Diligent Investor: Traveling Chuppies
By Todd Schoenberger
Editor, Diligent Investor
Read More Profit From the Pumps
Traveling has always been one of those activities in life that satisfies needs and wants. Humans sometimes need to travel, perhaps for business or personal reasons. But, humans will always want to travel. Traveling presents stories of romantic adventure, exploration, people in distant lands and, of course, vacation.

I like to travel and evidently so do a lot of other people. The Travel Industry Association of America located in Washington, D.C., reports that travel and tourism generates US$1.3 trillion in economic activity in the United States every year.

That equates to US$3.4 billion a day, US$148 million an hour, US$2.4 million a minute and US$40,000 a second.

Who's doing all of this traveling? Baby boomers.
This demographic generated the highest travel volume in the U.S. last year by registering for 268.9 million trips, more than any other age group. Boomers are also most likely to stay in a hotel, motel or bed-and-breakfast establishment on overnight trips. They're also most likely to travel for business.

It's no secret why baby boomers are the largest traveling segment of the population. They have more money, time and resources, which provide ample opportunity to take a trip at their leisure. And, because of this prosperous generation, tourism in the United States has never been stronger.

Traveling to the Eastern Hemisphere

But tourism isn't just flourishing in the United States; it's a global phenomenon that is reaching new highs in all regions of the globe, but nowhere is it stronger than in China.

Traveling to China never used to be in vogue. According to the International Air Transport Association (IATA), 2002 and early 2003 were disastrous years for air travel. All regions in the world suffered significant passenger declines following the terrorist attacks on September 11, but routes to the Far East and the transpacific were hit the hardest.

By late 2003, though, traveling began to pick up and it seemed as if travel on a global scale had recovered. All regions in the world began showing strong signs of recovery, and travel to the Asia/Pacific region was much stronger than for other regions in the world. Then SARS appeared and paralyzed any hope for an increase in travel demand to the area.

Paralyzing Virus Slows Travel

SARS, or Severe Acute Respiratory Syndrome, began showing in cases in south China. The fear was the virus was airborne and that any remote human-to- infected-human contact would be fatal.

The PISA Forum, a well-respected "think tank" for the global tourism industry, formed an opinion that SARS would leave an indelible mark on tourism for 2003. The group figured that the damage to travel demand due to the epidemic would be greater than any event in the history of travel and tourism. Due to these types of fearful statements, East Asia's passenger traffic plummeted, led by double- digit declines for both China and Hong Kong.

After additional research and education, scientists determined that humans infected with the SARS virus could be treated and the spread of the virus was much more obstinate than originally believed.

With this news, the Chinese tourism industry breathed a collective sigh of relief, as everyone involved knew that China was a sleeping giant and travel would represent a remarkable percentage of the country's overall GDP.

Even with the difficult operating environment during the SARS epidemic, some experts in the travel industry began to question whether the Asian tiger had lost its teeth. But, as confirmed by the Pacific Asia Travel Association (PATA), the market is about to explode.

A Growing Trend Toward Travel


In all the markets in Asia, outbound travel is growing rapidly. The Asian Lifestyle Survey, a biannual survey of Asian travelers conducted in 13 Asia/Pacific markets, has consistently reported that most respondents now see personal travel as an integral component of their desired lifestyle.

By 2014, the annual spending of Asian travelers is estimated to reach US$180 billion. This is equivalent to 26% of Korea's GDP in 2004, 110% that of Hong Kong, and 118% that of Singapore.

Spending by tourists is especially important for small- and medium-size businesses in the retail and hospitality sectors in the destination markets. These businesses are also typically more labor intensive. Thus, the income and employment impact of tourist spending is proportionally more significant in stimulating local consumer markets in terms of employment creation.

Next Key Demographic: Women

Part and parcel of the rise of women consumers and the growing trend of outbound travel is the coming of age of women travelers in Asia. A quarter of a century ago, only 10% of Asian travelers were women. In 2004, about 40% of Asian travelers were women.

Women travelers deserve special mention as one of the important underlying trends shaping the future consumer markets of Asia because of some of their unique trends and business impacts.

One unique trend of women travelers is shopping, where the primary activity of the overseas trip is to shop in the destination city. Key destinations of such "travel shopping" by women travelers include Hong Kong, Bangkok, Kuala Lumpur, Singapore and Seoul.

Research conducted by MasterCard Asia/Pacific estimates that women "traveler- shoppers" could spend up to US$9 billion shopping in these five destination cities in 2010.

Don't Forget the Elderly

The elderly in Asia also embrace the outbound travel trend. In fact, in terms of spending, it is estimated that they will have much more spending power than younger travelers in Asia on a per capital basis.

While China will account for the largest number of outbound travelers in the next 10 years in Asia, Japan will account for the largest travel expenditures; and most of it will be spent by travelers in their 50s, 60s and 70s.

By 2015, it is estimated that these elderly travelers will collectively spend over US$100 billion, making them a powerful driving force in shaping the consumer markets in Asia.

