Online Travel in China Expected to Take Off

In a report released Tuesday surveying online businesses in China, online travel is expected to be the fastest growing segment in 2009, with a projected growth rate of over 90%. This follows a 65.4% expansion in 2007 and an estimated 71% increase for the industry in 2008.

The report cites two reasons for the acceleration: The Olympic Games (of course) and the further opening up of the domestic tourism market. This bodes well for market leaders such as Ctrip (CTRP)and eLong (LONG), but the effect will be felt industry-wide, benefiting smaller players such as Universal Travel Group (UTVG.OB).

A trend cited by the report is the consolidation of online and offline travel, and with UTVG stronger in the latter department, the company can easily be a partner or acquisition candidate for one of the larger online players. Clearly UTVG's strategy of aggressive M&A can be applied by others too.

In fact, if I were Ctrip, I'd be looking closely at UTVG right now. With the former trading at 64.1x LTM earnings and the latter at 17.8x, Ctrip can pay a premium of 300% and still make the acquisition accretive to earnings. In other words, UTVG could be worth $10 per share.

But UTVG may decide to go it alone. At (say) $10, with an estimated 2008 EPS of $0.39, this works out to a P/E of 25.6x, which is really not that rich. My expectation is that if the company continues its aggressive M&A stance (and there's no reason why it shouldn't), this EPS of $0.39 can easily be topped.

My Position: Long UTVG.OB.