Ctrip: Emblematic Of Chinese Industry

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by Ella Yi Zhang

Chinese internet stocks seemed like the latest way to get rich quick, until they weren't. Now investors are wondering whether shares have been deflated enough to make them worth buying again given the industry's undeniable rampant growth prospects. An excellent example is Ctrip (NASDAQ:CTRP), the country's largest online travel booking site. The company's Nasdaq-traded shares tripled in value from mid-2009 to mid-2011. They have been crashing since last summer, and are now below where they started three years ago.

The most important change in the company's volatile picture has been new competition in the online travel booking space. Starting out as the dominant first mover in Chinese e-booking, Ctrip's market share plunged by 10.5% last year to 41%, according to industry monitor iResearch.

New home-grown online travel search platforms like Taobao and Qunar have nibbled away at Shanghai-based Ctrip's business. So has eLong, a subsidiary of global travel giant Expedia (NASDAQ:EXPE), whose shares have incidentally been on a rampage, doubling over the past year. Hotels and airlines are also picking up online travel sales themselves, gradually alleviating reliance on agencies like Ctrip.

Competition has led to price wars directed particularly at individual leisure travelers. ELong has grabbed market share by offering hotels attractive cash-backs and group buys. "People try to kill competitors by growing market share and sacrificing the margins — this is the business model for most internet players in China nowadays, no matter if it is B2C or online travel," says Henry Guo, an analyst at U.S. brokerage ThinkEquity. "But that is actually bad for the whole industry."

Ctrip is also grappling with costs that swelled during its years as a quasi-monopoly. Five years ago, the company got back 15% from hotels whenever a transaction was made, now it is around 10%. Meanwhile it has built up an army of 6,000 call agents, by far the largest in the online travel industry, and they are becoming ever-more expensive in China's environment of wage inflation.

The live agents are not simply deadweight. Ctrip books around 40% of its reservations over the phone, unlike the U.S,. where Expedia and its competitors do almost all their volume online. The company has invested heavily in an image of superior service, spending ¥500 million ($79 million) on spanking new call center two years ago, and that seems to have helped win a loyal following of business travelers.

Still, Ctrip might be more competitive if it slimmed down, analysts say. "An aircraft-carrier like Ctrip is not as flexible as smaller companies," comments Zhang Yanan, senior analyst at the Zero2IPO Research Center in China. When eLong started its price war last year, for instance, it took Ctrip almost two quarters to realize that it had to launch competing online travel promotions, adds Guo.

That's the bad news. The good news is that China's online travel market, like its online market for everything else, is still in a phase of geometric growth. Internet bookings account for only 8% of the travel market, a figure expected to double over the next two years, even as total travel spending expands. Online travel revenue should already reach ¥230 billion in 2012.

Ctrip is still the biggest player in the burgeoning online travel industry, with scale, brand position, and a balance sheet well stocked with cash. Management implicitly told the market last week that it thinks the stock has fallen far enough with a new stock repurchase plan. "They want to give a signal that their business is still on track and the current evaluation is low," says ThinkEquity analyst Guo. The buyback is also a good utilization of the company's cash reserve, he added.

Ctrip is emblematic of a range of Chinese internet companies that have soared, crashed and may now be ready to advance again from more sober valuations. Or not. The most famous of the group, search provider Baidu (NASDAQ:BIDU), has traced a still more dramatic trajectory than Ctrip, rising more than 10-fold from an early-2009 low, then dropping more than 20% over the past two months.

Henry Guo thinks Ctrip may have bottomed, but is not ready to surge back just yet. He lowered his target price from $21 to $19 last week. The stock trades now at about $17.

Disclosure: No positions