Travelsky IPO back on runway

Stabilzing market sentiment has prompted Goldman Sachs to revive the $140 million H-share flotation of China''s national airline ticketing system, with roadshows to begin on Thursday.

What should have been China's last international IPO of 2000 now looks set to become its first in 2001, pipping to market China National Offshore Oil Corporation (CNOOC), which will begin roadshows four days after Travelsky Technology (TTL) prices. Lead manager Goldman Sachs is said by market observers to have been watching the market on a daily basis since the beginning of the year in a bid to make sure that it has a stable platform to launch the 270.32 million share transaction.

It previously pulled back from launch in late November when a sudden deterioration in sentiment towards PRC-related stocks sent the year's benchmark privatizations plunging. To date, the market has remained more or less flat, with the Hang Seng Index up 1.313%, the China Enterprises Index down 1.16% and individual stocks such as China Mobile and Petrochina respectively up 8.92% and 4.62%.

Unusually for a Mainland-based company, roadshows will span Chinese New Year and kick off in Hong Kong on Thursday and Friday, moving to Singapore on Monday, 22 January. Europe and then the US follow later the same week, with final pricing scheduled for Thursday, 1 February. With the deal set to be completed two days after the next FOMC meeting, bankers will be also hoping that a possible rate cut will give a strong boost to underlying market conditions.

Alongside the lead, ICEA Securities is senior co-lead, with ABN Amro and CLSA as co-leads and Bank of China International as co-manager.

In total, the company will be offering a 35% stake including greenshoe. The remaining 65% is split between China's Civil Aviation Authority (CAAC), the industry's regulator, on 35%, the three big domestic airlines - China Eastern, China Southern and Air China - collectively holding just under 30% and over a dozen smaller domestic airlines, retaining the balance.

Sales strategy

The company is likely to be marketed as a fast-growing, nimble and dynamic operator of the PRC's back-end national computer reservations system (GDS), used by the travel industry to channel bookings to the airlines' own internal systems. It also operates, but does not currently own, a front-end consumer portal that enables customers to bypass agents, book directly online and is the only system to have real-time access to China airline inventory.

For some, TTL is regarded as the ideal candidate to whet the market's appetite for the Mainland's ambitious privatization program of the coming year. A successful reception from investors will also play well for the larger and strategically more important IPO for CNOOC, which follows a few weeks later.

Strategic investors

Already, Goldman is believed to have anchored the deal with four strategic investors that will each purchase up to $10 million. Regionally, there is India's Sita Travel and Cathay Pacific, which is itself in the process of setting up a travel portal in association with Qantas, Singapore Airlines, Air New Zealand, Ansett and Thai.

From the US, there is Sabre Holdings, which established America's leading travel portal Travelocity and dominates 70% of the corporate desktop market for electronic books. From Europe, there will be Amadeus, which was founded by Air France, Lufthansa and Iberia.

In a pattern which is becoming increasingly evident with a number of forthcoming tech and telecom related offerings, TTL will also promise investors an additional kicker in the form of a 4% dividend yield.


In terms of valuation, the company is being pitched attractively against global comparables and has an indicative P/E range in the low double digits to prospective 2001 earnings, compared with a roughly 17 times average for the industry's leading international operators.

"The real story here is that this is a company in which the old China meets the new China," comments one observer. "Travelsky is both mainstream and tech-focused. It is an SOE, but it is also run by a very strong management team whose executives are mainly in their late thirties and early forties."

Attractiveness of a monopoly position in a fast growing sector

Unlike other sectors of the Chinese economy which are being rapidly deregulated, the ticketing industry has not and TTL has been allowed to retain its monopoly position. Established over a decade ago as a vehicle to pool domestic carriers' IT departments at a time when none could afford to set up on their own, TTL now controls 99% of the domestic ticketing market and 70% of the international market.

Any threat to its position has been vigorously stamped out and all the domestic airlines have been made to sign non-compete agreements spanning five- to 10-year periods. This was designed to stop a repeat of problems encountered last year, when China Southern tried to set up its own portal, and was threatened with withdrawal from the national GDS by CAAC.

Global industry leaders, on the other hand, have been encouraged to set up MOU's with the company. All four of TTL's strategic investors are believed to have done so and will seek to bring best international practise through technology transfers and staff swaps.

Above all else, however, the company is likely to be marketed as a play on the strong growth of the Chinese travel sector, which embraces the world's largest potential market. A fast upwards trajectory is forecast to be maintained over the coming decade, with compound average revenues from tourism predicted to average 24% growth per annum. According to figures from Boeing, revenue per passenger kilometre (RPK) will also average annual increases of 10.3%, compared to a worldwide average of 4.7%.

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