China Online Travel In Focus Again: Qunar Rejects Ctrip’s Acquisition Bid

June 8th, 2015 by Trefis Team
CTRP: Ctrip logo
CTRP
Ctrip

Recently, Qunar, one of the leading Chinese search and booking websites, made an announcement that it rejected a buyout offer from Ctrip International (NASDAQ: CTRP). Silver Lake, an equity investor, invested $330 million in Qunar and another undisclosed investor invested $170 million. Silver Lake has over $26 billion in combined investments in companies, including Alibaba (NASDAQ:BABA), Sabre, etc. Qunar intends to use the capital to enhance its mobile presence, expand its business, and increase its technological capabilities. [1]

Our price estimate of $66 for Ctrip is below the current market price.

See Our Complete Analysis For Ctrip International

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Recent Developments On The Ctrip Front

On May 22nd, Ctrip bought 40% of eLong’s shares from Expedia (NASDAQ:EXPE). The latter sold out its 62% eLong Stake to Ctrip and other Chinese investors. Prior to the acquisition, Ctrip’s main competitors in China included Qunar and eLong. [2] [3] Currently, Expedia and Ctrip have entered into a partnership to share inventory in certain geographies, mainly in the air and packaged tours segment. Priceline will remain Ctrip’s primary non-China hotel partner. But Expedia and Ctrip are expected to share hotel inventories as well. [3] (Read details of the deal here.)

Shortly afterward, Priceline (NASDAQ:PCLN) increased its investment in the Chinese online travel leader. On May 26th, Priceline announced that it will invest an additional $250 million in Ctrip via a convertible bond. Post the deal, Priceline could gain up to a 15% stake in Ctrip. [4] (Read details of the deal here.)

Qunar’s Rejection Forms A Roadblock For Ctrip

With Ctrip’s 40% stake in eLong and Priceline’s 10.5% stake in Ctrip (after the recent investments), Silver Lake’s investments in Qunar prevents Ctrip from becoming the sole ruler of the Chinese OTA segment. The competition in China will carry on for now.

Although, Qunar is the fastest growing OTA in China, it had been incurring persistent losses, that critics claim might not be sustainable. Ctrip’s margins are also under pressure due to the discounting and couponing trends in the Chinese online travel market. According to Silver Lake, Qunar’s growing mobile and online travel bookings, combined with its technological prowess gives it a competitive advantage over its peers in China. [1]

Ctrip stock has declined the most this year after Qunar rejected the former’s acquisition offer, raising concerns that the aggressive competition in China is not ending soon. Ctrip’s ADRs declined by 5.3% to $77.27 on June 2. Qunar, on the other hand, didn’t see a major change in its $46 ADR price, as it received $500 million from Silver Lake Management LLC and others, and plans to sell 8 million new ADRs. [5]

Analysts in China believe that Qunar is gearing up for further competition in China and that is not going to bode well with Ctrip’s margins. In Q1 2015, Ctrip displayed top-line growth towards the higher end of management guidance, though the bottom line remained dampened. At $373 million, net revenues for Q1 2015 grew by 46% year on year. The main contributors to this growth were accommodation (contributing to 41% of the revenue) and transportation ticketing (contributing 41%).

In its Q1 2015 earnings call, Ctrip’s management admitted that the company was aggressive in matching the coupon rates or discounts offered by its competitors. Ctrip’s GAAP operating margin in 2014 was a negative 2% due to its investments and its coupon discounts. Ctrip had projected that its coupon expenses will account for 20% of its hotel commissions in 2015. [6]

Is Consolidation Of Chinese Online Travel Sector Inevitable In The Future?

Qunar’s Q1 2015 revenues amounted to $108.3 million, reflecting a 100% year-on-year increase. However,  its net losses persisted. Qunar expects its top line to grow by 105% to 110% in Q2 2015, but admitted that the non-GAAP operating margin would be in the range of negative 90% to 100%, more than double the negative 43.4% growth rate it reported in 1Q 2015. Net losses for the first quarter were $113.1 million compared to around $30 million net losses in Q1 2014. [7]

The cost of acquiring mobile users through the offline media is one of the reasons for its rising operating expense. Qunar expects to turn a profit by end of 2016. [8]

China’s online travel market is expected to continue its double-digit growth and reach $75 billion in 2017. However, the competition for a greater customer base seems to dampen bottom lines for all its key players. [9]

The Qunar Ctrip merger discussion dates back to April 2014 when there was speculation whether it will be a full-blown merger or a partnership. The combined entity was valued at around $10 billion at that time since Qunar catered to its customers through online booking and Ctrip used its call centers. [10]

However, things have evolved for Ctrip ever since. In Q1 2015, Ctrip’s mobile application downloads totaled 800 million downloads, 550% year on year growth. Mobile channels accounted for almost 70% of total transactions undertaken on the Ctrip platform.

The bottom line erosion for all of the main players in China raises the concern whether this cut throat competition is sustainable in the long run. Both Ctrip and Qunar are gearing up for further competition, which would result in higher expenses in promotional and marketing activities. This expense would probably result in a  greater market share gain by the companies, but that doesn’t guarantee profitability, as the companies are increasingly cutting prices and offering discounts to lure consumers. Therefore, whether all these players will think of cooperating with each other, or move towards a big consolidation, are questions that the future will answer.

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Notes:
  1. Chinese Booking Site Qunar Bulks Up With $500 Million Investment Led by Silver Lake, Skift, June 1, 2015 [↩] [↩]
  2. Expedia sells stake in eLong to Ctrip and others for $671 million, tnooz, May 22, 2015 [↩]
  3. Expedia Reverses Course and Sells eLong Stake, Priceline Snubbed, Skift, May 22, 2015 [↩] [↩]
  4. The Priceline Group Announces Additional Investment in Ctrip, Priceline Press Release, May 26, 2015 [↩]
  5. Qunar Rejects Ctrip Buyout and Chinese Booking Market Begins to Worry, Belinda Cao, Bloomberg, Skift, June 2, 2015 [↩]
  6. Ctrip Leaders Say Discounts Are Killing the Chinese Travel Industry, Skift, March 24, 2015 [↩]
  7. Qunar Reports First Quarter 2015 Financial Results, Qunar Investor Relations, June 1, 2015 [↩]
  8. Chinese Travel Platform Qunar Raises $500M, Turns Down Ctrip Acquisition Offer, Tech Crunch, June 1, 2015 [↩]
  9. Chinese Travel Platform Qunar Raises $500M, Turns Down Ctrip Acquisition Offer, Tech Crunch, June 1, 2015 [↩]
  10. Baidu’s Qunar Said to Be in Merger Talks With Ctrip, Bloomberg Business, April 9, 2014 [↩]