Ctrip.com (CTRP) is the largest hotel and airline booking agent in China. It derives over 90% of its revenue from these two sources. In the past few years, the company has benefited tremendously from the explosive growth of Chinese business and leisure travels. Its revenue has increased over 80% and net income has more than doubled in the past two years. The company has a competitive advantage that makes it harder for other firms to imitate and with the recent sell off in Chinese equities, the stock valuation is looking increasingly attractive.
What differentiates Ctrip from other travel booking sites is its size and how the firm leverages the size to its advantage. For hotel booking, Ctrip has a guarantee room allotment policy with 70% of the hotel suppliers at a price equal or lower than what the hotels advertise. The guarantee room policy makes sure that the firm gets a certain percentage of the rooms without any advanced booking. This policy allows Ctrip to not worry about purchasing rooms from hotels beforehand and frees up cash for other purposes. It is the equivalent of make-to-order strategy in inventory management. It also allows the firm to get rooms during peak season. Hotels don’t give this type of treatment to anyone, and only when you are of a certain size that hotels will bend over backwards to serve you. The policy serves as an important barrier to entry and it differentiates Ctrip from smaller competitors.
In addition to the guarantee room policy, the company also runs its best price strategy to ensure its price is always the lowest. A website that offers both consistent low price and excellent inventory management is not something everyone can achieve easily.
I have always thought valuations are expensive for Chinese stocks, but with the sell-off in the last few months, a lot of well-run Chinese companies are trading at much more attractive prices. Ctrip is trading at 19x PE, a slight premium compared to the S&P average of 13, but it enjoys much faster growth. PE along doesn’t do the company justice as the firm owns over $560 million in cash and $330 million in equity investments in other publicly traded companies. Together that’s about 26.7% of the firm’s market capitalization in liquid investments or cash equivalents.
At a free cash-flow of $200 million in 2010, the firm trades at about 6% cash-flow yield or 8% minus cash and equity investments. The yield might not seem high in a mature market, but China has huge long-term potential. Its consumer only makes up about 35% of the country’s GDP vs 70% in the U.S. Boston Consulting Group has projected Chinese consumer to increase their share of the GDP to 45% by 2015. A big part of this increased spending will be from leisure travels as Chinese people love to visit places domestically and abroad. Ctrip is in a dominating position to benefit from this future growth.
It’s always a good sign when you see strong insider purchases. The firm’s CEO has recently announced a $2 million purchase with his own money on the open market. This move was no doubt to serve as a vote of confidence in the face of declining stock prices. Regardless of the motive, $2 million isn’t a small sum anyway you look at it, especially if it's coming from the CEO’s own pocket. He’s putting his money where his mouth is.
Risks and Entry Point
The potential risk for the company is obviously a slowdown in China. Right now, many economists are predicting a soft landing, but can anyone name a time when any economy had a soft landing after a bubble? I can’t. Given the risks in the Chinese economy, the stock will continue to be challenged until the severity of the slowdown is known or we see a visible shift in government monetary policy. While $23 is an attractive entry point, the stock might drop to under $20 given the recent volatilities. My entry point will be at $18. At that point, the cash flow yield increases to 11% minus cash.