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Why Tuniu Bleeds Red Ink in China’s Red-Hot Online Travel Market

Stocks in this article: TOUR SINA BIDU LONG CTRP

BEIJING ( TheStreet) -- A come-see-America travel package currently offered to Chinese tourists through the country's Tuniu (TOUR) vacation-planning Web site is a 13-day whirlwind with stops in Hawaii, Las Vegas, Salt Lake City, Yellowstone National Park, Hollywood, Calif., San Diego and more.

If that sound like too much, too fast, look at how Tuniu’s stock price has performed since its Nasdaq IPO in May and compare that sterling performance with the company’s steeper losses cited in a second-quarter financial report released this week.

READ MORE: Tuniu Announces Unaudited Second Quarter 2014 Financial Results

Tuniu shares have gained about 144% over the past three months based on high expectations for Internet consumer services and overall tourism demand in ever-wealthier China. It’s also popular for bridging the worlds of U.S.-listed Chinese online giants Sina (SINA) and Baidu (BIDU), and basic online ticket sellers such as eLong (LONG) and Ctrip (CTRP).

Yet over the past three months, Tuniu’s spending far outpaced its rising stock value. Moreover, the company reported a net loss of $18.3 million for the second quarter compared to a $1.2 million loss in the same period 2013.

READ MORE: Three Chinese Internet Stocks to Own for Long-Term Growth

The bleeding was on the back of a 403% increase in marketing costs and a 183% rise in "general and administrative expenses" quarter-on-quarter, according to the financial report. Higher costs linked to "suppliers of the organized tours and headcount-related expenses for our tour advisers" also played a role, it said.

Analysts told the Beijing News on Wednesday that before and after the U.S. listing, Tuniu spent a "huge" amount of money on a marketing campaign that featured celebrity endorsements and TV commercials.

The campaign apparently worked to boost sales. Revenue rose 85% quarter-on-quarter to $115 million on a 76% increase in traveler trips to about 550,000. The company said travel demand picked up despite jitters in China following the disappearance in March of a Malaysian Airlines flight full of Chinese heading home from holidays, China’s diplomatic rifts with Vietnam and Japan, and political unrest in Asian vacation hotspot Thailand.

READ MORE: 5 Hated Earnings Stocks You Should Love - views

A recent Morgan Stanley analysis rated Tuniu stock a "hold" based on expectations that the company will lose money in the short-team, but that it will benefit from a strong brand image and growth in the online travel services sector.

"China’s leisure tourism industry is growing rapidly, up 53% in 2013," the analysis said. “But online penetration (by travel agencies)  is still low. Tuniu will be able to take advantage of growth in the online leisure travel market,” particularly as mobile Internet expands in China.

Chinese spend about $480 billion on travel and tourism every year, with an increasing amount going toward discount deals sold through online services. Tuniu’s price for that 13-day tour of the western U.S., airfare and hotels inclusive, was just under $3,500.

At the time of publication, the author held no positions in any of the stocks mentioned.

This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.

READ MORE: 3 Stocks Reiterated As A Buy: BMY, BIDU, XOM

TheStreet Ratings team rates SINA CORP as a Sell with a ratings score of D+. TheStreet Ratings Team has this to say about their recommendation:

"We rate SINA CORP (SINA) a SELL. This is driven by a number of negative factors, which we believe should have a greater impact than any strengths, and could make it more difficult for investors to achieve positive results compared to most of the stocks we cover. The company's weaknesses can be seen in multiple areas, such as its generally disappointing historical performance in the stock itself, deteriorating net income and disappointing return on equity."

Highlights from the analysis by TheStreet Ratings Team goes as follows:

  • Despite any intermediate fluctuations, we have only bad news to report on this stock's performance over the last year: it has tumbled by 36.24%, worse than the S&P 500's performance. Consistent with the plunge in the stock price, the company's earnings per share are down 150.00% compared to the year-earlier quarter. Although its share price is down sharply from a year ago, do not assume that it can now be tagged as cheap and attractive. The reality is that, based on its current price in relation to its earnings, SINA is still more expensive than most of the other companies in its industry.
  • The company, on the basis of change in net income from the same quarter one year ago, has significantly underperformed when compared to that of the S&P 500 and the Internet Software & Services industry. The net income has significantly decreased by 151.8% when compared to the same quarter one year ago, falling from -$13.17 million to -$33.17 million.
  • The company's current return on equity has slightly decreased from the same quarter one year prior. This implies a minor weakness in the organization. Compared to other companies in the Internet Software & Services industry and the overall market, SINA CORP's return on equity significantly trails that of both the industry average and the S&P 500.
  • SINA's debt-to-equity ratio of 0.70 is somewhat low overall, but it is high when compared to the industry average, implying that the management of the debt levels should be evaluated further. Even though the debt-to-equity ratio shows mixed results, the company's quick ratio of 5.71 is very high and demonstrates very strong liquidity.
  • SINA CORP has experienced a steep decline in earnings per share in the most recent quarter in comparison to its performance from the same quarter a year ago. This company has reported somewhat volatile earnings recently. But, we feel it is poised for EPS growth in the coming year. During the past fiscal year, SINA CORP increased its bottom line by earning $0.59 versus $0.45 in the prior year. This year, the market expects an improvement in earnings ($0.75 versus $0.59).

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