Universal Travel Group: Ctrip for Value Investors

Includes: CTRP, PCLN, UTRA
by: Danny Furman

My most recent writing has focused on Ctrip.com (NASDAQ:CTRP), and not in the most positive light. I do, however, believe that CTRP operates in one of the 10 or so most promising industries, worldwide, for profitable growth in the coming years.

China's travel industry is young and government stimulus is developing cities and transportation between them that travelers throughout the world will want to see, be it for business, pleasure or simply to observe the nation leading global economic growth. In selling travel services throughout China without the high fixed expenses of, for example, an airline, CTRP appears poised to grow top-to-bottom for years to come.

The only problem with CTRP is price. After reporting FY09 earnings of 68 cents/share on $311M in revenue, up 34% YOY, the stock trades around 14x trailing sales and 40x trailing earnings. Priceline.com (NASDAQ:PCLN), which has grown revenues and profits faster than CTRP in each of the last 4 quarters, trades for less than 5x sales and 25x earnings through only the first three quarters of FY09. The market appreciates that PCLN is performing extremely well and gives the stock a solid growth premium. CTRP, on the other hand, is simply priced for growth and already has a market cap half the size of PCLN.

It is important to remember that these companies create nothing, pay minimal dividends, have almost nothing of proprietary value, and are priced purely on expected future earnings. Therefore, it is silly to compare these internet travel agents, who are simply travel agents with online stores, to innovative technology or cloud computing companies, whose proprietary technology bars competition. Given CTRP's valuation, where's the upside?

Surprising as it may seem, one of China's leading online travel services companies trades for just over 8x projected FY09 earnings and 2x sales. United Travel Group (UTA) provides travel services throughout China through the company's website. UTA has been profitable since 2005, when it did less than 3% of 2008 sales. Through three quarters of FY09 revenues and profits are on pace for records, at $65M and $10M respectively.

The Company has even been on an acquisition spree lately, buying two agencies that operate near some of China's most attractive natural areas. Each acquisition was for less than unaudited 2009 sales and about 6x earnings for the acquired companies. Trusting those figures, UTA has cheaply acquired already profitable businesses it can freely advertise on its website, simultaneously eliminating the middleman it previously purchased inventory from for the core business. Funds for the acquisitions were raised in a $20M public offering at $9/share, well below the market price at the time. Institutional investors took advantage of the offering, as several multi-million dollar positions have been taken in recent months.

As I've stated in previous writing, investors appear to be deluded into thinking that CTRP has no competitors. UTA is just one of several in a flourishing industry, and under $10/share it is as attractive as any China stock I follow.

Disclosure: Author holds a long position in UTA