Asian Equities Analyst, Logistics & Transport, Tracking Traffic

Daniel Hellberg

Asian Equities Analyst, Logistics & Transport

Equity Bottom-Up

After <a href="https://www.smartkarma.com/entities/180" target="_blank" data-smartkarma-citation="entities:180:1">Ctrip.com International (ADR) (CTRP US)</a> recently surprised investors by raising US$2.1 bn via new equity and convertible notes (see <a href="https://www.smartkarma.com/insights/ctrip-com-surprises-markets-with-new-equity-and-convertible-note-issuance" target="_blank" data-smartkarma-citation="insights:5702">Ctrip.com Surprises Markets With New Equity and Convertible Note Issuance</a>), some observers speculated that most of these funds will be used for new investments outside the Chinese online travel space. Should this turn out to be true, we would be puzzled, even alarmed. What could be the possible rationale for further acquisitions outside CTRP's core business (it invested over $640 mn outside the core business in H1)?We believe any attempts to increase scale or product breadth via M&amp;A would be misguided. In our view, CTRP's problem is not that it lacks scale or a sufficiently broad product offering. Rather, we believe CTRP's problem is that it already has ample scale and a sufficiently broad product offering...but it still can't generate positive returns!CTRP's past investments outside its core business in China -- and the potential for more in the near-term -- are troubling. If we held CTRP's ADSs, we would much prefer that management focus on improving profitability in the existing online travel agency business in CHina, and that it do so soon. The reason for the urgency is that, in our view, some of CTRP's addressable markets are no longer growing, and a few of its addressable markets are actually shrinking.Note that we employ a very specific definition of CTRP's addressable markets. For example, in the case of air travel ticketing, we do not view total Chinese air ticketing revenues (domestic, international, ancillaries) as CTRP's addressable market. In reality, CTRP's addressable air travel ticketing market is made up of only those air ticketing revenues that are available to intermediaries (ie, not including the airlines' direct sales). Looked at this way, CTRP's addressable markets are in most cases significantly smaller than total available market revenues; and in a few cases its addressable markets are already shrinking due to dis-intermediation by travel service providers.

After Ctrip.com International (ADR) (CTRP US) recently surprised investors by raising US$2.1 bn via new equity and convertible notes (see Ctrip.com Surprises Markets With New Equity and Convertible Note Issuance), some observers speculated that most of these funds will be used for new investments outside the Chinese online travel space. Should this turn out to be true, we would be puzzled, even alarmed. What could be the possible rationale for further acquisitions outside CTRP's core business (it invested over $640 mn outside the core business in H1)?We believe any attempts to increase scale or product breadth via M&amp;A would be misguided. In our view, CTRP's problem is not that it lacks scale or a sufficiently broad product offering. Rather, we believe CTRP's problem is that it already has ample scale and a sufficiently broad product offering...but it still can't generate positive returns!CTRP's past investments outside its core business in China -- and the potential for more in the near-term -- are troubling. If we held CTRP's ADSs, we would much prefer that management focus on improving profitability in the existing online travel agency business in CHina, and that it do so soon. The reason for the urgency is that, in our view, some of CTRP's addressable markets are no longer growing, and a few of its addressable markets are actually shrinking.Note that we employ a very specific definition of CTRP's addressable markets. For example, in the case of air travel ticketing, we do not view total Chinese air ticketing revenues (domestic, international, ancillaries) as CTRP's addressable market. In reality, CTRP's addressable air travel ticketing market is made up of only those air ticketing revenues that are available to intermediaries (ie, not including the airlines' direct sales). Looked at this way, CTRP's addressable markets are in most cases significantly smaller than total available market revenues; and in a few cases its addressable markets are already shrinking due to dis-intermediation by travel service providers.

Tough Road Ahead: Some of Ctrip.com's Key Addressable Markets Are Shrinking

Founder, Riedel Research

David Riedel

Founder

Independent equity research on GEM Markets

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<ul><li>The stock price has risen 17% since our BUY rating in March 2016. However, based on the strong operating metrics in recent reports we believe there is still an upside of 22%.</li><li>In April, an attempted kidnapping damaged the reputation of Home Inn (a major competitor).</li><li>The occupancy rate at manachised hotels (hotels that are franchised but then managed by the company) stopped declining for the first time in three years and a half.</li><li>We believe gross margin will improve, as newly opened higher-end hotels raise the general daily rates. Manachised hotel number still expanded rapidly, increasing 54% YOY in 1Q16.</li><li>The Company has 607 manachised hotels in the pipeline.</li><li>We assume revenues will grow at least 14% in 2016 and the operating margin will improve to 13% in 2016 versus 10% in 2015.</li><li>Historical valuation suggests a target price of USD46 and an upside of 22%. BUY.</li></ul>

The stock price has risen 17% since our BUY rating in March 2016. However, based on the strong operating metrics in recent reports we believe there is still an upside of 22%.In April, an attempted kidnapping damaged the reputation of Home Inn (a major competitor).The occupancy rate at manachised hotels (hotels that are franchised but then managed by the company) stopped declining for the first time in three years and a half.We believe gross margin will improve, as newly opened higher-end hotels raise the general daily rates. Manachised hotel number still expanded rapidly, increasing 54% YOY in 1Q16.The Company has 607 manachised hotels in the pipeline.We assume revenues will grow at least 14% in 2016 and the operating margin will improve to 13% in 2016 versus 10% in 2015.Historical valuation suggests a target price of USD46 and an upside of 22%. BUY.

HTHT - Continued Strength and Widening Margins to Drive Shares in China Travel Play Higher - BUY

China

Huazhu Group Limited operates a hotel operator and franchisor. The Company provides hotel leasing, directly hotel operation, and co-development services. Huazhu Group mainly conducts businesses in China.

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Huazhu Group (HTHT US)

Tough Road Ahead: Some of Ctrip.com's Key Addressable Markets Are Shrinking

After Ctrip.com International (ADR) (CTRP US) recently surprised investors by raising US$2.1 bn via new equity and convertible notes (see Ctrip.com...

Daniel Hellberg

HTHT - Continued Strength and Widening Margins to Drive Shares in China Travel Play Higher - BUY

The stock price has risen 17% since our BUY rating in March 2016. However, based on the strong operating metrics in recent reports we believe...

David Riedel

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