RESEARCHOctober REPORT22, 2018 BookingOctober Holdings 22, |2018 Second Look Insert Picture in Master View Stock Rating BUY Current Price USD $1,806 Bear Price Bull Case Target Case $2,100 $2,541 $2,786 Ticker BKNG Booking Holdings Inc. Market Cap (MM) $85,722 A Second Look EV / EBITDA 15.0x P / E 20.3x Booking Holdings operates several Online Travel Agencies (OTAs), including Booking.com, as well as meta-search websites, including 52 Week Performance KAYAK. 130 Following the initial Booking Holdings report, A Travel Industry Leader, the Consumers & Healthcare team decided to follow-up on some important topics. 115 Summary – The Asian market serves as a key growth lever for Booking Holdings. 100 – The size, growth trajectory, consumer characteristics, and implications for the original thesis are analyzed. 85 – Acquisitions have been an important part of the company’s past 20-Oct-17 29-Mar-18 5-Sep-18 performance. BKNG S&P 100 Index – The acquisition of Booking.com in 2005 is sometimes credited as being the most successful internet deal in the history of M&A. Consumers & Healthcare – This is a large market with many capable competitors. Andrei Florescu – The Google threat is briefly revisited, and Expedia and [email protected] Airbnb are introduced. Ioulia Malamoud – The key to our intrinsic value estimate is the execution of the [email protected] brand advertising strategy. Connor Steckly [email protected] The information in this document is for EDUCATIONAL and NON-COMMERCIAL use only and is not intended to Bronwyn Ferris constitute specific legal, accounting, financial or tax advice for any individual. 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Tawfek Abdelwahed © Queen’s University 2018 [email protected] October 22, 2018 Booking Holdings | Second Look Table of Contents Asian Tourism Market Overview 3 Asian Tourism Market Overview: Consumer Characteristics 4 Asian Tourism Market Overview: Implications for BKNG 5 Recent Acquisition History 6 Competition 9 Valuation Risk 11 References 12 2 October 22, 2018 Booking Holdings | Second Look Asian Tourism Market Overview An important growth lever the QUIC team identified in on foreign travel, and sheer population size. In 2020, its initial investment report on BKNG was the APAC total travel bookings are expected to be $488B, appealing market of outbound Asian tourism, outpacing the United States by $70B (Exhibit I). particularly to Europe. The purpose of our second look at this thesis is to better understand the market Growth Trajectory characteristics and resulting implications for BKNG’s within the Asian market. The growth trajectory for Asian consumer tourism bolsters Booking’s prospects, particularly through The growth in Asian travel is well understood and is online channels. Online tourism bookings are grown largely priced in to BKNG’s current valuation. However, through (1) total market size growth and (2) growing the C&H team believes it is important to discuss this online & mobile penetration. Given Booking’s online growth lever – understanding the Asian travel market platform, they are poised to benefit from both of these allows QUIC to have conviction in our recent position secular industry trends. While total travel bookings in BKNG, and establishes a baseline to monitor for growth YoY in the APAC region was an estimated 7% underperformance, which may suggest unfavorable in 2017, online-specific growth was 10% higher at 17%. competitive developments. The differential between total and online bookings growth among Asian consumers is expected to remain Relative Size present for the foreseeable future, albeit at a slightly lower magnitude as online matures. In 2020, online Outbound travel by Chinese tourists ranks first in the bookings growth is estimated to grow 12% YoY and world, totaling $260B in 2016. This is a result of rising total bookings growth is expected to be 8% (Exhibit II). disposable income, urbanization, relaxed restrictions EXHIBIT I EXHIBIT II APAC Consumer Travel Spend ($B) APAC Online Bookings Growth 600 60% 25% 450 45% 15% 300 30% 5% 150 15% 0 0% (5%) 2014 2015 2016 2017 2018 2019 2020 2015 2016 2017 2018 2019 2020 Total Bookings (LHS) Online Bookings (LHS) YoY Total Bookings Growth YoY Online Bookings Growth Online Penetration (RHS) Source(s): Credit Suisse Source(s): Credit Suisse 3 October 22, 2018 Booking Holdings | Second Look Asian Tourism Market Overview: Consumer Characteristics Accommodation Spend within Asia. Neilsen reported that in 2017, 68% of Chinese travelers go to locations within Asia like Japan A key difference in the buying patterns of Asian or Thailand. Europe and North America are the next consumers in comparison to their western peers is