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iAsk Qinghua Hong: Why do 80% of China's Scenic Spots Suffer Losses?

the first season of iAsk Entrepreneurial Investors program

iAsk
    Mar 04, 2019 5:59 PM  PT
iAsk Qinghua Hong: Why do 80% of China's Scenic Spots Suffer Losses?

Qinghua Hong never wastes his business talent. During his school years, he worked as a tutor, a sales person, a contractor of the school's ballroom, video hall and karaoke hall, and even opened the first public computer room on campus through raising RMB 300,000 yuan from private capital. By the time he graduated, he was already the "richest man" of the school and planned to start his own business.

Qinghua Hong did think about the failure of entrepreneurship. To this end, before starting a business, he took the graduate school entrance examination. "The worst-case scenario would be becoming a teacher with a diploma at hand. If you know your way out, you will not be afraid. I usually imagine the worse-case scenario before making any decisions. If I can bear the consequence, I will work hard towards the best turn out."


Story No.1:

It is not hard to notice that as long as an upsurge opportunity appears, capital will certainly intervene.

During the past 18 years, Qinghua Hong has had second thoughts. He attempted to make the company embark on the path of "too big to fail", and intervened in other industries through capital, but eventually gave up on the tempting investments from angel investors and refocused on tourism.

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He noticed that there are plenty of great tourism projects in China. People spend a lot of money to plan and construct and then find another operator to take over upon completion. However, it usually turns out to be a failure. In response, Qinghua Hong proposed a "one-stop" system of planning, investing, operating, and marketing.

On the tourism industry chain, Qinghua Hong owns more than 30 wholly-owned, holding or share-holding companies to date, including Lvmama, Kchance, Joyu TMS and Joyu, which cover tourism planning, scenic area operation, tourism marketing, online popular hotels and other businesses, forming a unique "Joyu pattern".

Although he has been working in the tourism industry for 18 years, Qinghua Hong feels that it's still not long enough. He compares himself to the "coral worm" of the tourism industry. "I will use my body to pile up the island reef and rush out of the sea to make contributions to the tourism industry."

 

Is cross-industry investment not rewarding?

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Qinghua Hong: It depends on the core of acompany. It is actually about value investment. It's up to if I can understand the business pattern. If I can't understand it, I will never blindly follow this trend. It seems like an upsurge opportunity where everyone wants to investin it. If I don't understand it, I won't invest. If I understand it and acknowledge the founder, we will invest. The failure rate was basically very low. Because we have operated a business ourselves, we don't just focus on the performance data if a company shows up with various data evidence.

See the investors nowadays. Many of the monly pay attention to the data, yet do not focus on the logic behind. A lot of things could be superficial. In addition to reading the data, we also care about the business conditions reflected in the corporate data, which could be completely different. I would talk to the founders of the company, all the executives, even their entry-level employees and intermediate-level managers.Their performance and status can reflect the future of the business.

Sometimes we would even go check if people work overtime. We would check all the activities of the company, and its corporate culture. The fast growth of a firm can't be solely reliant on performance data. There must be a mission, vision and values behind it, which we especially value. When you take a look at the office inside the company, you would see many people look lazy or are sleeping, or running instead of walking, which reflects the state of a company.

Gloria Ai: During the 18 years of business operation in the tourism industry, you found out that occasionally the return of angel investments could also be very high. Why did you return to industrial investments only instead of continuing with angel investments?

Qinghua Hong: I think my company is my priority. Our company is constantly growing stronger and bigger. I need to focus more on this industry and my own business. Secondly, everyone has their own life purposes. For example, I think my life is not just about making money. I should strive to be outstanding in a certain field. I have had this thought since I started my own business at school. Regardless of industries, I must be outstanding in a certain field and do something for this field. This is what I thought at the time.

 

Story No.2:

In 2008, China's tourism industry entered the era of mass consumption with an increasing number of tourists and a larger industry scale. In 2013, the number of Chinese tourists traveling overseas ranked first in the world for the first time, and maintained at the top todate.

However, behind the fascinating numbers hides a surprising fact: 80% of over 30,000 scenic spots in China are operating at a loss; most of over 30,000 travel agencies are struggling to survive; 12,830 star hotels are losing money. The loss of the whole industry reaches several billion yuan on a yearly basis.

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Hong Qinghua has his own thoughts: tourists want to be surrounded by the scenery, yet we often offer city views; tourists want an impromptu trip, yet many of the travel routes provided are fixed; tourists want local specialties, yet we supply standard group meals. All in all, what we offer is not what tourists want. Only IP is the new key to the travel industry.

Take the tycoons of domestic theme parks as an example. Although they despised Disney for bringing American-style branding to China, Shanghai Disneyland attracts 11 million tourists and achieves profitability within just one year. In comparison, domestic theme parks' traffic has been disappointing.