China's Money Class

The burgeoning middle class of China is the catalyst for the growth in the travel industry. China doesn't have a baby boomer generation, per se, because this era was aptly classified for a post-WWII U.S. population.

But, China's middle class is similar to the U.S. boomer generation because of its pockets of money and resources. Some financial pundits like to refer to this group in China as, quite simply, the Money Class. I like to call them Chuppies for China's Yuppies.

This Money Class is traveling and, just like Americans, going online to book their travel. There is one company in China that has emerged as the leading middleman in the enormous yet highly inefficient Chinese travel market: Ctrip.com (CTRP: NASDAQ).

50% Market Share

Ctrip.com is reaping the benefits of a rapidly changing Chinese travel landscape. The Chinese government traditionally dominated the country's travel distribution, but they catered almost entirely to group travelers.

In recent years, the Chinese individual traveler has burst onto the scene, driven by loosened governmental regulations and a desire to travel with more freedom and flexibility. Before consolidators like Ctrip.com came along, independent travelers lacked a user-friendly way to purchase travel and often had to book directly at an airline's office or hotel's front desk and pay the higher walk-in rate.

Ctrip.com has aggregated an unmatched national network of hotel suppliers, giving it a significant advantage over thousands of local agencies in China. Ctrip's growing wealth of inventory has attracted more and more customers, which, in turn, has enhanced the consolidator's appeal to suppliers.

Thanks to this expanded network of contacts, savvy marketing and superior execution, Ctrip.com has grown faster than its competition. The firm now commands 50% of the hotel consolidator market, with No. 2 player eLong - majority owned by Expedia - holding a 25% market share.

40% Operating Margins

The World Travel & Tourism Council estimates that the US$90 billion Chinese travel and tourism market will grow to more than US$300 billion by 2014. Companies like Ctrip.com, which account for less than 5% of all bookings, are expected to grow even faster than these figures suggest because their core target market, the independent traveler, should continue to grow disproportionately.

Moreover, Ctrip will benefit as more consumers book online. Right now, 70% of Ctrip's bookings come through its call centers, with the remaining 30% flowing through its Web site. The Chinese travel market will increasingly move online, driven be increased broadband penetration, credit card use and e-ticket adoption by airlines.

The scalability of the online model should help Ctrip's economics, which is noteworthy considering that the company already generates 40% plus operating margins.

Eye-Popping Revenue Projections

Ctrip.com continues to generate staggering growth, particularly in its air ticketing and packaging businesses. Hotel bookings are robust as well, and the company is making a rigorous push toward bolstering its presence in second-tier cities in China.

The company is expected to have 30% compound annual revenue growth between 2005 and 2009. Also, Ctrip is a prime acquisition candidate for international players looking to make a splash in the Chinese market. Expedia, Sabre Holdings and Cendant could be potential suitors.

Bullish Themes on Ctrip.com

For one, Ctrip's business model is highly scalable. Its existing infrastructure can support incremental transaction volume at very little incremental cost, so profit growth should continue to outstrip revenue growth.

Ctrip's customer service is highly valued by its customers. In addition to its cutting-edge technology, the company's call centers provide 24-hour support and its nationwide ticket-delivery network is the industry's best.

Ctrip is the Travelocity of China. The company boasts about having more than 1.9 million registered users - more than twice the amount of eLong's customer base - and is adding customers at a brisk pace. Ctrip's first-quarter earnings report commented that the company added 60,000 new customers per month.

Financials Are Traveling North

After a bump in the road in 2003 because of the SARS scare, Ctrip's revenues grew 93% in 2004 and more than 55% in 2005. The hotel business has been prosperous for Ctrip, but air ticketing and packaged tours have been its major growth drivers lately.

Ctrip's balance sheet is very healthy. At year-end 2005, the company had no debt and about $2.80 per share in cash. This balance, along with Ctrip's robust free cash flow, should cover the firm's modest investment needs for the foreseeable future.

Competitor Comparison

Ctrip's main competitor in the Chinese travel space is eLong (LONG: NASDAQ), but the similarities end there. Ctrip has a 50% market share while eLong controls 25%, and their financials are represented in the same proportion.

Ctrip's market cap is US$1.57 billion, while eLong's market cap is a modest US$356 million. Ctrip's revenues print at US$73 million, while eLong's come in at US$32 million.

Each company's stock performs in similar fashion.

Target Price

Ctrip.com pays a minor dividend of 24 cents share, and currently offers a yield of 0.48%. With the dividend and its growth prospects, Ctrip.com is poised for a 30% total return over the next 12 months, which would give it a target price of US$65 a share. I would recommend picking up shares of Ctrip.com (CTRP: NASDAQ) at any price below US$50 for your portfolio and holding for the next 12 months.

Sincerely yours,

By Todd Schoenberger
Editor, Diligent Investor
http://www.isecureonline.com/reports/DEN/EDENG908/

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