Why Now is Not the Time to Invest in eLong

The cash-rich Chinese internet companies, several of whom are trading near their cash value (Linktone (LTON), eLong (LONG), KongZhong (KONG), etc.) have piqued my interest lately. Recently, I dug into eLong to take a peak under the hood.

eLong is the trailing Chinese internet travel company behind Ctrip (CTRP). I think this space has a lot of potential going forward, and though Ctrip appears to be an excellent operator it is way to expensive for my tastes. eLong, however, is another story.

eLong still has a boatload of cash from its IPO ($130M). Subtract that out, and you get an EV of about 110M, or about 3.5 trailing revenue vs. about 25x revenue for market leader CTRP. No doubt, LONG has not executed as wel l-- its expenses appear bloated (G&A is 2mil more annually, despite 1/3rd the revenue); S&M seems bloated as well, with costs same as CTRP. It has chronically under-invested in its product development until recently, putting it considerably behind CTRP in terms of technology (product development since launch, up till 2006, was a fraction of what CTRP spent in 2005 alone).

Long-term, if they get their act together, their margins should not approach those of CTRP as the internal systems improve due to increased product development expenditure. LONG's hotel booking rate and revenue is about half of CTRP's, but its airline booking rate and revenue is much lower. LONG is working on building out this the airline booking technology better. Current ratio of hotel:air booking is 3.5:1. Over time, this should approach 1:1, which gives a nice boost to growth going forward. 80% repeat business on par with CTRP, suggesting strong loyalty.

No analysis of LONG would be complete without mentioning Expedia's position in the company. On the plus side, LONG benefits from Expedia's expertise in growing out their business in the US. But, as we all know, foreign countries are riddled with the remains of US backed internet companies who have tried and failed to penetrate foreign opportunities. Overall, I view their stake as neutral for now.

At a 25% net margin (CTRP's is 42%), the company would generate about 8M in net profit, giving it a P/E ratio of about 13 on an EV basis at current rate. That said, I'm not comfortable with their execution currently (Update: Q4 numbers were very poor, with revenue growth reported), and am not sure how long it would take to reach those net margins or if they are even attainable. I'd be much more interested in the stock if the emerging markets continue to take a beating, and if the name drops to near cash value.

I believe the opportunity will come at that price (or lower) soon enough.

LONG 1-yr chart

Disclosure: Author has no position in any of the above-mentioned securities