Why Is It Not a Good Time to Invest in Ctrip
► Ctrip has a historical habit of issuing new common stocks.
► Ctrip has lots of convertible bonds to mature that will keep the stock price flat.
With increased revenue and gross profit, stock price decreases
1 Steady growth in the OTA (online travel agent) industry
The revenue of online travel industry agents keeps a steady growth rate. And Ctrip is the dominant player in this industry which gives Ctrip an advantageous position to develop business and improve revenue.
2 Decent financial performance and leading position in the OTA industry
Ctrip has always performed financially well since it was established in 2000. For profitability, its net revenue and gross profit have grown for over 10 years from 2007 to 2019, which shows that Ctrip has done a pretty good job even under the situation where the growth rate in the online travel agent industry is slowing. For operation capability, turnover of accounts receivables and turnover of assets go up through these years, which means that Ctrip has well-managed its company.
Also, Ctrip easily dominates the OTA industry in almost all related aspects. As the chart shows, Ctrip accounts for half of the market share in both the online air ticket market and the online accommodation market. Moreover, Ctrip has become one of the most important players in the worldwide OTA industry with a 15% market share.
3 A stock price that doesn’t rise
As the data shows, the stock price of Ctrip is USD 30.60 and it has been going down or not going up for a very long time. However, compared with Tongcheng-Elong, its stock price is HKD 15.24. Generally, its stock price has grown slowly but steadily which is very different from Ctrip’s. As one of the main competitors of Ctrip, Tongcheng-Elong has shown better performance in stock price than Ctrip.
Ctrip issued a large number of common stocks
As of March 31, 2016, Ctrip had a total of 57.77 million common shares. In the same period of 2015, Ctrip's capital stock was only 35.51 million shares, the capital stock increased by 22.26 million shares, and the excess part was 62.6% of the original capital stock.
The increase in Ctrip's capital stock during this period was due to a share exchange deal between Baidu and Ctrip. According to the transaction, the 178 million class A common stocks of Qunar and 11.45 million class B common stocks owned by Baidu during the last transaction were exchanged for 11.4884 million common stocks newly issued by Ctrip.
In addition, in December 2015, Qunar announced that minority shareholders had approved a stock exchange deal between Qunar employees and Ctrip. According to this plan, the shares and future options held by Qunar employees can convert to Ctrip's shares at 1:0.725.
In other words, the acquisition of Qunar is an important reason for the increase in Ctrip's equity.
After this, Ctrip completed several times to issue new stocks. In September 2016, Ctrip completed the issuance of 28.5 million ADS, which increased 3.565 million common stocks.
And now as the data shows, Ctrip has expanded its common stock to 74.13 million.
From this point, it is not hard to find that Ctrip’s market value grows by increasing its common stock instead of increasing stock price.
A large number of convertible bonds will mature
Since 2013, Ctrip has issued eight convertible bonds, with a total size of USD 4.23 billion. Except a convertible bond valuing USD 800 million was due in 2018, the total value of the current convertible bonds is $3.43 billion
Ctrip now has a market value of USD 16.56 billion. If all the bonds were converted, there would be close to 10 million common shares, equivalent to about 14% of its current total equity. This does not take into account the increase in total equity generated by employee equity incentives. Therefore, these convertible bonds could be a potential reason for increasing common shares again, which will decrease its stock price.
Although the economy is recovering, the concerns and limitations for transportation and travel have still incurred a negative impact on this industry. And the future of the full recovery of travel is still not certain. As the data shows here, transportation this year decreased dramatically compared with transportation last year. Also, history showed that the SARS also caused a long-frozen period to wait for transportation to recover. However, this time the COVID-19 is still spreading in some countries or regions in the world. There could be an expected date for the full recovery until the vaccine is available for the public.
Based on all of the ideas above, Ctrip is a company that is an awesome company in the online travel agency industry. It is good at operating the business and improve management, but it is not a good time to invest in this company. Firstly, Ctrip has a long history expanding its common stock which will belittle the stock price. Also, there is a possibility that the current convertible bonds will transfer to common stocks in the near future which could be another way to decrease the stock price. Lastly, the travel industry hasn’t recovered enough due to COVID-19. The future of this industry is still not clear. Thus, this is not a good time to invest in Ctrip.