Ctrip.com International, Ltd. (ADR) (NASDAQ:CTRP) and eLong, Inc. (ADR) (NASDAQ:LONG) have been locked in a costly pricing war over the past three years. eLong started introducing cash rebates for hotel bookings in 2010, sacrificing its margins and profits to reduce Ctrip.com International, Ltd. (ADR) (NASDAQ:CTRP)’s market share. eLong, Inc. (ADR) (NASDAQ:LONG)’s started to claim so many hotel bookings that Ctrip was forced to counter eLong with rebates of its own. Both companies started to give cash rebates for airline tickets as well.
Last quarter, Ctrip’s hotel reservation volume rose 44%, compared to eLong’s 58% gain. Revenues from hotel reservations rose 25% at Ctrip and 29% at eLong. However, Ctrip.com International, Ltd. (ADR) (NASDAQ:CTRP)’s profit margin came in at a healthy 15.2% compared to eLong’s -11.8%, indicating that the only real victim in eLong’s persistent pricing war has been itself. Going forward, eLong will have a tough time continuing its pricing war, which should result in Ctrip regaining market share over the next few quarters.
E-commerce is still cruising along
Both Ctrip.com International, Ltd. (ADR) (NASDAQ:CTRP) and eLong have benefited from the rising rate of Internet penetration in China, which is projected to jump to 52.7% by the end of 2013. Considering that the United States has an 81% penetration rate, Chinese Internet companies like Baidu, Qihoo 360 and Sina still have substantial room to grow.
However, the hottest Internet market right now is e-commerce, which is currently dominated by Alibaba , which owns Taobao and T-Mall, two of the largest e-commerce sites in China. Taobao is a consumer-to-consumer site that dominates 95% of the market, and T-Mall is a business-to-consumer site that controls 44%. Alibaba’s total annual sales are higher than eBay’s and Amazon‘s combined. Last quarter, Alibaba’s earnings soared 189% as its revenue climbed 71% from the previous year.
Although shares of Alibaba are only available in the OTC markets to American investors, two other publicly traded Chinese e-commerce companies — E-Commerce China Dangdang and Vipshop Holdings — have respectively risen 70% and 670% over the past twelve months. I discussed both companies, which I consider bullish underdogs, at length in a previous article.
A Foolish Final Thought
China is still a lucrative growth market for investors who know how to look beyond Baidu. Investors should avoid the Chinese airline stocks, which are vulnerable to higher fuel prices, but stick with travel agencies like Ctrip.com International, Ltd. (ADR) (NASDAQ:CTRP), which benefit from hotel, airline and package bookings. Meanwhile, e-commerce is still the key market to watch, as China’s increasingly-connected, growing middle class spends more money online.
Although China’s growth slowed down substantially after the Beijing Olympics in 2008 and the Shanghai World Expo in 2010, the country still has favorable investment opportunities for patient, long-term investors.
The article Separating the Winners from the Losers in China’s Turbulent Markets originally appeared on Fool.com and is written by Leo Sun.
Leo Sun has no position in any stocks mentioned. The Motley Fool recommends Ctrip.com International. The Motley Fool owns shares of Ctrip.com International.
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