Bottom line: New fund raising by Ctrip and Tujia looks like far more than either company needs, and is part of a broader wave seeing Chinese Internet sites raise big funds to take advantage of strong investor sentiment.
Someone recently asked me why so many companies in China are currently rushing to raise cash, and, after some quick thought, I provided my best answer: Because they can. That seems to be the mentality among Chinese companies these days, including leading online travel agent Ctrip (Nasdaq: CTRP), which has just issued bonds to raise a cool $1.1 billion in new cash that it really doesn’t need. But that statement isn’t completely true, as Ctrip is in another headline that has it joining in a new $250 million funding round for Tujia, China’s equivalent of Airbnb.
Ctrip moved very quickly in this latest fund raising, announcing its plan to issue up to $1 billion in convertible notes on Wednesday and then actually pricing the offering a day later. (company announcement) The company upped its original fund-raising target to $1.1 billion in the final pricing announcement, indicating demand was probably quite strong for the notes among investors eager to cash in on China’s rallying stock markets.
Ctrip had about $2 billion in its coffers at the end of March, meaning this latest fund-raising will bring its total cash pot to about $3 billion, or more than a quarter of its current market value of about $11 billion. The company has actually been involved in a number of equity tie-ups in the last year, including the sale of $750 million worth of convertible notes that could ultimately give 15 percent of its stock to US peer Priceline (Nasdaq: PCLN). (previous post) Last month Ctrip also paid $400 million for about a third of smaller rival eLong (Nasdaq: LONG).
There are certainly other investments out there for Ctrip to make, though one of those won’t be its biggest rival Qunar (Nasdaq: QUNR), which is valued at $5.5 billion. Ctrip recently approached Qunar about a merger, but was rebuffed and later said it has no interest in any tie-ups with the company controlled by leading search engine Baidu (Nasdaq: BIDU). (company announcement)
While a purchase of Qunar is off the table, Ctrip has been relatively busy buying a series of strategic stakes in other online travel companies, in what some has said is its attempt to “encircle” Qunar and deprive it of allies. That encirclement theory gained some more credence with one of the sector’s other new headlines, which has Ctrip joining with several other investors in the new $250 million funding round for Tujia.
Tujia and Airbnb use a similar business model, which brings together homeowners who want to rent out their properties for a week or two at a time, and travelers looking for that kind of accommodation. Ctrip had previously invested in Tujia, and was joined in this latest funding round by All-Stars Investment, a company run by a former Morgan Stanley China analyst. (English article; Chinese article)
The deal values Tujia at around $1 billion, meaning the partners in this latest funding round are probably buying around a quarter of the company. I’ve written several times over the last few years about Tujia, which previously raised $100 million in its third funding round last year. (previous post)
I do like the business model, especially in China where many people own vacant properties and might want to fill them with the kinds of very short-term tenants offered by Tujia. Still, such big fund-raising sums seem far too large for this kind of young company that doesn’t have huge capital costs. All that brings me back to the explanation I gave at the outset of this post, namely that Ctrip, Tujia and just about any other Chinese company out there is currently raising big piles of cash they don’t really need, simply because they can.