Ctrip: Priced Beyond Reason

China's equivalent of Priceline.com (NASDAQ:PCLN), Ctrip.com (NASDAQ:CTRP), is the PRC's leading online travel agent and operates with almost erotic profit margins. The Company's record quarter, thus far, was during the 2008 Beijing Summer Olympics (Q4 FY2008), with $100M in revenue and $32M in net income. Through the first TWO quarters of 2009, CTRP has booked $128M in sales and earnings of $41M. Even with two quarters each matching last year's record quarter to finish this year (arguable, given China's stimulus spending however unlikely, given reality), CTRP earns about $1.50/share and trades at a P/E of 50 and a P/S near 15.

Given the current valuation, it appears that investors are pricing in a delusion that CTRP does not have significant competition in China and will continue to grow unhindered. Despite beating analyst earnings estimates, margins have dropped thus far in 2009 due to lowered ticket prices. Leading airline CEA sells discounted tickets through Taobao.com (OTC:ALBCF) and direct competitors eLong (NASDAQ:LONG), Travelsky (OTCPK:TSYHF) and Universal Travel (UTA) are all profitable and growing.

"Middlemen companies" in China (such as travel agencies) will never make the kind of money American ones have. A higher savings rate and better education in math make Chinese consumers more prone to shop wisely. My point in this case is that Chinese people currently don't fly (or take cruises...) as much as Americans (if at all), making what has CTRP so highly valued ($5B or 25x 2008 sales, which included The Olympics!) some parabolic expected future growth. If the Chinese consumer is going to use CTRP more, he is going to need to see value there. Since he has never even flown before, he will not care how much retail prices are for air-travel and simply find the best deal for what he wants, absent of any prior loyalty.

While CTRP was first to the party, there are now other well-equipped players to take advantage of the young travel market in China. Chinese airlines, which didn't have the same pre-internet glory days American ones did, are generally new and modeled to grow in today's economy. In turn, they will price tickets and work with other sellers in a way that maximizes profits in today's economic environment, whereas American airlines (not just AA) have shot themselves in the foot time and time again by trying to maintain excessive retail premiums.

Early investors in CTRP have already been paid handsomely and momentum has carried the stock to unreasonable levels.

My estimated fair value for CTRP is 35X 2009 earnings which, at a more realistic $1.30/share, makes the $72 stock overvalued by about $22/share.

Disclosure: Author holds a short position in CTRP