Ctrip’s $2.3b equity combo a roaring success

China’s leading travel agency completes the largest dual-tranche equity fundraising ever from an Asia ex-Japan issuer.

Chinese travel giant Ctrip.com International got overwhelming demand for its $2.3 billion dual-tranche equity offering this week, showing international investors' confidence in China's burgeoning travel market.

Nasdaq-listed Ctrip's success was underlined not only by the fact it put together one of the biggest order books for an Asian issuer in recent years but also the extremely tight pricing it achieved for both its convertible bonds and a secondary offering of American Depositary Shares (ADS)

Ctrip broke with the usual practice for equity deals from US-listed companies, which typically run over the course of two days. Instead, Monday's Labour Day holiday stateside left it to build the book in just one day on an accelerated schedule. The company was only able to launch the deal shortly before the US market opened on Tuesday and collect orders during trading hours before setting final pricing ahead of market opening on Wednesday.

One source familiar with the situation said Ctrip moved quickly to launch the trade immediately after the holiday because it wanted to move ahead of other potential equity issuers in September, typically a busy month for issuance as fund managers return from their summer breaks.

Indeed, delaying by a day would have pitted the Chinese play directly against two other prominent deals: Advanced Micro Devices' $1.05 billion combo offering and another $325 million deal from BMC Stock Holdings.

As it was, Ctrip received a flood of orders totalling around $8 billion, according to a source, split fairly equally between the ADS and the convertible bond tranche.

It had launched the equity portion at an indicative size of $1.1 billion and the equity-linked portion at $750 million. The overwhelming demand meant Ctrip was able to increase the size of the tranches to $1.4 billion and $900 million, respectively.

That maintained its impressive record of upsizing every convertible bond offering since its first issue in 2012.

The $2.3 billion transaction is the biggest-ever concurrent equity and convertible bond offering from an Asia ex-Japan issuer.

Convertible bond

For the latest issue, Ctrip went out with an initial coupon guidance of 1.25% to 1.75% for the non-call six-year convertible note, including a put option in year three. It was offered with a conversion premium range of 37.5% to 42.5%.

Final pricing for both was settled at the tightest end for investors, namely a 1.25% coupon and a 42.5% premium that translates to a conversion price of $65.49. This is about 17% above Ctrip’s $55.84 all-time high, indicating that investors expect a considerable upside in the underlying stock.

The source said investors showed confidence in the credit because Ctrip had been a frequent issuer of convertible bonds and was a liquid stock. In addition, both its existing 2020 and 2025 convertible bonds are trading deeply in the money, making it almost a no-brainer to subscribe for the new deal.

“Every convertible bond fund holds Ctrip bonds,” the source said. “Being a Chinese tech name in the fast-growing travel industry, together with the magnitude of the deal, it is a transaction that no one would want to miss.”

Underlying assumptions were a bond floor of 90.7% and implied volatility of 29.4%, based on a credit spread of 350 basis points and stock borrow at 50bp at the final price, according to a bond trader.

Besides the $900 million public offering, Ctrip also announced a concurrent placement of $25 million convertible bonds to Priceline, the company’s strategic partner and an existing shareholder.

ADS offering

Ctrip is a repeat convertible bond issuer but not a frequent equity issuer. Still, it was able to attract demand to upsize its $1.1 billion ADS offering by 27% to $1.4 billion, making it one of the largest deals of its kind from an Asian company so far this year.

Supported by two anchor orders from Baidu and Priceline, which committed $100 million and $25 million respectively, Ctrip was able to sell 6 million additional ADS on top of its initial offer of 22.5 million shares.

Despite launching without any price guidance, Ctrip managed to price the equity tranche flat to the last close at $45.69 per share. That represented a file-to-offer discount of 4%, the extent in which Ctrip’s ADS dropped in Tuesday trading when the bookbuild was conducted.

Sources said the order book for the equity tranche comprised mostly existing shareholders as well as a few new accounts. The deal was predominately supported by US accounts with decent Asian participation.

JP Morgan and Morgan Stanley were joint bookrunners for both the ADS and the convertible bond offering.

Growing outbound tourism

Ctrip has been a public company since 2003, but its shares only began to surge in 2013 on the back of China’s rapidly-expanding outbound tourism.

According to the China Outbound Tourism Research Institute, the number of Chinese travelling abroad has been increasing at more than 15% per annum for the last three years. That is despite a slowdown in overall growth of the Chinese economy, which has fallen from 7.7% in 2013 to 6.9% in 2015.

There are multiple factors behind the growth in tourism from China, not least the growing size and spending power of China's middle class and the appreciation of the renminbi.

The Chinese government, meanwhile, has implemented favourable policies including extending holidays and easing bureaucracy for would-be travellers as part of its efforts to establish "soft power", or build influence abroad without conflict.

Ctrip has been building its platform through external investment since 2013 to take advantage of the growth in Chinese tourism.

Last year, it took the bold step of acquiring its main competitor, Qunar, creating an industry behemoth that holds more than 65% of China’s online travel service sector. It also has stakes in other travel booking sites such as Elong, Huayuan and India’s makemytrip.com.

The company also extended its reach outside the traditional hotel and airline booking businesses by tapping into other tourism-related industries. So far, Ctrip has invested in hotel operators including 7 Days Inn and Huazhu Hotels Group, auto rental firms such as eHi and Yongche, as well as China Eastern Airlines and Zhongan Insurance.

In August, the company announced it would team up with General Atlantic to take a stake in Ocean Link, a private equity firm that invests in tourism and related businesses.

Senior management said the strategy of diversifying the business was intended to expand its range of products and increase the entry barrier for anyone looking to break into China’s travel industry.

So far the strategy appears to have borne fruit. Ctrip’s total number of customers rose 50% from 44 million in 2014 to 66 million by the end of June this year.

In the long term, the company said it intended to increase its operating profit margin, which had been dropping in recent years, as well as further expanding its market share and becoming a global online travel agency.

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