Ctrip Analysis and Valuation
Ctrip has been the fuel for much of the gains achieved in the Two Roads Diverged Portfolio since it was purchased in February 2006. Much of the rise in the company’s share price has been fueled by some pretty remarkable growth in revenue and earnings. The market has come to expect these numbers on a quarterly basis despite management’s attempt to temper expectations.I was drawn to Ctrip because I wanted to diversify my holdings to companies outside the U.S., and also because it does all of its business in China. I believe that the company is fairly easy to understand. Expedia and Ctrip provide a comparable service, but Ctrip has the market potential of anyone who has enough money to travel in China. In my mind, that is a pretty amazing market opportunity. The key after this initial attraction is to avoid paying too much for this business that looks extremely expensive on the surface. I want to buy their growth at a reasonable price.
About the Company
Ctrip.com International, Ltd. is a travel service provider that offers hotel reservations, airline tickets, and packaged tours to business and leisure travelers in China. Ctrip aggregates information on hotels, flights, and vacation packages, and enables their customers to make informed and cost-effective travel bookings. Ctrip targets primarily frequent independent travelers in China who do not travel in groups. These travelers come form a traditionally under-served yet fast-growing segment of the China travel industry.
The company is incorporated in the Cayman Islands and conducts substantially all of its operations in China. With its operational headquarter in Shanghai, it has branches in 9 other major cities in China, including Beijing, Guangzhou, Shenzhen, Hong Kong, Xiamen, Wuhan, Chengdu, Qingdao and Shenyang. The company also maintains a network of sales offices in about 45 cities in China.
The History
Below is a table demonstrating the last three years of earnings history for Ctrip. I’ve also estimated their year-end numbers based on the the first nine months of their fiscal year. Just to highlight Ctrip’s most recent quarter, net revenues were up 55% over the prior year period, and earnings per share were up 65%. Of course, Ctrip management noted in their release that they are targeting 35% net revenue growth. This has been repeated consistently even as they continue to report growth in excess of 50% year-over-year.
| (in millions) | 2006 | 2005 | 2004 |
|---|---|---|---|
| Revenues | $106.9 | $64.6 | $40.4 |
| Cost of Goods Sold | $26.6 | $11.0 | $5.9 |
| Gross Profit | $80.3 | $53.6 | $34.5 |
| Total Expenses | $44.2 | $26.4 | $24.0 |
| Taxes | $5.3 | $3.8 | 1.5 |
| Net Earnings | $30.8 | $27.8 | $16.1 |
| Depreciation & Amortization | $1.8 | $1.1 | $0.8 |
| Capital Expenditures | $12.4 | $4.0 | $1.8 |
| Growth Capex | $9.3 | $3.0 | $1.4 |
| Owner Earnings | $29.6 | $27.9 | $16.5 |
| Dividends | $8.6 | $4.9 | $3.3 |
| Shareholder Equity | $131.7 | $94.8 | $72.8 |
| Shares Outstanding | 33.27 | 31.80 | 31.80 |
| Owner Earnings Per Share | $0.89 | $0.88 | $0.52 |
| Gross Profit Margin | 75.2% | 83.0% | 85.4% |
| Net Profit Margin | 28.8% | 43.0% | 39.9% |
| Return on Equity | 15.5% | 42.3% | 46.6% |
| Earnings Growth | 10.9% | 72.7% | 147.7% |
| Revenue Growth | 65.4% | 59.9% | 82.8% |
The trailing twelve month history looks like this:
| (in millions) | ttm total | 3Q 2007 | 2Q 2007 | 1Q 2007 | 4Q 2006 |
|---|---|---|---|---|---|
| Revenues | $139.9 | $43.1 | $37.8 | $30.1 | $28.9 |
| Cost of Goods Sold | $28.2 | $8.5 | $7.5 | $6.3 | $5.9 |
| Gross Profit | $111.7 | $34.5 | $30.3 | $23.8 | $23.1 |
| Total Expenses | $65.5 | $19.7 | $17.8 | $14.6 | $13.4 |
| Other Inc/Exp | $4.7 | $2.4 | $1.2 | $0.8 | $0.4 |
| Taxes | $7.7 | $2.6 | $2.1 | $1.6 | $1.4 |
| Net Earnings | $43.2 | $14.6 | $11.6 | $8.4 | $8.6 |
| Shares Outstanding | 68.40 | 68.40 | 67.78 | 33.74 | 33.52 |
Valuation
My base valuations assumptions are starting owner earnings of $29.6 million, a 10% discount rate to future cash flows, and a 55% year one growth rate. From here, I hope to obtain a range of values. The variables that I will examine are year 2-5 growth rate, and the reversionary price to earnings growth ratio. I am building a five-year forward look at owner earnings. At the end of five years, I build a reversion value to represent a sale of the company. Looking at the PEG ratio and changing this as a variable, allows me to value the company based on its outlook after five years.
