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Chinese travel service provider, eLong (LONG: Charts, News, Offers), has long been in the shadow of its market dominating competitor, Ctrip.com (CTRP: Charts, News, Offers), and has been widely ignored by individual and institutional investors. It disappointed investors constantly with its clumsy attempts to mimic Ctrip and missed earnings repeatedly. Two weeks ago, however, eLong released 2Q earnings that revealed a stunning 45% gain in revenue attributed to the World Expo in Shanghai. Net margins also increased by 2% to 7.4% over the previous year. The stock has gained 265% since the pit of the financial crisis in early 2009. Is this only a temporary spike due to renewed interest in a Chinese bull market fueled by World Expo news, or is this the start of a real turnaround for the underdog to finally challenge Ctrip, which owns 57% of the Chinese travel market?
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Those who have visited China will tell you that traveling around the country, even for native speakers of Chinese, is no simple task. Lines at train stations pour out onto the streets. Illegal taxis try to scam locals and tourists alike at tourist hot spots. Hotel staff follow you aggressively through the streets trying to undercut their neighbors by convincing you to change your accommodations. These are the reasons that online travel packages have become so popular. This is how Ctrip and eLong made a name for themselves – by organizing taxis, trains, planes, hotels and tour packages together in a neat, stress-free package tied together with their online or telephone services. Each of these services is easily accessible from their website and travel books found at station kiosks, and organizing a trip at discount rates is a snap.
eLong, which is majority owned by US online travel service Expedia (EXPE: Charts, News, Offers), is Ctrip’s little brother in every regard, claiming 13% of the Chinese online travel market. It offers the same services but has not ingrained itself upon the Chinese (or investor) consciousness the same way Ctrip has. eLong is to Ctrip what Yahoo is to Google; travelers, like web searchers, don’t settle for second best. What sets eLong apart from Ctrip and the horde of even smaller travel competitors nipping at its heels?
Most significantly, eLong’s parent company, Expedia, provides it with 120,000 hotels worldwide that can be booked directly from the Chinese website, which is more than any other site in China. Its mobile booking service for 3.5G handsets, made to rival CTrip, launched in the second quarter and has a small but growing user base. eLong has reported that the mobile service is being used to book more hotels than flights, which bodes well for its Expedia connection. The company has also increased its online advertising presence and offered discounted promotions to hotels connected to the Shanghai World Expo, which boosted its profits dramatically in the most recent quarter.
Ctrip’s monopoly has also become its Achilles’ heel. Long-time hotel and airline partners are now struggling to escape Ctrip’s clutches to establish more profitable sales channels. In November last year, China Eastern Airlines signed an agreement with search engine Alibaba and opened an online store on eBay to sell their tickets directly. Smaller carriers China-SSS, Hainan, Xiamen, Shenzhen and Shandong Airlines all followed suit and signed special contracts with Alibaba to cut Ctrip, and its exclusive fees, out of the picture.
This could be good news for eLong if Expedia can help attract these defecting airlines to offer better deals on its website. In addition, Expedia would be capable of offering Chinese hotels and airlines better reciprocal advertising internationally in different Expedia-partnered countries beyond CTrip’s reach, and convince them to offer lower rates on eLong. In addition, eLong could, with the aid of Expedia, partner with or buy out the smaller competitors in the Chinese market – Auyou, SunnyChina, Yoee and Mongo City, to name a few. If this occurs smoothly, eLong could capture up to 43% of the market and truly become a threat to Ctrip.
Currently, the Chinese online travel market only represents 10% of the travel industry, however it is expected to grow 5-6% in the next two years. In addition, the entire Chinese online market is forecast to grow to 760.6 million USD by the end of 2010, a 38% increase over the previous year. By 2013, it is estimated to rise to 2.3 billion USD. That represents huge untapped potential considering more and more purchases are done online, not only through computers but mobile devices as well.
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Leo Sun is long-time market follower and finance writer. He regularly contributes to the Stock of the Day analysis.
