Bottom line: Ctrip’s recent series of equity tie-ups, including a new rumored deal with Tuniu, could prompt the anti-monopoly regulator to take action to preserve competition in China’s online travel market.
A strong earnings report from online travel titan Ctrip (Nasdaq: CTRP) and word of a potential new business alliance with a major rival has ignited the company’s shares, which soared 14 percent after it released its latest financials. Ctrip has become a master at the strategic tie-up, buying stakes in most of its rivals over the last 2 years without actually acquiring any of them.
That strategy seems designed to make sure its rivals act more friendly and aren’t competitors, which will help support its profits by reducing the constant price wars that have plagued the industry for much of the last 2 years. The only problem is that such actions have distinctively anti-competitive overtones, and could well draw the attention of China’s anti-monopoly regulator.
The fact of the matter is that China’s anti-trust regulators have yet to make any major decisions on the nation’s Internet, even though near monopolies exist in several cases. The most obvious is Baidu’s (Nasdaq: BIDU) dominant position in online search, but Tencent’s (HKEx: 700) domination of instant messaging with WeChat and Alibaba’s (NYSE: BABA) control of half the e-commerce market could also be strong cases.
The regulator may be reluctant to act in these cases since most of these sectors are quite young and still relatively small, and have also nurtured some of China’s most promising private companies. But the travel market is quickly becoming quite large, and Ctrip’s aggressive buying of stakes in its many rivals could tempt the regulator to finally chase the company for this clearly anti-competitive behavior.
All that said, let’s look quickly at Ctrip’s latest quarterly report, its first since it announced a landmark share swap deal last month with former bitter rival Qunar (Nasdaq: QUNR). (previous post) The results don’t really reflect any easing of competition from the Qunar alliance, since they are for the third quarter that ended that deal was signed. Revenue grew 50 percent in the quarter to 3.2 billion yuan ($501 million), and operating profit also leaped as the company’s margins improved. (company announcement; Chinese article) Ctrip also announced the equivalent of a 2-for-1 stock split.
Tie-Up With Tuniu
Separately, other media reports said Ctrip is exploring buying a stake in Tuniu (Nasdaq: TOUR), one of the few major industry players that Ctrip doesn’t hold any stake in right now. (Chinese article) The reports say a Ctrip stake purchase would be part of a move to eventually split off its tour packages business into a separately listed company, though it’s a bit unclear if that company would be Tuniu or a new entity.
A Tuniu tie-up would give Ctrip equity stakes in nearly every major domestic online travel company, including Qunar as well as former top rival eLong (Nasdaq: LONG) and travel package operator Tongcheng. Ctrip also has a major tie-up with Priceline (Nasdaq: PCLN), after signing a deal earlier this year selling a major stake in itself to the US giant.
Investors certainly like this growing web of tie-ups, which is helping to prop up Ctrip’s profits. The stock soared 13.6 percent in after-hours trade after it posted its latest results, sending it close to its all-time high reached late last month. The shares have nearly doubled this year, and have increased more than 7-fold from a low in mid-2013.
All of that brings us back to my original point, which is that a new tie-up with Tiuniu, combined with the blockbuster Qunar deal, might finally draw some attention from the anti-trust regulator. Some might argue that Ctrip still faces competition from global rivals, but the reality is that none of those has been able to enter the China market. All those factors could lead the regulator to finally choose Ctrip as its first anti-trust case on China’s Internet, which could force the company to break some of its new tie-ups to bring back some competition to the market.
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