Investing In The Explosively Growing Chinese Online Travel Industry
The Chinese online travel market is projected to double its size by the end of 2017, driven by rapidly rising consumer spending.
The online travel industry is extremely fragmented, with explosive growth potential. According to CNIT-Research, the Chinese online travel market's transactions topped $3.5 billion in 2013, but that only represented 10% of the overall Chinese travel market. The online travel market is projected to double in size by the end of 2017, driven by rapidly rising consumer spending. The Chinese online travel market is one of the more attractive high-growth markets in the world, with Ctrip and Qunar as the two largest companies in the market, along with several other mid-sized companies that have potential to overtake the two market leaders.
In response to the fact that there are many companies in the industry that may confuse investors, we decided to take a few paragraphs to differentiate them before coming to a conclusion. Although Ctrip and Qunar both have promising futures, we believe risk-averse investors should stay away from this volatile industry until it is further consolidated.
Ctrip (CTRP): Founded in 1999 and having gone public on the Nasdaq in 2003, Ctrip is one of the first online travel agencies (OTA) in China. The company is currently the largest and only profitable public company in the industry, with more than 50% market share. Similar to Priceline, the company created a platform to make offline hotels and air ticketing services available online. It has one of the largest networks of hotels, air ticketing services, and offers services in almost every segment in the market, including online booking services for online travel products, offline travel agents and car rental services. Ctrip has also emerged as the industry consolidator by investing in Tongcheng and Tuniu. The competition between Ctrip and Qunar is fierce, due to which they both refuse to promote each other's products on their own online platforms.
Qunar (QUNR): Founded in 2005 and having gone public on the Nasdaq last year, Qunar is similar to Kayak that provides a platform for customers to compare prices between more than 1500 online travel agencies. Baidu (BIDU) owns a 62% stake in Qunar, and has allowed Qunar's search engine to be embedded within Baidu's search engine when people search about travel on Baidu, guaranteeing online traffic to Qunar. Qunar is also the first online travel company to have stepped into mobile. Its mobile app currently has the largest market share in the Chinese market, handling more than $1.6 million flight ticketing transactions every day. The company's CEO made a promise to make the company's mobile business a priority. He projected the Chinese market will follow the Japanese market, where half of the online travel transactions are completed on mobile devices.
Tuniu (TOUR): This is an online leisure travel company founded in 2006 that offers a platform as a marketplace for packaged tours, sourced from over 3,000 travel suppliers. It went public on Nasdaq a few weeks ago. The company's competitive advantage comes from its customized service of helping customers to select the best tour packages. Tuniu does not provide the lowest-priced services, but it provides the best services, which somewhat immunes Tuniu from price wars. Ctrip made a minor investment in Tuniu this April, signaling the partnership between the two companies.
Tongcheng: This is a relatively new full-service OTA founded in 2004 that is backed by Tencent (OTCPK:TCEHY), recently emerging as a major competitor for Ctrip. Competitive advantage comes from its leading local attraction ticket service. Tongcheng is the first company in China to provide services for customers looking to buy discounted attraction tickets online. Ctrip started a price war with Tongcheng earlier this year, and the war was ended by Ctrip acquiring a 30% stake in Tongcheng this April. The company is expected to file for an IPO very soon.
Lvmama: This is an OTA founded in 2008 that focuses on the self-travel segment of the market, allowing individual travelers to gain access to tailored travel services, from travel guides to attraction tickets to hotel accommodation bookings. It formed a strategic partnership with Qunar in response to the alliance between Ctrip, Tongcheng and Tuniu.
eLong (LONG): This is a traditional leading OTA founded in 1999 that is backed by Tencent. Traditional competitive advantage comes from its hotel accommodations service. The company used to be the main competitor of Ctrip, but had to shrink its business, closing its business travel division to focus on its traditional flight tickets and hotel services due to its recent poor financial performance. eLong formed a strategic alliance with Tongcheng earlier this year, but the partnership was broken by the later tie-up between Ctrip and Tongcheng.
As shown above, the Chinese online travel market is extremely fragmented, and there are complicated capital relationships between companies in the industry. The major two forces are Ctrip and Qunar. Ctrip has investment and strategic relationships with Tongcheng and Tuniu, in which Tongcheng and Tuniu will complement Ctrip's weaker attraction ticket and packaged tour services. Qunar, backed by Baidu, is allied with Lymama. Although Ctrip is big, the company is not as dominant as Baidu in the search industry or Alibaba in the e-commerce industry. Industry consolidation is happening, and we believe it will continue in the near future. The constantly changing Chinese online travel industry makes it very difficult to forecast the financial performance of companies in the industry.
For those who think the explosive growth outweighs the risks of uncertainty, investors can invest in both Ctrip and Qunar to mitigate the risk. Ctrip is the industry leader, and it is consolidating its position through aggressive capital spending. The return of its founder last year as the company's new CEO is also a huge positive. On the other hand, Qunar's business in mobile looks promising. If the company is able to maintain its lead on mobile, it will be able to greatly expand its user base to sustain its explosive revenue growth.
However, risk-averse investors should be aware that the industry is rapidly changing. eLong was considered as the top company in the industry a few years ago, but it was not able to maintain its lead due to the intense competition. Ctrip or Qunar could be the next eLong. As a result, prudent investors should wait until the industry is further consolidated to determine which company to invest in.
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