"The Ultimate Takeover Target in Chinese Travel" (CTRP, LONG, IACI, CD)

Pacific Growth Equities analyst Jason Brueschke re-iterated his overweight rating on Ctrip.com (ticker: CTRP) on Friday. He believes the stock will reach $70 a share in the next 6-12 months. Here are some key points from his note to clients:

On Ctrip

• Large customer base.
• Growing faster than the competition (including LONG).
• Pacific Growth estimates that Ctrip currently has more than a 55% market share in the hotel sector and 80% of the air ticketing market.
• It expects Ctrip to control 70%+ of the China travel market in the future.
• As Ctrip's market share grows so will its leverage with hotel companies.

On customer acquisition costs

• Customer acquisition costs have remained constant despite significant increases in customers and competition.
• Ctrip generates nearly 75% more in revenues per customer per year than it spends to acquire each customer.

On portal advertising

• Ctrip is not dependent on portal advertising whose costs are increasing dramatically.
• Ctrip experimented with online advertising and decided it was not effective.
• Competitor eLong (ticker: LONG) spends heavily on portal ads in attempting to catch up to Ctrip.

On high barriers to entry

• Chinese online travel has high barriers to entry.
• Ctrip's competitive advantages stem from a strong brand and sophisticated IT.
• Due to its entrenched position Ctrip benefits from China's absence of a global reservation system and lack of large hotel chains.

On China travel companies seemingly protected from issues faced by other Chinese companies

• Not vulnerable to the whims of China Mobile (ticker: CHL) which have negatively affected other publicly traded Chinese companies.
• Travel is much less sensitive to the Chinese government than portal, wireless value-added services and gaming companies.
• Travel has not been affected by customer complaints.

On Q2 2005

• Pacific Growth expects a strong Q2 driven by hotel and air ticket revenue.

On Ctrip as the ultimate takeover target in Chinese travel

• It has a dominant position, superior brand, faster growth rate that its competition, high degree of profitability.
• It benefits from a precedent setting acquisition -- competitor eLong (ticker: LONG) was acquired by IACInteractive (ticker: IACI).

On possible suitors

• IACInteractive (ticker: IACI). More on IAC's announced plans here.
• Cendant (ticker: CD). Chairman and CEO Henry Silverman recently discussed his company's plans for China. See here.

CTRP recommendation

• Overweight.
• $70 per share in next 6-12 months.

CTRP chart.

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