NEW YORK (TheStreet) -- With the rich getting richer in China and the middle class still in rapid expansion mode, rising disposable incomes in the country is affording Chinese travelers the ability to embark on more and more unique travel adventures than ever.
Beijing-based e-commerce travel site Qunar (QUNR - Get Report) has managed to work itself into a strong position of being able to serve these travelers by giving them the tools they need to research, explore and buy highly customized travel experiences through the convenience of the web and mobile devices.
A record 168 billionaires made it to Forbes' China Rich List this year, up from 113 last year. According to Bloomberg, China's per-capita disposable income has accelerated four-fold since 2000.
Even with strong travel demand in China, the overall infrastructure of the Chinese travel industry remains surprisingly underserved and disjointed. The total market is divided between state-owned companies, offline agencies and a number of online services. In the U.S., consumers can easily choose between a vast number of online travel services sites to pull up all the comprehensive bookings information they need with a quick search of the Internet. Such an option still isn't as prevalent in China, despite the country having already exceeded the U.S. on the population of web and mobile phone users.Qunar has recognized this services gap, and as a strong strategic ally of China's second-largest Internet company Baidu (BIDU - Get Report), which holds 58.8% of Qunar's voting power, has been building up its online travel services business since 2005. The company aggregates and processes highly fragmented travel product information from tens of thousands of travel service providers into an organized and user-friendly display through its proprietary technology. It ranked number one among all non-state-owned online travel companies in China based on monthly unique visitors since 2010, according to Internet consultant iResearch. According to Nielsen, Qunar was the most visited travel website in China as of June 2012. The company, which has drawn comparisons with Priceline.com (PCLN)-owned Kayak, has seen revenues increase to RMB 501.7 million ($81.7 million) in 2012, up from RMB 123.9 million in 2010, as the online travel market in China grew at a compound annual growth rate of 36.9% in the 2008 to 2012 period. Qunar's active web users grew to 29.7 million in 2012 from 12.6 million in 2010, and active mobile user ship increased to 10.4 million in 2012 from 80,000 in 2010. Active web user and active mobile user figures stood at 31.4 million and 17.6 million, respectively for the 12-month period ended June 30. The company estimates that as of June 30, there were more than 100 million downloads of its mobile apps. Qunar, which means "Where to go" in Mandarin Chinese, went public on the Nasdaq last week to help fuel investments into Qunar's technology, infrastructure, and services. In reflection of the robust confidence in Qunar's business proposition, shares soared by as much as 133% to an intraday high of $34.99. The company had priced about 11.1 million American depositary shares at $15 a share the evening before, above the expected range of $12 to $14.
Jenna Qian, the company's head of investor relations, said during an interview with TheStreet on Monday that the IPO had a strong showing also with the help of steps the company had taken to eradicate any fears tied to the accounting scandals that marred Chinese technology stocks over the last several years. On Wednesday, Qunar shares closed ahead by 5.89% to $28.06.
Andrea Tse: How long were you waiting for market conditions to ripen for an IPO? Jenna Qian: I think Qunar has been ready for an IPO a long time ago. For us, it's a very natural process of company growth and development, and now I think the investor appetite is here, and the macro is good, so I think it's a very natural step for us. Tse: What would you say were the key drivers behind the demand for your initial public offering? Qian: I think it comes down to the fundamentals of our business. Firstly, we are in a hugely growing market. The Chinese online travel market is growing at about 33% CAGR, so the growth is tremendous and the online penetration for the Chinese travel industry is relatively low. It's only seven percent. Versus the U.S., it's about 40%. So we have huge growth potential. And secondly, in this online travel market, we are the leading player. We are a 100% online. We are a technology company. So that puts us in a very sweet spot. We are the leading search-based commerce platform in China. So it's a very good value proposition for us. And then thirdly, I think investors have known us for some time. As a Chinese company, I think we stand out in terms of corporate governance. Our CFO came into the company three years ago. So normally Chinese companies only hire CFOs right before an IPO. So for us, we've had him here for almost four years, and he understands our business. He's very involved in the operational details. And we also engaged independent directors, the Big Four, also legal counsel a long time ago, like three or four years ago. Right now we're using Ernst & Young because Baidu uses Ernst & Young. So that's actually quite rare for a Chinese company, to set a very high standard for our corporate governance. And now today among our board members, four out of seven are independent directors. Tse: How has Qunar benefited from Baidu's controlling stake in the company? Qian: Yeah, Baidu invested in us for $306 million in 2011. Since then, they have become our majority shareholder. I think our relationship with Baidu, first of all is a strategic alliance. Baidu is the leading general search in China and we are the leading travel vertical search in China. So there's a lot of natural