INTERNET: Qunar Stalls Amid Ballooning Losses

Bottom line: Qunar’s ballooning losses reflect its aggressive spending on market share, which will turn off investors and pressure its stock until it shows signs of moving towards profitability.

Qunar losses swell past revenues

My third-quarter Chinese earnings season officially ends today with the newly issued results of online travel agent Qunar (Nasdaq: QUNR), whose losses appear to be spiraling out of control. Frankly speaking, I could never really understand why investors were so attracted to this company, whose main asset seems to be its association with leading Chinese search engine Baidu (Nasdaq: BIDU), which also happens to be Qunar’s majority stakeholder.

Qunar has just achieved the dubious distinction of posting net and operating losses that were both bigger than its total revenues in the third quarter. I don’t often write about companies in that situation, and few if any investors would find such a company attractive. The last time I wrote about this kind of firm was last month in the quarterly results of social networking (SNS) firm Renren (NYSE: RENN), whose business is rapidly dying as it gets overtaken by better-run rivals. (previous post)

One obvious difference between Qunar and Renren is that the former is still posting strong revenue growth, with revenues more than doubling in the third quarter to 501 million yuan ($82 million). (company announcement) But at the same time, Qunar’s operating loss soared 16-fold to 575 million yuan, while its net loss also ballooned more than 11-fold to 566 million yuan. A big part of the loss appears to have come from one particular marketing agreement, though it’s unclear if that agreement will continue to affect its performance in the current and future quarters.

Investors weren’t too impressed with the numbers, bidding down Qunar shares nearly 6 percent in regular trading before the news came out, and by another 4 percent in after-hours trade. The fact that the stock fell so much during the regular session indicates investors were expecting bad news, and also probably shows that short-term speculators who profited handsomely on the company over the last year might be selling their shares to lock in gains.

Qunar’s outlook didn’t look too exciting either, with the company forecasting that revenue growth would slow to 90-95 percent in the current quarter. The slight good news is that Qunar’s ballooning losses don’t seem to be affecting its limited cash pile, which grew slightly to about 1.6 billion yuan at the end of the third quarter from 1.5 billion yuan at the end of March this year.

Qunar was one of the first Chinese Internet firms to launch a successful IPO late last year, kicking off a year of frenzied fund-raising that culminated with Alibaba’s (NYSE: BABA) record $25 billion New York listing in September. Qunar’s shares had more than doubled at one point early this year from their $15 offering price. They’re still nearly 70 percent ahead of the IPO price even after the latest sell-offs, though I really do think they’ll continue to fall and could dip below the $15 level by the middle of next year.

Qunar is feeling many of the same pressures as other companies in China’s online travel space, where competition has become fierce with the recent rise of a number of new players. I wrote earlier this week about a nasty new war between recently listed Tuniu (Nasdaq: TOUR) and unlisted Tongcheng (prvevious post), and Qunar itself got in a costly squabble last month with industry leader Ctrip (Nasdaq: CTRP). (previous post)

The thing that seems to separate Qunar a bit from its rivals is its aggressive spending on marketing and promotions, which is the direct cause of its ballooning losses. That kind of spending can only continue for so long before the company will start undermining its own financial situation. Of course it will always have financial support from Baidu, but it could rapidly lose support of other investors if it doesn’t move soon to rein in its losses.

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