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Priceline Could Grow Asia Business by Tweaking Business Model

By: Trefis
Posted: 3/1/2011 5:00:00 PM
Referenced Stocks: EXPE;OWW;PCLN

Priceline ( PCLN ) is the second largest player  in terms of booking volumes after Expedia ( EXPE ) and competes with other leading online travel agencies such as Travelocity, Orbitz ( OWW ) in offering travel services over the Internet, including bookings for air tickets, hotel stays, car rentals, cruises and vacation packages.

We recently wrote an article on Priceline's impressive growth in Asia titled If Priceline Harnesses Asian Growth, Shares Have Ample Upside . We highlighted that for Priceline each 1 percentage point increase beyond our 3% market share projection would correspond with about 30% upside. Here we explore additional growth opportunities that exist in these markets outside of Priceline's traditional business model and how the company might capture market share at a faster pace.

We maintain a price estimate of $452 for Priceline's stock , in line with market price.

Strong Footing in International Markets with Existing Brands

Priceline made three key acquisitions, among others, in the past five years. It acquired in 2004, BV in 2005 and Agoda in 2007. has driven most of Priceline's hotel bookings growth since its acquisition and provides the company with a foothold in the European hotel market. The acquisition of Agoda will help Priceline tap into Asian markets and will be a substantial driver of Priceline's expected hotel bookings market share increases in the years ahead.

How can Priceline further strengthen its position in Asian markets?

Move Beyond Reliance on E-Commerce

While travel is the largest e-commerce category in India, it is still restricted by the limited reach of credit cards and banking products and services to remote areas in India and main land China. While the banking and consumer credit sector is undergoing explosive growth in these economies, we believe Priceline could adopt other payment mechanisms, such as cash-on-delivery and cash-on-arrival to fully exploit the growth opportunities in tourism.

An example here is that Alibaba, the most trusted online vendor in China, has a system called Alipay that acts as an escrow service where a buyer deposits funds that are not released to the seller, until the buyer verifies the receipt of the product.

Move to Acquire Local or Regional Players

Priceline's acquisition of Agoda mainly serves Hong Kong, Singapore, Malaysia and Thailand. Given Priceline's healthy cash balance and availability of cheap credit in US amidst low interest rates, Priceline could well explore acquisition targets in China and India. Ctrip is one name that has come up in the past. Yatra and Cleartrip are funded by venture capitalists, Norwest for Yatra and Kleiner Perkins for Cleartrip, which could look to sell their shares through an IPO or buyout from a large player like Priceline.

Inorganic expansion through mergers or partnerships would not only enable a steep rise in market share but also enable Priceline to fully leverage the explosive growth that is expected in the Asian travel market.

You can see a detailed analysis of our $452 Trefis price estimate of Priceline's stock here .