most popular travel destinations, with 38% and 25% of views towards spending on accommodation. Chinese travelers having visited Europe and North Affordability of travel is only the fifth-most important America, respectively (Exhibit III). factor to the Chinese, in comparison to the second- most important factor for non-Chinese consumers. While travel within Asia is currently the majority of However, while non-Chinese consumers spend the Chinese travel, Neilsen expects a destination shift to most on accommodations while travelling, Chinese favor more travel to Europe and North America. consumers spend more on shopping, then followed by According to the European Travel Commission, the accommodations. This difference in spending number of Chinese households that can afford long- ideologies is negative for online travel agencies like haul travel will triple in five years, from ~20M Booking, as the commission revenue model earns households at present to 60M households in 2023. more when the consumer spends more on their accommodations. With that being said, this consumer While BKNG’s accommodation footprint is spread characteristic is widespread and will not hurt Booking globally, the company is most dominant in the any more than its competitors. European and North American accommodation markets. This means that BKNG benefits from the shift Travel Destinations of Chinese travelers increasing their frequency of long- haul, inter-continental trips. The most popular destination for Asian travelers is EXHIBIT III EXHIBIT IV Chinese Leisure Travel: Destinations Visited per Year Chinese Leisure Travel: Long-haul Travelers (MM) 80% 200 160 60% 120 40% 80 20% 40 0% 0 Asia Europe North AUS & NZ Africa 2000 2003 2006 2009 2012 2015 2018 America Source(s): Credit Suisse Source(s): The European Travel Commission 4 October 22, 2018 Booking Holdings | Second Look Asian Tourism Market Overview: Implications for BKNG Mobile Booking Tailwinds primarily domestic travel accommodation inventory. Agoda is a leading OTA in Asian markets like Thailand China’s online travel bookings are more “mobile and Indonesia, and BKNG’s inherent strength in penetrated” than any other country, despite a lower increasingly popular Chinese destinations like Europe proportion of online vs traditional bookings compared and North America mean that the Chinese OTA to competing travel markets. This enables lower incumbents do not pose a credible barrier to Agoda’s customer acquisition cost as clients deal directly rather success in capitalizing on the growing outbound than referral through search platforms. Chinese travel market. In 2015, mobile held ~40% of all online sales in China, The lack of Chinese traction is likely not a determining and is expected to capture ~75% of online Chinese factor in BKNG’s ability to realize Asian travel growth travel bookings by 2020. To add context, the next given that a large portion of the mentioned growth most “mobile penetrated” geography is Japan, which will be long-haul trips to Europe and North America, will reach ~40% of total online tourism bookings by where BKNG is the dominant player with the largest 2020. This consumer trend plays well into Booking’s accommodation inventory. Further, BKNG holds a 12% shift from variable marketing channels, like search stake in Ctrip, providing meaningful exposure to the engine advertisements, to direct bookings through domestic Chinese travel market. Key rivals (Expedia & increased brand advertisement spend. With a greater TripAdvisor) hold no similar stakes. proportion of bookings made on mobile in China, Booking will be able to capture more sales direct on its A greater understanding of the Asian outbound travel app – a more profitable customer acquisition strategy market allows the C&H team to quantify expected that mitigates competitive risks from search providers growth rates and monitor BKNG’s performance against entering the booking phase of the process. This was a a benchmark as we hold the name. risk explored in depth in our first look at BKNG. EXHIBIT V China’s mobile penetration will help BKNG realize the C&H team’s thesis surrounding margin expansion from Global Travel Market: Size and Online Penetration more direct orders and downplay competitive threats from search-oriented players. $500 60% The Efficacy of Agoda Given that Asian travel growth is well publicized and $375 45% understood by the market, the ability for BKNG to capture growth hinges on the success of their Agoda $250 30% brand. While Agoda caters to Asian travelers, it does not have a dominant position within China. Of Agoda’s ~2M property listings, Credit Suisse estimates that just $125 15% 1% of properties listed are located in China.