Ctrip.com - Should You Buy A Boat?


CTRP expands into cruise ship operation.

Strategy creep or something more?

JV could be valuable going forward.

Ctrip.com (NASDAQ:CTRP) announced that it signed an agreement to purchase a cruise ship from Royal Caribbean (NYSE:RCL), the 1,800 passenger Celebrity Century. The release didn't indicate the price, however Royal Caribbean's press release noted that it would record a 20 million USD non-cash loss on the deal. The ship isn't by any means new (built & brought into service in 1995), and had already passed about 2/3 of its usefulness. (That is based on disclosures in the Royal Caribbean's most recent 10-K; the ship was built in 1995, and the company depreciates ships for 30 years down to 15% residual value.)

When first reading the press release, investors were probably scratching their heads as to exactly what management was planning on doing with such a move. Ctrip noted in its release that it had already sent over 120,000 customers on cruises, and estimated that it held over 10% of the market in China. So the company has established itself as a player booking cruises, but operating a cruise business is a materially different business than selling tickets. And from an investor's standpoint, that could represent strategy creep, which is rarely good (ask any Japanese conglomerate who also owns a golf course).

But included in the release was a note that the two companies had signed an MOU about setting up a JV to manage the vessel. After reading that sentence, the strategy became a bit clearer. It seems like the arrangement could be Royal Caribbean to operate the ship while Ctrip fills the seats, so to speak. This model sounds somewhat familiar to the model being used by economy hoteliers in China, a franchise and manage model (a landlord owns the property, but the hotelier manages and operates it).

The arrangement seems like it could indeed be mutually beneficial for both parties, as advertised in the release. Based on some news stories from late last year, Royal Caribbean was looking for a buyer (which it later denied), but considering the age of the ship it doesn't seem too far-fetched. Selling the vessel (even at a loss) to Ctrip provides a way to unload the asset while picking up some management fees which may offset the $20 million non-cash loss…and the optionality potential through the JV doesn't hurt. It sounds like Ctrip may have found a bargain in the asset, but also gets inventory to push through its channels, something which could help in gaining share in the market. Because Ctrip controls both the asset and the sales channel, it may be able to mitigate under-utilization (boost occupancy) which can help maximize total revenue (i.e. price discrimination).

So after an initial puzzled reaction to what Ctrip was doing by making a relatively significant fixed asset purchase, it seems that there may be more to the story. We'll find out more as things develop, however the potential for Ctrip to monetize its distribution channels to boost vessel utilization could be something interesting going forward.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.

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