In the highly fragmented travel market, having the reputation of a reliable agent with attractively priced and popular products, can put you ahead of the industry competition. Ctrip.com International Ltd. (CTRP) is one of these cases, offering its travel service in the Chinese market. Over the past decade, this company has served as a consolidator for hotel reservations and air ticketing transactions, apart from offering package tours and corporate travel. Several investment gurus, including Steven Cohen (Trades, Portfolio) and Louis Moore Bacon (Trades, Portfolio), have recently acquired this firm’s stock shares, possibly looking for a long term profit generator.
A Strong Brand, in a Competitive Market
Over the past five years, Ctrip has tripled its net sales through an extensive offering of quality hotels and airline bookings (80% of sales), catered mainly to business travellers in China. The large and loyal customer base that turns to this company’s online and call- centre facilities for well-priced travel packages, has made it indispensable for many travel suppliers, awarding the firm with some pricing power. The high-end leisure travel and business segment, in particular, have pushed the company’s growth levels in the past and helped form a differentiation factor. In fact, 80% of hotel bookings are operated amongst hotels rated with 3-stars or more. Ctrip’s package tours have also been growing consistently, due to favourable demand trends in China and enabling visa restrictions in popular destinations like Europe, Japan, or the United States.
In order to meet Chinese population’s growing travel demand, the company recently acquired several experienced travel agents in Taiwan and Hong Kong, which are bound to level out increasing market competition from meta-search sites and other online tools. However, despite the company’s position as China’s largest travel agent, new online options, including e-commerce and daily deal sites, have been growing at a fast pace and currently present the strongest threat. Meta-search sites particularly, like the Baidu Inc. (BIDU) owned Qunar and Tripadvisor Inc. (TRIP)’s subsidiary Kuxun, hold a competitive advantage over Ctrip, by offering a comparison-shop system between different travel providers and agents. Therefore, the firm will have to focus on product innovation in the future, reaching beyond its advantage of outstanding customer service and user experience.
Valuation and Projections
Ctrip’s marketing efforts in 2012 and 2013 have been successful in boosting the company’s financial results at the end of the fiscal year. While revenue marked a 28.2% annual growth, more than doubling 2010’s results to $668.4 million, operating margins experienced a 1% growth, closing at 15.7%, due to product development and lower administrative costs. Furthermore, these metrics will be sustainable in the future, with the five-year projection showing an average annual revenue boost of 21.2%, driven by growing travel volume and price increases in hotel and airline fares. The package tours are expected to riel in revenue bumps of 31%, and corporate travel will grow 20% over the next five years.
However, while the company’s return on capitals has decreased slightly, it’s 58.2% is still well above the industry average of 12.10%. EPS growth has sustained its 11% annual rate and while hotel bookings bumped 34% in year-over-year revenue growth, airlines shift away from travel agents will affect Ctrip’s sales, decreasing the 77% accountability to 70% in the next few years. Furthermore, with the company’s stock currently trading at a 73% price premium relative to the industry average of 22.60x trailing earnings, leads me to believe that this company is somewhat overvalued. Nevertheless, I feel bullish about Ctrip’s long-term future, given its narrow economic moat rating, pricing power and loyal customer base.
Disclosure: Patricio Kehoe holds no position in any stocks mentioned.