Ctrip.com Is Going Places

When Chinese citizens decide to spend a vacation traveling, chances are they will use CTrip.com (CTRP) at some point in the planning stages. The company operates much the same as the US equivalent Orbitz or Expedia except for the fact that CTRP enjoys what essentially amounts to monopoly status. Bear Stearns estimates that the company holds a 57% market share of the Chinese online travel market and that level has been growing quarter after quarter.

Despite the high level of penetration, the company’s future growth prospects remain bright because the online travel market itself in China is expected to grow at a 37% rate through 2010. At the same time, Chinese culture is just beginning to embrace the idea of online travel booking whereas in the past, most have used more traditional travel agent services. Add to that, a broad population that has only recently been introduced to discretionary spending and leisure travel and you get the recipie for long-term secular growth.

Bear Stearns estimates that the company only accounted for 2.7% of total hotel bookings in 2005, and 4% of total airline tickets in 2006. Both of these statistics are likely to increase to above 10% in 2010 and this in the context of a robustly growing overall industry. While eLong (LONG) is also a player in this market, the competition is tilted in CTRP’s favor as name recognition, service offering, and pricing power all appear to benefit the more well established player. Some of the major airlines have created their own online offering platforms, but at this point they have not been able to reach critical mass in order to effectively compete against CTRP.

During the most recent earnings release, management guided towards 35% revenue growth in the fourth quarter. This would be a significant decrease in the growth rate compared to previous quarters but analysts do not appear to be very concerned. Citigroup notes that after Q2, management guided analysts to model 35% growth for Q3 but instead delivered 55% growth. Obviously it is prudent for management to give a conservative view of their outlook, but at the same time, it is difficult to gage when management is truly giving an objective view of their future prospects and when they are simply setting the bar low so that they can beat guidance yet again.

A look at industry trends shows that while hotel bookings are a strong cash flow driver for the company (and this business is expected to continue to grow), the primary growth engines will likely revolve around air ticketing and packaged tours. CTRP is set up nicely to benefit from trends in all three of these areas and while domestic travel and outbound travel from China makes up the bulk of its business, the company is beginning to receive more inbound business in relation to the upcoming Olympics as well as a general willingness of the global population to visit China. As the company expands its reach from the large primary Chinese cities to reach the tier 2 cities, some have been concerned that the average sales price of a hotel package would drop. That has actually not been the case as CTRP has maintained impressive pricing power even when counting the lower priced secondary city business.

From a fiscal perspective, the company is in good shape with $160m in cash on the balance sheet. The debt level is very low and primarily consists of short-term liabilities such as accounts payable. Management has done an excellent job of funding growth with free cash flow and equity capital which continues to appreciate. The healthy financial state of the company gives them flexibility as they review options for future growth. While no plans appear to be in the works to spend the cash on acquisitions, this would not be outside the realm of possibility, or the company could build new platforms organically leveraging management’s skill in assessing the travel market.

The longer the stock consolidates its gains and the company continues to expand its reach, the more attractive the situation becomes. It is not reasonable to call this stock a “value” play because it truly is trading at a high multiple. The intelligent investor, however, must realize that the premium price is warranted because of the superior growth and the way the company is positioned to take further advantage of China’s expanding economy. I would not suggest stepping in to buy this company recklessly, but it appears that a diversified account would benefit from a strong competitive position such as CTRP.

Author's CTRP Notes

Full disclosure: Author does not have a position in CTRP

Comments

[BuySideGuy]

You do realize that business connections are still the driving force to CTrip sales, yes? Most of their air ticket sales are to business travelers, not vacationing families; not even close. The other travel sites are actually easier for consumers; it is the business account which keeps CTrip on top.

[ZacharyScheidt]

That probably explains why they want to grow the packaged tours side of the business. I have not heard that detail on CTrip's revenue coming primarily from business travelers. What is your source on this information?

Thanks for the comment!

[kkin365]

I was on an extended tour of China in October 2005 (to visit locations made famous by Zheng He, who led 7 international voyages beginning in 1405, decades before Columbus did to N America), and had a chance to visit several interior airports in China such as Kunming and Xiamen. With a position in Ctrip, I paid special attention to its activities. I noticed that it had booths at various airports, soliciting new members. Few stopped by -- no different from various frequent-flying airlines soliciting for members in the US airports. I have no idea how residents in China sign on to Ctrip's on-line services. My experiences with US-based on-line trip arrangers in USA (4 times in recent months) suggest that doing so is not easy. Paying for tickets is one problem, checking in with e-tickets is another.

[ZacharyScheidt]

Thanks for the firsthand view. From what I am reading, the company has made it fairly easy to book the travel and I have not heard any reports of trouble actually at the airlines. But getting in there and seeing for yourself is priceless. Hopefully you can see what issues will come up before they are uncovered by the analysts here.

Good luck with your position.