Ctrip Tries Cruising, Starwood Bulllish On Hainan

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 |  Includes: CCL, CTRP, HOT, QUNR, RCL, TOUR
by: Doug Young

China's broader domestic travel market may be quickly getting saturated, but that hasn't stopped leading online travel agent Ctrip (NASDAQ:CTRP) and global hotel giant Starwood (NYSE:HOT) from seeking out new investment opportunities in more niche-focused areas. News involving the former will see Ctrip purchase a cruise liner from global giant Royal Caribbean (NYSE:RCL) to capitalize on the rising popularity for ocean cruises among Chinese vacationers. The latter news bit will see Starwood, owner of the Westin and Sheraton hotel brands, open an ambitious 4 new resorts on the tourist-friendly Hainan island over the next 5 years.

Both of these news bits reflect the fact that companies catering to travelers are having to look a bit harder these days for good growth opportunities in China. A huge building spree over the last decade has left the domestic hotel market oversupplied, and it will likely take at least 4 or 5 years for all the new capacity to get absorbed. Meantime, the boom in demand for travel-related services has also spawned a new crop of ambitious companies that now compete with Ctrip, including the recently listed Qunar (NASDAQ:QUNR) and Tuniu (NASDAQ:TOUR), as well as other up-and-comers like Tongcheng.

Against that backdrop, Ctrip's foray into the cruise business looks like an interesting proposition, even if I think the move may not make the most strategic sense. Ctrip said it will purchase Royal Caribbean's Celebrity Century, a cruise ship that can accommodate 1,800 passengers. (Ctrip announcement; Royal Caribbean announcement)

Ctrip will officially take ownership of the liner next April, and has formed a joint venture with Royal Caribbean to operate the ship. No financial terms were given, though Royal Caribbean said it would take a $20 million non-cash loss as a result of the sale. That seems to imply that the sale price is probably in the neighborhood of the $100-$200 million range. Such a sum would certainly be easily affordable for Ctrip, which had $1.7 billion in cash at the end of June after some major fund-raising last year.

The deal certainly looks interesting due to the recent rapid rise of the cruise industry in China. Both Royal Caribbean and US rival Carnival Corp (NYSE:CCL) are investing heavily in the market, and are collectively expecting nearly 1 million Chinese passengers next year - double the figure from 2013. I do think that Ctrip is smart for forming a joint venture with Royal Caribbean to operate its new ship. But at the same time, Ctrip has never been an owner of hotels, planes or any other travel-related assets, and I would suggest the company should stay out of that business and retain its focus as a service provider.

Next let's look quickly at Starwood, whose new plan will see it open 3 resorts under its high-end St Regis brand and one under its trendier W Retreat on Hainan as part of its aggressive expansion plans for the vacation island that offers warm weather year-round. The 4 new resorts will open by 2020, and will complement an existing St Regis resort that Starwood already operates on Hainan.

I'm not very bullish on the broader China hotel market for reasons that I've mentioned above, but this new plan by Starwood does seem quite intelligent and forward looking. Among my friends here in China, Hainan is quickly gaining a reputation as a playground for the wealthy and trendy, especially during the colder winter months. Thus these new luxury resorts should play well to those crowds, providing a nice niche-oriented growth opportunity for Starwood and others who could transform the island to China's version of Hawaii or the Maldives.

Bottom line: Ctrip's purchase of a cruise ship is a misguided step into asset ownership, while Starwood's aggressive Hainan expansion is a smart move to tap the island's growing reputation as a playground for the wealthy.

Disclosure: None