In my article, Sohu: Underappreciated Company in the Midst of Brand Reinvention, I pointed out that one of the reasons why Sohu.com (SOHU) is underappreciated is the lack of awareness and familiarity North American investors have with Sohu’s product offerings. Like Sohu, I believe that Ctrip.com (CTRP) is also underappreciated by investors based on the company’s industry leadership and growth potential, partially due to lack of familiarity investors have with CTRP’s products. As readers will see later in this article, one of CTRP’s competitive advantages lies in its customer service, which is similar to a company's brand equity in that it is difficult to quantify. In this article, I will attempt to give investors a deeper look at China’s leading online travel agency (OTA), Ctrip.com.
Ctrip.com (CTRP) is offers hotel reservations, airline tickets and packaged tours. The company has a market cap of approximately $6 billion and is trading at 28x FY2011. CTRP could be an attractive investment for the next 5 to 10 years due to China’s continued economic growth, the structural shift from export-driven to a more consumer-driven economy, the company’s competitive position within the OTA industry, and a solid management team.
From 1999 to 2009, China’s 10% GDP growth has created a middle class consisting of between 100 million to 250 million people. According to the National Bureau of Statistics, per capita urban household disposable income grew at a CAGR of 11.4% to $2,514 while rural household incomes grew at a CAGR of 8.8% to $754. The combination of strong GDP growth and rising disposable income, coupled with the government’s effort at boosting domestic consumption by adding public holidays, has increased the number of domestic tourists from 719 million to 1.9 billion while total travel expenditure increased from $41 billion to $185 billion over the same period.
Aviation infrastructure also saw nationwide expansion. The number of civil airports in China increased from 142 to 175 over the past five years, and the Civil Aviation Administration plans to have more than 230 airports by 2015 under the 12th Five-Year Plan. Air passenger volume increased at a CAGR of 14% from 67 million to 267 million over the past ten years and is expected to grow at a CAGR of 13% over the next five years.
The hotel industry also capitalized on the growing travel industry by increasing the number of hotels to meet the leisure and business demand. According to the National Tourism Administration of China, the number of star-rated hotels doubled to 14,099 from 1999 to 2008. Over the same period, the number of star-rated hotel rooms tripled to 1,591, representing a CAGR of 13.1%.
According to the Boston Consulting Group, China’s tourism industry is expected to grow at 14% per year over the next 10 years, driven by increasing leisure and business travel demand. The evolution of the industry will most likely follow the path of the US tourism industry in that growth in the airline, auto, and railroad travel sectors mirrors that of the US in the 1950s, 1910s, and 1940s, respectively.
China’s tourism industry is still very different from that of the US and still has significant future upside (see table below):
| China | US |
General Information | 35% of online payment by credit card | Universal adoption of online payment using credit card |
35% of reservation via online | ~100% reservation via online | |
Oligopolistic Market | Multiple Competitors | |
Hotels | Major hotels accounts < 10% market share | Major hotels account ~ 50% of market share |
Lack Global Distribution System (GDS) | Has fully operational GDS | |
Airline | Regulated by the government | Deregulated |
Emergence of E-Ticket | E-Ticket mostly used | |
Tickets issued by travel agents | Tickets issued by airlines | |
Packaged Tour | New concept. | Already exist |
Age group | 25 – 50 | All age group |
Corporate Account | New concept | Already exist |
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