What Does Ctrip.com’s Increasing Leverage Mean for Investors?



Increasing debt

As we discussed previously in this series, Ctrip.com (CTRP) tried to consolidate China’s online travel industry by acquiring majority stakes in rivals Qunar (QUNR) and Elong (LONG) and other acquisitions like Suany and You Score. The major online travel agencies, Expedia (EXPE) and Priceline (PCLN), adopted a similar strategy in the US.

In addition to these acquisitions, Ctrip.com also invested heavily in business and technology to reach the current size and scale. All of this resulted in an increased debt burden for Ctrip.com.

The total debt on Ctrip.com’s balance sheet increased to $4,796 million at the end of 2015. It was $1,873 million at the end of 2014 and $1,062 million at the end of 2013.

As a result, Ctrip.com’s leverage ratios also increased. The total debt-to-EBIT (earnings before interest and tax) ratio stands at 81x. The net debt-to-EBIT is at 9.4x at the end of 2015.

Due to equity dilution, the total debt-to-equity ratio decreased to 49% at the end of 2015—compared to 122% at the end of 2014.

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Why is increasing leverage risky?

High leverage and interest cost reduce a company’s ability to cope with unfavorable conditions. This makes it a risky stock for investors.

At the end of 2015, Ctrip.com’s cash on the balance sheet was $4,237 million. Its net debt-to-cash ratio was at 1.13x. This means that it would take about one year to repay its debt with the current cash on its balance sheet. Currently, Ctrip.com’s debt seems to be at manageable levels. However, the debt has been increasing at a higher rate than the cash flows.

The cash flows are expected to improve. The expenses should slow down. However, if the margins decline, it would mean reduced cash flows. Ctrip.com would have a hard time making interest payments. It wouldn’t leave much on the table for investors.

Investors should pay close attention to Ctrip.com’s increasing leverage.

Ctrip.com is the largest holding of the Golden Dragon Halter USX China ETF (PGJ). It accounts for 5.6% of PGJ’s portfolio.


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