Strategic trade
Trade view / 19 November 2015 at 3:52 GMT

Tech giant Baidu gets a boost from Ctrip travel earnings

China Watcher / Shanghai
China
Instrument: BIDU:xnas
Price target:
Market price:
Background

Online travel agent Ctrip reported its earnings last night, with revenues of $501 million, which beat consensus of $490mln, and non-GAAP earnings of $2.20 beating consensus of $0.09. However, it may be the case that the earnings per share figure isn’t directly comparable to the consensus, making it less impressive than at first sight. The firm has also had strong growth in its accommodation and packaged tours business. 

However, the most important aspect of the Ctrip earnings release is commentary on the firm’s collaboration with tech giant Baidu in the conference call. 

In addition to commentary from Ctrip, the subject of the collaboration between the two firms, Qunar, will announce its third-quarter earnings on November 23. In the event that Ctrip commentary is insufficient for Baidu investors, the key focus on Qunar’s earning release will be the Ctrip-Baidu partnership, given that Ctrip now holds a large stake in the firm. 

Prior to the announcement of the deal between the two firms, I had posed the argument that Ctrip was in a difficult position. It has become the norm for firms to aim to partner with one of the trio of tech giants in China: Baidu, Alibaba and Tencent, in order to gain access to their large ecosystems and user bases. 

Whilst it may be the norm for most, Ctrip was one of a handful of firms that were big enough not to need to take this route, with only search engine and internet security firm Qihoo being able to claim a similar position. My argument was that if Ctrip remained independent, it would see its user base growth decline as Qunar had partnered with Baidu and would enjoy strong organic traffic flows through Baidu’s services ecosystem. 

Baidu has rallied almost 50% over the past two months, particularly on the back of the Ctrip deal, as well as growing positive sentiment towards Chinese equities after the summer selloff. As impressive as this has been, I believe that there is still room to grow, and the Ctrip earnings release should shine further light on the collaboration plans between these two large firms. 

Further drivers for Baidu include the announcement that it will be included in MSCI’s Emerging Markets index, which in turn should result in institutional buying, and the yuan's inclusion into the International Monetary Fund’s SDR basket, which should boost all Chinese equities.

Baidu daily chart

Baidu's 5 year share price chart













Source: Stockcharts.com

Management and risk description

Basing a trade view off an earnings release is inherently risky, especially when it involves the earnings release of other firms. However, I expect that the key emphasis of the earnings release from Ctrip will be management commentary on the partnership between itself and Baidu, and this will be reflected in the performance of the share price of both firms over the rest of the week. 

Macro concerns should always be at the forefront of investors’ minds when dealing with US-listed Chinese firms, and this is no different. The IMF’s decision on the yuan's inclusion in the SDR basket of currencies could potentially be a volatile period at the end of the month. 


Parameters

US dollars


Entry: $204.73

Stop: $195

Target: 215

Time Horizon: One month



— Edited by Susan McDonald


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