Qunar eclipses Ctrip as revenue growth surges

For investors in Chinese travel websites, growth in sales is trumping profits.

Analysts surveyed by Bloomberg project that sales at Qunar Cayman Islands Ltd, which they expect to lose money until 2017, will rise 71 percent this year. That is more than twice the forecast growth for Ctrip.com International Ltd, China's biggest travel site that has been profitable since at least 2003.

Investors are taking note of their differing strategies to tap China's growing leisure industry, according to Eric Chen at CIMB Securities Ltd. Ctrip's traditional travel-agency approach, where it makes commissions on bookings, is putting it behind Qunar, which allows people to view deals offered by a wide range of providers and gets paid for steering customers to them.

OppenheimerFunds Inc sold its Ctrip stock in the fourth quarter while boosting holdings in Qunar to become the Beijing-based company's largest external shareholder as of the end of December, data compiled by Bloomberg show. Qunar is valued at 14 times sales, compared with a ratio of 5.7 for Ctrip.

"For tech stocks, growth matters more than the bottom line," Chen, a Hong Kong-based analyst at CIMB Securities, said by email on Feb 11. Qunar differentiates itself with a "perfect combination" of a technology-driven culture and an extensive offline sales team, while its management "has clear growth strategies that are executed very well", Chen said.

Sales growth

Qunar's American depositary receipts have climbed 1.4 percent this year to $28.82 last Friday, after rising 7.2 percent in 2014.

The company has increased spending on sales and marketing to add more smaller brick-and-mortar travel agencies to its search platform amid efforts to attract bargain-hunting travelers. Last year it maintained a more than 100 percent sales-growth rate over consecutive quarters, Chief Strategy Officer Yilu Zhao said last Thursday.

The expansion is driven by "rapid market share gains across all categories of our business, including flight, hotel and tour package", she wrote.

Qunar expanded its direct sales network to cover 223,000 hotels by the end of the third quarter, executives said in a December conference call, tripling the size from a year earlier. The company increased headcount "on a very large scale" to focus on hotel reservations, Zhao said at the time. Hotel booking volume for the period rose about 85 percent. That compared with Ctrip's 69 percent increase in the segment, according to a November statement by Shanghai-based Ctrip.

Increasing competition

OppenheimerFunds, which runs a developing-markets fund, held a passive 14.2 percent in Qunar's listed shares, according to its filing on Feb 9. The New York-based money manager sold its holdings in Ctrip, its Feb 4 filing showed. It owned as many as 16.9 million of Ctrip's ADRs in 2012 and has been reducing the holdings over the past two years.

Ctrip, which has faced increasing price competition with smaller peers that take a similar approach to the online travel business, had its net income margin narrow to 10 percent in the third quarter, from 24 percent a year earlier. Its ADRs have gained 3.2 percent in 2015 after dropping 8.3 percent last year.

'Clear roadmap'

While Qunar's efforts to offer a wider selection of travel service providers will help it lure customers seeking bargains, its growth will eventually be hurt by the growing competition in the industry, according to Ella Ji, an analyst at Oppenheimer & Co.

"If not an immediate risk, the pricing war may eventually force out some small shops as the market consolidates," Ji said last Friday. "If the number of small travel agencies declines as a result of the competition, it will have a negative impact on Qunar's revenue. Investors are overly optimistic about Qunar's outlook."

Qunar, which means "where to go" in Chinese, is majority-owned by Baidu Inc, China's largest online search engine. US-based Priceline Group Inc has a stake of less than 10 percent in Ctrip. Expedia Inc is the largest shareholder of Elong Inc, the smallest among the three Chinese travel websites.