyst of Credit Suisse in a note.
“We believe the deal implied that e-commerce is also a viable monetisation approach on Tencent SNS platform. But, the market has not factored such potential into Tencent share price yet,” he added.
Wallace also noted Tencent participation into e-commerce in two approaches:
i) launch of open platforms (OP) on these e-commerce businesses, e.g. Paipai OP, Tenpay OP, Group Buying OP. These OPs are expected to improve the value of Tencent e-commerce platforms.
ii) Tencent invested in multiple entities to maximise its value under the e-commerce trend, e.g. Tencent and GroupOn (private), together with Yunfeng fund, formed a group buying joint venture (Gaopeng.com).
In January 2011, there is rumour that Tencent have invested Rmb50-60 mn for 30% of TongCheng (www.17u.net), one of the leading online B2B travel marketplaces in China. TongCheng has 140,000 corporate members and 10,000 VIP members, and provides online booking services to 12,000 hotels (a 30-70% discount), 3,000 travel hotspots tickets, 100+ limo firms services.
“Given Tencent direct investment into elong, we expect Tencent potential investment into TongCheng may not go through because we do not expect Tencent will invest into 2 companies with similar business models ,” said Wallace.
According to Bloomberg, eLong consensus net profit in 2011 should be US$10 mn, including around US$2.7 mn interest income. Given elong currently holding US$155 mn cash, the consensus implied multiple on Tencent investment should be around 39x 2011 PER (ex-cash).
Tencent had US$3.3 bn net cash and generated US$200-300 mn net cash per quarter. Thus, Tencent had enough cash to fund the deal.