Strategic trade
Trade view / 27 October 2015 at 1:39 GMT

Ctrip deal upgrades Baidu to first class

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

Baidu announced yesterday that it has completed a share transaction with online travel agent Ctrip, which sees Baidu exchange its shares in Qunar for Ctrip shares. The new shareholding arrangement means that Ctrip will hold 45% of rival Qunar’s voting rights, while Baidu will hold 25% of Ctrip’s voting rights. 

This is a major deal for all firms involved, and it backs up an argument that I have been making for a while. I have previously favoured Qunar over Ctrip because Qunar was able to leverage its operations within the Baidu services ecosystem, whereas Ctrip remained independent. 

The argument that I have posed is that in order to be successful in China, it is becoming imperative to work with one of the BAT trio of Chinese tech titans: Baidu, Alibaba or Tencent. This is because their respective ecosystems already have a wide range of services, such as shopping, social media, gaming, banking and search. Therefore a user has very little reason to leave one of these ecosystems to use an independent service. 

As services such as Qunar benefited from the organic flow from Baidu’s ecosystem, Ctrip would suffer. The deal between Baidu and Ctrip looks to have corrected this issue, and makes Ctrip the strongest online travel agency in China. 

The potential of this deal is huge. Ctrip is already seen as the top travel site in China, and as such has a strong flow of user traffic. Baidu has a huge user base and firms within its ecosystem enjoy strong organic traffic flows. Ctrip will benefit greatly from this. 

An unanswered question remains of what will happen to Qunar. Technically, Qunar and Ctrip are different, because Qunar is effectively a travel search engine that directs users to deals on sites such as Ctrip. Therefore whether or not Qunar will be merged into Ctrip remains to be seen. 

For Baidu, its travel services are now best in class. Alibaba and Tencent had average proprietary services, and Baidu's partnership with Qunar already gave it the market-leading edge. Ctrip was the independent elephant in the room. 

An eventual partnership with one of the BAT trio was inevitable, but it depended on how long Ctrip would stubbornly (and foolishly) remain independent. The Baidu-Ctrip tie-up takes the largest travel firm in China out of the reach of Alibaba and Tencent, and from my perspective, they will simply not be able to compete with Baidu in the travel business.

Baidu’s five year share price chart
Baidu's 5 year share price chart

Source: Stockcharts.com. Create your own charts with SaxoTrader; click here to learn more. 

Management and risk description

Baidu releases its third-quarter earnings on October 29 and Ctrip is expected to release its earnings at the end of November. Both of these events should give more insight into the longer-term cooperation between the two firms, but they also have the potential to derail Baidu’s share price from the trade thesis. 

Chinese economic data continues to be a major focus point for global investors as they look for evidence of a slow or hard landing for the Chinese economy. Therefore investors should expect a lot of attention being placed on upcoming economic data releases, which could add volatility to this trade view. 

Parameters

Entry: $166.24.

Stop: $150.

Target: $190.

Time horizon: three months.

— Edited by Gayle Bryant

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