| Growth Yrs. 2-5 | 5th Yr OE ($mil) | PEG | Implied P/E | Reversion Value ($mil) | Value/Shr at 10% Disc. |
|---|---|---|---|---|---|
| 22% | $101.5 | 1.0 | 22.0 | $2,232.4 | $24.05 |
| 22% | $101.5 | 1.5 | 33.0 | $3,348.6 | $34.18 |
| 22% | $101.5 | 2.0 | 44.0 | $4,464.9 | $44.32 |
| 30% | $130.8 | 1.0 | 22.0 | $3,924.7 | $40.00 |
| 30% | $130.8 | 1.5 | 45.0 | $5,887 | $57.81 |
| 30% | $130.8 | 2.0 | 60.0 | $7,849.5 | $75.63 |
| 38% | $166.1 | 1.0 | 38.0 | $6,312.7 | $62.35 |
| 38% | $166.1 | 1.5 | 57.0 | $9,469.0 | $91.00 |
| 38% | $166.1 | 2.0 | 76.0 | $12,625.4 | $119.65 |
As this table illustrates, there may still be some upside to Ctrip shares. I am estimating the most probable range to be between $57 and $91 per share. The market obviously agrees. I believe 30% growth for years 2-5 and a PEG of 1.5 to be on the conservative side. I believe that it is entirely possible that Ctrip could be valued at between $9 and $12 billion at the end of five years.
Risks
The risk that just jumps out at you on this company is that they are in China. It’s a big part of their growth, but there are also significant political risks here. My goal is to participate in this growth without letting Ctrip grow beyond 5% of my investments. So in the Two Roads Diverged Portfolio, I do not want Ctrip to grow much beyond 20% of the total portfolio.
Conclusion
As of today, Ctrip makes up a little over 13% of the Two Roads Diverged Portfolio. The current stock price is not unreasonable for this company, as it could possibly be worth over a $100 per share at a 10% discount rate. Without discounting the owner earnings back at 10%, the top end of my valuation range puts Ctrip at $185 per share, over 3x higher than shares trade today. Still, the risks are great with this company and it makes up a good portion of my current holdings. I will likely not add shares unless they fall below $40 per share.
August 13th, 2008 at 8:56 am
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March 4th, 2009 at 5:34 am
[...] As the Chinese economy has slowed, so has the remarkable growth of Ctrip. Gone are the days when Ctrip management guided conservatively to 35% net revenue growth while reporting net revenue growth over 50%. [...]
December 15th, 2009 at 5:51 am
[...] provided guidance of 25% growth. Inevitably, the company produced earnings and revenue growth well in excess of 25%. In their most recent quarter, Ctrip seems to have resumed their phenomenal growth. For their [...]
December 15th, 2009 at 10:26 am
[...] provided guidance of 25% growth. Inevitably, the company produced earnings and revenue growth well in excess of 25%. In its most recent quarter, Ctrip seems to have resumed its phenomenal growth. For its fiscal [...]
December 15th, 2009 at 2:13 pm
[...] provided guidance of 25% growth. Inevitably, the company produced earnings and revenue growth well in excess of 25%. In its most recent quarter, Ctrip seems to have resumed its phenomenal growth. For its fiscal [...]
December 15th, 2009 at 9:03 pm
[...] provided guidance of 25% growth. Inevitably, the company produced earnings and revenue growth well in excess of 25%. In its most recent quarter, Ctrip seems to have resumed its phenomenal growth. For its fiscal [...]