Target Information

Zhóngxìn Lüyóu, the first privately-owned travel agency to go public in China, has witnessed its stock price surge dramatically since its listing on January 23. By February 26, the stock had reached a peak of over 90 yuan, marking a price appreciation of nearly 300%. This rapid increase in share price led to multiple trading suspensions and verification announcements in line with market regulations. Despite these interruptions, Zhóngxìn Lüyóu has been dubbed the 'new stock king' of 2014, quickly positioning itself as a notable player in the travel industry.

According to its prospectus, one of the primary shareholders of Zhóngxìn Lüyóu is the well-known private equity firm, Jiuding Investment. Jiuding's Beijing Jia Li Jiuding Investment Center increased its investment in the travel agency in November 2010, acquiring 8.75% of its shares, making it the second-largest shareholder. Following the recent issuance of new shares, Jiuding holds 382,510 shares, representing 6.56% of the company. Based on the closing price of 79.8 yuan on March 7, this investment has grown to a market value of approximately 305 million yuan, reflecting a remarkable return of 12.3 times the original investment cost.

Industry Overview

The travel agency industry in China has experienced significant growth over the past few decades. From 1995 to 2012, the number of Chinese outbound travelers increased at a compound annual growth rate (CAGR) of 20%. According to projections by the World Travel and Tourism Council, the number of outbound travelers is expected to grow at an annual CAGR of 15% until 2020. In 2012 alone, Chinese travel agencies generated 93.6 billion yuan in outbound tourism revenue and facilitated 28.3 million outbound trips, marking an impressive growth rate of 40%.

Although competition within the travel agency sector remains fierce and the market is notably fragmented, reports from CITIC Securities indicate that leading firms with strong resource control, product development, and comprehensive operational capabilities stand to benefit from the robust expansion of the market. The Chinese outbound tourism industry serves as a promising segment for growth, bolstered by rising consumer demand for international travel experiences.

The continuous expansion of Zhóngxìn Lüyóu is closely aligned with these positive industry trends, as evidenced by its business performance. Between 2009 and 2013, the company's overall revenue demonstrated a compound annual growth rate of 40.3%, while net profits soared with a CAGR of 53.5%. Such impressive figures resonate with market analysts and underscore the sustained interest in the company’s stock.

The investor sentiment surrounding Zhóngxìn Lüyóu is further reinforced by the recent IPO revival among Chinese enterprises. Since the resumption of IPO activities, 48 companies have successfully listed, with an average return of 4.44 times for institutions with VC/PE backgrounds. This resurgence provides a fertile environment for growth-focused investors, leading to heightened enthusiasm for companies like Zhóngxìn Lüyóu.

Rationale Behind the Deal

The rationale for Jiuding Investment's involvement with Zhóngxìn Lüyóu stems from a well-informed investment strategy. While the company's initial projected profits in 2010 were modest at only 30 million yuan, Jiuding Investment was confident in the industry's growth potential and Zhóngxìn's competitive positioning in the outbound tourism market. Their approach to selecting promising sectors and enterprises underpins their investment philosophy.

Furthermore, the remarkably strong growth trajectory of the outbound travel market in China aligns with Jiuding’s strategic foresight. By enhancing its investment in Zhóngxìn Lüyóu at an early stage, Jiuding not only added a lucrative asset to its portfolio but also positioned itself as a key player in a high-growth industry.

Investor Information

Jiuding Investment is a notable private equity firm with a successful track record in identifying and capitalizing on high-growth investment opportunities. Founded in 2000, it focuses on investing in sectors showing substantial potential for expansion, such as healthcare, technology, and consumer goods. The firm prides itself on its rigorous analysis and strategic investment philosophy, which emphasizes in-depth market research and comprehensive due diligence.

The firm has a history of backing promising companies early in their growth stages, which has yielded significant returns. Jiuding’s partner, Zhao Feng, highlighted that finding and nurturing the next successful venture is paramount to their investment approach. Their notable achievements, such as the over 10-fold return from their investment in Jifeng Agricultural Machinery, reinforce their reputation for making sound investment choices.

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The investment in Zhóngxìn Lüyóu appears to be a strategically sound decision by Jiuding Investment. The substantial returns achieved, alongside the promising outlook for China's outbound tourism sector, support the notion that Jiuding has made a prudent investment choice. The company's strong revenue growth and net profits reinforce its potential for continued success, highlighting the viability of their target market.

Given the ongoing trends of increasing consumer spending on travel and the anticipated growth in outbound tourism, Zhóngxìn Lüyóu is likely to maintain its upward trajectory for the foreseeable future. This positions Jiuding Investment well, making its stake in the company not only beneficial but strategic in the long term.

Moreover, the investment landscape has become increasingly favorable following the IPO resurgence in China, allowing Jiuding Investment to leverage the favorable market conditions for potential exits. Zhao Feng's commentary on the significance of the registration-based IPO system reflects a forward-thinking approach, which can benefit investors in the long run if they continue identifying promising companies.

Overall, Zhóngxìn Lüyóu stands out as a compelling investment opportunity, and Jiuding's decision to invest aligns with its commitment to driving returns by targeting high-potential opportunities within flourishing sectors.

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