Article / 05 December 2014 at 6:30 GMT

Qunar needs to know where it is going

China Watcher / Shanghai
  • Qunar's operating and net losses have dwarfed its revenues, despite an impressive improvement on the latter
  • The travel search engine firm’s problem is exorbitant spending on marketing and promotions
  • CTrip split with Qunar over abandoning its original model as a neutral travel products search platform

By Neil Flynn

Chinese travel search engine Qunar posted its third quarter earnings this week, which were taken negatively by investors. The issue with Qunar is that revenue growth is impressive and they consistently beat management’s guidance. However, their losses are far too high, and in the third quarter, the firm posted operating and net losses of RMB575.1m ($93.5m) and RMB566.2m ($92m) respectively, which both exceeded third quarter revenues of RMB501.1m RMB ($81.4m). Therefore whilst rosy-eyed investors can wax lyrical about the impressive 107.8% annual revenue growth, it’s very difficult to look past the even more impressive losses.

Qunar's Revenue Guidance History Source: Qunar’s Revenue Guidance History. Source: Qunar Investor Relations  

The most impressive driver of Qunar’s third quarter revenue is the growth in mobile revenues, which is perhaps not a surprise given that the travel search engine’s majority shareholder is Baidu, who had made mobile its core strategy. Mobile revenues grew 445.1% year on year and accounted for 40.4% of total revenues, up from 15.4% a year ago.

Travel search engine Qunar may have the financial backing of Baidu, but continued excessive spending will soon see investors turn sour. Photo: Thinkstock

But growth often comes at a price, and in Qunar’s case, that price is very high. The biggest concern for shareholders is the firm’s exorbitant spending on marketing and promotions. This is currently sustainable, because Qunar has the financial backing of Baidu, but continued excessive spending will soon see investors turn sour on the firm. Product development expenses increased 153.1% year on year to RMB229.5m ($37.3m), product sourcing expenses increased 519.9% year on year to RMB99.8m ($16.2m), and sales and marketing expenses increased 189.6% year on year to RMB266.2m ($43.3m). The firm’s headcount has also grown exponentially, from 2,000 at the end of 2013, to 6,000 at the end of the second quarter, over 7,000 at the end of the third quarter, and the firm targets 8,000 by the end of the year.

Of the 575.1m RMB ($93.5m) of operating losses, Qunar spent 235.6m RMB ($38.3m) on a cooperation with Baidu Zhixin, which is Baidu’s advertising platform. The investment in this system is designed to direct traffic to Qunar from Baidu’s pages, through advertising on related search results. It is likely that this will be a one-time expense, however, investors will be anxious to know the results from the cooperation over the next few quarters. I expect that this will help the firm to gain market share over the likes of Tuniu, but there are much bigger firms in the industry with equally large financial backing, that are posting profits.

Rising Competition

Qunar differs from CTrip in the sense that Qunar is a travel search engine, where online travel agencies like CTrip post their hotels and flights, so that search traffic can be directed to their site. Earlier in the year, it was mooted that Ctrip and Baidu would merge their travel services via Qunar. However, the partnership between CTrip and Qunar broke down because Qunar started implementing a premium listing service, where online travel agencies could pay more to appear at the top of search results. CTrip announced that the split was due to Qunar having largely abandoned its original model as a neutral travel products search platform.

The problem for Qunar is that CTrip is the outright market leader in China’s online travel agency market, with a market share of 55.9%, whilst second place Elong has a market share of just 9.7%. This also comes at a time when a big new participant has entered the market. Alibaba has launched their Alitrip site, and this poses a real threat to Qunar, because whilst both have the financial backing of wealthy parent firms, shareholders will be much more patient with Alitrip’s marketing expenses because it isn’t a separately listed entity. In addition, Tencent uses smaller market participants Tongcheng and for its travel search service, which it promotes through its WeChat and QQ platforms.

The firm’s name 去哪儿 (Qunar), meaning ‘Where Are We Going?’ is somewhat apt for shareholders, because whilst the firm is making good progress in revenue generation, it is taking excessive risks in terms of its exorbitant spending. The firm may believe that excessive spending now will result in higher revenues and perhaps profitability over the next few quarters, but strong revenue growth means nothing if expenses remain this high.

-- Edited By Adam Courtenay

Neil Flynn is head equity analyst at Chinese Investors. Follow Neil or post your comment below to engage with Saxo Bank's social trading platform.


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