fit between our businesses. We can have a lot of cooperation on the R&D level, so our engineers talk to each other to share the R&D ideas. But if you look at our operation, we run pretty independently from Baidu. Our management is still the same as before Baidu. So Baidu has set a very good example on strategic investments. I think they've intentionally kept us independent from their system in terms of daily operations. They gave us enough independence and freedom to run the business because they know that we are the best in terms of vertical search. So it's a very healthy, positive relationship between us. Tse: What are some Chinese travel industry trends or patterns that Qunar is uniquely positioned to benefit from? Qian: I think compared to the U.S. market, the Chinese market is still in the relatively early stage. We think online travel booking has taken off over the past few years. As you can see, in China's travel industry, most of the travel agencies have been offline, right? Those are like a lot of state-owned travel agencies who were dominant in the market. And then in the 1990s, Ctrip came up as the leading online travel agency. They were the disruptor back then. But their business still largely relies on call centers. They have over 10,000 people in call centers. And now, in the 2000s, the business involves us. Qunar is now the leading search platform. You know, we are the new disruptor to the industry. You know, we brought technology, we brought search technology to consumers. Chinese consumers have the platform, have the entry point to compare prices and products across the whole internet for the first time ever. So I think this is like you know ... it comes in a two-way interaction. First of all, we see the trend. The consumer trend is taking off. And secondly we are also driving the online movement of the consumer behavior. And then the last thing to mention is that the mobile penetration in China is really ahead of the curve. It's even more ahead of the curve than the U.S. and Europe sometimes. For example, our mobile app has received over 100 million downloads by Q2 of this year. And then in Q3, our mobile revenue has already contributed to 14.5% of our total revenue and we only started to monetize it July of last year. So that was fairly recent and the growth is very fast. So I think the Chinese market will be more similar to the Japan market when it comes to mobile development. In Japan, according to some industry players there, they said that mobile penetration has already reached 40% to 60% of the total market. And for us, over the next few years, China could be able to reach that level. Tse: Are there any travel destinations or vacation experiences that have been particularly popular with Chinese travelers? Qian: Well they're willing to do anything, you know, from the North Pole to South Pole. I think you can find Chinese everywhere. Tse: What's your long-term outlook on the travel industry in China? Qian: I think no matter how the macro economy is, I think we're staying, as I mentioned. I think the overall, the size is huge, and it still keeps a growth rate of around 10%. And within the travel industry, we're seeing online travel growth at 33% right. So the growth will continue, it is anticipated to continue. And then the other thing is Chinese consumers having more disposable income from their pockets and also the realization of the lifestyle upgrades, right ... they're travelling more. You know, they're simply doing more leisure travel. And for us, our main target audience are leisure travelers. You know, they are FITs, frequent independent travelers. So we think that maybe ten years ago, most of the Chinese travelers, they will go on travel tour, right? Led by those travel guides. But not anymore. I think as they are more educated, as they have more experience with different cultures around the world, I think they are more willing to have a more personalized experience. Tse: What other measures has Qunar taken to placate lingering concerns about Chinese technology stocks? Qian: I think the concerns over Chinese companies in the past couple of years, I think it could be a good thing. I think that it differentiates good companies like us from the bad ones. We have done a lot to ensure that we have the best corporate governance, and as I mentioned, we engaged Big Four accounting at a very early stage, you know, three years ago to help us on the accounting audits. And internally, last year we set up a whistleblower email address that HR and internal auditors can directly access. And then I mentioned that we have engaged independent directors in 2010, and after Baidu got in, our board now has four independent directors. The other thing to mention is our voting structure. We use a voting structure that provides protection to minority shareholders through cumulative voting. So we've done the best we can to become a really transparent company and if you look at our F-1, we have disclosed a lot of operating metrics, which a lot of our comps don't. So we really want to become the best practice in this market. And that's also another reason why we came to the U.S. for listing because we think the U.S. market is much more regulated. It's the best governance market in the world. We want to test our capacity to perform in this market. Tse: Which particular metrics are revealed by Qunar but not your competitors? Qian: I think we have metrics on different fronts. For example we have the user numbers, the mobile users and the PC users. We have active user numbers and general user numbers. And if you look at other travel companies in China, they only disclose downloads. For us, we always choose the more rigid ways to disclose numbers. No fuzzy items. We want to be crystal clear to investors and users. --Written by Andrea Tse in New York