On October 26th, Ctrip (NASDAQ:CTRP), the leading Chinese OTA, announced a partnership with its chief rival, Qunar, and its backer, Baidu, through an exchange of shares. We think Ctrip’s worries about Qunar’s strengthened capabilities – due to Baidu’s backing and an added funding of $500 million – is mitigated to some extent. As a result of this alliance, Ctrip’s leadership position in China might remain intact for now. Also, both Ctrip and Qunar might experience better profitability due to reduced price wars. Currently, the alliance between close rivals is a common feature in China’s technology space.
According to Reuters, the deal’s value is around $3.4 billion.  As a result of the alliance, Ctrip will own around a 45% of Qunar stake, and Baidu will have a 25% share in Ctrip. Currently, Ctrip and Qunar are valued at around $11 billion and $5 billion, respectively. Qunar’s board of directors will be joined by four Ctrip representatives, including its CEO, James Liang and Chief Operating Officer, Jane Sun. Ctrip’s board will be joined by Baidu’s Chief Executive Robin Li and its head of investments, Tony Yip. (Read Press Release.)
Ctrip’s shares that are listed in the NASDAQ experienced a 28% intraday rise to reach a record $94.66 on October 26th, as a result of this news. Qunar’s share price, too, soared by 20% to reach a five-month high of around $50. 
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Our price estimate of $80 for Ctrip is at around a 10% discount to the current market price.
China’s Online Travel Is As Dynamic As Ever!
As we had mentioned in an earlier report, Chinese tourism and the online travel sector had remained unscathed by the recent slowdown of the Chinese economy. China’s growth rate in 2015 has been around 7% – its worst in the last 25 years. However, the Chinese tourism industry seems to be far removed from the grim economic scenario. China’s online travel market transactions reached ~95 billion Yuan ($15.28 billion) in the first quarter of 2015 reflecting an over 50% year-on-year growth.  The online travel market in China is expected to cross $75 billion by 2015. 
One of the main purposes of the agreement between Ctrip and Qunar was to tap into the rising Chinese outbound travelers. According to a report by China Luxury Advisors, the overseas spending by Chinese outbound tourists is expected to reach $229 billion by the end of 2015, reflecting a 23% year-on-year growth. By 2020, the spending is expected to almost double to reach $422 billion. Also, it is forecast that by 2020, close to 250 million Chinese are expected to travel globally. 
Ctrip Finally Wins Qunar’s Support
Earlier in June, Ctrip had made an attempt to acquire Qunar but was turned down by the latter. Instead, Qunar opted for a $500 million investment from Silver Lake Partners and another undisclosed investor. Following that, in September, Baidu–which bought a majority stake in Qunar four years ago – gained a larger presence on Qunar’s board. As a result of the strengthened alliance, Qunar now enjoys access to Baidu’s O2O (online to offline) platform which ensures an expansion of services to both the company’s respective user bases. China’s three internet titans are Baidu, Alibaba, and Tencent and the increased support from one of the tech giants had significantly strengthened Qunar’s capabilities in the OTA space, thus making it a tough competitor for Ctrip.
Hence, the current partnership might abate Ctrip’s fear of a price war in the form of discounts and commissions and consequently prevent further erosion of Ctrip’s bottom line growth. Chinese online travel space growth had been heavily dampened by the pricing related competition. Ctrip’s management had admitted in its Q1 2015 earnings call, that the company always strives to match the coupon rates or discounts offered by its competitors. . In 2014, Ctrip’s adjusted operating margin declined to 4.8% from 23.6% in 2013. Qunar’s margins declined from negative 10% in 2013 to negative 46% in 2014.  Ctrip had projected that its coupon expenses will account for 20% of its hotel commissions in 2015. 
The new trend of mergers among companies in China’s technology sector is a way to mitigate stiff competition by the participants. In early October, Meituan.com and Dianping Holdings – companies offering online reviews and deals for restaurants, retail, and leisure businesses – merged after being aggressive competitors for a long time. Also, earlier in 2015, Didi Dache and Kuaidi Dache, two leading taxi-hailing firms, entered into an alliance with a $6 billion worth share swap. 
View Interactive Institutional Research (Powered by Trefis):Notes:
- China online travel firm Ctrip in tie-up with rival Qunar, Reuters, October 26, 2015 [↩] [↩] [↩] [↩]
- China Online Travel Market Exceeded US $15 billion in Q1 2015, China Internet Watch, May 21, 2015 [↩]
- Chinese Travel Platform Qunar Raises $500M, Turns Down Ctrip Acquisition Offer, Tech Crunch, June 1, 2015 [↩]
- New CLA Report: Chinese Tourist Spending to Double by 2020, China Luxury Advisors, September 28, 2015 [↩]
- Ctrip Leaders Say Discounts Are Killing the Chinese Travel Industry, Skift, March 24, 2015 [↩]