TRAVEL: Ctrip, BTG Spotlight China Travel’s Rewards and Risks
Bottom line: New quarterly earnings data show that China’s travel industry is on the cusp of a slowdown likely to last for at least the next 2 years, while a major new fund set up by Ctrip shows the sector still has strong longer-term growth potential.
A couple of items from the travel space are casting a spotlight on the risks and rewards of China’s travel sector, which has huge potential but is also susceptible to economic cycles. Highlighting the big potential is word of a new $400 million fund being launched by leading online travel agent Ctrip (Nasdaq: CTRP) and US private equity firm General Atlantic to invest in Chinese travel-related projects. Meantime, the downside was showing up in the newest results of BTG Hotels (Shanghai: 600258), whose first-half profit plunged after its recent buyout of budget hotel specialist Homeinns.
As a longtime industry watcher, I personally believe that Chinese travel-related stocks are generally very good long-term bets, since millions of people will become new travelers as the nation’s economy raises them to middle-class status in the next few decades. But from a shorter-term perspective, China is also finding out that its travel industry is subject to the same kind of cyclicity that is quite common throughout the rest of the world.
The nation is clearly standing on the cusp of a downcycle, which was apparent in BTG’s latest results. (Chinese article) The company’s profit tumbled by two-thirds to about 14 million yuan ($2.1 million) in the first half, following its recent successful privatization of the formerly New York-listed Homeinns.
The Homeinns purchase helped to turbocharge BTG’s revenue for the quarter, which more than tripled to 2.3 billion yuan. The report points out that Homeinns now accounts for nearly three-quarters of BTG’s revenue and most of its profit, in what some might interpret as a backdoor listing. They also point out that the big profit drop for BTG was at least partly due to privatization-related costs and depreciation of China’s currency, the yuan.
But the fact remains that China’s rapidly slowing economy is having a cooling effect on the broader hotel industry. That reality was more clearly present in the latest quarterly results of rival operator China Lodging Group (Nasdaq: HTHT). The owner of the popular Hanting brand reported earlier this month its revenue per room (Revpar), a widely watched industry metric, was flat year-over-year the second quarter. The company was still able to double its profit for the quarter, but mostly due to new hotel openings that saw its room count rise 28 percent.
China’s last hotel downcycle occurred around 2010, fueled by a huge build-up in new rooms during the 2008 Beijing Olympics and Shanghai World Expo two years later. That downswing probably lasted a good 2 years before the new capacity got absorbed and the sector began to post strong growth again.
The latest investment by Ctrip and General Atlantic is clearly looking forward to the industry’s next upcycle, since many of the projects it invests in won’t even occur until a year or two from now. According to their announcement, General Atlantic and Ctrip will launch the fund with Ocean Link, which is billing itself as China’s first private equity company completely focused on the travel sector. (company announcement; English article)
There’s not much more detail in the announcement, and even the $400 million figure was provided through an interview in a separate media report. Ocean Link was formed earlier this year, and its investors include not only Ctrip and General Atlantic, but also Chinese Internet giant Tencent (HKEx: 700).
The announcement points out that China’s tourism sector has experienced rapid growth over the last decade, and the number of domestic and international travelers in 2015 rose 10.5 percent and 12 percent to 4 billion and 120 million, respectively. The number of international travelers is expected to double over the next decade, according to a Goldman Sachs forecast. With that kind of growth, it’s easy to see why the sector should have plenty of good longer-term investment opportunities over the next decade.
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