Priceline’s OTA Dominance To Be Reinforced By An Expanded Partnership With Ctrip
Earlier this year, Priceline (NASDAQ:PCLN) strengthened its commercial partnership (initiated in 2012) with Ctrip (NASDAQ:CTRP), the biggest Chinese online travel agency (OTA), by investing $500 million in the company. The investment, made through a convertible bond and an agreement to buy Ctrip shares on the open market over the next year, means Priceline may own as much as 10% of Ctrip after the investment. Priceline expects the acquisition to broaden its presence in China, where it is currently under-represented in the accommodations space. [1] Priceline earns approximately 95% of its revenue from hotel bookings. Thus, gaining access to a wider portfolio of hotel booking in China (as a result of its partnership with Ctrip), which is the fastest growing travel market in the world, will augur well for its long-term growth potential, in our view.
Through the investment, both the companies intend to increase the cross-promotion of each other’s hotel inventory and other travel services. Priceline now has access to Ctrip’s 100,000 accommodations in the Greater China region while Ctrip has access to Priceline’s global portfolio of over 500,000 accommodations. [2] Additionally, Ctrip has agreed to promote Priceline Group’s other services, like rentalcars.com and OpenTable, to its customer base. Apart from online travel, Ctrip’s foray in China extends to call centers, logistics and distribution. This unique sales model will offer a comparative advantage to Priceline’s products within China. [3]
Earlier in 2014, speculations were rife about the merger of Baidu’s Qunar travel website with Ctrip. Baidu owns China’s most popular search engine. The combined entity was expected to be valued at around $10 billion. [4] However the the deal failed to materialize.
In this article we discuss how Priceline benefits from an expanding footprint in the Chinese OTA market and how it impacts other global OTAs in the market.
Our price estimate of Priceline at $1108 is at a slight discount to the market price.
See Our Complete Analysis for Priceline Here
China To Account For One-Third Of The Asia-Pacific Travel Market By 2015
According to a report by PhoCusWright, the Asia Pacific market overcame Europe to become the global leader in regional travel in 2012. The contributing factor to this growth would be increasing internet penetration, rising adoption of mobile devices and telecom infrastructure improvements in the region. China is expected to account for one third of the Asia-Pacific travel market by 2015. Online gross bookings in China is estimated to more than double from $14 billion in 2012 to $30.3 billion by 2015. [5]
The Chinese online travel market remains largely untapped at present. WSJ claims that only 15% of Chinese travelers book online currently, which provides a large opportunity for future growth. According to the research firm iReasearch, the Chinese online travel market transaction amounted to $36 billion In 2013, displaying a 29% year-on-year growth. The total revenue for the Chinese online travel companies amounted to $1.9 billion. [6] The research firm forecasts China’s online travel gross merchandise value to total $46 billion in 2014, $55 billion in 2015, $65 billion in 2016 and $75 billion in 2017. [7]
In 2013, Chinese outbound trips amounted to 97.3 million with a total expenditure of $129 billion. According to research by Timetric and Skift, the number is expected to reach $160 million by 2018. Chinese tourists are currently considered to be the world’s biggest spenders in terms of total spending. [8]
With a 55.9% share in revenues, Ctrip is the market leader in the Chinese online travel market, followed by Elong and TongCheng with a revenue share of 9.7% and 6.3% respectively. The market is concentrated with the top three players accounting for 72% of revenues. [9].
The Priceline Ctrip Partnership Is Expected To Aggravate Competitors’ Worries
The enhanced partnership poses major threat to Priceline’s biggest competitor, Expedia (NASDAQ: EXPE). In Q3 2014, Expedia’s deceleration in international room night booking was mostly due to the poor performance of eLong, Expedia’s partner in China. eLong’s performance was adversely impacted by the stiff competition in the Chinese OTA market. Priceline’s enhanced partnership with Ctrip might aggravate the slowdown of Expedia’s Chinese operations.
Priceline had taken the aid of acquisitions to surpass Expedia in the past. In 2010, Priceline’s expanded global footprints helped it in overtaking Expedia’s position as the top OTA by sales. Currently Priceline is proving to be a formidable competitor for Expedia on the domestic front, with its offline advertising campaign (Booking.yeah) for Booking.com , its partnership with NYC and Co. to aid bookings on New York City’s official tourism website, and its 2013 acquisition of Kayak, a leading US meta-search engine (50% share of the US meta search market). In H1 2014 Priceline generated $25.8 billion (an increase of 34%) and Expedia stood at $25.7 billion (an increase of 29%) in terms of gross bookings. In Q3 2014, gross travel bookings for Priceline were $13.8 billion, while Expedia’s were $13.5 billion.
However, Expedia is ramping up its focus on the Asian markets by building a presence in India, Japan, Singapore, Thailand, Malaysia, Hong Kong and Korea, with a strong emphasis on the Chinese market. Expedia plans to gear up investments in China in the domains of technology, supply front, and marketing, as it sees great potential in the Chinese market. [10]
Priceline’s large footprint in Europe through booking.com should complement Ctrip’s offerings in the Chinese region and provide outbound tourists from China with a greater array of choices on the global map. According to Darren Huston, President and CEO of The Priceline Group, with Ctrip being the online travel leader in China and China being a rapidly expanding tourism market, this partnership will bring more bookings from Chinese travelers venturing abroad and also expand Priceline’s geographic reach within China. He describes the situation to be similar to putting more products on the “shelf”, which translates into greater value add for the “store”.
Other than Expedia, even TripAdvisor‘s (NASDAQ: TRIP) position in China might be under pressure due to the Priceline-Ctrip partnership expansion. Ctrip is the leader in hotel reviews in China and with the enhanced partnership, the international Priceline hotels will definitely gain more exposure among the reviewers visiting Ctrip. TripAdvisor’s Chinese site DaoDao might receive a setback due to this. [3]
However, the Priceline-Ctrip marriage is not devoid of roadblocks. One such example is Alibaba‘s (NASDAQ: BABA) Alitrip. Alitrip’s 10,000 strong vendor base (offering plane tickets, vacation packages, and services for hotel booking, visa applications, and tour guides), coupled with Alibaba’s recent $25 billion IPO, equips it with ample resources to provide stiff competition. [11]
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- Priceline Expands China Option With Ctrip Investment, Bloomberg, August 7, 2014 [↩]
- The Priceline Group and Ctrip Expand Partnership, Ctrip Investor Relations, August 2014 [↩]
- Expedia (and others) will be affected big-time by Priceline-Ctrip marriage, tnooz.com, August, 2014 [↩] [↩]
- China’s Ctrip and Qunar In Talks About a Possible $10 Billion Mega Merger, Skift, April 2014 [↩]
- Deep dive into Asia Pacific online travel market, tnooz, Dec 2013 [↩]
- China Online Travel Market Outlook 2014, iResearch, Feb 2014 [↩]
- Enter the dragon: China online travel soars, $75 billion market by 2017, tnooz, Mar 2014 [↩]
- The State of Chinese Outbound Travel, Skift, September 2014 [↩]
- China Online Travel GMV Grows to 70 Bn Yuan, iReasearch Views, November 2014 [↩]
- Expedia’s Q3 2014 Earnings Call Transcript, Seeking Alpha, Nov 2014 [↩]
- Alibaba Launching New Alitrip Travel Brand, Going Head To Head With Ctrip, Skift, October 2014 [↩]