- Priceline’s investment stake in Ctrip is contingent upon the conversion value of the bond and stock and whether Priceline increases its stake to 10% of the total shares outstanding.
- The partnership between Priceline and Ctrip offers meaningful upside for both companies involved.
- Investing into Ctrip via Priceline offers a reasonable compromise between earnings growth and valuation, versus investing into Ctrip directly.
Recently, Priceline (NASDAQ:PCLN) invested approximately $500 million into Ctrip.com (NASDAQ:CTRP) which is an online booking and travel website. The company trades at a fairly high valuation in relation to earnings due to the relatively high growth prospects of the Chinese travel industry.
According to Ctrip.com:
The Priceline Group agreed to invest $500 million through a convertible bond and Ctrip has granted The Priceline Group permission to acquire Ctrip shares in the open market over the next twelve months, so that combined with shares convertible under the bond, The Priceline Group may hold up to 10% of Ctrip's outstanding shares. Upon purchase of the convertible bond, The Priceline Group will acquire the right to appoint an observer to the Ctrip board of directors.
In the event that Ctrip stock (See: Ctrip stock chart) moves higher, Priceline may decide to convert the bonds into an equity holding. However, the underlying fundamentals of Ctrip weren't really discussed in much detail. Therefore, in this article it’s important to quantify the value of Priceline actually owning up to 10% of Ctrip’s outstanding shares.
Fundamentals Of The Priceline-Ctrip Deal
Ctrip.com has a market capitalization of $8.7 billion, so for Priceline to acquire 10% of outstanding shares, the company would have to convert the bonds into stock, and commit an additional $370 million in cash to buy the stake. Another alternative scenario is if the price of Ctrip were to fall considerably, the $500 million could be used to buy a significantly higher amount of shares.
However, given the sheer momentum in the price action, the likelihood of a further decline in valuation is unlikely. Currently the stock is up by 78.45% from its 52-week low. The bullish investment thesis may not play out for quite a while, but investors are already buying into the stock on the anticipation of exploding Chinese tourism growth.
The guidance figures, and reported results in the most recent quarter weren’t bad at all. Ctrip revenue grew by 38% YoY, which was driven by transportation ticketing revenue growth of 83%, coming in well ahead of the 50% to 60% YoY growth guidance range. Net income fell by 36% YoY, driven by share based compensation expense, along with higher op-ex figures.
According to Ctrip:
For the third quarter of 2014, the company expects to continue the net revenue growth year-on-year at a rate of approximately 30-35%. This forecast reflects Ctrip's current and preliminary view, which is subject to change.
Historically, Ctrip has exceeded its own sales forecasts, which by extension may give Priceline a pretty decent investment return assuming Priceline converts its bonds into shares prior to a major earnings beat.
|Earnings History||Sep 2013||Dec 2013||Mar 2014||Jun 2014|
|Surprise (as a %)||48.10||21.70||9.10||27.30|
Source: Yahoo! Finance
However, the extent to which Ctrip beats earnings, has varied significantly over the prior four quarters. Currently, analysts on a consensus basis anticipate Ctrip to grow sales by 33.3%. The analyst consensus sales growth forecast is at the mid-end of the guidance range, which indicates that for Ctrip to grow its earnings significantly, a notable uptick in travel demand would have to occur over the duration of the second half of 2014.
Ctrip Growth Potential
Currently, China has the highest amount of outbound travelers among Asian countries, and has had an outbound spending rate of $84.5 billion. China’s contribution to the global tourism industry is increasing at a drastic rate.
According to Ctrip:
Expanding on the existing commercial relationship established in 2012, the global partnership between the world's largest online travel group and China's largest online travel company will significantly promote tourism to and from China by allowing Ctrip's customers to reach The Priceline Group's global portfolio of over 500,000 accommodations outside of the Greater China Region, and The Priceline Group's customers to reach Ctrip's over 100,000 accommodations in the Greater China Region.
This two way partnership helps Ctrip significantly, as it gives better affordability to the 45 million outbound travelers that leave China to explore other countries. The network of hotels that Priceline has agreement with is hard to match, so bringing that kind of inventory onto Ctrip enables Ctrip to remain a more dominant online travel company. Meanwhile, Priceline gains the hotel inventory that Ctrip has, making it easier for foreign travelers to enter into China at competitive booking rates for both flights and hotels.
The Boston Consulting Group estimates that the Chinese travel market will grow into a 5,455 billion RMB market (888 billion USD based on current exchange rates) by 2020. The bulk of the growth will come from domestic travel; however outbound trips are also expected to grow at a fairly high rate as well.
The partnership deal gives international travelers better booking rates in China, but the same could be said about outbound Chinese travelers. Improving Ctrip’s inventory for outbound trips puts the company in a much better position to grow bookings, and the high growth potential for domestic Chinese travel makes the business a compelling investment opportunity. Gaining direct exposure into Ctrip may be too risky, so investing into Ctrip via Priceline gives investors an adequate risk to reward.
Not to mention, Priceline trades at a 34.5 P/E multiple, and is expected to grow sales by 25.6%, which gives it a better growth rate and valuation in relation to Ctrip. However, Priceline’s equity interest in Ctrip may grow significantly, which may give Priceline significant investment income in future fiscal years. After all, investing in Chinese eCommerce Alibaba worked out extremely well for Yahoo!, to think it wouldn't work in the case of Chinese online travel and booking would be naive.