TRAVEL: Ctrip Flies Abroad with Skyscanner, as Profits Wobble

Bottom line: Ctrip’s latest results and its first major overseas purchase point to a company with the wind at its back as it heads into a new phase, which could see it become China’s first globally competitive Internet company.

High-flying online travel agent Ctrip (Nasdaq: CTRP) is taking its first major flight overseas, with announcement that it has just agreed to buy travel search specialist Skyscanner in a deal that values the British company at a hefty 1.4 billion pounds ($1.65 billion). At the same time, Ctrip has also reported earnings that show its bottom line is suffering some short-term pain as it swallows the profit-challenged Qunar (Nasdaq: QUNR), a former bitter rival that Ctrip now controls.

Investors seemed quite pleased with the net result, bidding up Ctrip shares by 7.2 percent in after-hours trade after the company announced its biggest overseas purchase to date and its latest quarterly results. But that said, it’s worth noting that Ctrip is down more than 25 percent from its all-time high about a year ago, including a 14 percent decline in the last month alone.

We’ll look at the company’s future prospects again towards the end of this post, but first let’s review the latest news beginning with the Skyscanner deal. Ctrip says it has signed an agreement to buy a majority of Skyscanner’s shares from one group, and will offer to buy the remainder from other shareholders. (company announcement) It it didn’t give any more specifics, except to say the deal valued Scotland-based Skyscanner at 1.4 billion pounds.

It said Skyscanner is one of the world’s leading search engines focused on the travel sector, allowing Web surfers to compare plane ticket and hotel prices across a wide range of sites. That’s similar to TripAdvisor (Nasdaq: TRIP), which is valued quite a bit higher at $7.4 billion. Ctrip said that Skyscanner’s current management team will remain intact and continue to operate from its base in the UK.

In its latest earnings report, Ctrip also announced that it has invested separately in 2 large US tour operators that cater to Chinese traveling abroad. It didn’t provide any names or investment values, but it’s probably safe to say those deals were worth quite a bit smaller, somewhere in the tens of millions of dollars. (company announcement)

I’ve always been a fan of Ctrip due to its status as a leader in its space and its ability to focus on expansion into its core competency in travel-related products and services. I’ve also been somewhat critical of its anti-competitive practices over the last 2 years, which include its purchase of controlling stakes in most of its main rivals including Qunar. While such practices are bad from a consumer’s perspective, it’s certainly much more positive from Ctrip’s own perspective since it will be able to raise prices and face much less competition at home.

Back to Profits

That takes us nicely into a quick look at Ctrip’s latest earnings statement, which shows that revenue soared 75 percent in this year’s third quarter, in no small part because Ctrip started consolidating Qunar’s results into its own starting this year. Ctrip predicted revenue will continue growing by 75 percent in the fourth quarter, though it could have trouble matching those rates next year after the Qunar effect wears off.

While the revenue soared, Ctrip’s bottom line looked far less attractive. It managed to post a modest 10 percent rise in operating profit, which hit 447 million yuan ($65 million). But net profit actually nearly evaporated, from a hefty 2.4 billion yuan a year ago to just 24 million yuan in the latest quarter. Ctrip was quick to note that it reported a net loss in the second quarter, meaning this latest result at least marks a return to profitability.

All of the headlines certainly seem to point to a company with the wind in its sails, as it heads out of a somewhat turbulent transition period. Ctrip has been expanding into a wide range of travel-related products and services, and is clearly positioned as the leader in its space at home.

The next logical step is for the company to look abroad, and we’ll have to see how it does with the Skyscanner and other acquisitions before determining how it will do over the longer term. The international market is a far more competitive place than Ctrip’s relatively protected home market. But that said, the company does seem quite well managed, and therefore I would give it a reasonable chance of success at carving out a place in the global market over the longer term.