Why am I bullish for CTRP?
CTRP is an online travler consolidator in China. You act think of it as Expedeia.com of the US. Unlike the online travel business that is showing signs of more difficult business outlook in the US, online travel business is merely starting in China and is set to undergo dramatic business uptick in coming 10 years. CTRP share price has seen selling pressure due to market correction in China and poor earning results from Expedia.com in the US which triggered investors' fear that the company earning growth may slow and current high PE multiple cannot be sustained.
Investent thesis.
China is one of the biggest travel market in the World. With recent rise in the living standard, more and more people are showing interest in doing both domestic and international travel. the World Tourism and Travel council estimates that the Chinese travel market is valued at $90 billion (US) and is expected to grow to $300 billion by 2014. The online consolidators are currently commanding less than 5% of the ovearll Chinese travel market. CTRP is only thoought to be making 90 mil in FY 2006 and as such, the company has merely begun to tap into the huge Chinese market. The growth towards 2008 Olympic is thought to be explosive, both driven by uptick in the travel volume among the consumer and corporate travelers and prevalence of internet among common Chinese people. Over next 5 years, I suspect that the online travel business could be 25% of the overall Chinese travel market. And this represents more $22 billion opportunity for the online travel consolidators. If CTRP can sustain its 80% market share among online travel consolidator, this represents revenue close to $17 billion for the company even if you assume no growth in the overall Chinese travel market.
Competition lanscape
Unlike the US online market, there is a significant barrier to entry in online travel business. Chinese travel is still somewhat restrictive as the government demands more paper work especially for the foreign travel. So the traveller agency must both be experienced in having extensive partnership with various hotels and tourist business and government agency. So although there will be new competitions in the future, the online travel market is currently dominated by two main players in China: CTRP and LONG. CTRP is far ahead of elong with 80% market share. Thus, CTRP is expected to have monopoly-like position over next two to three years. Even as the competitions enter beyond that point, the market will grow fast enough to accomodate more than one players.
Past and near term earning performance
Figure 1. Ctrip Quarterly Financial Highlights
US$m 1Q06E
2Q06E
3Q06E
4Q06E
FY06E
Hotel reservation
10.7
12.9
15.0
15.8
54.4
Air-ticketing
6.3
8.0
9.5
10.4
34.2
Packaged tour
0.9
1.1
1.3
1.2
4.4
Others
0.3
0.4
0.4
0.5
1.5
Gross revenues
18.2
22.3
26.1
27.9
94.5
Gross profit
13.7
16.9
19.8
21.1
71.5
Operating profit
5.4
6.8
8.1
8.9
29.2
Net income
5.3
6.7
7.9
8.7
28.7
Reported FD EPS (US$)
0.16
0.20
0.24
0.26
0.87
Pro-forma FD EPS (US$)
0.20
0.25
0.30
0.33
1.09
As above table shows, the company has generated avearge of 10 to 12 % Q to Q growth in FY 2006. For 2007 FY, this growth rate is expected to pick up. I suspect that the company is able to deliver 40 to 50% revenue growth over next two years. This implies revenue close to 140 mil in FY 2007 and 200 mil in FY 2008. the typical operating number for CTRP has been 45% as the business is highly scalable. Also the company is benefitting from the lower tax rate in China compared to the counterparts in the US. What this all boils down to is EPS that exceeds $2.50 for 2008. Further question is the multiple that the investors will be willing to pay for such growth. If CTRP will be perceived to grow at 40 to 50% YOY growth in both revenue and EPS number, then the investors will be willing to pay at least 40 to 50 as the company is in the hyperbolic growth stage. This implies $125 possible price in 2007, anticipating the strong 2008 earning.
Conclusion
Risk is substantial as China is completely unknown territory for US investors. However, growth aspect of CTRP is just too tempting to pass on. CTRP will be in the heart of China growth story and US large institutions clearly favors CTRP over unknown more speculative China plays. As such, I am naming CTRP as top pick for China Play. furthermore, I am naming CTRP as best idea for 2007 as strong growth potential coupled with possible investors' enthusiasm over 2008 China Olympic could provide outstanding upside potential for the share price.
CTRP shares will remain volatile. however, I recoomend that you guys accumulate aggressively upon any pullback on greater than 10%
$25.25 (06/28/06)
