Chinese internet stocks seemed like the latest way to get rich
quick, until they weren't. Now investors are wondering whether
shares have been deflated enough to make them worth buying again
given the industry's undeniable rampant growth prospects.
An excellent example is Ctrip (
CTRP
,
quote
), the country's largest online travel booking site. The
company's Nasdaq-traded shares tripled in value from mid-2009 to
mid-2011. They have been crashing since last summer and are now
below where they started three years ago.
The most important change in the company's volatile picture
has been new competition in the online travel booking space.
Starting out as the dominant first mover in Chinese e-booking,
Ctrip's market share plunged by 10.5% last year to 41%, according
to industry monitor iResearch.
New home-grown online travel search platforms like Taobao and
Qunar have nibbled away at Shanghai-based Ctrip's business. So
has eLong, a subsidiary of global travel giant Expedia (
EXPE
,
quote
), whose shares have incidentally been on a rampage, doubling
over the past year. Hotels and airlines are also picking up
online travel sales themselves, gradually alleviating reliance on
agencies like Ctrip.
Competition has led to price wars directed particularly at
individual leisure travelers. ELong has grabbed market share by
offering hotels attractive cash-backs and group buys. "People try
to kill competitors by growing market share and sacrificing the
margins -- this is the business model for most internet players
in China nowadays, no matter if it is B2C or online travel," says
Henry Guo, an analyst at U.S. brokerage ThinkEquity. "But that is
actually bad for the whole industry."
Ctrip is also grappling with costs that swelled during its
years as a quasi-monopoly. Five years ago, the company got back
15% from hotels whenever a transaction was made, now it is around
10%. Meanwhile it has built up an army of 6,000 call agents, by
far the largest in the online travel industry, and they are
becoming ever-more expensive in China's environment of wage
inflation.
The live agents are not simply deadweight. Ctrip books around
40% of its reservations over the phone, unlike the U.S. where
Expedia and its competitors do almost all their volume online.
The company has invested heavily in an image of superior service,
spending ¥500 million ($79 million) on spanking new call center
two years ago, and that seems to have helped win a loyal
following of business travelers.
Still, Ctrip might be more competitive if it slimmed down,
analysts say.
"An aircraft-carrier like Ctrip is not as flexible as smaller
companies," comments Zhang Yanan, senior analyst at the Zero2IPO
Research Center in China. When eLong started its price war last
year, for instance, it took Ctrip almost two quarters to realize
that it had to launch competing online travel promotions, adds
Guo.
That's the bad news. The good news is that China's online
travel market, like its online market for everything else, is
still in a phase of geometric growth. Internet bookings account
for only 8% of the travel market, a figure expected to double
over the next two years even as total travel spend expands.
Online travel revenue should already reach ¥230 billion in
2012.
Ctrip is still the biggest player in the burgeoning online
travel industry, with scale, brand position, and a balance sheet
well stocked with cash. Management implicitly told the market
last week that it thinks the stock has fallen far enough with a
new stock repurchase plan. "They want to give a signal that their
business is still on track and the current evaluation is low,"
says ThinkEquity analyst Guo. The buyback is also a good
utilization of the company's cash reserve, he added.
Ctrip is emblematic of a range of Chinese internet companies
that have soared, crashed and may now be ready to advance again
from more sober valuations. Or not. The most famous of the group,
search provider Baidu (
BIDU
,
quote
), has traced a still more dramatic trajectory than Ctrip, rising
more than 10-fold from an early-2009 low, then dropping more than
20% over the past two months.
Henry Guo thinks Ctrip may have bottomed, but is not ready to
surge back just yet. He lowered his target price from $21 to $19
last week. The stock trades now at about $17.