Ctrip Struggles Under Massive Cash Pile
When does having nearly $2 billion in cash start to become a burden? If you’re China’s leading online travel agent Ctrip (Nasdaq: CTRP), the answer is “in the current climate”, where the company has just announced a plan to repurchase up to $600 million in its American Depositary Shares (ADSs). (company announcement) As a longtime company watcher, I can say with confidence that Ctrip shares are currently quite strong and have no need for this kind of repurchase program, which normally comes from companies whose stock is struggling. That leads to my conclusion that Ctrip simply has too much cash and doesn’t know what to do with it, prompting this buyback program.
The bigger problem for Ctrip lies in China’s online travel market, which has plenty of growth potential but is also sorely in need of consolidation due to the recent rise of many new players. Ctrip and eLong (Nasdaq: LONG) were the market leaders for years, but more recently have been joined by rapidly rising players like Qunar (Nasdaq: QUNR), the money-losing company backed by online search leader Baidu (Nasdaq: BIDU).
Another fast riser is Tuniu, which has hired investment banks to make a New York IPO to raise up to $100 million (previous post). Then there’s Tongcheng, which recently raised 500 million yuan from a group of investors that included leading Internet firm Tencent (HKEx: 700). (previous post) Others to try out the online travel services space include JD.com, China’s second largest e-commerce company that has filed to make an IPO to raise up to $1.5 billion in New York.
The rising competition led to a bruising series of price wars last year, putting pressure on everyone in the space. In the midst of that cluttered picture, Ctrip emerged as an ideal sector consolidator after successfully selling $800 million worth of bonds last fall during a broader wave of fund-raising by China’s leading Internet firms. That fund raising gave Ctrip a hefty $1.9 billion in cash at the end of last year.
Against that backdrop, this $600 million repurchase looks designed to put some of that cash to use. But Ctrip’s stock is hardly in need of this kind of support. The company’s shares rose 1.4 percent in the latest trading session, outperforming the broader market but still hardly a big gain following the repurchase announcement. Its stock has more than doubled over the last year, including a strong rally in the last 2 months after a brief sell-off at the beginning of the year.
After the $800 million fund-raising last year, I predicted that Ctrip would use its cash to purchase some rival travel sites, many of which are losing money. But this latest share buy-back seems to show that Ctrip’s attempts to find major acquisition targets are proving fruitless, and thus the company is resorting to share repurchases to put some of its funds to work. Perhaps that result isn’t too surprising, since many of the biggest acquisition targets already have wealthy backers who might be reluctant to sell. Qunar has Baidu, Tongcheng has Tencent and even eLong is backed by global online travel giant Expedia (Nasdaq: EXPE).
So what does all this mean for Ctrip and China’s broader online travel sector over the next 1-2 years? Unfortunately, this latest share buy-back by Ctrip seems to indicate some strong resistance to consolidation, meaning we could see stiff competition continue for at least the next year or 2. That means Ctrip could see its profits start to fall again, Qunar may not achieve its goal of profitability anytime soon, and Tuniu could face strong headwinds as it moves towards its IPO.
Bottom line: Ctrip’s massive share repurchase program hints that the online travel sector is resisting consolidation, which could boost competition and erode margins over the next year.
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