Tuesday, March 13, 2007

Sitting on the sidelines of Elong (LONG)

Elong is the trailing Chinese internet travel company behind Ctrip. I think this space has a lot of potential going forward, and though Ctrip appears to be an excellent operator it is way to expensive for my tastes. Elong, however, is another story.

Like some of my other favorite chinese internet stocks, its got a boatload of Cash (130M). Subtract that out, and you get an EV of about 110M, or about 3.5 trailing revenue (vs. about 25x revenue for market leader CTRP). No doubt, LONG has not executed as well--its expenses appear bloated (G&A is 2mil more annually, despite 1/3rd the revenue); S&M seems bloated as well, with costs same as CTRP. It has chronically under-invested in its product development until recently, putting it considerably behind CTRP in terms of technology. Long-term, if they get their act together, their margins should not approach those of CTRP long term as the internal systems improve due to increased product development expenditure. LONG's hotel booking rate and revenue is about half of CTRP's, but its airline booking rate and revenue is much lower. LONG is working on building out this the airline booking technology better. Current ratio of hotel:air booking is 3.5:1. Over time, this should approach 1:1, which gives a nice boost to growth going forward. 80% repeat business on par with CTRP, suggesting strong loyalty.

No analysis of LONG would be complete without mentioning Expedia's position in the company. On the plus side, LONG benefits from Expedia's expertise in growing out their business in the US. But, as we all know, foreign countries are riddled with the remains of US based companies who have tried and failed to penetrate new markets. Overall, I view their stake as neutral for now.

At a 25% net margin (CTRP's is 42%), the company would generate about 8M in net profit, giving it a P/E ratio of about 13 on an EV basis at current rate. That said, I'm not comfortable with their execution currently (Update: Q4 numbers were very poor, with revenue growth reported), and am not sure how long it would take to reach those net margins (or if they are indeed attainable). I'd be much more interested in the stock if the emerging markets continue to take a beating, and if the name drops to near cash value. I believe the opportunity will come at that price (or lower) soon enough.