E Ctrip Is A Market Leader In A High-Growth Sector

A Bit Of Context

China internet stocks have been particularly volatile in the past years. That has been a result of a series of factors. For example, they posted a significant correction as a result of the fears of an economic deceleration in 2015, but recovered soon when the market realized the excessive negativity.

In more recent times, we have seen a higher volatility as a result of the trade war between the United States and China and the negative effects the market is discounting. The market’s reaction is generating interesting buy-on-the-dip opportunities, and one of the most interesting names is Ctrip.Com International Ltd  (Nasdaq: CTRP).

Citrip.com is the market leader in the Chinese online travel industry, and is basically the Chinese equivalent of Expedia (Nasdaq: EXPE) or Booking holdings (Nasdaq: BKNG). In this context of market panic affecting the whole Chinese internet space due to the concerns about the potential effects of a trade war on the country’s economy and regardless of the potential impact of tariffs, Ctrip’s prospects remains solid thanks to the favorable conditions of the Chinese market, where the strong economic growth and the rise of the Chinese middle class will support growth in the travel industry for many years.

These factors have already driven Ctrip’s growth in the past years, and the stock has essentially quadrupled from $10 to more than $40 between 2012 and 2017, while sales per share more than tripled and FCF per share grew from $0.62 to $1.41.

Growth has slowed down in the recent past due to the aforementioned concerns about the effects of a trade war on the Chinese economy and the evidence of a deceleration in the past few quarters. While it’s true that growth is slowing from the 35% - 75% area in the past few years to just low-double-digit growth in Q1, long-term growth prospects remain solid and the management’s guidance actually implies an acceleration in the short term, to a growth rate in the 20% to 25% range. In any case, Ctrip’s business is driven by favorable long-term trends that will support sales growth.

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Disclosure: I have no position in CTRP nor in any other ticker mentioned.

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Zev Bannett 2 years ago Member's comment

I enjoyed the analysis, a lot of interesting details to think about here. I was wondering how you think about analyzing financial statements of Chinese companies like this. Do you have a way of avoiding fraudulent accounting, and ensuring that the statements are accurate? I've encountered problematic accounting in Chinese companies a number of times, and I'm curious what an experienced person like you has to say about this issue.


Real Alpha 2 years ago Author's comment

Thanks for the comment, Zev. You raised a good point. The risk of fraudulent accounting can be significant with some names. I don't know of any ways to ensure that statements are accurate. I tend to limit risks as much as I can. Besides the usual due diligence and the analysis of earnings quality, in general, I think it's important to analyze the business from a qualitative perspective and compare it with other other companies with are familiar with and that we consider "less shady". Analyzing the business' qualitative characteristics properly and ensuring that what's written in the financial statements makes sense has helped me a lot in the past. I also avoid smaller names, as they tend to carry an even higher level of risk from this perspective.

Zev Bannett 2 years ago Member's comment

Got it, and thanks for the reply:). Your approach makes sense to me. You're basically saying that you try to find ways to make sure the numbers make sense, at least, to reduce the possibility of fraud. It would be nice if we could create some kind of certification (kind of like the CFA GIPS standards) that companies (probably predominantly foreign ones) could use to "certify" themselves as being legitimate. I really don't check out too many Chinese companies because of these issues, and it's unfortunate for me, as well as for them.

Real Alpha 2 years ago Author's comment

Yes exactly, I try to limit the risk as I can. The certification idea makes a lot of sense. I wonder how much the costs of implementing it would be.