Ctrip was the first China tech IPO on Nasdaq since 2000 and has set a trend that will see more deals following. Why did your deal work?
Shen: There has been a good run up among mainstream internet companies in the US including Amazon, and that provided a good market sentiment for technology and internet investing. The other positive factor is that Sina, Sohu and Netease have done better compared to two or three years ago in terms of their earnings. They have found a business model and produced growth. So US investors have started to have a genuine interest in this space, ie the China technology sector.
Ctrip carries a similar model. It is a technology company with very strong growth in revenues and a track record of profitability. It is also a market leader in the space in which it operates and has a brand name. We obviously came to market at the right time, and this is the sort of thing US investors are looking at. There is obviously very strong sentiment towards China stocks. The timing was pretty perfect.
Is the difference this time round versus 2000 that the stories being IPO'd on Nasdaq are companies with profits as opposed to just profit potential?
Yes, this is a very different scene. A lot of the companies in 2000 didn't have profits, let a lone a very clear business model. This time round most of the companies have at least one year of profitability. We had eight quarters of profitability, and consecutive quarters of revenue growth.
Investors also like your story presumably because of the China growth story?
Most of the US investors who looked at Ctrip saw our growth and our operating leverage. We use technology in a traditional industry, ie travel, and therefore make the business process work more efficiently. This gives us high operating margins [the gross margin is 90%].
When you spoke about Ctrip and its business model to investors, was Priceline a benchmark?
No, actually Priceline is in a similar space, but operate a different business model. Priceline uses a reverse auction model. More common practice in the US is that of companies such as Hotel.com and Expedia, and they're intermediaries between hotels and airlines and end users. They are similar to Ctrip. However, we use call centres as well as the internet.
What has been the growth rate of Ctrip in the last two years? And what will it be like in coming years?
In 2002 we grew by more than 200% versus 2001 in net revenue terms and this was the first year we became profitable. Last year, even with SARS we had 20-30% growth. Moving forward, this year we are looking at 50% growth.
In the case of past tech IPOs from Asia some very strange valuation multiples have been used. Is it correct that Ctrip was just valued on a PE basis?
Yes, this time around investors were much more careful. I never actually heard anyone discuss a sales multiple even. They were looking at earnings multiples for 2003 and 2004 and all the comparables and looking at growth versus the multiples.
What was the PE you listed at?
As it was a US deal we didn't have an estimate of 2004 numbers, but according to research by Merrill Lynch, we will make $11.6 million of earnings, and on that basis it was a 24 times multiple.
Immediately after your IPO the share price shot up 85%. Were you happy about that?
It is really difficult to predict secondary performance nowadays. Ctrip is not a big market cap stock and there could be a lot of retail investors. It really depends on peoples' timeline too and if they are thinking about 2005 earnings. That may give them greater confidence. A high stock price puts more pressure on management to execute well and deliver the expected revenue growth.
Do you think we are in a bubble?
In general, investors are starting to assign a pretty high multiple to China stocks. Recent IPOs have performed strongly. But I must say most of the companies have track records and strong earnings.
Nine months ago when we had SARS, people were not comfortable assigning a decent multiple to a China company. Now they're willing to take more risk, and are assigning a generally high multiple to China stocks as a group.
You mentioned SARS. Is that the biggest risk you face as a company dedicated to China travel?
Not necessarily SARS per se, but generally disruptive events like SARS that prevent travel are obviously a big risk. Those risks are totally out of our control.
In the case of SARS there have been a few cases, but they have mostly been isolated. I haven't seen much impact on our business yet.
If there is continued consolidation in the airline sector in China, would that have an impact on Ctrip's business?
We have already seen a consolidation in the Chinese airline sector in the past three months. The three big airlines consolidated some of the small airlines. The CAAC has reiterated its interest to relax pricing controls and the e-ticket business is beginning to take off among the Chinese airlines. So we are seeing an improved operating environment for air-ticketing billing.
How many users does Ctrip have and how is that growing?
We have more than half a million users and a very stable customer growth pattern. We are looking at roughly 20,000 new customers per month.
Your business model is quite comprehensible to US investors, but what do you think about the SMS companies that are currently trying to list. Will they find it tougher to explain and sell?
Even our story was not straightforward, because unlike in the US we use call centers as well as the internet. Also China has very limited credit card usage so the way we transact hotel payments is very different. But in general the value proposition could be understood.
In the SMS space it is different. The US hasn't had much SMS activity and so it will probably take more effort to explain. But what is promising is that SMS has become a decent sized industry. There are about 100 players in the space and they are able to be profitable, with the industry growing fast.
If I am a US investor the first question I am going to ask is what happens if China Mobile decides to do this themselves?
That's definitely a valid concern, because you always rely on one big guy to determine this. The carriers will see it as a partnership, but there is concentration of client risk.
At Ctrip we have a lot of hotels, but on the airline side we have a similar story dealing with three to four airlines.
What are the barriers to entry to some other company doing what you do?
The entry barrier has increased since our founding. Most importantly, we have acquired customers not only by direct sales but also through branding efforts. And after becoming a public company that has been intensified. Secondly, it is very difficult to establish such a broad supply relationship in China, particularly for the hotel sector. We are talking about more than 2000 hotels and you have to sign them up one by one and establish a relationship with them. We, for example, have a guarantee allotment relationships, where a certain number of rooms are allocated to us and we will fill.
Plus there is the complexities of the processing and fulfillment side. We are talking about handling over 300,000 room nights per month and close to 90,000 airline tickets per month. Anyone who gets in this business would need a very long learning curve.
You are a former banker. How did you get involved in this industry?
Back in 2000 there was a lot of talk about how the internet could revolutionise the industry in China, and I have a particular industry in the travel industry because I feel it is an inherently virtual industry. There are no physical goods. So together with the other co-founders we knew we could build China's Expedia.
