A "Trip" to China

05/05/2006 12:00 am EST


Robert Hsu

Editor, China Strategy and Asia Edge

For investors wishing to learn about the long-term opportunities for US investors in China, attending a workshop by Robert Hsu should be at the top of your to-do list at the upcoming Money Show. Here's a look at his newly launched China Report.

"My first visit to Xian, China, was six years ago. Back then, most of the visitors were foreigners. More recently, we again visited the area and this time, Chinese tour groups far outnumbered foreign tourists, suggesting that China's tourism industry is booming as a result of rising affluence.

"Established in 1999, Ctrip.com (CTRP NASDAQ) is a leading online consolidator of hotel rooms and airline tickets in China. The company is a play on three key trends: increase in tourism; growth of the Internet and travel information databases; and the popularity of independent travel. Like many of the companies on our buy list, Ctrip is managed by young Chinese entrepreneurs educated and trained in America.

"The main founder is James Liang, a 35-year-old Georgia Tech grad who learned the software business at Oracle, and then turned a $250,000 investment into a $1.3 billion online travel powerhouse in less than seven years. Now worth over $100 million, Liang and his team built Ctrip into one of China's best-known travel brands, which generates nearly 4% of the entire country's hotel room reservations (and in a country as big as China, that's a lot of rooms).

"Currently there are about 110 million Internet users in China, number-two in the world but with a penetration rate of only 8%. The number of Internet users in China is growing by over 20% a year. The colossal size and rapidly growing Chinese Internet market presents tremendous opportunities for online companies in China. The success of sites like Expedia worldwide shows that travel reservations is a business highly suitable for the Internet.

"Ctrip's main competitor is Expedia, whose China spin-off-eLong- has poured $167 million into China during the past two years. But Ctrip still has more than 60% of China's travel market. Ctrip has a dominant position in the industry while high entry barriers like a highly fragmented travel industry with no central reservations database, along with its first-mover advantage, will protect Ctrip from competitors.

"Less than 1% of all trips taken in China are currently booked online. But we believe that this is changing, and online travel in China clearly has tremendous room for growth. In the most recent quarter, Ctrip posted year-over-year revenue growth of 57% to $64.9 million and earnings growth of 50% to $27.9 million. The stock is trading at 30 times next year's earnings, which is not expensive for a company that will likely have sustained 50% annual growth for many years to come. Buy below $45 for at least a 50% gain in 12 months."

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