Decline in Ctrip shares sets up a long-term opportunity, fund manager says
BloombergCtrip’s margin compression may only be a temporary setback for the dominant online travel service in China.DMAMBMCMDMEMGPREVIEWZGZQZRZSZTZU
Ctrip.com Ltd. has a virtual monopoly in China’s online travel space, and recent pressure on the shares springing from a regulatory action has set up a buying opportunity for long-term investors, according to Di Zhou, a co-portfolio manager for the Thornburg International Value Fund.
Consider this two-year chart for Ctrip.com (CTRP):
The stock closed at $46.78 on Jan. 31, up from its closing low of $43.16 on Dec. 11 but down substantially from its closing high of $58.73 on July 31.
What has spooked investors is a regulatory requirement for Ctrip to change its website so that the default setting is for customers to opt-out of various add-on services. During the company’s second-quarter earnings call, Ctrip CFO Cindy Xiaofan Wang said the change would have a “negative impact on the revenues for our air ticketing business” in the fourth quarter and in the first quarter.
“They have margin pressure this quarter and next quarter but fundamentally Ctrip is best positioned to grow,” among large internet companies in China, including Alibaba Group Holding Ltd. (BABA), Tencent Holdings Ltd. (TCEHY) and Baidu Inc. (BIDU), Zhou said in an interview last week.
Read: This China-focused fund beats its rivals by looking beyond Alibaba and Tencent
“You can argue China is almost near full online penetration,” Zhou said, adding that the story is different for Ctrip because online travel is still limited for Chinese consumers.
“You still have a penetration story that is going to be your tailwind for a long time,” she said,” noting that Ctrip is similar to Alibaba in that it has been able to eliminate all of its competition in China, in part because of “regulatory protection.”
Thornburg Investment Management Di Zhou, co-portfolio manager on the Thornburg International Value Fund.PREVIEW
Zhou expects the “near-term margin reset” to be only a temporary setback for the stock because of the company’s long-term growth potential and the necessity of some of the add-on services. “The trip delay insurance is popular because of all the delays in China,” she said.
Ctrip reported a 42% year-over-year increase in third-quarter sales, with its gross margin improving to 83% from 78% a year earlier, while its operating margin improved to 17% from 8%.
The company has not announced when it will report fourth-quarter results, but FactSet expects the announcement on Feb. 20.
Thornburg International Value Fund
Thornburg International Value Fund (TGVAX) has $5.6 billion in total assets and earns a four-star rating from investment researcher Morningstar. It is co-managed by Zhou and Lei Wang, who are both based in Santa Fe, N.M.
The fund’s Class-A shares carry a 4.5% upfront sales charge, but the charge may be reduced or waived if you buy shares through various brokerage services, including Schwab, TD Ameritrade or Fidelity, or through some financial planners and advisers.
Here’s how the Class-A shares (excluding sales charges) have performed against both the fund’s Morningstar category and the MSCI All Countries World Index:
Total return - 2018 through Jan. 30Total return- 2017Average return - 3 yearsAverage return - 5 yearsAverage return - 10 yearsThornburg International Value Fund - Class A 6.2%25.0%10.4%7.3%3.8%MSCI AC World Index (U.S. dollars)5.6%27.2%9.8%7.1%3.5%Morningstar Foreign Large Blend category5.0%25.1%9.4%7.5%3.4%Source: Morningstar
Here are the fund’s top-10 stock holdings (out of 47) as of Nov. 30, 2017:
CompanyTicker% of portfolioPrice/ consensus 2018 EPS ratioPrice/ consensus 2017 EPS ratio - Jan. 30, 2017Total return - 2018 through Jan 30Total return - 3 yearsUniCredit S.p.A.(MTAA:UCG)4.8%11.68.114%-29%Electricite de France SA(EDF.PA)3.9%19.112.97%-38%Credit Suisse Group AG ADR(CS)3.5%15.017.99%14%Commerzbank AG ADR(CRZBY)3.5%19.318.210%40%Canadian Pacific Railway Ltd.(CP)3.4%17.517.32%10%SAP SE ADR(SAP)3.3%20.720.3-1%75%Ping An Insurance (Group) Co. of China Class H(IFX.V)3.2%14.59.811%130%Infineon Technologies AG ADR(IFNNY) 3.1%25.721.77%173%China Petroleum & Chemical Corp. Class H(0386.HK)3.1%10.812.620%27%Ferrovial SA ADR(FRRVY)2.7%N/AN/A0%32%Sources: Thornburg Securities Corp., FactSet
Strategy and more on China
Zhou said she and Wang categorize companies held by the fund as “basic value” plays, consistent earnings or emerging franchises, with the goal of managing a balanced portfolio “with a chance to outperform through cycles.”
She emphasized the long-term importance of the digital revolution in China with government support for companies developing technology in three areas:
• Image and facial recognition.
• Voice recognition and language processing.
• Machine learning.
Zhou stressed how much data there is for companies (and the government) in China to gather, given China’s population of 1.4 billion. “All the e-commerce transaction data is on Alibaba’s platform; the information data, surge, map, location, online-to-offline [data ]are largely on Baidu’s platform. The social networking data is largely on Tencent’s platform,” she said.
The Thornburg International Value Fund has positions in Alibaba and Tencent but not in Baidu, as the stock’s valuation to earnings has gotten too high, Zhou said.
Zhou said that initial public offerings are important for investors who wish to participate in China, and named Qudian Inc. (QD) as an example, although the micro lender isn’t held by the fund. Quidian completed its IPO in October. The company is partially owned by Ant Financial (currently a unit of Alibaba), which Zhou expects to be publicly listed on its own “pretty soon.”
China doesn’t have a credit-card or unsecured consumer-lending environment similar to the one in the U.S., but the country’s mobile payment volume in 2016 was $11 billion — 16 times as large as volume in the U.S., Zhou said. Ant Financial runs Alibaba’s Alipay service, which has the highest market penetration for mobile payments in China. So Alibaba’s shareholders may be looking at an excellent opportunity for further gains if and when Ant Financial is spun-off.
Philip van Doorn covers various investment and industry topics. He has previously worked as a senior analyst at TheStreet.com. He also has experience in community banking and as a credit analyst at the Federal Home Loan Bank of New York.
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