Investment summary:
Incident: On June 14, the company issued the “Suspension Notice Concerning the Planning of Major Asset Restructurings”, stating that the company and CITIC Travel (002707.SZ) are planning for the company to absorb and merge CITIC Travel (hereinafter referred to as the “Merger”) and issue A-shares to raise supporting capital by issuing A-shares to all shareholders of CITIC Travel. This merger will not result in a change in the actual controller of the company.
On June 11, 2021, the company and Zhongxin Travel signed a “Cooperation Intent Agreement” regarding this merger. The main contents are: 1) the company plans to absorb and merge CITIC Travel by issuing A-shares to all shareholders of CITIC Travel; 2) The two parties will negotiate on the specific transaction plan, share exchange price, debt handling, employee placement, objection shareholder protection mechanism, etc. of this merger; 3) This agreement is only a preliminary agreement of intent. The specific rights and obligations and arrangements in this merger are subject to the final agreement; 4) The merger and formal agreement are subject to the final agreement; 4) The merger and formal agreement are subject to the final agreement; 4) The merger and formal agreement are subject to the final agreement; Both parties are reviewed by their respective boards of directors and shareholders' meetings, and implemented after approval by the supervisory authority. 5) This agreement may be terminated in writing by mutual agreement.
Affected by the epidemic in 2020, the outbound travel industry was under severe pressure, making it difficult for small to medium travel agencies to sustain themselves. With the spread of vaccines and subsequent gradual recovery of outbound travel, there is greater flexibility. The merger of leading midstream companies in the two major tourism industries not only complemented each other's strengths and was deeply integrated, but also further increased market share when the industry was cleared. In the future, upstream and downstream bargaining power and voice will be effectively improved, while laying a solid foundation for subsequent diversified business development.
According to data from the Ministry of Culture and Tourism, the total revenue of national travel agencies in 2020 was 239 billion yuan, a year-on-year decrease of 66%. According to enterprise survey data, a total of 118,000 tourism enterprises (including individual businesses) were cancelled in 2020, of which 15,000 were cancelled in the first quarter, 38,000 were cancelled in the second quarter, 33,000 were cancelled in the third quarter, and 32,000 were cancelled in the fourth quarter. Both the second and third quarters showed a year-on-year growth trend, and the year-on-year growth rate increased quarter by quarter.
The domestic travel industry also saw many collaborations to combat the impact of the pandemic in 2020. Among them, Caesar Group invested in Tuniu in November, with a shareholding ratio of 21.1%; Alibaba invested 385 million yuan in CITIC Travel, with a shareholding ratio of about 5%; and CITIC Travel and Alibaba Travel jointly funded the establishment of a company, which is mainly engaged in the export of travel product distribution solution system capabilities and tourism product distribution platform business.
The 14th Five-Year Plan emphasizes the need to accelerate the development of service industries such as health, old-age care, childcare, culture, tourism, sports, etc. At the same time, it is proposed to promote the integrated development of culture and tourism. The Ministry of Culture and Tourism frequently publishes tourism-related policies, which will continue to be promoted in the future.
The company and Zhongxin Travel belong to the middle reaches of the same tourism industry chain, and each has its own advantages. The company's main business is a direct-run travel retail and catering business. The advantage is that the business is relatively diversified, and at the same time it has a relatively high level of profit. The main business of Zhongxin Travel is tourism wholesale, which has a strong supply chain base and a relatively large revenue scale. In contrast, it has a lower profit level.
Under the influence of the epidemic, both have made strategic adjustments, shifting the focus from outbound travel to domestic travel. Both are exploring diversified development paths and making arrangements for tax exemption. The company completed its relocation to Hainan this year. In the future, it will focus on the Hainan market, take advantage of favorable policies, participate in the construction of a free trade port, and actively plan duty-free related business in Hainan. Zhongxin Travel has also successively signed strategic cooperation agreements with China Duty Free Group and Wangfujing Duty Free.
The merger of the two can integrate shared resources (destination resources, customer sources, products, etc.), reduce internal consumption, and improve operational efficiency. The increase in market share after the merger will give the company more bargaining power and voice in the tourism industry chain. Coupled with the experience accumulated in the travel retail field, it will facilitate the development of diversified businesses in the future.
Investment strategy: With the spread of vaccines and the mitigation of the epidemic, tourism-related policies continue to advance, domestic travel is booming, outbound travel will eventually recover, and spring tourism in the post-pandemic era is not far away. The two major travel leaders will join forces to prepare for the advent of the post-pandemic era and the recovery of outbound travel. We expect the company's earnings per share to be -0.10/0.07/0.24 yuan in 2021-2023, and PE 119 and 36 times respectively in 2022-2023, maintaining the “increase in holdings” rating.
Risk warning: The stock exchange merger is in the planning stage, and there is still uncertainty about implementation; macroeconomic downturn; uncertainty about the development of the epidemic; recovery of the tourism industry falls short of expectations; shareholder risk, etc.