By John Warbuck
Ctrip.com (CTRP) is China's largest online travel agency and specializes in hotel and air travel bookings. 40% percent of its business comes from its website, while call centers handle the remainder.
After a decade of nothing but steady growth and a dominance of the Chinese market, the company fell into a tailspin in the fall of 2011. The question on many investors' minds currently is: Can Ctrip.com recover, or will it fall prey to competitors who will seize the opportunity to diminish its dominance on the Chinese travel market?
The Chinese travel giant was founded in 1999 in Shanghai and went public only four years later in 2003. The stock reached $34 per share in its first day of trading and became the only stock since the IPO of Transmeta (TMTA) to double its value on its first day. The stock proceeded to reach a peak of $50 per share until plummeting in the last quarter of 2011. It is currently trading around $24 per share and is has a pretty bleak outlook going into 2012 as competitors begin to make their moves against the company.
Ctrip.com's tight grip on the Chinese travel market has defended it over the last decade from competitors such as Priceline (PCLN), Expedia (EXPE) and the smaller but prominent eLong (LONG). The global recession has now begun to take its toll, however, and Ctrip.com is being forced to spend more than ever before to acquire new customers. To exacerbate the situation even further, recent data shows that the Chinese economy is now slowing down as well.
Poor economies hurt travel because it is one of the first expenses consumers will give up when they need to adjust their budgets. Priceline and Expedia spend a huge chunk of their revenues on advertising (17.6% and 19.1% respectively) compared to Ctrip.com which only spends roughly 7% of its revenues on the acquisition of new business. In order to defend itself against invading competition, Ctrip.com will need to devote more of its capital to advertising if it wants to keep competitors from slowly eroding its position in China's travel market.
eLong has made an attempt over the years to enter Ctrip.com's territory with a coupon promotion which has forced Ctrip.com to match the coupon prices in order retain its customers. This move has forced Ctrip.com to increase costs and decreased its margins slowly over time as a result. The competition by eLong hasn't dealt a crippling blow but it makes the situation worse as Expedia and Priceline prepare to tap the market as well.
Each company has the ability to apply pressure through calculated advertising buys and special promotions. Both major competitors have the means to dump a lot of money into the pool and Ctrip.com will be forced into a losing position. It will either lose customers to the invading competition or drop its margin by spending more money to win or retain the customers that its competitors are courting. While Ctrip.com shouldn't be pushed out of its own market, the pressure it is receiving will make its road to recovery rough with more potholes to navigate.
While most analysts believe that Ctrip.com is capable of recovery, what they don't seem to agree on is how quickly the travel agency will be able to pull it off. Major factors include the company's ability to find a way to retain and earn new business without reducing its margins greatly through increases in the cost of customer acquisition and the aggressiveness of Ctrip.com's competitors in the Chinese travel market. The final piece of the puzzle is the Chinese economy and the effect that it will have on Ctrip.com as customers continue to slash their budgets and give up their plans for international travel in favor of less expensive domestic options.
Ctrip.com poses a risk at the moment to its investors and some may choose to wait out the storm before buying shares while others might take the opportunity to buy while the stock is low in anticipation of a recovery. In the short term, it is a much more logical decision to either short the stock or leave it alone entirely but in the long term, the stock has a pretty good chance of recovery even though the road may be long and filled with hills and valleys.
If you have patience and are able to take the risk, it may reward you to wait for Ctrip.com to finish its plummet and buy when it is cheap. Specifically, on a discounted cash flow basis, I value Ctrip.com shares at $25 apiece, using an 11% cost of equity to adjust for cyclical risk, and nearly $28 per share in one year's time, adjusting for growth. Don't expect to profit from the investment immediately, however, as the stock may not recover at all in 2012. Tread carefully here or look into a different stock for the time being.