China's third-largest online travel company is buying the hotel management unit of a former highflying operator now struggling to stay one step ahead of its creditors

Key Takeaways

• Tongcheng has agreed to buy the hotel management arm of Dalian Wanda, adding high-end properties to its growing portfolio of 2,300 managed hotels
• The deal gives Dalian Wanda, a former property and entertainment giant, more cash to meet its debt commitments

It's not a match made in heaven, at least according to shareholders of Tongcheng Travel Holdings Ltd. (0780.HK), which last week announced it would buy the hotel management, construction and design business of Wanda Hotel Development Co. Ltd. (0169.HK) for 2.5 billion yuan ($342 million). Tongcheng's shares fell 6% after the announcement, even as Wanda's shareholders welcomed the news by sending it stock up as much as 24% before the stock closed up a more modest 10%.

The deal, announced April 17 just before the long Easter holiday, gives Tongcheng 100% equity in the management, design and construction assets for Wanda's nine hotel brands, ranging from luxury to mid-scale, covering 204 properties with 40,200 rooms and another 376 hotels under contract that have yet to open. These will join Tongcheng's existing portfolio of 2,300 managed hotels, with another 1,400 in the pipeline.

Tongcheng's existing hotel management business consists of mostly midscale and economy brands such as Yaze, eLong and Mehood. The sale will see Tongcheng take over the Wanda brands and management teams, but the actual property assets aren't included.

The two portfolios are complementary, and part of a fast-expanding business segment that Tongcheng so far only identifies in its financial reports as "others," which includes hotel management and online package tour services. Tongcheng's core online lodging and transport bookings businesses represented 27% and 42% of its 17.3 billion yuan in revenue last year.

But while revenue for both of those core categories grew 20% year-over-year, the "other" category grew by a much faster 35%, reaching 2.3 billion yuan, or 13% of total revenue. The new Wanda purchase could spark even faster growth for the hotel management business, since those hotels are typically higher-end and bring in bigger management fees per property.

Tongcheng, whose major backers include internet giant Tencent and leading online travel agent Trip.com (TCOM.US, 9961.HK), is China's third largest online travel agency (OTA) with 14% of the market, well behind Trip.com's leading 50% share. Still, its evolving business model distinguishes it from its peers, and its managed hotels could ultimately benefit if it gives those properties preferred status on its platform.

Tongcheng also has plenty of cash to help pay for the acquisition, with 8 billion yuan at the end of the last year, more than triple the acquisition price. The purchase price also looks quite affordable, equal to 5% of Tongcheng's own market cap of HK$48.67 billion ($6.27 billion).

In announcing the acquisition, Tongcheng said the assets would "enhance the company's competitiveness in high-end hotels, thus further solidifying its position in the industry."

Fallen star

On the other side of the transaction is Wang Jianlin, founder of Dalian Wanda, which owns or controls 65% of Wanda Hotel. Wang was once China's richest man, worth $31.3 billion in 2017 on his then-booming real estate empire. But things began to unravel as early as 2016, when he delisted his Wanda Dalian Commercial Properties, which he believed was undervalued, from Hong Kong. He then failed to re-list the company in Shanghai as part of his plan, leaving him in heavy debt to an investor group that helped to fund the buyout.

Wanda was one of China's earlier property giants to run into trouble after taking on too much debt during the country's property boom, and has been selling off assets to meet bond repayment deadlines since 2017. In 2018, it put prize assets including Atletico Madrid and AMC Entertainment Holdings up for sale. It has also sold more than 30 of its signature Wanda Plaza mixed-use shopping and office complexes in the past three years, together with its British luxury yacht manufacturer Sunseeker International.

Recent media reports said it is hoping to redeem 2.27 billion yuan in onshore bonds early, which may explain why it's eager to close the deal with Tongcheng and get its hands on some fresh cash. Wanda Hotel Development is also probably in need of its own cash, after falling into the red last year with a loss of nearly 1 billion yuan.

The assets being acquired by Tongcheng posted a profit of HK$21.6 million last year, down sharply from HK$148.6 million in 2023.

The sale comes after a similar move in March last year that saw Wanda sell 60% of its Newland Commercial Management unit, which manages 496 Wanda shopping malls across China, to a consortium led by PAG for 60 billion yuan. Those and other sales have kept Wang Jianlin one step ahead of his creditors, at least so far.

So, what explains the negative reaction by Tongcheng shareholders? As we've already noted, the deal looks complementary for Tongcheng's existing low-end hotel management business by providing it with nine new premium brands. But it also comes at a time when the market is downshifting as consumers rein in their spending with China's slowing economy.

Investors may like Tongcheng's lower-end hotel management business, which could thrive as travelers look for more affordable lodging options to save money. But such downgrading could come at the expense of the pricier options that Tongcheng is now acquiring.

Tongcheng and Wanda already have a relationship that dates back at least 10 years, even as their fortunes have moved in opposite directions lately. Wanda was one of three investors in a 1 billion yuan funding round in 2016, which also included Trip.com and Tencent.

The same year, Tongcheng bought Wanda's travel agency business for 700 million yuan, which had nearly 1,000 shops nationwide at that time. Wanda set up that business in 2013, at a headier time when it was aiming to build up a leisure and entertainment empire that it likened to a Chinese version of Disney. But that vision is now a distant memory, with companies like Tongcheng emerging as buyers for pieces of a former empire that Wanda would probably like to move on from.