[JD Says] An Outgoing Right Away, A Market Worth of Trillions

2016-03-25

[JD Says] Focusing on industrial investment, witnessing market development. With the power of capital, JD shares the insights and experiences with Chinese enterprises on the way.

[Who’s sharing?] Department of Investment on Tourism and Life Services of JD Capital: Improving the efficiency of tourism and realizing industry value by means of equity investment, M&A integration and asset securitization; contributing to Chinese people’s happy life with the power of capital.

To implement the paid leave system, enhancing the infrastructure construction of tourist transportation, tourist attractions and self-driving camps, regulating the tourism market, and welcoming the emerging area of mass tourism. –Excerpt from the 2016 Government Work Report

“Observing Tourism from the Policy Perspective”

March, 2014—Several Opinions of the State Council on Promoting the Integrated Development of Creative Cultural Creativity Industries, Design Services and Relevant Industries proposed to improve the cultural connotation in the development of tourism, and support the development of diversified and comprehensive products; to improve the human and scientific nature in product development and service design.

August, 2014—Several Opinions of the State Council on Promoting the Reform and Development of Tourism proposed to put emphasis on cultural inheritance, innovation and sustainable development; to promote the change from tourism services to quality services and realize the organic unity between standard services and customized services.

August 2015—Several Opinions on Further Improving Tourism-related Investment and Consumption proposed to foster the development pattern of supervision, lawful operation and civilized tourism; to control the number of tourists within the maximum capacity and unify the standard for domestic and overseas tourism services; to improve the system of statistical indices and investigation methods, and develop the system of performance evaluation; to improve the vacation system, and enrich the life in disposable time and boost the development of near-city tours; over 10 provinces, autonomous regions and municipalities have included tourism as a strategic pillar industry.

The year of 2015 has been a major year for China’s tourism, with the total industrial output first exceeding 4 trillion yuan, accounting for approximately 5% of the GDP. At the beginning of a new period for China’s economy, tourism is maintaining a compound annual growth rate of around 13%, with contribution rates to economy and employment both exceeding 10%. This has made it one of the fastest-growing industries in the era of China’s all-round economic transition.

Behind the numbers is the enormous demand for mental vitality from the Chinese people with improving material conditions. With the economic development entering the “new normal”, Chinese people’s demand for tourism and vacation has also entered the “new normal”. For the urban middle class, a more important issue is “where and how to spend the money”.

The increasingly boosting demand and policy incentives have been pushing China’s tourism to become the mainstream of national economy from a marginal status, and an important industry for stabilizing growth, adjusting structural and improving people’s livelihood.

Considering the future 5 to 10 years, the prime time to invest in “Chinese people’s happy life” is right now.

Industrial securitization in the ascendant

The tourism industry integrates production and services combined in various forms by enterprises, organizations and individuals from the origins and destinations of tourists and the connector in between, with the aim to fully satisfy the tourism demand of tourists. In this sense, the tourism industry is an economic complex based on tourism resources and linking relevant industries to offer tourism products and services to consumers.

In the capital market, there are only been 33 companies listed on the main board with tourism as their main business. In contrast, China now boasts 212 5A scenic spots, around 1,800 4A scenic spots, i.e. nearly 2,000 quality scenic spots. Among these, fewer than 70 has realized securitization (including independent Initial Public Offering (IPO) and merger into listed companies), showing a low rate of securitization and a huge amount of asset left unsecuritized.

According to the Wind statistics, 48 M&As were conducted in the tourism industry in 2015, among which plenty were well-known ones such as the EUR 939 million privatization of the Mediterranean Club by JD Capital, Fosun and U-tour. From the capital perspective, the tourism industry has the opportunity of recieving systematic securitization; from the industry perspective, there are multiple subdivided industries with a compound annual growth rate of over 30%, which entails huge opportunities in these fields with great potential of growth spurts.

Numeric interpretation of the tourism industry in 2015

4.12 billion people—In 2015, there were over 4 billion tours domestically in China, turning over more than 4 trillion yuan. The overseas tours reached 120 million person times. Both the person times of domestic and overseas tours and the related consumption ranked first worldwide.

5,830 yuan—From January to October 2015, Chinese tourists spent an average of 5,830 yuan overseas during their travel, showing a year-on-year growth of 16.3%.

10.1%—According to the World Travel & Tourism Council (WTTC), the overall contribution to GDP by China’s tourism is 10.1%. Based on the calculation of the National Data Center of Tourism, the number of employees in tourism accounts for 10.2% of total employment.

75%—Independent traveling, which is mostly in the form of self-driving, has become the major way for tourists to reach the scenic spots. Independent tourists account for 75% of the total number.

71.2%—71.2% of independent tourists hope to get one-stop solution and complete tourism products, and expect to make friends during the travel.

Subdivision + vertical exploration: developing the market of trillions

Before 2013, the intermediate sector of the tourism industry operation, namely carrying tourists from the source location to the travel destination (involving catering, accommodation and transportation), is mainly completed by Online Travel Agents (OTA). OTA has became the pursuit of many major capitals, including Baidu. So far, the integration among OTAs is close to completion, and offline resources will be the new target of investment institutions.

