A slowdown in China’s economic growth is likely to affect the middle class the hardest. When the going gets tough, families don’t get going – in other words, they are less likely to take vacations. This may well affect Shanghai-based travel company Ctrip.com (CTRP.O), which has seen growth driven by the expanding middle class. Let’s look at the financial itinerary.
The stock is up 26% in the last 90 days and looks expensive on the StarMine valuation models. With international players like Priceline and Expedia looking to make a push in China, Ctrip’s current dominance in the local market could come under some pressure. The devaluation of the renminbi could further pressure earnings. The CEO of Macy’s pointed out on the earnings call yesterday that “Chinese customers are still coming to the United States, [but] not to the degree that they had been buying last year.” That trend is likely to hurt Ctrip’s earnings.
Source: Eikon/ StarMine
Travel market risk
The chart above compares the median P/E ratio over the past five years to the forward 12M P/E ratio. As you can see, the F12M P/E (red line) is 112, far above the five year median of 35. While it is possible that earnings could grow at that pace, any disruption in that market (think Uber for taxis and Airbnb for hotels) could cut into margins. Already, earnings estimates have been taken lower by analysts over the past 90 days.
Customers want bargains
The recent acquisition of a 75% stake in Bidu’s QUNR division could boost revenues going forward, but it remains to be seen how that affects margins. The chart below shows that operating profit margins have already been declining over the past five years and reached new lows over the past 2 quarters. It looks like customers are looking for great vacation deals and that means margins are suffering.
Source: Eikon/StarMine
Unpopular holding
Ctrip performs poorly on many of the StarMine models including our SmartHoldings model, with a score of 1 out of a possible 100. That means that the fundamentals of the company are not aligned with what institutional investors are valuing right now. The company also scores poorly on our Earnings Quality model which means that the earnings may not be coming from sustainable sources and may not strengthen soon.
