Though the spree of acquisitions and restructuring in the tourism sector has triggered a rally in related stocks, the surge could be short-lived due to the worse-than-expected reform plans and weak corporate fundamentals.

In the last four weeks, Beijing Capital Tourism Co, OCT Holding Company in Shenzhen and Guangzhou Dongfang Hotel Co have announced restructuring plans.

Beijing Capital Tourism surged 6.4 percent on Tuesday, before its shares were suspended for the temporary shareholders meeting called to discuss an acquisition plan announced on May 21.

In a statement to the Shanghai Stock Exchange yesterday, the company said it plans to issue 60 million new shares of its common stock to a Beijing-based company managing State-owned assets at a price of 15.53 yuan per share.

The latter, in return, has sold 100 percent and 77.68 percent stakes in its wholly owned Beijing Xinqiao Hotel Co and Beijing Heping Hotel Co to Beijing Capital Tourism for 526 million yuan.

In addition, Beijing Capital Tourism will also inject 274 million yuan in cash to Xinqiao Hotel thereafter.

"Mergers and acquisitions have become the in thing for fully-competitive tourism companies, " said Tang Jianwei, analyst, Guojin Securities.

Last Monday, Dongfang Hotel said the Guangzhou city government has decided to transfer the company's 51.6 percent stake held by Guangzhou-based Yuexiu Group and Dongfang Hotel Group to Lingnan International Enterprise Group Co, controlled by the local government.

Following the news the company's shares rose 2.4 percent to close at 8.6 yuan on May 26, the highest in a year.

Broadly speaking, the tourism sector surged 5.54 percent on Tuesday to outshine all other industries, with Beijing Tour Co and Shenzhen OCT Holding Company soaring to their daily limits.

"The premium of tourism industry to the major index is over 100 percent now, much higher than the average of 80 percent in history," said Wang Ding, analyst, GF Securities.

According to Wang, share prices in the tourism industry rose nearly 51 times the earnings on average, while the P/E on major bourses was 24 times.

"We don't see any strong profitability in the firms that announced the restructuring plans. Assets injected into these listed entities have shown poor performance in the past," said an analyst from Essence Securities based in Shanghai.

Xinqiao Hotel, which was wholly acquired by Beijing Capital Tourism, for instance, lost 9.08 million yuan in the first quarter with liabilities of 497 million yuan. But Beijing Capital Tourism expects the newly added hotel to achieve profits of around 1.93 million this year.

"The acquisition is a strategic move for the parent company to develop a hotel platform rather than directly lift its performance," said Tang.

The acquisition is expected to dilute Capital Tourism's earnings per share to around 0.5 yuan in 2009, down from 0.75 yuan in 2008. Its shares sank 3.38 percent to 16.3 yuan yesterday.

(China Daily June 12, 2009)