August 20, 2007: Is there a home team advantage in online travel?
If so, U.S. Web travel firms like Barry Diller´s Expedia (NASDAQ:EXPE) that are hot to enter the Chinese market better watch out.
Ctrip.com International CTRP, China´s homegrown slugger in online travel, is hitting lots of home runs lately. That meant some scoring for investors in its U.S. shares, until a recent downturn.
"The question is not whether Ctrip can compete against Expedia, but whether Expedia can compete against Ctrip," said Piper Jaffray (NYSE:PJC) analyst Aaron Kessler.
The Shanghai-based travel firm founded by four Chinese entrepreneurs has recorded double-digit year-over-year per-share profit growth for 11 straight quarters, excluding stock-based compensation charges. Its year-over-year sales have risen at least 46% every quarter since mid-2003. In the second quarter, sales rose 59% to $37.8 million.
Gilford Securities analyst Ashish Thadhani forecasts 43% compounded annual revenue growth for Ctrip from 2006 through 2009. Thadhani says the company has consistently exceeded his expectations in key metrics such as room nights booked and air tickets sold.
Ctrip offers hotel reservation, air-ticketing and packaged-tour services online, mostly targeting middle class Chinese consumers. It sells plane seats for local airlines such as Air China. It also books seats for foreign carriers such as United Airlines UAUA that have flights that originate in China.
With JPMorgan (NYSE:JPM PRH) (NYSE:JPM PRX) (NYSE:JPM PRK) (NYSE:JPM PRJ) (NYSE:JPT) (NYSE:JPM) estimating that the number of Chinese Web users could swell to 190 million by 2010 from 137 million in 2006, China has a potentially huge online travel market.
In addition, China boasts more than 10,000 hotels and inns and is building more in the run-up to the 2008 Beijing Olympics. Chinese airlines are adding planes and routes.
Robert Lawrence Kuhn, a senior adviser on China for Citigroup´s (NYSE:C) investment banking unit, says Chinese government policy is very focused on increasing consumer spending. "One way to do that is to get more people to travel inside China," Kuhn said.
Expedia is one of several U.S. online travel players building beachheads in this emerging travel market. Travelocity bought Singapore-based online travel Web site Zuji in January 2006. Priceline.com (NASDAQ:PCLN) PCLN runs a travel Web site with local Chinese partner Hutchison Whampoa for travelers departing Hong Kong and Singapore. Priceline is said to be eyeing more travel investments in China.
Ctrip´s giving its U.S. rivals a run for their money. Ctrip´s market value of about $2.4 billion is 10 times larger than Expedia´s China unit, eLong (NASDAQ:LONG) LONG. Expedia owns 52% of eLong and Chinese partners own the rest.
Ctrip and eLong aren´t the only China-based Web travel firms. There´s also Qunar.com, a price comparison travel Web site. All of these players are trying to get traction in a frontierlike local travel market, where opportunities are rife and many facilities and services are being built from scratch.
Ctrip´s success vs. eLong has fueled rumors this month that Expedia might sell its stake in eLong to Ctrip.
Nine-year-old Ctrip enjoys wide brand recognition among Chinese. As a locally owned firm, China´s government imposes fewer legal curbs on it than it does rivals with foreign investors, including eLong.
China´s middle class is relatively new to booking travel online, but they´re fast learners. And the number of wealthy Chinese who take package tours to destinations such as the U.S. and Europe is expected to keep growing.
Analysts say the country´s growing middle class is waiting for more affordable hotels and motels to rise from the dust of China´s ongoing building boom. And Ctrip has the advantage here. It´s more familiar with regional markets, laws and politics than foreign Web travel firms that have been focused on China´s big urban centers, analysts say.
"(Ctrip) understands Chinese consumers better than a multinational would," Kessler said. "They know what Chinese consumers want and understand local marketing better."
Not that Ctrip is ignoring the big cities. In June, Ctrip said it would open a Beijing-based offline travel agency to compete with traditional travel agents in China.
Kessler says there´s room for several winners in China´s nascent e-travel sector.
"We don´t think it´s a winner-take-all business," he said. "There´s room for more than one player in online travel in China."