Qunar Cayman Islands, Ltd.

(QUNR)

Recommendation: BUY
ENTRY @ 29.70
STOP @ 28.2
Target @ 39.3
Risk = 5.1%; Reward = 32.3%

Overall Market Climate: The market has started to slip, while it is going through some
distribution for the first time, as it was unable to pierce the 2000 level. On Monday, there was
intense selling in the Nasdaq and many momentum stocks, while on Friday there was wide
scale selling in the S&P 500.

Tuesday represented an accumulation day, which is the first sign that an end to the selling may
be near. The short term determinant whether this is the end of the pullback or whether the
pullback will turn into a correction will most likely be determined by the Federal Reserve meeting
on Wednesday. Dovish news out of the Fed and a positive market reaction would be a green
light for market participants to resume risk on behavior.

This has created a much more difficult and ambiguous trading environment. In this situation, it
is more difficult to find bullish setups and better to be patient and wait for better market
conditions before getting aggressive. Given the nature of the selling and lack of bounces on
mild breadth, it is not prudent to seek out short positions either.

Instead, the best strategy is to be patient and look for accumulation. There is the potential for
strong bounces in momentum stocks and Chinese internet stocks. However, select stocks in
the financial space look to be setting up well, assuming this bull market continues. At this point,
it is best to give this uptrend the benefit of the doubt and treat this as a normal pullback. A
move higher on weak breadth would lead to reconsidering this conclusion.

However in the short term, extremes have not been hit in terms of sentiment, so it is not
appropriate to take an aggressive position on the long side. Either price will confirm an end to
this weakness or extremes will be hit in terms of sentiment and volatility, that will allow for
aggressive positioning.

Chart Analysis:
QUNR IPO’d in late 2013 at an opening price of 27, since then for the majority of its trading
history, it has remained within its opening range. It experienced weakness during the March-
May time period when many internet stocks were sold off, but it held well above the bottom of its
range. The stock eventually fell from 36 to 22, where it bottomed with many internet stocks in
mid May.

Since then, the stock has been steadily climbed higher and showed very bullish volume
patterns. Up days are on massive volume while down days are on lighter volume. Another sign
of a big winner for the stock, is that it has basically disassociated itself from the influences of the
US and Chinese market, remaining under accumulation even while these markets have been
weak.

During these periods of general selling pressure, the stock tends to trade in a tight range with
low volatility, a clear signal that the price is being supported. And when the selling pressure
from the overall market lifts, the stock moves higher on strong volume. This is classic behavior
of a stock with strong upside momentum.

Additionally, the stock has three important characteristics that fund managers will be targeting in
an effort to make up underperformance - high growth, high margins and high short interest.
Revenue for growth on a YoY basis was 127%, while similar numbers are expected for next
quarter as well. The company sports an impressive 70% gross margins, and short interest is
slightly above 20%, creating the possibility for a big squeeze higher.

The combination of fast growing revenue and high margins are a potent combination that can
justify all types of valuations. In a study of the biggest gaining stocks, this was a common
ingredient amongst many big winners. A similar example is Baidu whose stock has climbed
nearly 100x since its IPO. Throughout its history it has grown at a similar rate with margins
above 50%. Baidu is a relevant example because it is actually the largest investor in QUNR,
instantly giving QUNR a powerful platform to reach customers.
Fundamentals: As noted above, the most impressive aspect of QUNR is its rapid growth rate.
Gross margins are above 70% while revenue is growing above 100% on a year over year basis.
QUNR has the same strategy as Baidu of not worrying about earnings but instead investing in
its own growth in early years, focusing on winning market share.

The long term opportunity for QUNR is especially appealing due to the growth rate of the
Chinese travel market and online travel bookings. The Chinese travel market is growing nearly
22% on an annual basis over the last 5 years, as that country’s middle class continues to
expand. And online travel booking is growing nearly 50% on an annual basis, providing plenty
of opportunities for online travel stocks. Given the company’s close relationship with Baidu the
largest search engine in China, it is certain that QUNR’s market share will continue to increase
while the overall pie continues to increase as well.