Beijing Olympics Investing: Think Travel Stocks

The 2008 Olympics is quickly approaching as we wind down toward the grand ceremony on Aug 8, 2008 at 8:08:08PM. Despite all the negative political publicity regarding this event, the Olympics is still the Olympics; unlike most sporting events, it happens only once every four years; this means attendance will be high and viewership will be high. In addition, the Chinese have picked a string of lucky numbers for the opening date and time– the number 8 is considered a lucky number for which fortunes can be made. I don’t believe in superstition but I do have reasons to believe that investors can make a hefty profit in the markets.

In terms of investments, the Beijing government is spending approximately $40 billion USD on venues and related infrastructure; this is not including the billions of dollars they have already spent on pollution control. Additionally, an estimated $3.5 million visitors will be bringing their wallets to the games (Beijing Tourism Authority). And more than 60 sponsors are spending hundreds of millions of dollars at the event.

The number of international visitors in China rose 9.6% in 2007 with close to 55 million arrivals (World Tourism Organization). At the same time, Chinese domestic travel also increased drastically to1.6 billion trips.

What this means in terms of potential stock investments is that railway services, airline services, hotels and online travel services will all stand to benefit from the increased travel within China.

Hotels

Hotels and hostels are going quickly, and insiders say that rental rates during the Olympics will be 10 times the regular price. The average cost of a hotel room in Beijing was $127 a night in 2007 with an occupancy rate of 71%. Even with all the new hotels being completed in 2008, it’s same to assume that the both occupancy and the cost of accommodations will likely max out. I recently did a quick search of various hotel chains in Beijing and many of the hotels are already sold out.

Home Inns & Hotels Management (HMIN)

A leading economy hotel chain like HMIN stands to win in this environment. HMIN operates under the Home Inn brand name. The company has 266 hotel chains, including 195 leased and operated hotels and 71 franchised and managed hotels, all in China. Revenues increased by 95% from 2006 to 2007, while gross profit increased by 60% and net income rose by 53%. The company has $254 million in Cash or 49% of total assets. The company’s trading at a trailing PE of 164.

Railways

Rail is the most popular form of travel in China due to its convenience, affordability and availability, particularly in a struggling airline industry; Rail will gain even greater popularity come the Olympics. Rail’s greater fuel efficiency relative to other transportation modes, along with highway congestion and driver availability are factors that could drive more commercial and industrial transport over the longer-term. Unlike, many North American railway carriers, China’s railway infrastructure is extremely dense, and thus should not face the considerable infrastructure limitations faced by many western countries.

The following is a look at the millions of railway passenger km traveled in the past decade. As we can see, there has been a considerable amount of increase in this form of travel.

click to enlarge images

Guangshen Railway (GSH)

GSH provides passenger and freight transportation services between Ghangzhou and Shenzhen and certain long-distance passenger transportation routes. The company operates the Hong Kong through-train passenger service that sees hundreds of thousands of travelers each day. GSH operates 123 pairs of passenger trains per day, including 67 high-speed trains. Freight services offered by the company include full load cargo, containers, fresh and live cargo and oversized cargo. Revenues increased by 14% from 2005 to 2006 and operating income increased by 36% to $124 Million. Continued traffic growth due to closer economic integration between Hong Kong and Southern China will continue to benefit this company.

Internet Travel Services

Besides the travel operators themselves, online travel companies should also benefit from the increased amount of domestic and international travel. In a report that surveyed online businesses in China, online travel is expected to be the fastest growing segment in 2009, with a projected growth of rate of over 90%. The following is a look at the significant increase of airline passengers in recent years.