Based on Qinghua Hong's logic, "Tourism investment is not non-profitable, but investments must be made professionally." At this point, he jokingly said: "You can follow Qinghua Hong and invest."


Why are 80% of the scenic spots losing money?

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Hong Qinghua: The first big trap is to invest in a theme park, which costs more than RMB 10 billion yuan or 5-6 billion yuan, and locate the park in a third- or fourth-tier cities, however infact, the market can't provide enough support for your investment. It seems cost-effective when the land costs you nothing or minimum investment, but eventually the revenue can't cover the costs. You suffer losses due to bad tourism management and limited raise in land value. This is the first trap.

Secondly, for instance, there are numerous channels in the market. Many online travel companies used to have a variety of vertical companies. When many angel investments and venture capital kick in, dozens of online travel companies receive investments in the entire industry within a year. In the end, many of them couldn't generate profit and even endup in bankruptcy. This is also a trap. It seems that the market scale is large. In fact, the market has already formed a fixed layout. Once you missed the round of investment opportunities, you can't invest any more.

Thirdly, let's say you eyed a lot of scenicspots and expected a natural growth of 30%-40%. Then you invested in a lump sum of seven hundred and eight hundred million yuan or over a billion yuan. You invested a lot in the infrastructure of the scenic spot, but did not increase the attraction or consumption opportunities of the scenic spot or motivations for tourists to visit again. Consequently, the number of tourists didn't go up. It sometimes even went down on the contrary.

Fourthly, in the current cultural and creative industry, people shop a lot while traveling. You see that travel shopping used to be very profitable. Nowadays, many people think that travel shopping should be regulated, so they reinvest in tourist service centers and tourism complexes, and thus lose money. A lot of Chinese investors invest morethan RMB one hundred million, or even seven or eight hundred million in building tourism service centers, but no one makes a profit out of it.

 

Story No.3:

Although the Online Travel Agency (OTA) sector hasn't been dominated by the three monopolies, Baidu, Alibaba and Tencent (BAT), they still compete fiercely for market shares. On November 26th, LY.com and eLong were listed on the Hong Kong Stock Exchange, and the happiest ones were the "investors" behind them - Tencent and Ctrip.

However, compared to the LY.com and eLong from the "Tencent clan", Qunar from the "Baidu clan", Alitripand Qyer.com from the "Alibaba clan", Qinghua Hong's Lvmama doesn't seem to fit in. It seems like he is deliberately keeping some distance from BAT and mainstream OTA.

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In fact, Lvmama obtained investments fromangel investors when founded in 2008. In 2009, Lvmama completed the A round financing of RMB tens of millions yuan. In 2010, it also received the B round capital injection from Sequoia Capital and CDH Venture Capital. In 2011, Lvmama received the C round financing from Jiangnan Capital and Sequoia Capital. In 2013, Lvmama's investor was Linear Venture.

However, BAT was never among the investors. Starting early does not mean going far. As a market leader, in the face of ambitious competition from BAT, will Lvmama be able to handle BAT in the capital market?

Hong Qinghua has his own explanation for this: "At first, I just wanted to take investments from angel investors or purely VC/PE. Later on, I started to feel strongly that I should have asked for investments from the industry. I did not refuse any investments. I just chose the ones that were right for me at the time."


You don't want BAT's investment?

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Qinghua Hong: My financing logic is as follows: at the beginning, I just wanted to solely take investments from angel investors or VC/PE, because they just wanted to make money. Helping my business grow can realize that, which is simple logic. So I received same types of funding during the A, B and C rounds. When it reached the D round, I felt that besides from funding support, I could also use some industrial support, so Iaccepted Jinjiang International's investments. The later the stages were, the more I felt that I should have obtained more investments from the industry practitioners, but I did not reject any funding offers. I just chose the one that were right for me at the time.

Gloria Ai: Does such financing experience help you when you make investments now?

Qinghua Hong: It is helpful. Since I have raised funding before, I know what investors desire for and whether their viewpoints are right or not. There are times where investors' suggestions interfered with my own vision, but we have to treat it objectively. So at this point, since I know that I am both an entrepreneur and an investor, I will evaluate opportunities with the mind set of entrepreneurs and make investments, which has a higher success rate.

Gloria Ai: For those who are transforming into entrepreneurial investors, do you have any suggestions for them?

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Qinghua Hong: If you want to be an entrepreneurial investor, the first step is to manage an enterprise well. The second step is to make investments with the mentality and belief of operating abusiness. In this way, you can certainly see through the core of that enterprise and avoid a lot of traps. This is very important. If you start with making investments and then operating a business later, it would be acapital-supported mode, which is reliant on the macro market trend. 

Some entrepreneurial investors who invest first and then manage a firm are actually managing a business with the mentality of investing, which is the opposite direction of making investments with the mentality of operating a business. There is no right or wrong. It's your choice to choose a path for yourself. But I think the more reliable way would be to manage a firm well first and understand a company, then invest.

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