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Priceline and Ctrip Investment Analysis to Evaluate Travel Acquisitions and Optimize Capital Allocation
 

Priceline and Ctrip Investment Analysis to Evaluate Travel Acquisitions and Optimize Capital Allocation

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Using multiple regression series focused on travel company valuations such as Priceline’s and Ctrip’s to evaluate travel technology and online agency acquisitions in China

Using multiple regression series focused on travel company valuations such as Priceline’s and Ctrip’s to evaluate travel technology and online agency acquisitions in China

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    Priceline and Ctrip Investment Analysis to Evaluate Travel Acquisitions and Optimize Capital Allocation Priceline and Ctrip Investment Analysis to Evaluate Travel Acquisitions and Optimize Capital Allocation Presentation Transcript

    • Page 1
      Travel industry financial, risk and decision analysis in uncertain economies
      Using multiple regression series focused on travel company valuations such as Priceline’s and Ctrip’s to evaluate travel technology and online agency acquisitions in China
    • Page 2
      Travel industry financial, risk and decision analysis in uncertain economies
      The analysis here was designed to help plan critical acquisition and strategic decisions focused on maximizing investor returns to
      Inform decisions to acquire several travel technology companies in a risky China market
      1
      Drive capital allocation and shareholder return by using multiple regression analysis to understand how investors assign pricing multiples and value industries
      2
      Drive business decisions, such as whether to invest in a sales sub-agent network in southern China or invest to relocate call centers from Hong Kong to Guangzhou
      3
      Account for risks such as foreign currency policy shifts and potential impacts of recession
      4
    • Page 3
      Travel industry financial, risk and decision analysis in uncertain economies
      This high-impact approach is based on the fact that any change in P-R or P-E multiples drives the stock price and creates or destroys shareholder value.
      Understanding how investors assign pricing multiples to different segments in an industry can help drive capital allocation decisions and shareholder returns.
      As just one practical example, a firm might invest $10 Million in a revenue-driving promotional campaign rather than cut staff to save costs, depending on how investors weigh revenue growth vs. EPS volatility.
      Investor returns driven by:
      companies invest to increase sales and profits…
      …but slight changes in multiples impact market values dramatically
      Industry valuation drivers are often defined too broadly as “growth” or “profit”…
      …and companies may miss opportunity to influence increases in the multiples
    • Page 4
      Looking at Priceline and Ctrip pricing multiples to set stage
      Investors often prioritize different metrics in different segments within the same industry, such as online vs offline travel agencies and legacy vs low-cost airlines
      Sample variables and weightings
    • Page 5
      Looking at Priceline and Ctrip pricing multiples to set stage
      Priceline case – how should it allocate capital over time?
      The collapse of 2008 and 2009 drove another dip. Key questions include whether Priceline could do anything about its own valuation, as in post-9/11, and whether actions such as excessive job cuts would even impact shareholder value.
      China Online Travel Agency case – Ctrip – why is it getting astronomical valuations?
      Trading at an extraordinary P-E of up to 90x in China’s hot economy in 2006 and 2007, one might assume CTRP’s valuation was driven by high revenue growth expectations, dominant market share over eLong, or increasing earnings…
    • Page 6
      Looking at Priceline and Ctrip pricing multiples to set stage
      Multiple regression series identify correlations between multiples and 30+ economic, financial, and operating metrics…
      …and the regression equation isolates and quantifies the impact of the significant factors
      For example, the equation calculating Priceline’s P-R multiple from 2005 – 2007 matched the actual multiple very closely:
      P-R = 18 – (40 * OTA share) + (15 * 1st Std-dev T4Q Revenue) – (2 * Revenue growth)
    • Page 7
      Looking at Priceline and Ctrip pricing multiples to set stage
      Priceline case – how should it allocate capital over time?
      In a bad US economy after 9/11, the only forces correlated to Priceline’s P-R were the NASDAQ and US internet penetration. Key growth and volatility-oriented metrics phased in from 2004 to 2007, but investors did not reward Priceline until OTA market share became a significant factor – after Priceline acquired Booking.com in Europe.
      Today’s economy could be similar to post-9-11 as valuations correlate to macro-indicators more than actual performance
      Slow recovery
      Maturation…and a force again?
      Start-up, dot-com crash, lead-in to 9-11
      2008 economy
      post-9/11
      Priceline’s P-R significantly correlated only to:
      • US internet penetration
      • Season-adj Rev growth
      • ROIC and EPS
      • 1 Std-dev T4Q Rev
      • Operating margin %
      • NASDAQ Index
      • US internet penetration
      • Season-adj Rev growth
      • 1 Std-dev T4Q EPS
      • Season-adj Op margin %
      • OTA market share
      • Season-adj Rev growth
      • 1 Std-dev T4Q rev
      • Variables data incomplete
    • Page 8
      Looking at Priceline and Ctrip pricing multiples to set stage
      China Online Travel Agency case – Ctrip – why is it getting astronomical valuations?
      Trading at an extraordinary P-E of up to 90x in China’s hot economy in 2006 and 2007, one might assume CTRP’s valuation was driven by high revenue growth expectations, dominant market share over eLong, or increasing earnings…
      However, CTRP’s P-E correlated to only one variable in 2006 and 2007:
      Chinese Internet Penetration
      Which is even more interesting considering 80% of Ctrip’s hotel bookings occur via call center, not online…
      Should investors keep buying it? And how should Ctrip invest capital to meet these expectations?
    • Page 9
      Looking at Priceline and Ctrip pricing multiples to set stage
      It’s not possible to truly predict behavior, but anticipating patterns can help direct capital where it may likely be rewarded over time.
      For example, a firm might need to choose whether to invest $5 Million to expand a sales network in Southern China or $5 Million to save labor costs by relocating call centers from Hong Kong to Guangzhou.
      PE
      Earnings gain or cost savings
      Valuation gain
      Assumptions
      Project choice
      • Revenue growth is a primary factor, and a growth pattern drives an PE increase from 15x to 20x
      • Labor cost savings are helpful, but operating margin is not correlated or rewarded additionally