Ctrip: Rapid Growth Along With China Travel

I first met Neil Shen, co-founder of Ctrip (NASDAQ:CTRP), about 2 years ago when we were both speakers at Cyberport Hong Kong’s Venture Capital Forum. I had just flown in from Shanghai to talk about edutainment in China and how investments into the sector made sense from a venture capital standpoint. Neil had not joined the venture capital firm Sequoia yet. He was there to talk about the online travel service company Ctrip he had started in 1999 and his experiences in building the company up.

Although I frequently purchased plane tickets using Ctrip, this was the first time I had a chance to meet with Neil and hear his business strategy. I was impressed with Neil’s vision for the future of Ctrip and the business model they had going forward – they mixed a brick and mortar operation with technology quite well. To offset worries about e-commerce and a lack of credit card usage in China, for instance, Ctrip delivered tickets to a home or office by courier where consumers could pay in cash.

Call centers were automated for some parts of a sale but also had live and well-trained operators that made consumers feel comfortable buying tickets from someone other than the travel agent they were used to. After speaking with Neil, I was convinced that Ctrip was a company investors should keep their eyes on.

I still believe so despite a share price that has dropped in recent months.

Ctrip’s outstanding customer service has borne fruit, as it has become the clear leader in online travel services over competitors like E-long (NASDAQ:LONG) whose major stakeholder is Expedia (NASDAQ:EXPE).

Aspirations of China’s Middle Class – Domestic and International Travel

Most investors understand the macro aspects of why travel services in China are a good sector to look at. China’s middle and upper classes are burgeoning. The ranks of the middle class are estimated to top 250 million by 2010. As Chinese become wealthier and increase their purchasing power they have certain desires. Entrance or aspiration to the middle class is first heralded by the purchase of an expensive mobile phone such as one by Nokia (NYSE:NOK) or Motorola (MOT). The next major purchase is a car or a house.

But in between these major milestones, consumers turn towards travel, both domestic and, as Chinese are able to get more visas to countries like Malaysia and Italy, to international travel. As I wrote previously in Seeking Alpha, of the $6 billion USD a year of luxury products Chinese consumers are buying, only 1/3 of it is bought in China. The rest is bought on business trips or vacations to Italy, Hong Kong, and other hotspots.

The UN World Tourism Organization estimates that in 2006 there will be 34.1 million air flights originating from China. Domestic tourism in China has been growing at greater than 10% annually for the last five years. In 2001, spending on domestic tourism amounted to $42.5 billion USD – the number skyrocketed to $65.5 billion USD. As international and domestic travel in China become affordable for more people, demand for travel services is going to increase. Ctrip is well positioned to take advantage of this trend.

For the last several years, Ctrip has focused on growing its primary business in hotel booking and air ticketing that focuses on the ‘frequent independent traveler.’ In 2004 revenues from hotel reservations equaled $34.5 million USD and accounted for 78% of C-Trip’s revenue. In 2005 hotel-booking revenue had increased to $45 million USD but only accounted for 65% of total revenues, largely as a result of a surge in e-ticketing. 5.5 million hotel rooms were booked through Ctrip in 2005. However, 2005 witnessed a dramatic increase in the number of airline tickets sold through Ctrip as the number went from 1.7 million in 2004 to 3.7 million in 2005. Revenue from air ticketing jumped from $8 million USD and 18% of revenues in 2004 to $20 million USD or 29% of revenues by the end of 2005.

Ctrip has also begun focusing on corporate accounts, which should help fuel more sales. Companies in China still place a premium on conducting business face to face. Ctrip will continue to benefit, especially as many secretaries in companies are deciding which travel agencies to work with. They often choose Ctrip because it has a very good loyalty program, akin to Starwood’s Preferred Guest program that Chinese like and which I wrote about in BusinessWeek recently.

Another fringe benefit that has served C-Trip well has been its introduction of VIP cards that offer discounts at select restaurants and shopping destinations. Chinese consumers especially appreciate value added services like discounts at restaurants and this kind of well executed loyalty program is a great lure for customers. They have launched effective marketing campaigns by passing out membership cards at airports and train stations.

The Stock Price

After a great run-up at the start of 2006, the stock has dropped considerably from its 52 week high of $56.50 USD on July 12th to $45.25 USD on September 22nd. This three month slide has given investors cause for concern, but I believe that the two main reasons for the dip, profit taking, and a relatively high P/E ratio of 49.35 do not outweigh Ctrip’s long-term prospects. The stock could be a great buy because Ctrip’s fundamentals are solid.

Revenues in Q2 2006 were $25 million USD, a year-on-year increase of 47% and a 21% increase over Q1 2006. Revenues from hotel bookings were $15 million USD in the second quarter, 28% higher than Q2 2005 and 23% higher than the first quarter of 2006. Q2 revenues for air ticketing reached $9 million USD, 94% higher than Q2 2005.

Ctrip’s stock price has also been hit by overblown concerns that the military coup in Thailand will impact hotel and flight bookings through the company. The coup will actually have very little effect on C-Trip’s business as little of its business is tour group bookings to Thailand.

The fact remains that Ctrip does online travel better than any of its competitors in China and that its business has a lot of room to grow along with China’s middle class. In future years, Ctrip will benefit by focuses on building its corporate travel business and on expanding services from 1st tier cities like Beijing and Shanghai into 2nd tier cities like Chongqing and Dalian. Ctrip is also becoming more efficient in its business model and in October is making air ticketing entirely electronic. This should cut costs and improve margins.

In all, investors should strongly look at buying Ctrip. I do not own any shares yet, but I am thinking about buying some this week if the drop stabilizes a bit. Long-term, Ctrip is a welcome addition to any portfolio.

CTRP 1-yr chart:

Shaun Rein is the Managing Director of the China Market Research Group, a Shanghai based firm that helps foreign firms entering or expanding in China get the market intelligence they need to make smarter decisions in China.