There are three things to think about before buying Ctrip.com International (CTRP), the leader in China’s online travel market. Two of these things are positive and one negative. I think the balance comes down on the positive side but the negative element means the stock isn’t without risk.
First positive, on the basis of the 10-12% growth in revenue for Macau from the gaming tables and from the booking of hotel rooms, Chinese with the money to travel are traveling again. I think the government in China is certainly still watching to see who is spending their money and how, but the big swell of fear among the average Chinese with some discretionary income has subsided. And with the campaign to control the flow of yuan out of China registering a success (even if it’s only short term) there’s also less need to hide spending on travel outside of China. I think Ctrip.com CTRP has a good shot at beating the Wall Street consensus earnings estimate of 25 cents a share when it reports during the week of November 22 and continuing its recovery from the horrendous $3.02 a share loss in 2016.
Second positive, while 2016 was a brutal year for earnings at Ctrip.com, the year saw the company cement its dominant position in China’s online travel market. Revenue climbed by 76% in 2016 from 2015 at least partially as a result of the company’s tie-up with eLong and Qunar, two other Chinese online travel companies. In addition Ctrip.com has made investments in 517best, one of the largest offline travel agents in western China; in Skyscanner a leading global travel search company, and in two large U.S.tour operators that specialize in Chinese tourists. China’s online travel market has lots of headroom–the leisure travel market is only about one-third that of the United States while China’s GDP is 60% of U.S. GDP. Ctrip.com is now the largest consolidator of hotel rooms in China, and the largest consolidator of airline tickets. Through its partnership with Priceline, Ctrip.com has access to additional international hotel volume. In 2014 Ctrip.com and Qunar (where Ctrip now has 48% voting power) controlled 32.5% and 23.4% of the online travel market in China, respectively. In 2015 those percentages had climbed to 36.1% and 27.8%, respectively.
And the first negative, as always in China it’s an open question whether the government will decide that Ctrip.com should carry the national flag in its market–like Alibaba (BABA) and Tencent Holdings (TCEHY) or whether the government will step in to “re-arrange” market share. Ali Travel (spun off by Alibaba in 2014) and China’s domestic airlines (which have begun adding hotel reservations to their reservation systems) are serious competitors that the government could decide to favor over Ctrip.com. (On the other hand, Ctrip invested 3 billion yuan in China Eastern Air in 2016.)
Shares of Ctrip.com are up 17.46% in the last year and 7.36% in the last month. Because of the huge loss in 2016, the trailing price-to-earnings ratio is an astounding 790. Because of the 2016 loss, however, I don’t think the trailing P/E ratio provides a useful measure of valuation. The forward PE on projected earnings is a still high 36.38, but that’s not unreasonable if Ctrip’s growth lives up to current projections. In upping its rating to overweight yesterday Barclays said that it sees the company’s compounded annual earnings growth rate at 40% over the next five years. Barclays sees Ctrip as the largest online travel agency in the world by 2018 (in the value of bookings.) At that projected growth rate, Ctrip trades at 40 times 2018 earnings, Barclays calculates.
I’m adding it to my Jubak Picks portfolio with a target price of $64 by September 2018.
