China internet stocks have been among the most popular choices for investors in the past several years due to the unprecedented boom in China consumerism creating multiple high-growth opportunities. But one of the largely unheralded names in the China internet group is digital travel site Ctrip.Com International Ltd (ADR) (NASDAQ:CTRP).
CTRP is essentially’s China’s go-to online travel site, and is often referred to as the Expedia Group Inc (NASDAQ:EXPE) of China. The aforementioned boom in China consumerism encompasses a boom in China air travel. Indeed, China air travel is actually one of the biggest drivers of the China consumerism narrative. As consumers urbanize and earn more, they naturally want to travel more and spend those new dollars seeing the world.
As a result of this robust growth backdrop, CTRP stock has been a big winner over the past five years. During that stretch, Ctrip stock has essentially quadrupled from $10 to above $40.
But most of the gains came a few years back. CTRP stock broke the $40 barrier for the first time in mid-2015. Thus, over the past three years, CTRP stock has essentially just traded sideways.
Why the sideways trading despite strong numbers and huge growth prospects? Growth is slowing, and the valuation on Ctrip stock needed time to adjust to this era of slower growth.
Has the stock fully adjusted? I think so. At current levels, Ctrip stock seems not only adjusted to slower growth, but actually undervalued relative to the company’s realistic growth prospects in a still booming China air travel market.
Here’s a deeper look:
Robust Growth Narrative Gives CTRP Strong Fundamentals
There is no hiding the fact that CTRP is a slowing growth narrative. Revenue growth was 76% two years. It fell back to 39% last year, and is expected to be just 20% this year.
Some of this slowdown is due to near-term weakness. Namely, the company is facing backlash from a child abuse scandal at one of its Shanghai daycare facilities in late 2017. That has muddied the company’s public image, and undoubtedly had a negative affect on Ctrip.com visitor traffic.
But this near-term noise related to a bad PR incident will pass. China travel is still booming. Chinese consumers are estimated to take almost 70% more trips overseas in 2020 than they did in 2015, and CTRP is the undisputed leader in the China travel market with 50% market share. Naturally, then, CTRP will shake off near-term bad PR noise and grow healthily alongside still burgeoning China travel demand.
Moreover, CTRP is more than just a China travel growth play. The company has booming international operations, too.
CTRP operates Skyscanner, one of the most successful flight metasearch sites in the world. Skyscanner has 17 million active users and has found particular success in Europe.
Last quarter, CTRP launched Trip.com, an Asia-Pacific-focused, one-stop international travel platform. Although it is still early, growth from Trip.com has been very strong.
Overall, then, CTRP is mostly a pure-play on China travel growth, but the company also has tangential growth drivers through international oriented platforms like Skyscanner and Trip.com. All together, this gives CTRP a robust and fairly wide moat growth narrative over the next several years.
CTRP Stock Looks Reasonably Undervalued
Because of the aforementioned robust growth narrative, CTRP should be able to post big revenue growth numbers over the next five-plus years. China’s entire travel industry is expected to grow at an 8% per year pace over the next 10 years. Thus, assuming most of that growth is front-loaded in the first five years, the growth rate over the next five years for the entire China travel industry should look something like 10-15%.
CTRP should be able to outperform that 10-15% growth rate because of its market-leading position. Thus, a 20% revenue growth rate over the next five years seems very reasonable.
Margins are zooming higher, mostly thanks to increased automation providing a nice lift to gross margins. This trend should persist, and management thinks operating margins can get to 20% to 30% in one to two years, versus 18% last year.
Therefore, in a five-year window, it is reasonable to assume operating margins will reach 35%. Historically, net profit margins have hovered around 3 percentage points lower than operating margins, after non-operating income and taxes are thrown in the mix. In five years then, 35% operating margins should flow into 32% net profit margins.
In total, CTRP should be able to grow revenues around 20% per year over the next five years to roughly $10.3 billion. Net profit margins should rise to 32%, implying net profits of $3.3 billion in five years. Assuming the share count grows to roughly 650 million, that equates to about $5.10 in earnings per ADS in five years.
A market-average growth stock multiple of 19-times forward earnings on those $5.10 earnings implies a four-year forward price target of nearly $97. Discounting that back by 10% per year, you arrive a present value of over $65.
Bottom Line on CTRP Stock
The stock has gone through some rough patches recently. But the fact that this stock hasn’t made any progress over the past three years is actually an opportunity.
CTRP stock looks materially undervalued at current levels considering its huge exposure to the booming China travel market. As such, buyers here should be handsomely rewarded in the long-term.
As of this writing, Luke Lango was long CTRP.