Destinations Asia

Profit at Chinese Online Travel Agencies Shrinks as Competition Increases

Jan 12, 2014 5:00 pm

Skift Take

Hopefully Ctrip’s been saving up for their “zero margin” strategy. But will Amazon-like thinking work in online travel?

— Jason Clampet

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Ctrip is China's largest online travel agency. PlaceIt by Breezi


Ctrip.com International Ltd., Qunar Cayman Islands Ltd. and eLong Inc. tumbled, sending Chinese stocks in the U.S. lower for a second week, on concern growing competition will cut profits at online travel companies.

Ctrip, China’s biggest online travel agency, and Beijing- based eLong lost at least 11 percent last week while Qunar, a travel-booking website controlled by Baidu Inc., fell the most since its November U.S. debut. Perfect World Ltd., an online game developer, surged to the highest since September after China lifted a 13-year ban on gaming consoles. The Bloomberg China-US Equity Index of the most-traded Chinese stocks in New York was little changed at 103.03 last week.

Ctrip Chief Executive Officer James Liang aims to expand the company’s market share through a “zero margin” strategy, Beijing-based 86Research Ltd. said in a note on Jan. 10, citing an internal letter to employees. Competition in China’s online travel business is increasing as companies offer discounts ahead of the Lunar New Year. Ctrip’s profit margin in 2013 will be 24 percent, according to the average of 15 analyst estimates compiled by Bloomberg, compared with 37 percent in 2010.

“The recent Ctrip share weakness is mainly due to concern of margin pressure, due to competition and investment to emerging growth opportunities,” Henry Guo, a senior analyst at ABR Investment Strategy LLC, said Jan. 10 in an e-mailed response. While the pricing war and investments “make strategic sense” in the longer term for Ctrip, “the margin pressure is likely to last for a couple quarters,” he said.

Market Value

American depositary receipts of Ctrip dropped 14 percent last week to $38.95, the lowest since July. The shares have lost about a third of their market value since November, when the company forecast sales growth of 20 percent to 25 percent for the fourth quarter, falling short of a 26 percent mean analyst estimate.

Ctrip’s investor relations department didn’t respond to an e-mail sent by Bloomberg News seeking comment after business hours in China on Jan. 10.

ELong declined 12 percent, the biggest weekly slump since June 2012, to $18.10. Qunar fell 4.4 percent to $28.59.

Ctrip’s Liang told employees that the company will seek to increase market share at all costs this year, analysts at 86Research wrote in the report.

“Ctrip’s strategy works for a five-year goal to deliver long-term sustainable growth, but shares in the short to medium term will continue to have an overhang, due to volatile margin pictures,” analysts at 86Research wrote in the report.

A similar price war over air tickets in the first quarter of 2013 prompted Ctrip’s profit margin to dip to 11 percent, before rising to 23 percent in the third quarter.

Console Ban

ABR’s Guo said he’s still “very positive” about China’s online travel industry. Ctrip and Qunar are best positioned to benefit from the growing market, he said.

Noah Holdings Ltd., a Shanghai-based wealth management company, tumbled 15 percent last week to $15.07, a four-month low. China’s securities regulator told publicly traded banks on Jan. 10 to publish more information about savings vehicles, known as wealth management products, as the government tightens supervision of lending outside the banking system.

Perfect World, based in Beijing, jumped 20 percent to $20.87, the highest since September. NetEase Inc., China’s second-largest web games operator, rose 4.6 percent to $81.77.

China suspended a ban on gaming consoles on Jan. 6 while it drafts new rules. Consoles such as Microsoft’s Xbox 360, Nintendo Co.’s Wii U and Sony’s PS were banned under a 2000 rule to protect young people from the perceived corrupting influence of video games.

Baidu Raised

Baidu, China’s largest search engine company, advanced 2.5 percent on the week to $179.66. Maxim Group LLC raised it to buy from hold on Jan. 10, citing the company’s dominance in the mobile search market and its efforts to develop new products.

Aluminum Corporation of China Ltd. climbed 2.5 percent last week, the most since Nov. 15, to $8.65. The ADRs traded 3.6 percent above equivalent shares in Hong Kong, the highest premium since September.

The iShares China Large-Cap ETF, the largest Chinese exchange-traded fund in the U.S., fell 0.6 percent last week to $36.43 in New York. The Standard & Poor’s 500 Index added 0.6 percent as investors scrutinized data showing a slowdown in jobs growth for clues on the pace of Federal Reserve stimulus cuts.

In China, the Shanghai Composite Index fell 3.4 percent to a five-month low of 2,013.3, amid concern new share offerings will divert funds from existing equities. The Hang Seng China Enterprises Index in Hong Kong dropped 2.6 percent to 10,164.68.

With assistance from Belinda Cao in New York. Editors: Marie- France Han, Rita Nazareth. To contact the reporter on this story: Ye Xie in New York at yxie6@bloomberg.net. To contact the editor responsible for this story: Tal Barak Harif at tbarak@bloomberg.net. 

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