On 28 July 2025, the A-share listed Dalian Shengya announced that it would issue 38.64m shares to Tongcheng for RMB956.3m. With the entrusted voting rights, Tongcheng would become a controlling shareholder of Dalian Shengya and could consolidate this theme park company. While the deal could bring some long-term synergy to its existing business, Dalian Shengya could be margin dilutive, and vulnerable to impairments. We also see this could be impactful to valuations, as Tongcheng has made two rather significant investments, with the deal on Wanda Hotel Development still waiting for approval. However, we see the share price correction somewhat overdone, and current valuation has become more reasonable.
　　Key Factors for Rating
　　Tongcheng becoming a controlling shareholder of Dalian Shengya. After market close on 28 July, Dalian Shengya (600593 CH, NR) announced that it would issue 38.64m shares to Tongcheng at a price of RMB24.75/share and with a total consideration of RMB956.3m. After an arrangement of voting rights delegation, Tongcheng will hold 23.08% stake of the company and 30.88% of the voting rights, becoming the controlling shareholder. We understand Tongcheng would consolidate Shengya after the transaction completes.
　　Still profitmaking after adjusting for write-offs. Dalian Shengya is an aquarium and theme park operator with facilities in Dalian and Harbin. Before this transaction, Dalian Shengya is under the control of Dalian SASAC but with fragmented ownership. In 2024, Dalian Shengya had a revenue of RMB505m (+8% YoY) and a net loss of RMB70m (versus RMB34m NP in 2023). Yet, after adjusting for one-off non-operating items, it had an adjusted NP of RMB20.8m (-64% YoY), with an adj. NPM of 4.1%. However, we see this a highly seasonal business, as it is mostly making profits in 3Q (summer), and occasionally in 2Q, and constantly loss making in 1Q & 4Q due to climate in Northeastern China.
　　Short-term financial impact limited, thus share price decline on 28 July an overreaction. Using 2024 figures as an illustration, if consolidated, Shengya would boost Tongcheng’s 2024 revenue by 3%, and the RMB70m loss only dragged NP by 0.8% if adjusting for MI. Hence, we see the impact actually limited and manageable to Tongcheng. We also do not see Tongcheng’s financial position worsening, as it had net cash of RMB3,866m by end of 2024. However, Tongcheng’s share price declined by 10.9% on 28 July 2025, before the deal was formally announced. Solely from this transaction and the financial impact, we believe this is an overreaction.
　　Valuation of the deal may raise some eyebrows. We see this acquisition to be a supplementary of Tongcheng’s tourism business, which already includes a packaged tour operator acquired previously. However, the deal itself implies a valuation of RMB4,143m for Dalian Shengya, and this translates into 199x 2024 P/E, or 39x 2024 adjusted P/E if more non-operating items are excluded beyond the reported ones. We expect some investors could have concerns on such valuation, worrying potential impairment in the future.
　　It takes time for the market to erase investors’ concerns. Valuation aside, we believe investors would have additional concerns: (1) Tongcheng is now deviating from a pure OTA play, which could affect earnings visibility due to business complexity; (2) it is also investing more in low margin business, which is margin dilutive compared to the OTA business, and (3) serial acquisitions could raise the probability of further financing, despite net cash on hand, and lowering the likelihood of raising dividend payouts. We believe these concerns alone could drag valuation, in addition to concerns related to the industry performance (e.g. how well the travel demand is, and how JD Hotel impacting existing OTA players)
　　2Q25 preview and our latest view. We expect Tongcheng’s 2Q25 to be a good quarter with a 12.6% YoY revenue growth and an adj. NP of RMB748m (+14% YoY). Overall, we see Tongcheng is still outperforming the overall tourism industry and some OTAs due to its business focus on lower-tier cities, where it recovered better than higher-tier cities. While there could be some headwinds in the peak season in 3Q25, we still expect Tongcheng to extend the momentum in 2Q25. Hence, excluding the impact of the acquisitions of (i) Wanda Hotel Development (169 HK, NR) where we expect it could boost 5% earnings after the deal is done on a full year basis, and (ii) the deal related to Dalian Shengya, we maintain our full year adj. NP forecast of RMB3,357m (+20.5% YoY) unchanged at this moment.
　　Key Risks for Rating
　　(1) Weak recovery of tourism; (2) worsening relationship with top shareholders; (3) keen competition; (4) higher spending to defend market; and (5) newly acquired business weaker than expected and failing to create synergy.
　　Valuation
　　We leave our earnings forecast unchanged at this moment as the acquisitions are subject to completion.
　　Maintain BUY as we see the market has overreacted to the acquisition of Dalian Shengya, and the current valuation, at 13x/11x 2025E/26E P/E attractive.
　　Our DCF-based TP of HK$23.6 are based on following key assumptions: (1) WACC of 15.4%; (2) terminal growth rate of 3.0%; and (3) HKD/RMB rate of 0.94. Our TP is equivalent to 20x/16x 2025/26E P/E.