Tencent move increases Ctrip's grip on Internet travel business

Ctrip.com International Ltd is poised to strengthen its position as China's largest travel website after teaming up with Tencent Holdings Ltd to stave off competition.

The Shanghai-based company is the biggest shareholder in Elong Inc, an online trip-booking service, which earlier this month received an offer to take it private from Tencent, the e-commerce giant. Ctrip sees opportunities to "work closely" with Tencent to drive more online traffic to its travel site, Jane Sun, chief operating officer, said on a conference call with investors.

Tencent's bid for Beijing-based Elong may further improve Ctrip's position in China's growing leisure industry, Morgan Stanley analysts led by Amanda Chen wrote in a note last week. "People see the potential for Tencent and Ctrip to get closer together through their holdings in Elong," Jeff Papp, a senior analyst at Oberweis Asset Management Inc, which oversees about $1.9 billion, said.

"Tencent's social media users can generate a lot of traffic on mobile."

Tencent, China's second-largest Internet company, already owns about 16 percent of Elong. Ctrip has a 38 percent stake in Elong after investing about $400 million in May, buying the shares from Expedia Inc, which is based in the United States.

While Ctrip's investment in Elong has cooled a pricing war eating into profit margins, it still competes with Qunar Cayman Islands Ltd, which strives to expand market share by adding more offline travel service providers to its online trip search engine. In June, Qunar said in a statement that it had rejected an unsolicited takeover bid from Ctrip.

"The buyout plan is a positive for Ctrip as the company can leverage Tencent's dominance and expertise in mobile and social networks," Henry Guo, an analyst at Summit Research and based in San Francisco wrote in a note last week.

Tencent's WeChat instant messaging application had 549 million monthly active users as of March, and the mobile version of its QQ messaging tool had 603 million users, the company said in a May statement.

Ctrip reported second-quarter adjusted net income that exceeded analysts' average estimates by 73 percent on Aug 3.

"People had worried increasing spending by Ctrip's major competitor would impact its profit, but the earnings and revenue guidance eased that concern," Papp at Oberweis said.

Morgan Stanley upgraded its rating on Ctrip to a buy equivalent, citing faster profit and stronger than expected revenue growth.

Ctrip and Elong are among the best performers on a Bloomberg index of the most-traded Chinese companies in the US in the past two weeks.