Saturday, January 5, 2008

Zachstocks on Ctrip.com (CTRP)

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Just noticed Zach over at Zachstocks.com has a nice write up on one of the fund holdings, Ctrip.com (CTRP). Ironically for the first time since October, I added to this name Friday. I have noted in October at the height of China mania (PetroChina hitting 1 Trillion Valuation), when every financial expert on TV was telling you to pile into China (doh! at the top no less) that things were getting out of control and instead I was running to India [Buying a Bucket of India] which was getting no attention by the 'savvy smart money experts'. That worked out well in retrospect as Chinese stocks have performed quite poorly the past few months. [China v India the Past 2 Months] However, I have noticed the past week or so some 'relative outperformance' (not performing as badly as US equities) in the Chinese stocks so we might be ready to get some rotation back to these names. Maybe. I own a few small and mid cap Chinese stocks (Ctrip.com being one) but had cut back exposure the past few months, while focusing on India. However, I am watching to see if this group is ready to make a move up - in fact if the portfolio were not already chock full of names (I am trying to keep to roughly 55 long positions) I'd be interested in potentially adding some of the larger cap Chinese stocks if they begin to break out - oil company CNOOC (CEO) is one I have had my eyes on for a long time. So if I do add one as a proxy for large cap China this would be the one.

Regarding, Ctrip.com this has long been a personal favorite and a part of my personal portfolio on and off for quite a few years... this was a Chinese stock to own before Chinese stocks became sexy. The long term story is quite easy to summarize - China, travel. And without the risk of high fuel prices that you would encounter by buying a Chinese airline or things of that nature. Ctrip.com has never been a cheap stock, but it has been one of those "growth stocks that has always been expensive". Yet it always seems to perform and it's management plays the Wall Street game to the hilt; under promise and over deliver. While there are always threats of increased competition to a service company such as this (so one must always be on the look out for slowdowns ingrowth), the growing pie of Chinese travel should provide secular growth for quite a while.

As a side note - as readers know from the name of my mutual fund, I am a big believer that being in the right sector is 2/3rd of the battle, but this sector is a case where you have to be in the right company. Many times over the years, as Ctrip.com has been very expensive I've been called by the siren song of "cheap" eLong (LONG) a competitor. But if you pull up a 3 year chart of eLong you can see what an unmitigated disaster it has been. Thankfully I never touched this name, but it was close a few times. So this is certainly a case of you need to pay up for high quality. Since I have a preference for "growth at a value" I tend to chase after the eLongs in sectors such as solar which truth be told has held me back (I've sat many months in 'value plays' while the most expensive stocks in the sector ramp up day after day)- closing your eyes to valuation and just buying a First Solar (FSLR) [which I found 'expensive' way back at $60] for example, was the better option. So I just want to point that out - because as they say it is sometimes better to pay up for best of breed, and online travel in China is case in point.

Anyhow back to Ctrip.com -in terms of technical stock performance, this has to be one of the most reliable stocks I have been associated with the past half decade. It generally will stair step up - make a move, consolidate (rest), than make another move up, and keeps repeating it. Short of an earnings warning in the future, this just seems to be the historical pattern. And we might be coming to the next move. As the chart below shows, the stock has been range bound for the better part of 2 months after a larger move. The range has become more and more narrow - during this time I winnowed my exposure to the name to use cash in other places with more appreciation. But generally as this range narrows, we begin to enter a stage where a large move can be made. Whether it is up or down is the open question. :)



Here are some points from Zach's article:
  • The company operates much the same as the US equivalent Orbitz or Expedia except for the fact that CTRP enjoys what essentially amounts to monopoly status. Bear Stearns estimates that the company holds a 57% market share of the Chinese online travel market and that level has been growing quarter after quarter.
  • Despite the high level of penetration, the company’s future growth prospects remain bright because the online travel market itself in China is expected to grow at a 37% rate through 2010. At the same time, Chinese culture is just beginning to embrace the idea of online travel booking whereas in the past, most have used more traditional travel agent services. Add to that, a broad population that has only recently been introduced to discretionary spending and leisure travel and you get the recipie for long-term secular growth.
  • Bear Stearns estimates that the company only accounted for 2.7% of total hotel bookings in 2005, and 4% of total airline tickets in 2006. Both of these statistics are likely to increase to above 10% in 2010 and this in the context of a robustly growing overall industry. While eLong (LONG) is also a player in this market, the competition is tilted in CTRP’s favor as name recognition, service offering, and pricing power all appear to benefit the more well established player. Some of the major airlines have created their own online offering platforms, but at this point they have not been able to reach critical mass in order to effectively compete against CTRP.
  • A look at industry trends shows that while hotel bookings are a strong cash flow driver for the company (and this business is expected to continue to grow), the primary growth engines will likely revolve around air ticketing and packaged tours. CTRP is set up nicely to benefit from trends in all three of these areas and while domestic travel and outbound travel from China makes up the bulk of its business, the company is beginning to receive more inbound business in relation to the upcoming Olympics as well as a general willingness of the global population to visit China.
Long Ctrip.com in fund; no personal position


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