Back in 2007, Chinese travel stocks were expected to be the next great growth industry. At the time, investors had many reasons to be optimistic. The 2008 Olympics were supposed to open the floodgates to tourists, and the 2010 Shanghai World Expo and Guangzhou Asian Games would generate huge amounts of revenue for Chinese travel and lodging companies. Unfortunately, that grand long-term view didn’t account for the devastating 2008-2009 financial meltdown, the subsequent European sovereign debt crisis, a slowdown in Chinese GDP growth, and the recent outbreak of the H7N9 avian flu.
All of these factors have cast a long shadow over the industry, which means that it might be time for brave contrarian investors to load up on some depressed Chinese travel stocks. There are two primary ways for U.S. investors to invest in the Chinese travel market – through hotels and online travel booking sites. Let’s take a look at the best choices in these two industries.
Shanghai-based
is the biggest and safest bet in the Chinese hotel industry. With over 1,400 economy locations in 212 cities, Home Inns controls over 40% of the domestic lodging market. Home Inns notably acquired its rival Motel 168 (which includes Motel 268 and Yotel QQ) for $470 million in 2011.
Back in 2011, Home Inns struggled due to unfavorable year-on-year comparisons to 2010’s Shanghai Expo-boosted numbers. At the peak of the Expo, Home Inns’ average occupancy rate rose to 94% – an all time high. Its big acquisition of Motel 168 also spooked investors. As a result, the stock has lost nearly half of its value over the past three years.
Yet Home Inns has managed to consistently hit its target of opening 300 new inns and hotels on an annual basis. The company also recently affirmed its 2013 target to add 360 to 380 hotels by the end of the year. In other words, despite suffering from year-on-year comparisons in 2011, the company has continued to expand.
Moreover, Home Inns recently posted strong first quarter earnings that topped both top and bottom-line analyst estimates. The company reported earnings of $0.04 per share, topping the consensus estimate for a $0.05 loss. Home Inn’s revenue rose 11.7% year-on-year to $225.8 million, also ahead of the $219.2 million that analysts had expected. Home Inns now expects total revenue for fiscal 2013 to come in between 6.6 billion to 6.8 billion RMB ($1.07 billion to $1.10 billion), which would equal year-on-year growth of 14.4% to 17.9%.
RevPAR (revenue per available room) at Home Inns declined 0.75% from last year, but occupancy rates rose from 80.7% to 83.6%. However, its Motel 168 chain reported that is revPAR rose 4.5% while its occupancy rate climbed from 70.4% to 76.7%.
While those numbers are solid for the quarter, a look at its longer-term growth is a bit puzzling, as seen in the following chart.
The fact that Home Inns posted positive earnings per share last quarter indicates that its bottom line is improving, but the company’s margins and free cash flow have been wildly unpredictable. If Home Inns can continue posting positive earnings, rising revPAR and higher occupancy rates throughout the year, then it’s highly possible that these metrics will all stabilize in the right direction. If that happens, Home Inns will take off, since analysts are projecting the company’s full-year EPS to rise 54% at the end of 2013.
Meanwhile, online booking agencies Ctrip.com International, Ltd. (ADR) (NASDAQ:CTRP) and eLong, Inc. (ADR) (NASDAQ:LONG) have been engaged in a devastating pricing war.
Ctrip controls nearly 50% of China’s online travel bookings, which include flights, hotels and packaged tours. eLong, which controls roughly 8%, formulated a plan in 2010 to gain market share at the expense of profits – cash rebates. By offering cash rebates for most of its listed hotels in 2010, eLong’s year-on-year room bookings growth surged from 32% to 56% between 2010 and 2012.
For Ctrip.com International, Ltd. (ADR) (NASDAQ:CTRP), however, the results were disastrous. Ctrip panicked and responded with its own hotel rebate system in the second quarter of 2012, causing operating margins to plunge from its IPO high of 40% to 23% in its most recent quarter. In addition to hotel cash rebates, Ctrip.com International, Ltd. (ADR) (NASDAQ:CTRP) also started offering airline ticket rebates, doubling its margin pressure in a bid to fend off eLong, Inc. (ADR) (NASDAQ:LONG) and smaller competitor
. As a result of this prolonged pricing war, Ctrip lost over half of its market cap over the past two years.
However, Ctrip.com International, Ltd. (ADR) (NASDAQ:CTRP)‘s recently reported first quarter earnings show that there is still some life left in this lagging market leader. Although Ctrip’s first quarter profit declined 26% year-on-year to $24.7 million, or $1.37 per ADR share, revenue soared 27% to $198 million, easily topping the consensus estimate of $172.6 million.
In other words, Ctrip.com International, Ltd. (ADR) (NASDAQ:CTRP) has been able to consistently grow its top line despite posting steep margin and profit declines, flexing its muscles to show that it doesn’t plan to lose its dominant market share to smaller, hungrier rivals. In the meantime, Ctrip has been focusing on higher investments in mobile apps to further grow its market share.
In my opinion, Ctrip’s simple strategy to outlast eLong could work.
eLong, Inc. (ADR) (NASDAQ:LONG) recently reported that its first quarter profit plunged 62% year-on-year to $0.12 per ADR share, or $11.8 million, indicating that its prolonged war against Ctrip.com International, Ltd. (ADR) (NASDAQ:CTRP) is about to send the company diving straight into unprofitability. Revenue also plummeted 77% to $163.89 million. Although both eLong’s top and bottom line topped analyst estimates, the company is clearly playing a dangerous game of chicken with Ctrip, which the latter is more likely to survive.
Therefore, after the smoke clears and Ctrip asserts its market dominance once again, the company should ease off on its refunds and start growing its margins again. When that happens, I believe Ctrip will rally.
Analysts have forecast that China will surpass the United States as the world’s largest travel market by 2020. Approximately 22% of total global traffic will be entering and exiting China, while a third of the world’s travel spending will come from the Asia-Pacific region.
Those are huge macro growth catalysts for the Chinese travel sector, despite recent concerns of an avian flu outbreak or an economic slowdown. Therefore, the largest hotel chain, Home Inns & Hotels Management Inc. (ADR) (NASDAQ:HMIN), and the largest online travel booking site, Ctrip.com, could be excellent long-term investments to hold over the next few decades.
The article Is it Time to Invest in Chinese Travel Stocks? originally appeared on Fool.com is written by Leo Sun.
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