China Bears Converge on Qunar as Bad Blood Shadows Ctrip Deal

  • More than a fifth of Qunar's outstanding shares sold short
  • Partnership to create China's biggest online travel service

Short sellers are targeting Qunar Cayman Islands Ltd. after announcing a partnership with Ctrip.com International Ltd. to create China’s dominant online travel service, bringing together two firms whose managers have a history of animosity.

More than a fifth of the company’s outstanding shares were sold short as of Monday, after peaking at a record 29 percent on Oct. 26, the day the share-swap was announced, according to data compiled by Markit and Bloomberg. Short interest has surged from about 9 percent in September. Bearish bets on Ctrip dropped to 2.2 percent from 3 percent in the same period.

Under the terms of a share-swap agreement, Ctrip gets a 45 percent voting interest in its long-time rival, while Baidu Inc., which controls Qunar, will own 25 percent of Ctrip. They plan to combine products and services and together will control as much as 80 percent of the hotel and air ticket markets, according to Summit Research Ltd.’s estimate. It also brings together two management teams with a tense history. Qunar Chief Executive Officer Chenchao Zhuang refused a buyout offer from Ctrip in June.

“Publicly, the CEO of Qunar has said many times that they’re never going to partner with or sell to Ctrip,” Jun Zhang, head of China research at Rosenblatt Securities Inc., said by phone on Oct. 30. “People feel like he personally really hates the Ctrip management team. That’s why people thought, after the two companies finally partnered together, there might be some potential conflict of interest between the two management teams.”

Qunar shares have gained 11 percent to $44 since the deal was announced, while 10-day historical volatility has risen to the highest level in two years. Ctrip has gained 31 percent to $97.20, a record high. The partnership will help build a healthy travel ecosystem in China, the companies said in a joint statement.

In August, Qunar filed a complaint with China’s Ministry of Commerce, asking antitrust regulators to investigate Ctrip’s purchase of a 36 percent stake in online travel agency Elong Inc. in May. As China’s growing middle class travels more and books online, Qunar and Ctrip have burned cash and fought fiercely to compete for market share.

With its focus on hyper-revenue growth, Qunar has posted negative operating margins in each year since 2010, a trend that is forecast to continue at least through 2016, data compiled by Bloomberg show. Qunar had a 4 percent negative impact on Baidu’s margins over the last year, Alicia Yap, a Barclays Plc analyst in Hong Kong, wrote in an Oct. 30 research note. Baidu paid $306 million for a majority of Qunar in 2011.

‘Notoriously Aggressive’

Ctrip co-president Jane Sun said last week that Qunar will remain independent and its management will be respected. Yet, with four of Qunar’s nine board positions now controlled by Ctrip and two from Baidu, Qunar stands at risk of having its independence and growth squeezed, a position analysts say may be uncomfortable for its management team.

While the combined company will be poised to dominant China’s booming online travel market, some analysts see Ctrip benefiting more from the partnership. George Askew, an analyst at Stifel Nicolaus & Co, cut Qunar to hold from buy on Oct. 30, saying that its “management, notoriously aggressive and impressive and independent, may aggressively fight these changes.” 

Soaring short interest on Qunar and low short interest on Ctrip with climbing share prices on both stocks could be an indication investors see Ctrip as still undervalued, Simon Colvin, research analyst at Markit in London, said by phone on Oct. 30.

Buy Ratings

On a scale from 1 to 5, Qunar has a consensus analyst rating of four, according to data compiled by Bloomberg. The shares have a total of seven buy ratings, four holds and one sell.

“Qunar will continue to operate as an independent brand and its management will remain intact,” Kaiser Kuo, a Baidu spokesman, said by e-mail Tuesday. “While they will continue to compete in some areas, they will be better able to deploy their resources and deliver a better user experience and continue to grow.”

Investor relations representatives from Qunar and Ctrip did not respond to requests for comment.

“Investors doubt the loyalty of Qunar management after the merger, and that definitely will have an impact on the company’s growth,” said Henry Guo, who covers Chinese Internet companies at Summit Research in San Francisco.

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