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How to Trade One of China's Greatest Trophy Assets

By Larsen Kusick, analyst, Phase 1 Investor
Friday, October 29, 2010

Everyone knows China is going "commodity crazy." The country is buying resources like gold, copper, and energy commodities at a frenzied pace.
 
In the past month, we've seen CNOOC (a huge Chinese oil company) put up more than $1 billion for a piece of Chesapeake's Eagle Ford assets in Texas. Chinese firms are also buying oil sands and even uranium.
 
But what most folks don't know is China is going "travel crazy" as well.
 
China's growing middle class is Westernizing. That means vacations, business trips, and more visits to relatives living in other parts of China's massive landscape.
 
This weekend, the Shanghai Expo, an enormous world fair that began on May 1, will come to a close. By mid-October, the festival had topped 65 million total visitors. It had over a million visitors in one day this month. That kind of tourism makes the Super Bowl look like a street fair in a small town.
 
When I visited China two months ago, major tourist hotspots such as the Great Wall and the Terracotta Warrior site outside Xi'an were packed. I'd say 99% of the visitors were native Chinese.
 
China's 1.3 billion people are as big a market as you're going to find. The travel sector is guaranteed to see huge growth over the next decade. It's no surprise that China's major airlines, China Eastern and China Southern, are soaring to new highs.
 
But the best play on this mega growth trend is Ctrip (CTRP). In spite of its $7 billion market cap, most investors have never heard of it.
 
On a fundamental basis, there's a lot to love. Ctrip is similar to Expedia or Priceline. And online travel is just beginning to catch on in China. Although the "urban professionals" I met in Shanghai had used the site, there's still a lot of room for growth.
 
Online travel only accounts for about 10% of all travel bookings in China right now.
 
In the U.S., 56% of all trips are booked online. Ctrip will capture tons of market share over the next few years as consumers gravitate away from travel agents to online travel.
 
Ctrip has taken the early lead in the online travel space. In any online business, scale is critical. The bigger you are, the more people rely solely on your website... That's how you keep competitors out of your target market.
 
This has been the secret of online search giant Baidu's success. China's answer to Google has crushed domestic competitors such as Sina and Sohu.
 
Ctrip is on target to surpass $400 million in revue this year. Longtime competitor eLong (LONG) isn't expected to crack $100 in revenue anytime soon.
 
Like Baidu, Ctrip is one of the "trophy" assets of China. Unfortunately, investors rarely get a chance to buy trophy assets cheaply.
 
Shares have raced above $50 after trading around the $40 level for much of this summer. Part of this move is a result of the market anticipating that next year's earnings estimates are too low.
 
Shares of Ctrip are trading around 50 times this year's earnings estimates. Based on the expected 40% earnings growth next year, shares are trading at 39 times 2011 earnings estimates. That's around 1.5 times the company's earnings growth rate of 25% to 30%.
 
A super growth stock is a good value when it sports a price-to-earnings-growth rate of just 1. That means shares would have to fall down to $40 before Ctrip isn't expensive... Until then, owning this stock is simply a play on China momentum.
 

But the next time we get a good China panic, Ctrip is one "trophy asset" you'll want to consider buying.

 
Good investing,
 
Larsen




Further Reading:

As Larsen writes, the Chinese are buying up uranium and oil assets. That's not all...
 
"As you read this, the Chinese government is doing an extraordinary thing," writes Jeff Clark of Casey Research, "something nearly unheard of in the modern world." Find out why China is encouraging its citizens to buy gold here: How and Why China Will Flood the Gold Market.
 
The Chinese are also buying coal, real estate, gold stocks, copper... and dollars (for now).

In The Daily Crux
Market Notes
Big global coal producer Peabody Energy breaks out to 2-year high.
 
Las Vegas Sands surges to fresh high after earnings report… up 75% in three months. (Read more here.)
 
Ag fund DBA touches 2-year high as corn and soybean prices jump.
 
Earnings today... Chevron (big oil), Total SA (big French oil), Merck (big pharma), Sony (electronics).
Market Watch
Symbol Price
Change
52-Wk
S&P 500 1183.26 0.0% +11.0%
Oil 35.17 -0.6% -14.0%
Gold 132.62 +1.1% +29.2%
Silver 24.17 +3.2% +47.3%
US-Dollar 77.28 -0.9% +1.8%
Euro 1.39 +0.2% -6.0%
Volatility 21.20 +1.5% -14.4%
Gold Stocks 522.23 +1.5% +29.1%
10-Year Yield 2.61 -1.9% -25.4%

World ETFs
Symbol Price
Change
52-Wk
USA 118.49 +0.1% +11.1%
Canada 28.92 +1.1% +17.3%
Russia 19.98 -0.1% +6.5%
India 38.19 +0.2% +29.6%
Israel 16.67 +0.7% +20.2%
Japan 10.02 -0.4% +3.6%
Singapore 13.64 +0.8% +26.1%
Taiwan 13.90 +0.0% +16.1%
S. Korea 54.39 -1.2% +21.0%
S. Africa 67.73 +0.4% +25.0%
China 44.97 -0.3% +4.0%
Lat.America 52.12 +0.6% +15.4%

Sector ETFs
Symbol Price
Change
52-Wk
Oil Service 119.20 +0.3% -2.4%
Big Pharma 65.48 -0.5% +5.7%
Internet 69.81 -0.1% +27.1%
Semis 14.49 +1.2% +27.3%
Utilities 31.72 +0.2% +9.6%
Defense 18.02 +0.2% +14.2%
Nanotech 9.34 +0.2% -4.7%
Alt. Energy 10.00 -1.0% -0.9%
Water 17.37 +0.4% +7.3%
Insurance 15.72 -0.1% +14.7%
Biotech 19.99 -0.1% +28.2%
Retail 17.86 +0.1% +19.4%
Software 23.81 +0.6% +23.1%
Big Tech 52.18 -0.2% +24.0%
Construction 12.07 +0.4% +4.9%
Media 13.03 +0.3% +23.2%
Consumer Svcs 64.22 +0.1% +23.0%
Financials 53.01 -0.1% +2.0%
Health Care 64.28 -0.5% +10.4%
Industrials 59.69 +0.3% +20.4%
Basic Mat 68.64 +0.7% +24.9%
Real Estate 54.96 +0.1% +33.0%
Transportation 85.77 +0.4% +29.4%
Telecom 22.06 +0.3% +24.1%

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