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



Rising debt

Major online travel agencies Expedia (EXPE) and Priceline (PCLN) have developed a duopoly in the US online travel market with their aggressive expansion strategies. Ctrip.com (CTRP) has taken a similar path in China. In addition, CTRP has invested heavily in business and technology to reach its current size and scale.

Heavy reinvestments in its business have increased CTRP’s debt burden. Total debt on CTRP’s balance sheet rose from $1,062 million in 2013 to $1,873 million in 2014 and $3,565 million at the end of 3Q15.

As a result, CTRP’s leverage ratios have also increased. Its total debt to equity ratio rose from 74% in 4Q13 to 112% in 4Q14 and 176% at the end of 3Q15. Its net debt-to-equity ratio rose from -1% in 4Q14 to 50% in 3Q15.

As of the end of 3Q15, the cash on CTRP’s balance sheet was $2,545 million.

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Why is increasing leverage risky?

High leverage and interest costs reduce a company’s ability to cope with unfavorable conditions, thus making it a risky stock to invest in.

At the end of 3Q15, CTRP’s net debt-to-cash flow ratio was 41x, adjusted for other income, meaning that it would take 41 years to repay its debt at current cash flow levels. CTRP’s cash flows are expected to improve as expenses ease off, but if margins decline, reduced cash flows could make it difficult to make interest payments. This would leave little if nothing on the table for investors.

Investors should thus pay close attention to CTRP’s increasing leverage.

CTRP is the fourth-largest holding of the EGShares Emerging Markets Consumer ETF (ECON), accounting for 4.3% of its portfolio. It competes with Qunar (QUNR).


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