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October 16, 2012 5:49 pm
Travel is supposed to broaden the mind. The Chinese government tries to encourage such expansion with its twice-yearly Golden Week holidays. Almost half of the Chinese population left their homes to rove around tourist sites over the latest seven-day break, up 40 per cent from 2011. China travel stocks such as hotel chain Home Inns have rallied by a tenth since the national holiday kicked off on October 1.
Such is Chinese consumers growing wanderlust that 60m people left China’s borders to travel overseas last year. HSBC estimates those numbers will more than double by 2015. One of the reasons why Beijing has been so nonchalant about slowing economic growth this year is because industries such as tourism are boosting service sector jobs. Tourism has helped companies too. Ctrip, the country’s largest online travel agent, produced average annual net income growth of 60 per cent over the past decade. Its revenues have grown almost exactly in line with Chinese air passenger growth for years.
But the problem for Chinese travel groups now is keeping profits in sync with that travel boom as competition bites. Improving internet payment systems are enabling bricks and mortar travel agents, helped by aggregators such as Qunar (62 per cent owed by Baidu), to move online. That has eaten into the market share of Ctrip and rival Elong, exacerbating price wars. Ctrip is on course to record its first ever year on year fall in net income this year. Its operating margins are trending to all time lows of about 26 per cent.
At least those dynamics have helped to bring valuations back under control. Ctrip now trades on 17 times this year’s earnings. At its peak in 2009 it was trading on 50 times. But no longer can investors assume that Ctrip is unassailable. It must adapt to go on capitalising from China’s travel boom.
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