China’s cheap exports have had a dramatic impact on the global economy in recent years. And now canny investors can profit from the country’s next huge wave of exports: tourists. It is less than 15 years since China allowed its people to travel overseas, and initially that was just for business travel, but already the country is establishing itself as the fourth-biggest nation in the globe-trotting stakes.
As always with China, the numbers are vast. In 1995, only 4.5 million Chinese travelled overseas. But less than ten years later, that figure had jumped to 31 million. And that’s still only 2% of the population – both Chinese and international travel-industry experts forecast that at least 50 million Chinese tourists will be travelling overseas every year by 2010, and 100 million by 2020.
China’s wanderlust is already changing the face of its airline industry. Since 1997, when the government approved the first batch of destinations for non-business travel in southeast Asia, there has been a dramatic turnaround in the flow of Chinese air traffic. Chinese airports that once catered for business travel and overseas visitors are now teeming with outbound economy-class travellers. According to a report by Boeing Airlines, China is now the world’s fastest-growing market for civil aircraft sales, with the number of aeroplanes in the country set to triple by 2025.
Around 90% of trips abroad by Chinese tourists are within Asia, with gambling holidays to places such as Macao very popular. But a significant number are widening their horizons. The top Western destination is Europe, which can expect to host 1.4 million Chinese visitors this year, according to economic research firm Global Insight. The group expects the number of Chinese tourists venturing outside Asia to rise 40%-50% by 2010.
But it’s not just the sheer weight of numbers that makes investing in the Chinese travel boom an attractive prospect – Chinese tourism also looks set to unleash a phenomenal spending spree. Even before travel restrictions on China’s wider population were eased, Chinese travellers clocked in as the fourth-largest spenders in Europe, after the Japanese, Americans and Russians, according to duty-free shopping group Global Refund. The typical traveller to a destination such as Thailand stays in three-star hotels and spends $100 a day on such must-have items as crocodile bags and sharkskin shoes. That’s pretty hefty spending in a country where income per head is less than $900 annually. “All across the Pacific,” The New York Times reports, “officials are vying to net the elusive, wealthy Chinese tourist who is seen as the big-spending successor to the oil-fuelled Arab tourists of the 1970s, and the brandaholic Japanese shoppers of the 1980s and 1990s.”
However, those officials are also finding that catering for Chinese tourists has its downside. The Chinese have earned themselves such an inglorious reputation as tourists over the last few years that Beijing has launched a campaign to prepare them for travelling overseas. Helpful suggestions posted in the state-run China Daily include not to spit in your hotel room, not to talk loudly to your partner if they are right beside you, and to flush the toilet after use. Of course, as long as Chinese tourists keep lining the pockets of retailers, it may not matter how they behave.
How to profit from the trend
Morgan Stanley’s Richard Ji believes the best way to play the Chinese travel boom, both international and domestic, is through China’s two largest online-travel groups: Ctrip.com International (Nasdaq: CTRP) and eLong Inc (Nasdaq: LONG). The average Chinese person spends $50 a year on travel; Ji estimates the firms currently have less than a 2% market share between them – so “you can see the potential”.
That potential may be realised very soon: Deutsche Bank’s William Bao Bean tells the International Herald Tribune that there will be a “flood of customers to Ctrip and eLong this year” as they introduce electronic tickets, which is expected to undermine bricks-and-mortar competitors. The fragmented nature of the Chinese hotel industry, where there are no truly national lodging chains, should make it easier for them to maintain wider profit margins than international peers such as Expedia, which have commissions squeezed by big hotel chains. Ctrip is the largest firm in terms of hotel and airline bookings, but the share price has more than doubled over the past year and now looks rather expensive on a p/e of 63 – Bean has a ‘hold’ rating on the stock. Investors might prefer eLong, which Bean still rates a ‘buy’. It turned profitable in the second quarter of last year after listing in October 2004. Third-quarter net income came in at $337,000, from a $5m loss the year before, while sales rose 40%.