Consumer series IV: China Youth Travel

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I am resuming this series as I am in Shanghai, and I got first hand look at the consumer spending here. Travel industry grew very fast in recent years due to several factors:

1) The golden week, where people got one week break in Chinese New Year, May 1, and Oct 1;

2) People have more money to spend in general, especially young people want to more DIY travel (freedom tour instead of the good old group tour);

3) More sites have been developed, e.g., Sanya, Lijiang (Yunan), etc.

But the travel industry is highly fragmented in China. The main players include: the scenic sites (Huangshan, e’Mei Shan etc.); the travel agency; the airlines; and the hotels. The profit margin of travel agency business is not high, especially the domestic travel.

China Youth Travel (600138) is a public company in the travel agency business. It has invested in the online reservation and hotels business in recent years. Yesterday evening I got to see its CEO interview with No. 1 Caijing. Couple points I found interesting:

1) CY Travel (with a US company) has invested in, an online travel consolidator (like Ctrip), but it never really took off. It finally bought all the shares from its partner, and booked a profit from the transaction. It’s purely an “accounting” profit, no cash being generated, yet it made up more than 50% of its year 2006 profit, and the CEO still bragged about it.

2) CY Travel also bought an economy hotel chain in Shenzhen, and it has about 10 hotels now. When the reporter asked the CEO how can it compete with Home Inns, Jinjiang Inn, etc. The CEO says CY Travel’s strategy is a notch up than the Home Inns, in other words, its room rate is 300 Yuan (vs. Home Inns’ 200 Yuan).

3) With all that buzz, CY Travel’s main business, travel agency generated 6% of its last year’s profit.

I was speechless after listening to this interview. It’s very obvious CY Travel did not do well with the two investments, yet the CEO made it sound like it’s doing well.

Also while I’m bullish on China travel industry, I felt the competition is too intense, especially in the domestic travel (agency), and economy hotels arena. On the other hand, Ctrip has continued to grow; and it’s beating online rivals (eLong) and traditional travel agencies such as CY travel.

By the way, today I received my Ctrip VIP card, it will allow me to get discount at restaurants etc. Finanlly something to show off to my friends in STL…

ctrip VIP card

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