TRAVEL: Qunar Rebuffs Ctrip, Answers With New Fund Raising

Bottom line: Qunar’s latest quarterly results show it will continue to spend aggressively and post big losses as it competes with Ctrip, and reflect the fact that its biggest asset is its majority ownership by the cash-rich Baidu.

Qunar spurns Ctrip, raising cash

China’s highly competitive online travel landscape is rapidly shaping up as a two-horse race, with one group centered on industry leader Ctrip (Nasdaq: CTRP) and the other on up-and-comer Qunar (Nasdaq: QUNR), which is controlled by leading search engine Baidu (Nasdaq: BIDU). After Ctrip announced a flurry of major new tie-ups last week, Qunar is fighting back with new fund-raising announcements that include a nearly $1 billion cash injection through the issue of new stock and bonds.

Qunar announced the fund-raising the same day that it released its latest quarterly results, which contained the surprise disclosure that it was approached by Ctrip last month about a merger. It added that it rebuffed the advance, but it clearly needs new funds as its own cash pile remains relatively small and its losses balloon due to aggressive spending.

This flurry of news reflects the intense competition in the online travel space, amid a consolidation that has begun through a series of strategic partnerships. Ctrip has been leading the consolidation lately, announcing its purchase of more than a third of longtime rival eLong (Nasdaq: LONG) last week, as it also boosted its equity tie-up with US giant Priceline (Nasdaq: PCLN). (previous post) Ctrip has also made recent major investments in New York-listed Tuniu (Nasdaq: TOUR), and the unlisted Tongcheng travel site.

Meantime, Qunar has chosen a more go-it-alone strategy that relies heavily on its cash-rich parent Baidu, which gives Qunar strategic advantages like preferable placement in Baidu’s search results. Qunar has never made sustainable profits in its relatively brief life, and instead the company’s heavy spending has created a need for cash as it tries to compete with the Ctrip-led group.

In its latest quarterly results announcements, Qunar disclosed that it received an offer to be purchased by Ctrip just a month ago. (company announcement) It said it rebuffed the offer but remains open to future talks. It also reported that its net loss nearly quadrupled to 701 million yuan ($113 million) for the quarter through March, as it continued to spend heavily in the competitive landscape. It said its cash pile was quite low, totaling about $230 million at the end of March, roughly the same as a year earlier.

The need to beef up its cash pile was almost certainly a factor behind the new fund-raising announcements, which will see Qunar raise nearly $1 billion collectively in new money split evenly between new bond and share offerings. The bond deal will see Qunar sell $500 million worth of convertible notes to a group led by top-tier private equity investor Silver Lake. (company announcement). The stock deal will see Qunar sell up to 9.2 million new American Depositary Shares (ADSs), in a deal that could raise up to $420 million, based on its latest closing price. (company announcement)

With so much news coming out in one day, it was interesting to note that Qunar’s stock rose 4.4 percent in the latest regular trading session on Wall Street, and then another 2.9 percent after hours. The company is now worth about $5.5 billion, or about half the value of the much older and far more profitable Ctrip.

I’ve always been a bit surprised at how strongly Qunar’s shares have performed since the company’s IPO in late 2013. Its most attractive asset appears to be its majority ownership by the wealthy Baidu, which can continue providing funds to Qunar indefinitely. I personally like the Ctrip story more, as the company is equally focused on both profits and market share. I also like Ctrip’s recent series of tie-ups, though I’ll admit I was also a bit surprised by its latest offer to merge with Qunar, which would have been difficult and also could have run into regulatory hurdles.

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