China Internet: The Late Tuition Bill

Analysis for informational purposes only. Capital at risk.

Highlight

• Regulatory Tuition, Not “Crackdown 2.0”: The Trip.com antitrust probe is a delayed normalization of legacy practices, not a return to the 2020–22 era. Trip.com is paying the same “tuition” its peers already settled.
• True Moats Endure: History (Didi, Meituan) shows regulation breaks contractual advantages but is less effective against competitive edges built on infrastructure, product, and service.
• The Real Threat & Opportunity: Price wars are unlikely due to competitor distraction. The real threat is AI-led integration (e.g., Alibaba’s Qwen). The opportunity is the overlooked Skyscanner hedge and Trip.com’s role in Beijing’s “visa-free” agenda.

China’s recent antitrust probe into Trip.com has reawakened investor anxieties around a return to the 2021 regulatory storm.

Our take: this is unlikely to be the start of a new regulatory cycle. Instead, it looks like the closing of the previous one.

The “Class of 2021” (Alibaba, Meituan, Didi) already paid their “regulatory tuition” by removing exclusivity clauses and aligning with state priorities. The Trip.com probe appears more like a late tuition bill than a fresh crackdown.

Protecting SMEs in a Deflationary World

China is currently fighting a deflationary cycle and weak consumer sentiment. In this environment, the priority is to protect small and medium enterprises (SMEs).

The investigation targets two specific “rent-seeking” behaviours:

• Exclusivity (“Pick One of Two”): The practice of forcing hotels to list solely on one platform to maintain traffic dominance.
• Excessive Take-Rates: High commissions and “value-added service fees” that squeeze independent hotel operators who lack bargaining power.

Why Trip.com and not Tencent?

The distinction lies in the business model.

• Tencent: Connects individuals via WeChat and monetises primarily through advertising or self-developed games. It acts as a neutral infrastructure layer, avoiding direct conflict with users.
• Trip.com: It operates as a centralised marketplace that controls and monetises traffic flow. Consequently, merchants often lack pricing power against the platform.

The Regulatory Tuition

Direct Fees: China’s antitrust rules permit fines of 1%–10% of domestic revenue. Previous major cases (Alibaba, Meituan) landed in the 3%–4% range.

Applying a 4% penalty to Trip.com’s domestic revenue implies a one‑time hit of roughly USD 300–350m. Potential financial impact should be manageable given the company’s USD6.7bn net cash position.

Indirect Fees- Recurring Business Practice: Enforcement will probably force changes to Trip.com’s monetisation that depress recurring margins.

For example, ending “pick one of two” clauses would let hotels list simultaneously on Douyin and Meituan, diluting Trip.com’s pricing power. To retain merchants, Trip.com may need to increase merchant incentives such as marketing subsidies or guaranteed-traffic programmes, creating ongoing margin pressure.

On a positive note, Trip.com’s corporate and high‑friction services (B2B travel, visa support, dispute resolution) are less exposed to casual switching, mitigating some medium‑term pressure.

True Moats Endure Regulatory Action

Historical precedent suggests that regulation can break contractual advantages, but it is far less effective against moats built on infrastructure, product, and service.

Alibaba (The False Negative): Fined USD 2.8bn to end exclusivity.

• The Reality: Market share fell from ~70% to ~40% since around 2015, but this downward trend started before the regulatory action.
• The Lesson: It didn’t lose to the intended beneficiary (JD.com), but to cheaper rivals (Pinduoduo/Douyin) due to a consumption downgrade.

Meituan (The Split Verdict): Fined USD 530m.

• The Reality: Lost share in “In-store” deals to Douyin’s video feeds, which were easy to replicate.
• The Lesson: Retained >60% share in food delivery because Douyin could not replicate the “hard infrastructure” of millions of riders.

Didi (The True Positive): Faced the “Ultimate Penalty”—18-month removal from app stores.

• The Reality: Didi retained about 75% market share despite the ban.
• The Lesson: Didi offered an unmatched utility—”getting a car in 3 minutes” via 13 million drivers. Users stuck with the banned app rather than switch to inferior service.

Tencent Music (The Behavioural Correction): Ordered to abandon exclusive music rights in 2021.

• The Reality: The order had minimal impact on TME’s dominance.
• The Lesson: Product stickiness driven by social integration with WeChat, karaoke features, and the high switching cost of rebuilding playlists trumped contract exclusivity.

Competition Shifting from Price War to AI

In our view, the likelihood of a price war after the removal of exclusivity is low.

• Cash constraints and distraction: Meituan and Alibaba are already locked in battles in food delivery and quick commerce, pressuring margins and balance sheets. Launching a full‑scale offensive against Trip.com would lead to further stresses on its profitability and financial position.
• Strategic prioritisation: Both groups are focused on restoring profitability and are less incentivised to start a costly, uncertain new front in online travel right now.

Financially, Douyin can afford to start a price war, but its business model differs from Trip.com’s. Douyin’s travel product focuses on impulse, prepaid vouchers, and short‑form commerce pushed via video. As a result, Douyin is more likely to capture low‑end, price‑sensitive demand than to displace Trip.com in premium or corporate channels.

Having said that, competition is shifting from capital-intensive price wars to technological integration. Alibaba has embedded e-commerce, travel, payments, and other services into its Qwen AI app, creating a one-stop AI interface. Users can complete tasks in natural language, such as itinerary planning, ticket booking, ordering takeout, and shopping, giving Alibaba a new, AI-driven channel to capture traffic.

Strategic Role in Beijing’s “Visa-Free” Agenda

On a positive note, the government has expanded visa-free entry to over 30 countries. In our view, the government does not want to crush the infrastructure required to monetise these high-value visitors.

Major Western platforms, including Booking.com and Expedia face an infrastructure gap in China. They cannot sell standalone high-speed rail tickets or verify “PSB” (Public Security Bureau) licences. Trip.com is the only platform offering the full stack: payments, language, rail, and compliance.

Skyscanner – An Overlooked UK Asset

While the inbound story provides a floor, the outbound story provides the optionality. The most mispriced asset on the balance sheet is Skyscanner, the Edinburgh-based search engine acquired in 2016.

• The Disparity: Skyscanner accounts for over 30% of group traffic but less than 10% of revenue, by our estimates.
• The Model: Currently, Skyscanner operates as a “Metasearch” engine, a lead generation tool that hands users off to airlines for low referral fees. Management has historically kept monetisation low to prioritise market share.
• The Pivot: Should domestic Chinese margins be compressed by regulation, management can turn Skyscanner from Metasearch to OTA (Online Travel Agency). By processing bookings directly, it can significantly increase take-rates.

This article is a “periodical publication” for information only and is not investment advice or a solicitation to buy or sell securities. This article does not constitute a “personal recommendation” or “investment advice” under UK FCA regulations. Investing in equities involves significant risk. The author holds NO position in the securities mentioned. There is no warranty as to completeness or correctness. Please do your own due diligence or consult a licensed financial adviser. Please read the Full Disclaimer before acting on any information. Images created with the assistance of Gemini AI.

Article provided by Asia Pulse.