Why Wouldn’t The China Online Travel Market Slow Down Anytime Soon?

Ctrip International (NASDAQ:CTRP), the Chinese online travel leader, has been busy for the last few weeks. On June 18, it announced a $1 billion convertible debt offering, primarily designated to fulfill its general corporate expenses and a concurrent repurchase of its ADRs. The general corporate purposes might also include strategic investments on options such as mergers and acquisitions, expansion plans, and investments in products and services. ^[1]

Additionally, Ctrip, along with a group of other investors, have made a $1 billion offer to buy HomeInns, China’s prominent economy hotel chain. The offer is under consideration by HomeInns now. ^[1]

Earlier in May, 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. ^[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. Priceline will remain Ctrip’s primary non-China hotel partner. ^[4] (Read details of the deal here.)

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China Travel Market Scenario

According to a report by PhoCusWright, the Asia Pacific market overcame Europe to become the global leader in regional travel in 2012. China is expected to account for one-third of the Asia-Pacific travel market by 2015. Online gross bookings in China are estimated to more than double from $14 billion in 2012 to $30.3 billion by 2015. ^[5] China’s online travel market is expected to continue its double-digit growth and reach $75 billion in 2017. ^[6]

China’s outbound travel crossed 100 million in 2014, reflecting around 20% year-on-year  growth. ^[7] According to a research done by Attract China, in 2015, Chinese outbound travel is predicted to reach 140 million with a spending of over $188 billion. The US tourism industry can expect an influx of 2.85 million Chinese visitors in 2015, with a cumulative spending of $15 billion dollars. ^[8]

(Source: China Internet Watch)

However, the aggressive competition for grabbing a greater share of the Chinese online travel market seems to be dampening bottom lines for all its key players. The bottom line erosion raises concern whether this cut-throat competition is sustainable in the long run. Ctrip and its competitors 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.

No Dearth Of Competition In China

• Qunar Is Gearing Up For Further Competition With $500 Million Capital Support

In June 2015, Qunar, one of the leading Chinese search and booking websites, made an announcement that it rejected a buyout offer from Ctrip. Instead, Silver Lake, an equity investor, along with another undisclosed investor invested $500 million in Qunar. Qunar intends to use the capital to enhance its mobile presence, expand its business, and increase its technological capabilities. ^[9]

• Joint Venture Between NetEase And HNA Group Will Give Birth To Another Powerful Competitor

There is yet another new entrant on the verge of entering China’s online travel market. It is a proposed joint venture between NetEase, a NASDAQ listed internet services business in China, and HNA Group, a conglomerate with stakes in aviation holdings, capital, tourism, and logistics. HNA aviation group’s airlines carried 72 million passengers in total, in 2014. HNA Group’s hospitality group includes 450 hotels in China and abroad, and its tourist unit, handles nearly two million passengers a year. The group includes  73 travel agencies, luxury cruise operators, and a foreign exchange business. HNA’s revenues for 2014 amounted to $27 billion and NetEase has a market cap of more than $19 billion. The merging of two such strong entities ensures the entry of yet another significant player in the China online travel agency (OTA) market. ^[10]

• Alibaba’s Alitrip Is Expected To Provide Further Challenge
  

Alibaba (NYSE: BABA), the Chinese e-commerce giant, has announced its intention to separate its online travel business, Taobao, into an independent brand called Alitrip. Alibaba’s $25 billion IPO in September 2014 provides the company with adequate resources to provide stiff competition to the Chinese OTA leaders. Alibaba invested $457 million to acquire 15% of the hotel technology firm, Beijing Shiji Information Technology Co. — one of the largest property management system and central reservation system operators in China. Alitrip includes more than 10,000 vendors providing plane tickets, vacation packages, and services for hotel booking, visa applications, and tour guides. Alitrip’s mobile applications will play a pivotal role in gaining traction with the Chinese travelers. ^[11]

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1. Ctrip turns to market to raise $1 billion, tnooz, June 18, 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. Deep Dive Into Asia Pacific Online Travel Market, tnooz, December 20, 2013 [↩]
6. Chinese Travel Platform Qunar Raises $500M, Turns Down Ctrip Acquisition Offer, Tech Crunch, June 1, 2015 [↩]
7. China Outbound Tourism in 2014, China Travel Guide [↩]
8. 2015 Trends in China’s Outbound Travel Market, January 9, 2015, Attract China [↩]
9. Chinese Booking Site Qunar Bulks Up With $500 Million Investment Led by Silver Lake, Skift, June 1, 2015 [↩]
10. Plenty of room? Heavyweight-backed, China gets a brand-new online travel agency, tnooz, May 27, 2015 [↩]
11. Alibaba Launching New Alitrip Travel Brand, Going Head To Head With Ctrip, Skift, October 2014 [↩]