Ctrip (CTRP)/Baidu (BIDU)/Qunar (QUNR) Deal Should Stabilize Pricing and Lead to Profit Growth
Get Alerts CTRP Hot Sheet
Rating Summary:
22 Buy, 11 Hold, 0 Sell
Rating Trend: = Flat
Today's Overall Ratings:
Up: 12 | Down: 9 | New: 10
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In an unusual corporate combination announced this morning, a substantial share swap is occurring between the key competitors in the Chinese travel industry. Baidu is receiving shares of Ctrip in exchange for its stake in Qunar. As a result of the transaction, Baidu (NASDAQ: BIDU) will own 25% of Ctrip (NASDAQ: CTRP), and Ctrip 45% of Qunar (NASDAQ: QUNR).
The tight competition for marketshare led to uneconomic pricing. In 2014, Ctrip's non-GAAP operating margin in dropped to 4.8% from 2013's 23.6% due to aggressive promotions and rebates. Similarly, Qunar's non-GAAP operating margin deteriorated to -46% in 2014 from 2013's -10%.
Summit Research analyst, Henry Guo, believes "This deal significantly increases the likelihood of a profitability improvement trajectory over the next couple of years for both companies."
After the deal, Ctrip and Qunar are likely have 70%-80% of the hotel and air ticket market, Summit Research estimates.
The firm maintained a BUY rating on CTRP shares with PT of $122.
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