The company is being investigated for anti-competitive practices and investments that have given it control of more than 60% of China's vast online travel market

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Key Takeaways:

• Trip.com could be forced to end exclusivity practices and sell its investments in rivals as a result of a new anti-monopoly investigation into the company
• The investigation is the latest by China's market regulator into anti-competitive practices by some of the nation's top internet companies

What took them so long?

That's our first response to word that China's market regulator has launched an investigation into leading online travel agent Trip.com Group Ltd. (NASDAQ:TCOM) (9961.HK) for anti-competitive behavior. We've followed Trip.com for quite a while, all the way back to its IPO in 2003 when it became one of China's earliest companies to list on the Nasdaq.

It was a leader even then, and seemed to compete on a relatively level playing field in the first decade after its listing. But starting about a decade ago, it embarked on a series of aggressive investments and M&A that effectively gave it control of more than half of the market. It could do that due to its size and lack of serious competition from any of China's other internet giants, who were busy chasing more lucrative areas like e-commerce and online gaming.

The result has been that Trip.com, previously known as Ctrip.com, has become a 500-pound gorilla in China's online travel space, which is still quite sizable even though it pales compared with e-commerce and online games. That position has given it the clout to fight off more recent challenges in the online travel sector by takeout delivery giant Meituan (3690.HK) and e-commerce juggernaut Alibaba (NYSE:BABA) (9988.HK), which are still relative minnows compared to Trip.com and its web of related companies.

The State Administration for Market Regulation (SAMR) announced its investigation into Trip.com on Wednesday, saying only that it was looking into the company for potential abuse of its market dominance. The probe specifically focuses on the company's hotel booking operations, which accounted for about 44% of its revenue in the third quarter, sources familiar with the situation told financial media Caixin.

Room bookings are one of Trip.com's two main revenue sources, the other being transport ticket bookings, mostly for plane and train travel. It's not surprising that SAMR is looking into Trip.com's hotel booking service and not the ticket service. Despite the presence of a few large players like H World Group (NASDAQ:HTHT) (1179.HK) and Jin Jiang (600754.SH), China's hotel market is highly fragmented, consisting mostly of thousands of regionally owned companies.

That means these smaller companies are heavily dependent on online referrals for their business, giving Trip.com huge clout in negotiating its business relationships with them. According to Caixin, Trip.com frequently requires hotels to enter into exclusive or restrictive agreements, and also uses its clout to lock up huge amounts of room inventory in advance, all to the detriment of rivals.

Trip.com certainly wasn't the only company to engage in such monopolistic behavior, but it's one of the last to escape scrutiny by the market regulator. Alibaba was previously fined a record $2.8 billion in 2021 for similar anti-competitive behavior in e-commerce, and Meituan and Tencent have faced similar probes that resulted in fines and orders to change their ways. That wave of probes wrapped up two or three years ago, so it's a bit unclear why Trip.com has escaped notice until now, especially since it was one of the earliest to engage in such behavior.

For its part, Trip.com said it would "actively cooperate" with the investigation.

Stock plunge

Not surprisingly, Trip.com's stock tanked after announcement of the probe. The shares are down 22% over the last four trading days, wiping out about $9 billion in market value. Still, anyone who was smart enough to invest in Trip.com's IPO shares in 2003 has done quite well, even after the selloff. At its latest close at $61.30, the stock is still up by a factor of about 54 from its split-adjusted IPO price of $1.125.

China's online travel agency market was worth about $105 billion last year, and is expected to grow quite strongly at an annual rate of about 15% over the next five years, according to a report from Modor Intelligence. Trip.com directly controls about a third of that.

But its actual control is much higher due to its investments in many of its top competitors, most of those made during a brief burst of buying between 2015 and 2017. Those include Trip.com's 2015 purchase of 48% of Qunar, a top rival at that time backed by internet giant Baidu. Its other big investments included stake purchases in U.S.-listed Tuniu (NASDAQ:TOUR) and its purchase of 37.6% of former archrival eLong in 2015 from U.S. travel giant Expedia (NASDAQ:EXPE).

Trip.com later engineered a merger between eLong and Tencent-backed Tongcheng. That merged company, called Tongcheng (0780.HK), later listed in Hong Kong, and is still 27% owned by Trip.com, according to ownership information on the Hong Kong Stock Exchange website. All those various holdings effectively give Trip.com control of more than 60% of the Chinese online travel market. The only other major forces are Meituan at about 20%, and Alibaba's Fliggy with 10%.

That concentration has given Trip.com huge power in its space, helping it to post some of the industry's strongest growth as China's travel sector continues to rebound from the pandemic. Its revenue grew 16% year-on-year in the third quarter to 18.3 billion yuan, as its net income roughly tripled to 19.9 billion yuan from 6.8 billion yuan a year earlier. Such strong gains gave Trip.com a relatively premium price-to-earnings (P/E) ratio of about 20 before the selloff, though that's now down to 16.5, falling behind the 18.7 for Tongcheng.

So, what's ahead for Trip.com? We expect the market regulator will almost certainly determine the company is guilty of anti-competitive behavior and fine it a large sum, perhaps $1 billion or more. That shouldn't affect the company too badly, as it had the equivalent of $15 billion worth of cash at the end of September last year.

The far bigger worry is what kinds of remedial steps Trip.com might be forced to take. We wouldn't be surprised to see it forced to divest some of its holdings, most notably its Tongcheng and Qunar stakes. And it will almost certainly be required to end its exclusivity practices with the many hotels it deals with. Those should be far bigger concerns for investors, as they could finally knock the company off its perch and create a far more competitive online travel market in China.

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Benzinga Disclaimer: This article is from an unpaid external contributor. It does not represent Benzinga’s reporting and has not been edited for content or accuracy.