The bloody battle over eLong

As outbound and domestic travel continues to boom in China, companies are fighting it out in every corner. Sally White considers the outcomes

There is a battle being fought all over the highly competitive Chinese online travel industry. Consolidation is going on with a vengeance, and the protagonists seem to be red in tooth and claw! Quite who will win in the end is hard to predict. In the meantime, however, it is keeping investors on edge.

On the one hand, soaring Chinese traveller numbers look extremely attractive. But on the other, investors are increasingly worried that this is coming with a soaring marketing spend, savaging profits. The fighting is adding to existing uncertainty, as it can only increase margin pressure.

Certainly the prospects and prizes seem alluring. The Boston Consulting Group forecasts that tourists from China will account for over 40% of outbound Asian travellers by 2030. It believes they will be taking 1.7 billion trips annually, up from 500 million trips in 2012.

The China National Tourism Administration reported that the country’s tourism revenue increased by 14% to around $480 billion in 2013 from the previous year. Outbound travel from China to other countries rose 18% to 98.2 million tourists, while domestic travel grew 10% to 3.26 billion tourists. Since then the numbers have risen.

Right now the main action is the slugging match between Ctrip, Tencent and Qunar. The latter is backed by online search leader Baidu. The fact that Qunar is deeply in the red just makes it a more aggressive fighter. Both Ctrip and Baidu can draw on their huge cash resources to try to undercut one another and fire off bids and counter bids.

Baidu, which owns China’s primary search engine, is moving its business from being an information supplier to one for services and is going deeper into e-commerce. It is cash-rich as it controls almost a third of the country’s $24.2 billion online advertising market. This is a market that is forecast to rise, according to analysts at iResearch, by 41% this year compared to 14% globally. 

Rolled over

Ctrip is seeking to take over eLong to improve its own competitive position. With its huge $3.3 billion cash pile, more than six times eLong’s value, Ctrip can roll the smaller company into its own profitable operations. A decade ago these two companies were level-pegging it as industry leaders, but their fates have turned out differently.

Ctrip’s management has steered it well. It has kept ahead of the aggressive younger companies pushing their way into the market. It has managed to maintain a leading position, as shown by its latest quarterly figures. These were for revenue of 2.53 billion yuan (US$408 million) in the second quarter, up 47% from a year ago.

Of course, tough trading has taken its toll on the bottom line. Ctrip’s costs also jumped – by 50%. So profits posted don’t look that wonderful. Ctrip’s operating profit slumped by a third to around 61 million yuan for the quarter. But shareholders were just very relieved that the fall was not even greater and on that news the shares rose 4% on the New York Stock market.

Making a cautious play

One glance at eLong’s latest quarterly figures, out at around the same time, show why it is so vulnerable. There was a fall of 25% in revenue to 234 million yuan and the bottom line was heavily into the red with a 356 million yuan net loss. Just a year ago it was making profits.

However, on the day shareholders had an eye only for the advance on eLong by Ctrip and reckoned that these figures would ease its way. So, the shares rose by 12%.

Ctrip has already made incursions into eLong’s equity. It bought 37% of eLong earlier this year for US$400 million. (This was part of a wider deal in which US travel giant Expedia.com dumped its long-held stake in the ailing company.) And a former Ctrip executive has taken the helm of eLong.

Commenting on the Ctrip’s strategy the Hong Kong Economic Journal sees it as ‘smart’. All the same it recommends that Ctrip “be cautious before making such a bid”. The reason? “Since eLong could have many hidden problems in its operations that have led it to become such an industry laggard despite the many advantages it should have enjoyed,” it says.

However, undeterred by Ctrip’s stake, Tencent has entered the fray. Tencent has around 15% of eLong, but it seems to want all the rest. It has made an offer of around 24% above the share price level. At the moment Tencent comprises a wide-range of online business, from China's WeChat mobile messaging service to electronic messaging platform QQ and a very popular videogame business. But, like many others, it has its eye on those tourist numbers!

Calling in the big guns

If this was not complicated enough, a player of a very different kind is now involved. Qunar is employing devious tactics. It has called on the big guns - the antitrust regulators. It wants them to say that Ctrip was out of order in buying shares in eLong. It has filed a complaint with the Ministry of Commerce's Anti-Monopoly Bureau.

Unsurprisingly Qunar claims dirty tactics are at play. In a story put out by Caixin Media Company, Qunar said it decided to file the complaint after Ctrip pressured hotel operators. It alleges that in several regions Ctrip urged them not to cooperate with Qunar or offer Qunar customers the kinds of discounts that Ctrip customers enjoy.

This saga is obviously going to run and run until the battle is done! The question is just what toll the fight will take on the companies slogging it out

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