Qunar: Taking Market Share In The Chinese Travel Market

Sep. 5.14 | About: Qunar Cayman (QUNR)

Summary

Chinese online travel reservation market is relatively untapped.

Qunar is producing industry leading growth at a cost.

Stock is a compelling buy for high-risk investors.

The Chinese travel market promises a lot of potential for the player that eventually dominates the market now growing 20% annually and only 10% online. Qunar (NASDAQ:QUNR) is making a huge push to take over the market with the shift from travel agencies to online and now mobile. The emergence of high speed mobile networks and phablets increasingly provides the middle class in China with online access that didn't exist in previous years.

Qunar calls itself the leading search-based commerce platform for the travel industry in China. It is in heavy competition with Ctrip (NASDAQ:CTRP) amongst others in the fast growing switch by Chinese consumers to make travel reservations online and more importantly via the latest mobile gadgets. With the recent $500 million investment by Priceline Group (NASDAQ:PCLN) in Ctrip, Qunar faces stiff competition despite its strong bloodlines via the largest shareholder of Baidu (NASDAQ:BIDU). The company is quickly taking market share via heavy spending on marketing and development expenses to build out the platform. With the stock trading flat for the first year of its public life, now might be the time for investors to start learning more about the company and the large investment opportunity.

Mind Blowing Growth

For Q214, Qunar produced growth that would be mind-boggling to most companies if it wasn't from China. The online travel firm provided the following highlights:

  • Total revenues grew 127.3% YoY to reach $64.5 million.
  • Mobile revenue grew 511.8% YoY to reach $22.9 million for 35.5% of total revenues.
  • Pay-for-performance (P4P) revenues were $61.0 million, up 137.4% YoY.
  • P4P flight revenues grew 143.3% YoY to reach $45.0 million due to a 66.1% increase in ticket volume and a 46.4% increase in revenue per ticket.
  • Gross margin for Q214 declined to 73.6%, compared to 78.2% for the corresponding period in 2013.

The good news was the substantial revenue growth as measured by just about all metrics. The bad news is that most expenses grew by similar levels and sometimes faster. Product development expenses grew by 181.6% YoY, while sales and marketing surged 212.4% YoY. With other expenses growing substantially as well, the operating margin for Q214 was a negative 50.9%.

Qunar forecast revenue to surge 90% to 95% YoY during Q314. Similar to Baidu that continues to forecast investing in the growth of the business, the rapid spending will continue into the future to capture the large market opportunity.

China Outbound Travel Market

The reason Qunar is spending so aggressively in the Chinese online reservation market was quickly highlighted in the article from the Wall Street Journal while discussing the Priceline investment in Ctrip.

  • Boston Consulting Group estimates that 49% of all passenger traffic globally will be within Asia or between Asia and the rest of the world by 2030.
  • China is poised to surpass the U.S. as the world's top business-travel market this year.
  • Managing Director of Asia at Booking.com lists the biggest competitors as the offline travel agencies.
  • Ctrip's COO forecast revenue to increase tenfold by 2020, based on 45% annual growth.

Remember, Ctrip is a larger company with annual revenue expected to reach $1.2 billion this year and a market cap of roughly $9 billion. This compares to revenue of roughly $275 million for Qunar and a market cap of $3.6 billion. Analysts forecast Ctrip growing 33% annually providing plenty of incentive for Qunar outside the market growth listed above. Interestingly, the article suggests that Ctrip would surpass Priceline in value at 2020 despite the latter sitting at a $65 billion valuation now.

Compelling Valuation

The valuation for Qunar is relatively compelling considering it trades at roughly 8x forward revenue estimates. With the company growing faster than both Ctrip and Priceline, the only real question is the ability to leverage the higher revenue into profits.

QUNR PS Ratio (Forward 1y) Chart

QUNR PS Ratio (Forward 1y) data by YCharts

Conclusion

Qunar isn't a stock for all investors, but those attracted to fast growth shouldn't look much further. The compelling valuation to the larger Ctrip and the substantial growth potential in the Chinese travel market makes the stock very interesting. Investors should probably take some of the long-term growth projections especially from Ctrip with a high dose of skepticism, but it is undeniable that the Chinese travel market in general will surpass the U.S. The winner in the market will have a substantial valuation that might actually compare favorably to Priceline one day. The current results suggest that Qunar has the opportunity to overthrow Ctrip and be the leading travel provider in China.

Disclosure: The author is long BIDU.

The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: The information contained herein is for informational purposes only. Nothing in this article should be taken as a solicitation to purchase or sell securities. Before buying or selling any stock you should do your own research and reach your own conclusion or consult a financial advisor. Investing includes risks, including loss of principal.