What travel operator wouldn't want to grab a piece of the Chinese market? Despite growth that's slowed in recent times, the massive country's economy is still on the rise, making its population generally richer. As with Western countries, increasing wealth and discretionary income means a bigger appetite for travel, both of the domestic and foreign varieties.
With this doubtlessly in mind, one of the two incumbent online travel agencies in our country, Priceline Group (NASDAQ:BKNG), has boosted its existing investment in its Chinese counterpart, Ctrip.com (NASDAQ:CTRP). Let's take a look at how this will affect the American company's business.
In late May, Priceline bought $250 million worth of Ctrip convertible bonds, less than a year after making an initial foray into the company with a $500 million convertible bond purchase. Together, the two buys give it roughly 10.5% of the Asian company should both convert into shares. Additionally, Ctrip gave Priceline permission to buy enough of its American Depositary Receipts to bring that stake up to a potential 15%.
Before we dive into the specifics of why Priceline is so attracted to the Chinese market, we'll stay on our shores for the moment to see what's going on in the e-travel business in the U.S.
The sector has essentially become dominated by two companies: Priceline and Expedia (NASDAQ:EXPE). Both have recently opened their wallets to bulk up on travel assets. The former now controls, in addition to its well-known eponymous travel portal, Booking.com, Kayak.com, and even online restaurant reservations site OpenTable.com, among others.
Expedia, meanwhile, closed in on Priceline earlier this year by agreeing to a $1.6 billion deal to buy Orbitz Worldwide (UNKNOWN:OWW.DL); the merger is still pending approval by antitrust regulators.
That deal, meanwhile, came less than a month after Expedia announced its buyout of yet another name portal, Travelocity, for a comparably inexpensive $280 million. This joined an already-big portfolio of assets including Hotels.com, trivago, and CarRentals.com (in addition to Expedia's main portal, of course).
Passport to growth
For Priceline, international markets are where the growth is lurking. In the company's most recently reported quarter, gross bookings originating abroad grew by 14% on a year-over-year basis to reach a bit over $12 billion. This, by the way, was 88% of the total for the period.
This is due to several factors. First, the non-U.S. market is, obviously, collectively far larger than ours. It's also historically been less mature, with numerous countries on the planet trailing us in e-commerce utilization (and general Internet access, come to think of it). Lastly, the more fragmented nature of the hospitality sector has more potential for an online agency like Priceline, as opposed to the U.S. market, dominated as it is by well-capitalized hotel chains.
If you're a travel agency hungry for growth and looking abroad, China is an obvious choice. Thanks to that still-rising economy, more and more of its citizens are traveling, both within their immense nation and -- increasingly -- to foreign destinations. The number of outbound tourists from the country reached 107 million in 2014, nearly 20% higher than the previous year's tally.
A lucrative trip
Priceline began its Ctrip.com association with a partnership agreement between its Booking.com and the Chinese company in 2012. The two companies agreed to cross-promote each other's offerings.
That was a solid move for Priceline. In its most recently reported quarter, although it wasn't profitable, Ctrip.com managed to grow its revenue by a muscular 44% on a year-over-year basis to around $373 million, outpacing analyst expectations.
All three of the company's segments -- accommodations, package tours, and transportation -- reported very impressive increases across that span of time.
If China's travel culture continues to grow -- and there's no reason to think it won't -- Priceline is going to be well-poised to take advantage of it through that solid partnership with Ctrip. I think the future looks promising for both companies.