eLong has described in more detail the “hyper-competitive Chinese market” while outlining some risks relating to Expedia’s controlling interest.
It has filed its annual report six weeks after it revealed the biggest deficit in its history – net losses for 2014 came in at RMB268.9 million ($43.3 million). In 2013 its net loss was RMB167.7 million ($27.7 million).
Explaining this to analysts at the time, chief executive Guangfu Cui described the Chinese market as “hyper-competitive“.
The 186-page annual report filed today talks about a “highly dynamic and fiercely competitive market” and admits that “some of our current and future competitors have competitive advantages over us.”
These advantages are:
more well-known brands
lower cost sources of internet traffic
larger mobile download application install bases
larger customer bases
greater financial, marketing, technology and other expertise and resources.
Specific competitors mentioned include the usual suspects of Qunar and Ctrip, with Alibaba‘s Alitrip also mentioned. Qunar’s relationship with Baidu and Ctrip’s wide and varied range of investments and partnerships are noted (but not Priceline).
But it also talks about Meituan, a group-buying business for local services which picked up $700 million in funding earlier this year and has a strong hotel coupon business.
Alibaba has an equity interest in this business as well.
Another “risk” identified is its ownership structure, with Expedia Inc effectively controlling the business with 82% of the voting rights. Expedia is “generally able to exercise control over all matters requiring approval by our board of directors or our shareholders.”
This level of control means Expedia “could initiate a sale of our company, or of all or a portion of its controlling ownership interest in our company, in order to raise capital or to acquire other assets, or could prevent a sale of our company or cause the removal or replacement of any or all of our board of directors or senior executive officers.”
This risk is compounded by the fact that TenCent - the other Chinese internet services giant competing with Baidu and Alibaba – has 15% of eLong’s voting rights, and could also sell its stake “in a manner which would not be beneficial to our other shareholders”.
And of course, eLong itself “may be adversely affected by any conflicts of interest between Expedia, Tencent and us.”
All listed business in the US are required to outline risk in their annual reports, so it worth remembering that only a week or so ago, Expedia’s CFO Mark Okerstrom was asked about China when talking at a Piper Jaffray conference.
“China has a lot of e-commerce giants with a lot of deep pockets engaged in a deep battle with their pawns. We did say on our recent earnings call that eLong lost $27 million in the fourth quarter and we expect quarterly losses to continue. But, strategically, we have a business that’s in a nice position in China, which is a huge $100 billion travel market that is growing quickly.
“In our eLong investment, we have great partner with Tencent…and we have good relationship with them.
“For our shareholders, we aim to create shareholder value. We’ll see what form that takes regarding China in the next year or two.”
After Expedia’s recent acquisition spree – Travelocity, Orbitz, Wotif and Decolar – it’s position in China has escaped the spotlight. eLong is not the only travel business in China to have warned investors that losses will continue to be racked up, but those other businesses appear better positioned in terms of scale.
The Chinese Tourism Academy ranked the top 21 tourism business in China according to 2013 revenues and placed Ctrip second and Qunar seventh. eLong didn’t make the top 20.
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