How to Profit from China’s Travel Industry

by Robert Hsu | August 25, 2009 10:02 am

I travel to China regularly — typically at least three times per year. Most of these trips are dominated with research, visiting Chinese companies, talking with management, meeting with my boots-on-the-ground analysts and gathering my own insights about the Chinese economy. But every now and then, I have the opportunity to actually take in the sites and visit some of China’s popular tourist destinations.

One of these occasions occurred this summer when my family and I visited the Greater China region. During this trip, I made my fourth visit to the city of Xi’an, which is home to the fabled terra cotta army museum. As you might have guessed, this city attracts visitors from all over the world. In fact, on my first visit to Xi’an just nine years ago, most of the visitors were either foreigners or overseas Chinese like my family. And the main clientele at five-star hotels were overseas visitors.

But today, there is an incredible shift occurring in China’s tourism industry. On my visit to Xi’an this past July, there were more Chinese at high-end establishments than foreign visitors, and the majority of passengers on flights to Xi’an were Chinese, as well. And this held true for all of the places that we visited in July.

In fact, during our stay in Sanya — commonly known as the Hawaii of the Orient — Chinese consumers were truly displaying their newly acquired buying power. Five-star hotels up and down the beach were filled with Chinese consumers. Just two years ago, the majority of these customers were foreigners from the U.S. and other parts of Asia.

Clearly, the increasingly affluent Chinese are traveling and spending more than ever before. Combine that with the fact that China has the number-one Internet market in the world, and there’s no denying that online travel company, (CTRP[1]), is well positioned to profit.

Online Travel Is Just Starting to Take Off in China

Despite China having the largest amount of Internet users in the world with 338 million users, only about 10% of China’s travel plans are booked online. To me that spells opportunity, as online travel in China clearly has tremendous room for growth.

What’s interesting is that along with more Chinese traveling, they’re also changing their traveling habits. Prior to the rise of the Chuppies (China’s growing yuppie population), most Chinese tourists traveled in groups. But today, most Chuppies are too sophisticated and confident to travel in large tour groups.

In fact, an overwhelming 97% of the Chuppies that my analysts and I surveyed prefer to travel independently instead of with a tour group. And caters to such travelers.

Established in 1999, Ctrip has grown into the leading online consolidator of hotel rooms and airline tickets in China. It currently dominates the online travel industry with a 60% market share in China’s travel market.

Ctrip’s main competitor is Barry Diller’s Expedia. But despite pouring $167 million into China during the past two years to catch up, Expedia’s China spin-off, eLong is still playing catch up. And high entry barriers such as a fragmented travel industry that has no centralized reservations database, along with its first-mover advantage, will protect Ctrip from competitors and maintain its dominant industry position.

Ctrip Still Has Plenty of Room to Grow

Despite being the number-one online travel company in China, Ctrip’s business continues to grow. The company recently posted better-than-expected second-quarter results with its per-share profits increasing from 25 cents to 33 cents. That’s well above analysts’ projections for 29 cents.

Sales also walloped analyst’s estimates, increasing 28% to $70 million, nicely above the $64.5 million projections. The boost in sales was a direct result of increases in air ticketing revenues and hotel reservation revenue, up 32% and 16% respectively.

And Ctrip’s management is looking for even more growth going forward, projecting to grow around 25% in the third quarter. Plus, the company should greatly benefit from the 2010 Shanghai World’s Fair, which could bring 70 million people to the event. Now, that’s going to boost hotel reservations in Shanghai and the surrounding area — and you can bet a good portion of these attendees will book their hotels online.

So China’s number-one online travel company still has plenty of room to grow, equaling incredible profits for investors. Shares are already up 112% year to date — and this is just the beginning.

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  1. CTRP:
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