In The Wake Of The Expedia-Ctrip Alliance, Priceline Further Increases Investments In Ctrip

May 27th, 2015 by Trefis Team
PCLN: Priceline Group logo
PCLN
Priceline Group

Shortly after Expedia’s eLong divestiture and forging of a strategic alliance with Ctrip (NASDAQ:CTRP), Priceline (NASDAQ:PCLN) increased its investment on the Chinese online travel leader. On May 26th, Priceline announced that it will invest an additional $250 million on Ctrip via a convertible bond. Post the deal, Priceline could gain up to 15% of stake in Ctrip. [1] Currently, Priceline owns around 5% of Ctrip’s shares.

Our price estimate of $1040 for Priceline’s stock is slightly below the current market price.

See Our Complete Analysis for Priceline Here

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The Successful 2014 Partnership Expansion With Ctrip, Triggered Further Investments By Priceline

Earlier in August 2014, Priceline strengthened its commercial partnership (initiated in 2012) with Ctrip, by investing $500 million in the company. 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 agreed to promote Priceline Group’s other services, like rentalcars.com and OpenTable, to its customer base. The expanded partnership with Ctrip  reaped substantial benefits for Priceline  in 2014. Priceline’s outbound business witnessed significant growth after Agoda and booking.com were featured on Ctrip. The main reason for that was the growing Chinese outbound market, (which is  the largest in the world). Ctrip’s properties on Priceline’s platform are also gaining traction. In its Q4 2014 earnings call, Priceline’s management talked about plans to accelerate the rollout of its properties in China in the coming months. [3]

The Priceline Expedia Rivalry Heats Up

Both Priceline and Expedia had a strategically significant year in 2014. In 2014 Priceline generated $50.3 billion (an year-on-year increase of 28%) and Expedia stood at $50.4 billion (an year-on-year increase of 30%), in terms of gross bookings.

In January 2015, Expedia (NASDAQ:EXPE) acquired its marketing partner, Travelocity. In February 2015, Expedia announced its intention to acquire Orbitz Worldwide, the Chicago-based online travel agency (OTA) responsible for brands like Orbitz.com and Cheaptickets.com. Expedia expects the deal to close by the second half of 2015, once regulatory approvals are achieved. [4] Expedia might own up to 75% of the U.S. online travel market post the Orbitz acquisition, according to the 2013 market shares provided by PhoCusWright. [5]

While, Expedia tries consolidating on the domestic front in the U.S., Priceline is on the lookout  for expanding its presence in the international markets (that accounts for over 80% of its revenues). 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”.

Why Is The China Market So Crucial To The Leading Online Travel Agencies?

Chinese outbound travel traffic crossed 100 million in the first 11 months of 2014. [6]. This translates to an over 100% growth from 2009 (47.7 million). The number is predicted to surpass 160 million by 2018. China’s total outbound expenditure for 2013 was $129 billion and Chinese travelers are presently considered to be the top contributors to global tourism spending. China’s economic growth, despite slowing more recently, is expected to recover and display a healthy trend in the next half decade. This recovery, along with increased urbanization, point towards a greater propensity for the Chinese to travel in the coming years. [7]

Why Are The Online Travel Leaders Vying For Ctrip’s Alliance?

China is currently the second largest travel market in the world. Currently, Ctrip is the only Chinese OTA maintaining solid top line growth figures. Additionally, Ctrip’s scalability and aggressive investments in technology would lead to operational efficiencies, in turn resulting in solid margin growth in the long run.

Ctrip’s domestic hotel coverage increased to 270,000 in Q1 2015, triple the amount from Q1 2014. China’s hotel market is fragmented and Ctrip is trying to consolidate the hotels on its platforms with an aggressive increase in coverage. Ctrip’s air ticketing volume growth was more than 60%, exceeding management guidance of 50%. Ctrip is planning  for strong bottom line growth by the year 2020, with 20%-30% operating margins. [8]

As of Q3 2014, 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] Now, with a 40% stake in eLong, Ctrip will have a greater clout over the China online travel market.

Also, post the alliance between two largest online travel agencies in China, the aggressive discount and coupon offers, prevalent in the country, might slow down. 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. [10] The slowing down of discounts and coupons trends can help Ctrip recover its margins to a large extent.

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Notes:
  1. The Priceline Group Announces Additional Investment in Ctrip, Priceline Press Release, May 26, 2015 [↩]
  2. The Priceline Group and Ctrip Expand Partnership, Ctrip Investor Relations, August 6, 2014 [↩]
  3. Priceline Group Inc. (PCLN) CEO Darren Huston on Q4 2014 Results – Earnings Call Transcript, Seeking Alpha, February 20, 2015 [↩]
  4. Expedia to buy Orbitz in cash deal worth $1.6 billion, tnooz, February 12, 2015 [↩]
  5. Expedia Will Pay Orbitz $115 Million if Antitrust Complications Scuttle Acquisition, Skift, February 13, 2015 [↩]
  6. The Top Chinese Travel Trends to Watch for in 2015, Skift, December 2014 [↩]
  7. The State of Chinese Outbound Travel in 2014, Skift, September 2014 [↩]
  8. Ctrip.com International (CTRP) Q4 2014 Results – Earnings Call Webcast, Seeking Alpha, March 19, 2015 [↩]
  9. China Online Travel GMV Grows to 70 Bn Yuan, iReasearch Views, November 2014 [↩]
  10. Ctrip Leaders Say Discounts Are Killing the Chinese Travel Industry, Skift, March 24, 2015 [↩]