Ctrip.com International, Ltd. (NASDAQ: CTRP) engages in the provision of travel-related services. It provides hotel accommodations, airline tickets, packaged tours, corporate travel management services, property management systems, and advertising services. Let's first take a look at the online travel agency market.
China is shifting from an investment-driven economy to a consumption-driven economy. A significant portion of Chinese who grew up in the 1960-1990s are familiar with western civilization. As standard of living improved over the past 2 decades, outbound tourism has become more affordable, desirable, and practical for Chinese consumers. Higher GDP per capita translate to higher consumption. China outbound tourists on average spent 20,000 RMB (US$3,252) during travel per person and shopping is an important part of their spending in overseas trips (57.8%), according to a report released at Beijing Fragrant Hills Tourism Summit. From my personal experience, the outbound tourists' shopping were driven by i) Cheaper merchandise abroad due to a lack of import duty ii) more diverse product categories that cannot be accessed within China iii) Authenticity and high quality products, and iv) Affluence of Chinese shopper, typically first/second generation of rich family or highly paid professionals. CTRP has built strong international ally to exploit the growing trend of international traveling.
Transaction value of Chinese travel agency reached about 365B RMB (~$56.2B) in 2015, representing 11.2% growth. Online travel agency market reached 73.55B RMB (~$11.3B), representing 71.4% YoY growth.
CTRP is the largest Online Travel Agency ("OTA") in China and is well positioned to expand internationally. We believe that CTRP is a stronger and sharper strategic player in this field than its competitors. First, CTRP called off its acquisition of Qunar (NASDAQ: QUNR), and engaged a share swap with BIDU to acquire voting rights of QUNR. The fierce competition in the OTA market drove down profit margin as market participants are attempting to increase market share. The poor operating results of QUNR allowed CTRP to gain control over it at a lower cost. Second, CTRP built relationship with Priceline (NASDAQ:PCLN), Baidu (NASDAQ:BIDU), Royal Caribbean (NYSE:RCL), MakeMyTrip (NASDAQ:MMYT), and a number of other service providers. QUNR, a new affiliate, has built solid relationship with Starwood (NYSE:HOT) and a number of local hotel chains. Backed by the strong ally, CTRP and its affiliates can leverage their existing platform to offer strong outbound travel to Chinese consumers.
Note: BIDU owns 25% voting rights of CTRP and PCLN owns 15% economic interest. CTRP owns 37.4% of eLong (NASDAQ:LONG) and 45% voting rights of QUNR.
We believe it is important to identify the risk factors involved in investing in CTRP:
• European attack: The attack in Brussels will hurt CTRP, but it is deemed as a short-term extraordinary event. Note: 4Q15 financials already reflect the effect.
• China hotel alliance against CTRP: Some Chinese hotels built alliance against CTRP as it has strong pricing power over the hotels. We believe that the hotel alliance will not be sustainable due to a lack of homogeneity.
• Alibaba (NYSE:BABA) travel competition: CTRP has the first mover advantage over the other competitors. Strong ally such as Baidu and Priceline will help CTRP compete against other competitors.
• Going Private: The biggest risk factor - due to time and price uncertainty. There is the possibility for CTRP to go private and re-list in China as it expects higher valuation in the Chinese market. Currently, the travel agencies' valuation in China are at par or even lower than that of U.S. - 25-30x PE vs. 44x PE of CTRP. The current lower PE in China is correlated with the weak equity market and investors' fear about China now. With that in mind, we don't expect to see CTRP go private and re-list in China any time soon - maybe in the next 3-5 years.
We expect to see normalized profit margin and solid top line revenue growth in the near future. As Chinese currency weakens, international traveling will become more expensive, and the USD-denominated earnings will weaken due to weaker operating results and negative currency impact. However, we believe the strong demand will outweigh currency-driven negatives.
We want to narrow down valuation by comparing CTRP to local and international competitors. We try to break down Priceline's market cap by comparing with Expedia (NASDAQ:EXPE) through different angles. If Priceline is trading at same P/E multiple as EXPE, its market cap would be $47.3B. The difference of $64.6B and $47.3B is attributable to CTRP ($17.3B). If Priceline is trading at same P/S multiple as EXPE, its market cap would be $22B. The difference between $47.3B and $22B is attributable to Priceline's stronger margin (27.2% vs. 11.5%). Our understanding is that investors value CTRP associated with Priceline for $17.3B (only 15% ownership) while value CTRP (100%) at $13.8B. While an $115B valuation is too much ($17.3/15%), especially with the poor margin, we think $17.3B valuation is a reasonable price level. We can see 25% upside potential for CTRP.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.