Ctrip.com (TCOM 0.24%) is a great growth name in the travel space that has significant growth prospects moving forward. The company is the largest Chinese online travel agent, and it will grow considerably with a burgeoning middle class as well as rising Internet penetration rates throughout China. Further, the company has great prospects to grow outside of China as domestic travelers look to travel outside the country as well as travel into the nation grows. At this time, however, I believe that shares are pricing in this expected growth and then some. Further, competition is high in Chinese online travel market as both domestic outfits grow and foreign companies look to get involved. This competition could pressure the company as well.
What is important for Ctrip is their future. The future looks bright for the company, but keep in mind that does not always mean the same for a company's stock. As of the latest quarter, the company noted that there were 600 million Internet users in China along with 450 million mobile Internet users. Those penetration rates figure out to 45% and 33%, respectively, of China's total population. The raw opportunity for organic growth exists in the pure fact that China's Internet penetration should grow by 80% over the next six to seven years. Further, online travel is far behind those penetration levels as a growing middle class becomes more adept to spending disposable income. Ctrip will benefit from a growing middle class, and this macro-trend is the largest catalyst moving forward for the company.
According to Travel China Guide, outbound tourism in China totaled 83 million in 2012, which was an 18% growth over 2011. I would expect these rates to grow 15-20% for some years as disposable income and the popularity of outbound travel begins to grow. In 2012, 59% of outbound tourists traveled abroad for their very first trip, and travel agents helped 40% of the 83 million with profits up 24% from 2011. Domestic tourism is also quite popular, and it accounts for 4% of China's GDP. There are tremendous opportunities here for an online travel agent. The duality of both growth of mobile/Internet penetration in the nation along with the growth of travel puts Ctrip.com in an opportunistic spot.
Another exciting catalyst for Ctrip is the company's adaption of mobile. According to Chairman James Liang:
Ctrip Travel app is now the number one mobile app in the travel segment in China in terms of transaction value. The peak transaction value today achieved over RMB50 million. Our one-stop platform with comprehensive products and [excellent] service empowers the growth of our mobile app. I will continue to focus our mobile strategy and take the leadership in the mobile travel market.
The biggest positive about mobile is that it protects the company (for the time being) against rival Qunar, which is funded by Baidu (BIDU 0.98%). Qunar has made large strides in the vacation arena with its mobile focus. This conversation brings us to the main issue for Ctrip and why I am not very bullish on them at this time. Competition is major, and it is rising fast. Further, the market has seemed to price in all expected growth for the company. The company's P/E sits at 69 and its forward P/E sits at 46. When looking at growth stocks, PEG ratios tend to show opportunities. Ctrip's PEG ratio is nearing 3.0. Investors have to believe in very, very excessive growth in order to see potential upside. Market share for Ctrip has stayed the same for the past two years, but it's tough to expect the company to take much more market share with big-time players.
Qunar is backed by Baidu, the largest Internet company in China. eLong (NASDAQ: LONG) is partnered with Expedia (EXPE 0.58%), and everyone wants to be a part of this growth story. Currently, Ctrip holds the overall market share lead for OTAs, but Qunar is the leader in online bookings for airfare with around 150,000 per day in Q4 of 2012. Additionally, Qunar wants to increase their hotel booking revenue to 40% of total revenue. It sits at just 10% currently. Ctrip makes most of its money from hotels, and the growth of Qunar defintely threatens Ctrip. eLong holds just under 20% of the online market share, but the company has a strong luxury hotel mix and is looking to make big strides in mobile to gain more market share. There is a lot of players here at the top, and that challenges Ctrip's ability to outperform.
Competition will mean declining margins, price wars, heavy marketing spending, and a lack of economic moats. A high-growth name with little moat and tough competition is unlikely to be able to leverage their opportunity to create outstanding outperformance of the average growth rates of the market. Ctrip does not have any competitive advantage and will have to spend larger amounts of money to market and compete. These impediments are the reason the company has seen margins plummet from 37% (operating in 2010) to 14% in the TTM. Net margins have shown similar rates of decline. This situation should continue to persist for Ctrip moving forward as price wars will remain with many players and a key growth phase occurs for the next several years as the middle-class becomes more accustomed to using the Internet, traveling, using OTAs, and gains more disposable income.
Let's put this growth into the context of share price to understand these valuations further. If Ctrip grew net income by 25% even each year for the next four and a half years, 2017 net income would come in around 2.2 billion in CNY, translating into $360 million. That would convert (keeping shares the same) into an EPS of $2.75. That puts the company at a future P/E at 18, assuming the CNY/$exchange rate stays relatively similar. If the CNY gets stronger, these ratios are even less favorable. At an 18 future P/E in 2017, I cannot justify buying shares for more upside at this time.
I do not see any reason to be a a long-term investor in Ctrip at this time, and I believe that the opportunity has now passed for Ctrip.