Although I’m not a big fan of airline companies for fundamental reasons other than increased traffic and usage, I do believe their online travel partners will stand to gain from this frenzy.

eLong (LONG)

LONG provides online travel services such as hotel reservations, air tickets and vacation packaged through its toll-free call center, reseller network and websites. The company also offers non-travel services including advertising and non-travel wireless messaging services. LONG operates as a subsidiary of Expedia. LONG saw revenue growth of 29% between 2005 to 2006; during the same period, the company reduced its net income loss from $7.7 Million in 2006 to $0.3 Million in 2007. LONG has almost 90% of its assets in cash ($154 Million), and holds almost no debt.

Ctrip.com (CTRP)

CTRP, like Expedia (EXPE) and Orbitz (OWW), offers services including hotel reservation, air-ticketing, packaged-tour services as well as internet advertising. The company sells air tickets for major airlines including Air China, China Eastern Airlines, China Southern Airlines, Shanghai Airlines as well as a host of international carriers operating between China and western countries. CTRP recorded revenue growth of 55% from 2005 to 2006, operating profit growth of 20%, and net profit growth of 11%. The company has approximately $109 million cash, or 59% of its asset base; the company also has minimal debt, with majority of capital in stockholder’s equity.

The 2008 Olympics will likely accelerate China’s economic and social-economic growth. With the world watching the second largest economy on this planet, China will likely make this Olympics a huge success, possibly surpassing records of previous games. I believe the companies mentioned in this article will not only ride the short-term wave, but also stick around for the post-game festivities as well.

Disclosure: None

Comments

[thedivot]

There is also a Chinese small cap - Universal Travel - involved in China travel.

seekingalpha.com/artic...

[rlirph]

I like to know how does Guangshen Railway which runs the railway service between Guangzhou and Shenzhen will benefit from the Olympics. For those who are not familiar with geography Beijing is at least 2000 miles from either Guangzhou or Shenzhen.

The GSH railway is like Amtrak train between San Diego and Los Angeles. Are you saying that because the Olympics was held in Atlanta we should expect a pickup in passengers between San Diego and Los Angeles? I would assume most visitors would prefer flying rather than sitting in a train for 36 hours.

[imthewiz]

Thank you rlirph!!!!

[User 186230]

Excellent comment,rlirph!! At least you know what you are talking about unlike the certain posters. I think GSH is overvalued at $28. It should be trading around $20-22.It had all this growth compared to the prior yesr because of acquisitions. All the growth factored in would still result in a fair valuation of around $ 22.

[brianjason]

Actually, while the RR between HK & Guangzhou is their bread and butter, 50% of their total passengers come from the long distance trains but this accounts for only 36% of revenue. The reason is because the HK/SZ trains get better prices/km. They also bought the guangping line (basically tripled their track length) from the parent company about a year ago. That goes up into the middle of China close to Changsha. In addition, they run trains up to beijing and shanghai. While they don't own the track, they can still use it.

I don't disagree with the over valued part.. but the reasons you give up there are not correct. You'd have a better reason noting that their trains are almost always 100% packed and the only way they can surprise the market on the upside would be if the government allowed them to hike ticket prices. This is not likely to happen because rail travel is how the average chinese travel and the consumer is already being killed by higher food prices. You might have also commented about the 1Q results which were were about 10% below consensus because of the Feb snow storm.

short away...

[hknmtt]

During the Olympics the Beijing hotel rates are generally 3-4 times regular. Home inns and other budget hotels share a rate around 1500 RMB, equals to about 200 dollars. Budget hotels in China are facing fierce competition because of similar products , city coverage and location. At the moment leasing and management is the main trend due to the lack of mature property develop companies.
The biggest risk for Chinese budget hotels is soaring property leasing fees. These hotels and inns must be located near city center due to the lack of leisure travellers and safety issues if the hotels are located in the less populated areas.
ADR (average daily rate) and occupancy are the key to define a healthy hotel operation. If homeinn is boasting 95% occupancy, their profitability is in doubt. Why not operate at 80% with a 20% higher rate. The lower headcount and facilities bills will make the property more profitable. The only reason is that homeinn cannot raise the rate and they must attract franchise opportunities.