Ctrip: An Acquisition Target? (CTRP)

While they enjoy a tiny fraction of China's travel services industry both Ctrip (ticker: CTRP) and eLong (ticker: LONG) are considered major players in a fragmented but fast growing market. Ctrip and eLong operate as online and offline consolidators of hotel accommodations and airline tickets. Both consistently generate robust revenue growth and both expect to capitalize on increasing Chinese disposable income, consumer travel, Internet use, online transactions and availability of credit cards. But there is a stark difference between the two: Ctrip is profitable, effectively controls its operating expenses, and consistently beats consensus Wall Street estimates; eLong, on the other hand, continues to pour capital into its business without profitability anywhere in sight. [Of course, eLong management is not likely concerned as it is already majority-owned by Expedia (ticker: EXPE).]

What does the future hold for Ctrip and eLong? With international players scrambling to get a piece of China's growing travel services market I would like to suggest a number of possible scenarios:

• Expedia (ticker: EXPE) and Chairman Barry Diller Acquire Ctrip. Why would Diller do that when he already owns a majority stake in eLong? He might now realize that he made a mistake buying eLong and that Ctrip runs a far superior operation. This would be a quick way to become THE dominant player in the Chinese travel services market without having to continue to pour money into the consistently unprofitable eLong.
• Cendant (ticker: CD) and CEO Henry Silverman Acquire Ctrip. Like Diller, Cendant's Henry Silverman is no stranger to acquisitions. While he already has a joint venture agreement with China Youth Travel Service and has begun opening Super 8 motels in China (WSJ sub req) he is likely looking for more. And now that Cendant has announced plans to divide itself into four separate publicly-traded companies (WSJ sub req) including one pure-play travel services company (expected in mid-2006) Silverman will soon have the platform, currency and quite possibly institutional support to make new acquisitions.
• Ctrip and eLong Merge. A third scenario would be a combination of Ctrip and eLong. I have been told that this was recently proposed by a major institutional investor.

Comment: Keep in mind that CTRP has appreciated almost 26% year-to-date and sports a higher P/E relative to other China Internet players. Remember also that the company expressed concerns about Avian flu during its latest conference call (see CTRP's Q3 conference call transcript here).

Final Comment: There is no doubt that CTRP's business model is scaleable, its online business (which represents less than 30% of its total revenue) has room to grow, it operates in an industry that does not appear to face the wrath of the Chinese government, and it is an attractive platform for anyone looking to enter China. Whether an acquisition materializes only time will tell.

As always, I welcome your comments.

Related:

• All China Stock Blog articles on Ctrip.
• All China Stock Blog articles on eLong.
• Ctrip's Q3 earnings results.
• eLong's Q3 earnings results.
• Full transcript of Ctrip's Q3 earnings conference call.
• Full transcript of eLong's Q3 earnings conference call.
• Full transcript of Expedia's Q3 earnings conference call.
• Full transcript of Cendant's Q3 earnings conference call.

Comments

[wild]

I would say it shows how ignorant the writer of this article is considering the deal between IAC and elong is well presented in the sec filings. If someone closely follow it, he or she should know the 1st and 3rd options suggested here are almost impossible. Just bury your head into the filings then you will find the two options are almost nonsense. The 2nd option may have a chance to survive if CD is willing to throw in a pool of cash.

[Michael]

Wild -
Can you put a link to the filings?

[Ezra Marbach]

I received the following comment:

Pretty remarkable article, considering IACI looked at CTRP first, decided at $36/shr it was too pricey, and went to LONG and Tang instead....and we're talking over USD $1B now for CTRP....

I think the possibility of CTRP being bought out is one that needs to be considered, but I can't see EXPE being the buyer, given the fact they looked and passed before.

CTRP and LONG won't/can't merge without EXPE absorbing CTRP (or EXPE shedding LONG to another buyer and getting out of China completely).

Just went back to the prospectus, as I kinda sorta recalled some non-competition language about IACI (and sucessors) travel businesses.

As it stands, EXPE would need to sell LONG (which they can't do until next November) to buy CTRP (or for that matter, to support a CTRP/LONG merger).

Looking at EXPE's B/S, I just can't see that happening. Barry took the cash to IACI...

Prohibited from owning any other travel interests so long as they have a 15% economic interest in LONG.