Market Strategists. SG & US Equity Analysts. By Phillip Securities Research. 19 th Jan 15, 8.15am/11.15am Morning Call/Webinar

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1 19 th Jan 15, 8.15am/11.15am Morning Call/Webinar Market Strategists Kenneth Koh, Market & Equity Analyst Soh Lin Sin, Macro Equities Economist Osama Bakhteyar, Macro Equities Economist SG & US Equity Analysts Wong Yong Kai, US Equities Colin Tan, Telecoms Technology Caroline Tay, Real Estate Benjamin Ong, Finance Offshore Marine Richard Leow, Transport & Logistics By Phillip Securities Research Mr. Chan Wai Chee, CEO Jaelyn Chin, Operations Exec 1

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3 Priceline Group Market Leader of $500b Online Travel, 46% CAGR Wong Yong Kai Investment Analyst Phillip Securities Research 19 January 2015

4 Company Snapshot Share Price: $1, Week Range: $ , Diluted Market Cap: $53.4 billion Historical P/E: 22.4x 4

5 Segment Revenue ($'m) Net Profit ($'m) Company Overview No.1 market leader in online travel, earning % cut whenever travel reservation (typically with an airline, hotel, or car rental) is performed on its websites. Mostly facilitates transactions with third parties => 100% Gross Margin. 5-Year Revenue & Net Profit 10,000 8,000 2,385 3,000 2,400 6,000 1,893 1,800 4,000 1,059 1,424 1,200 2, F Merchant Agency Others Net Profit

6 Investment Merits Valuable Online Brands: Booking.com, Agoda.com, Priceline.com Revenue, Gross Bookings 26% and 32% y-o-y in 9MFY14. 33% Net Margin. Multi-Year Secular Trend: Migration from traditional travel agencies to online. Low oil price should translate to cheaper air tickets, higher discretionary income. Network Effect attracts more repeat users, and enables it to outspend competitors ($1.8b online advertising expense in FY13 is 50% more than No. 2 Expedia). Net Cash Position. Flexibility to lever up and repurchase 20% outstanding shares. Attractive at 22.4x historical P/E, on the basis of ~15% p.a. EPS future growth. Target $1, % potential return. Initiate coverage with Buy. 6

7 Double-Digit % Growth

8 Double-Digit % Growth 1) According to Expedia, online travel is ~45% total travel market. Migration from traditional travel agencies to online is a multi-year secular trend => NATAS Fair (Sep 2014) saw 10% less visitors, 10-20% fall in sales. Priceline gaining traction in its mobile channel, $8b bookings (20% of total) in FY13, up from $3b (10% of total) in FY12 and $1b (5% of total) in FY11. 2) IATA expects 31% increase in passenger numbers between 2012 and 2017, reaching 3.91 billion. Forecast was released when WTI crude oil traded at $100/bbl, vs $45/bbl today => lower fuel surcharges improve affordability of air tickets + increase in discretionary income brought about by gasoline savings and other lower input costs (logistics, energy, raw materials). 3) Hotel industry is very fragmented. Top 10 Worldwide Hotel Group owned 4.6m hotel rooms, which makes up only 34% global hotel room inventory. Network Effect: more listings attracts more users, which in turn encourages more listings; powerful feedback loop that reinforces market leadership. 8

9 Double-Digit % Growth 'm Gross Bookings (Type & Dollar Amount) $'b M 2014 Room Nights Rental Car Days Airline Tickets Gross Bookings 0 4) 267.8m Room Nights booked via Priceline in 9MFY14, 29.1% y-o-y and nearly exceeding the full-year quantity of million clocked in Mostly international growth. Even so, Priceline has barely captured 10% of online travel market, estimated to be $500b in Online Penetration. 9

10 Double-Digit % Growth 5) Online advertising is the biggest component of operating expenses, at 54% in 3QFY14. $1 of online advertising spend drove $1.06 net profit in FY13, while the same $1 advertising expense only earned Expedia $0.18 net profit. 4.9x better profitability per dollar spend enables reinvestment into core biz. 6) Airbnb is disruptive, but more of a threat to the traditional hospitality industry than Priceline itself. It ought to be viewed similarly as Hostels.com, or HomeAway.com, in the sense that all offer alternatives to travellers. HomeAway.com, in particular, was established in 2005 and has over 1 million listings today, focusing on vacation rental homes. Longer operating track record than Airbnb (founded in 2008), but still only $2.6b market cap. Airbnb listings are individual properties. Once booked, they will become unavailable to others, whereas 100-room hotel can simultaneously cater to 100 bookings. As such, Priceline business model is more scalable than Airbnb. 10

11 14/1/ /7/ /1/ /7/ /1/ /7/ /1/ /7/ /1/ /7/ /1/2015 Valuation 60.0 Historical P/E (based on LTM Earnings) SD Mean -1 SD 10.0 At a more sustainable 15% EPS growth rate (which could be too conservative), compared to past 4-year CAGR of 46%, Priceline should deserve forward P/E of 27.7x, a multiple that is ½ standard deviation below mean. Applying that multiple to $51.80 FY15 EPS (15% higher than FY14 EPS of $45.00) = Target $1,

12 Investment Merits Valuable Online Brands: Booking.com, Agoda.com, Priceline.com Revenue, Gross Bookings 26% and 32% y-o-y in 9MFY14. 33% Net Margin. Multi-Year Secular Trend: Migration from traditional travel agencies to online. Low oil price should translate to cheaper air tickets, higher discretionary income. Network Effect attracts more repeat users, and enables it to outspend competitors ($1.8b online advertising expense in FY13 is 50% more than No. 2 Expedia). Net Cash Position. Flexibility to lever up and repurchase 20% outstanding shares. Attractive at 22.4x historical P/E, on the basis of ~15% p.a. EPS future growth. Target $1, % potential return. Initiate coverage with Buy. 12

13 Ask Questions! Market Strategists Kenneth Koh, Market & Equity Analyst Soh Lin Sin, Macro Equities Economist Osama Bakhteyar, Macro Equities Economist SG & US Equity Analysts Wong Yong Kai, US Equities Colin Tan, Telecoms Technology Caroline Tay, Real Estate Benjamin Ong, Finance Offshore Marine Richard Leow, Transport & Logistics By Phillip Securities Research Mr. Chan Wai Chee, CEO Jaelyn Chin, Operations Exec 13