Ctrip, Qunar Surge as Deal Lessens China Travel Competition

  • Companies will have 70-80% market share, Summit Research says
  • China has become largest source of tourists in the world

Ctrip.com International Ltd. and Qunar Cayman Islands Ltd. jumped in U.S. trading after the companies agreed to a merger, creating the dominant online travel service in China in a deal that may ease price competition that has crimped profits.

Ctrip rallied 22 percent to a record close of $90.78 in New York on Monday. Qunar advanced 7.9 percent to $42.65, the highest since Aug. 10 on trading volume that was nearly 17 times the three-month average. Goldman Sachs Group Inc. upgraded both companies to buy. A Bloomberg gauge of U.S.-traded Chinese stocks rallied 2.1 percent.

While Chinese trip-booking sites have benefited from a boom in overseas travel, profits have been squeezed as the industry becomes increasingly competitive. Under the terms of a share swap deal announced Monday, Ctrip and Qunar will combine products and services and control 70 percent to 80 percent of the hotel and air ticket markets, Summit Research analyst Henry Guo wrote in a research note Monday.

“After this deal, these two companies will own the majority of the market share in China,” Guo said by phone on Monday. “They can coordinate a strategy in such a way that they can continue to grow market share, but meanwhile profitability and the bottom line should remain in good shape, which meets investors’ expectations and is good for both companies.”

‘Getting Bigger’

Baidu Inc., which controls Qunar, will own 25 percent of Ctrip, and the companies will combine products and services, according to a statement released Monday. Ctrip will have a 45 percent voting interest in Qunar. The exchange ratio represents a 36 percent premium to Qunar’s closing price on Friday, valuing the company at $7 billion.

“You’re seeing the bigger players getting bigger,” Brendan Ahern, managing director at Krane Fund Advisors LLC in New York who invests in Chinese Internet companies, said by phone on Monday. “There seems to be more and more impetus for the boutique and niche players to be affiliated with one of the big companies, Baidu, Alibaba and Tencent. You would have thought maybe Alibaba would have made a play for Ctrip, since Baidu had Qunar. So maybe it was, the best defense is a good offense.”

Travel Boom

The deal comes about five months after Qunar rejected a buyout offer from Ctrip.com amid fierce competition for online bookings in China, where an expanding middle class is jetting abroad. The country is the largest source of tourists in the world as Chinese travelers made 100 million outbound trips in 2014, according to iResearch, which cited data from the National Tourism Administration.

China’s online travel market will more than triple to $200 billion by 2020, Goldman Sachs analysts led by David Jin wrote in a note Monday. While the number of Chinese who book trips online keeps growing, tougher pricing competition has hurt profit margins for the biggest online travel agencies.

Ctrip’s adjusted operating margin shrank to a record low of 4.8 percent in 2014, falling every year since 2010. Qunar’s adjusted operating margin has been negative for at least the past six quarters, data compiled by Bloomberg show.

Internet Deals

China’s three largest Internet companies are all seeking to capture more leisure travelers. Alibaba Group Holding Ltd. is expanding its Alitrip unit, and Tencent Holdings Ltd. offered to buy out the 85 percent of Elong Inc. it doesn’t already own as they compete with Baidu.

The deal “demonstrates Baidu’s continuing commitment to online travel, an industry with tremendous potential ahead,” Baidu Chairman Robin Li said in the statement.

The acquisition would add to the $62.5 billion of Internet deals involving Chinese companies during the past year, data compiled by Bloomberg show.

Qunar is the leading seller of airline tickets with 32 percent of the market last year, while Ctrip had about 39 percent of hotel bookings, according to iResearch.

“If you look at the travel market, it’s such an obvious way to drive synergy through consolidation,” said Chi Tsang, an analyst at HSBC Holdings Plc. “The key issue the two have always needed to figure out was always about valuation and management integration.”

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