[Key words]

Online travel agencies (OTA): a term in tourism e-commerce. OTAs bring the sales pattern of traditional travel agencies to the online platform, thus spreading the itinerary information in a wider scope. Besides, the interactive way of communication provides convenience for consumers to make consultations and place orders. Representative institutions include Ctrip, Qunar, Lvmama, Elong and Tuniu.

Offline resources: resources with tourist destinations as the core and covering different sectors in the whole operation process of the tourism industry (catering, transportation, hotels, etc.).

For investment institutions, the tourism industry is a market worth of trillions. In the coming two or three years, many quality star enterprises in the industry will emerge and enter the capital market; several domestic and overseas M&A cases worth of tens of billions may also be conducted. The investment opportunities shall mainly be found in three aspects:

1. Integration of resources takes place at the core of the industry chain

Among the six major factors in the tourism industry, namely catering, accommodation, transportation, sightseeing, shopping and entertainment, the former three are the pre-conditions of tourism activities and also sectors where OTAs are much involved. As of now, relevant integration is close to completion. In addition, shopping and entertainment are the post-conditions for the tourism activity, while sightseeing, i.e. tourism resources, is the core and also the pursuit of major capitals. The period of the next three to five years is predicted to witness the most intensive and frequent offline tourism resources integration.

2. Booming development gives rise to industrial leaders in subdivided areas

Not every subdivided field in the tourism industry maintains a compound annual growth rate of over 10%. For instance, the business of traditional travel agencies is shrinking. Nonetheless, there are four subdivided fields promising many investment opportunities: near-city tours, tourism devices, ice-snow tourism and self-driving travel. 

For instance, the concept of camps for self-driving tours has been introduced to China for a long time. The business has seen rapid development and strong policy support. However, there has only been fewer than 200 standard self-driving camps in China, compared with over 1,500 well-equipped ones in Japan. Therefore, it is highly likely that one or two industry giants with dozens or hundreds of chain camps will emerge.

3. Regional integration and industry upgrading with governmental coordination

At present, over 10 provinces in China have included the tourism industry as one of the strategic pillar industries and provide it with considerable capital and policy support. It is possible to realize the regional integration and upgrading of tourism industry by means of designing targeted products or coordinating with local governments.

Sichuan Tourism Fund invested by JD Capital in 2015 is so far the only provincial tourism fund in Sichuan. The fund aims to assist the Sichuan Provincial Government, the Development and Reform Commission and the Bureau of Tourism with the tourism industry integration and upgrading, specially focusing on such international tourist resorts as the “Greater Emei”, “Greater Jiuzhai” and “Greater Chengdu”, as well as quality tourism resources and innovative investment opportunities in other core scenic spots in China.

Getting the most of the new tourism market creatively

From the investment perspective, quality tourism programs domestically and overseas are also worth close attention. In addition, more effort is diverting from solely share participation to the designing of innovative patterns and new trading structures.

It is worth noting that the widely-recognized new pattern does not involve the heatedly-discussed “Internet +” initiative, as the existence of OTAs has already made tourism and Internet inseparable.

1. “Tourism +”

This refers to the integration between the tourism industry and other industries, e.g. “tourism + education” means combining the biology courses in primary and middle schools with videos filmed by panoramic cameras installed in zoos and aquariums; “tourism + sport” means combining overseas tours with European soccer schools and American NBA training camps. For tourism, the inter-industrial integration also entails better investment opportunities.

2. “Whole-region tourism”

As the most frequently-mentioned term in tourism, whole-region tourism means breaking the distinct regional features, so as to bring tourists the best traveling experiences. For instance, the four provinces in the North-western area, namely Shaanxi, Gansu, Ningxia and Qinghai, all have their specialty cuisine and customs. Attempts may be made to introduce the features of the other three provinces into the symbolic scenic spots of Shaanxi, thus providing tourists opportunities to appreciate the local conditions, customs and cuisine of the four North-western provinces in one place. In fact, there is no border in the tourism industry. Its integration with other industries is rather frequent and promises huge market potential.

According to consumers’ demands, the tourism industry can be divided into various fields, where innovations in major business may be realized specifically, so as to enhance the enterprises’ competitiveness in relevant subdivided fields. In the future, as more and more young people become consumers, the satisfaction level of tourism experience is to become increasingly important. Enterprises offering quality and innovative tourism products will excel in this incremental market, and become well-known tourism enterprises nationally and even worldwide. Besides, as the largest market of domestic tours globally, China has an unimaginable room for market exploration.

During this process, enterprises with innovative advantages are expected to be increasingly capable of and willing to dominate the market, and those with weaker competitiveness will be inevitably merged by the competitive large ones. This will not only make it harder for enterprises to enter this industry, but optimize resource distribution and promote the sound development of the tourism industry to some extent. More and more enterprises and subdivided fields will emerge in the tourism industry, so will large-scale cross-industrial mergers and acquisitions, industrial integration and giants’ alliance.