STOCKS: Ctrip Builds Empire with Focus on Travel, Tie-Ups

Bottom line: Ctrip’s stock could be set for strong gains over the next 12 months, thanks to strong profit growth following its recent string of equity tie-ups that have neutralized most of its major competitors.

Ctrip neutralizes rivals with string of tie-ups

In this series on my favorite China-concept stocks, leading online travel agent Ctrip (Nasdaq: CTRP) is the only one that I don’t really like in terms of corporate personality. But that fact aside, there’s still plenty for investors to like about this company that has slowly built up an enviable empire in China’s fast-growing market for travel services.

Ctrip was ahead of the curve with its establishment back in 1999 when China’s Internet and travel industry were both in their infancy. It  was also one of China’s earliest Internet companies to list in the US, making a New York IPO back in 2003. Since then its prospects have soared with China’s booming travel industry, as the company faced relatively little competition for most of its first decade in business.

Ctrip’s formula for success was relatively simple. Unlike many of China’s larger Internet companies that have diversified into a wide range of unfamiliar areas in pursuit of growth, Ctrip has stayed extremely focused on its core competency in travel services. That doesn’t mean it hasn’t expanded, but rather that all of its investments have a strong travel angle that can exploit Ctrip’s experience and synergies with its core online travel site.

One of the company’s earliest investments was in Homeinns (Nasdaq: HMIN), which has gone on to become one of China’s leading homegrown hotel operators. More recently the company has also invested heavily in the fast-growing domestic cruise industry, including its purchase of  cruise liner from global giant Royal Caribbean (NYSE: RCL) in 2014. (previous post)

Its savvy investment strategy, combined with China’s booming travel sector, has helped Ctrip to handsomely reward its investors. Anyone who purchased the stock shortly after its IPO and held onto it through the present would have seen their investment increase by a factor of 30 over the last 12 years. The returns would have been even greater if not for a recent sell-off that has seen Ctrip shares slump 17 percent since reaching an all-time high last November.

The company’s strong prospects are reflected in its latest earnings report, which saw its revenue jump 50 percent to $444 million in the fourth quarter of last year. That kind of growth is quite impressive for a company of Ctrip’s size, and is easily faster than that for leading Chinese Internet companies Alibaba (NYSE: BABA) and Baidu (Nasdaq: BIDU), which are both a bit larger.

Equally important, Ctrip returned to the black in last year’s fourth quarter, posting a net profit of $12 million that reversed a $36 million loss a year earlier. Industry watchers will know that intense competition in China’s online travel sector was directly responsible for pushing Ctrip into the red. The group of young up-and-comers fueling that competition was led by the extremely aggressive Qunar (Nasdaq: QUNR), which is backed by Baidu, and also included names like Tongcheng, Tuniu (Nasdaq: TOUR) and the older eLong.

Neutralizing Rivals with Tie-Ups

This part of the story is what led me to say earlier that I’m not a big fan of the latest manifestations of Ctrip’s corporate personality. That’s because in response to the growing competition that was hurting its profits, Ctrip embarked on an aggressive campaign of buying major stakes in most of its biggest rivals. While such a campaign is understandable, it also looked quite monopolistic and aimed at boosting Ctrip’s position through the anti-competitive strategy of buying out its rivals rather than by beating them with innovation.

The tie-up spree saw Ctrip purchase major stakes in Tongcheng and eLong, and culminated with its landmark equity tie-up with Qunar late last year. Ctrip’s growing clout hasn’t exactly pleased China’s hotel owners and airlines, which are taking their own steps to try to counter the company’s consolidating position. But there’s really not that much they can do, since Ctrip is one of their most important sales channels and China’s anti-monopoly regulator hasn’t indicated it will launch an investigation.

After the latest sell-off of its shares, Ctrip now trades at a relatively rich price-to-earnings (PE) ratio of 42. But at least the company has a positive PE, unlike publicly listed rivals Tuniu and Qunar, which don’t have proper PE ratios because they are still losing big money. It’s important to note that most of the losses, including Ctrip’s own loss in 2014, are the direct result of the competition that has begun to ease sharply following Ctrip’s recent buying spree. As a result, I do expect to see Ctrip’s profits accelerate this year, which could translate to some nice gains for its stock over the same period.


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