Online Travel in China Expected to Take Off

Includes: CTRP, LONG, UTRA
by: China OTC Player

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 (NASDAQ:CTRP)and eLong (NASDAQ: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.