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Money Train Merges With Orient Express
In August, China will host the XXIX Olympiad in Beijing. Anyone who pays attention to world news knows that these Olympics are a very contentious issue given China's attitude toward Tibet. I'm no politician but I do know a hot topic when I see one. The world will keep an eye on China in the coming months leading up to the athletic competition - and investors will be watching closely too.
Jim Rogers, co-founder of the Quorum Fund with George Soros, is a big China supporter, and has moved his family from New York to Singapore to be closer to the action. In Rogers' book, A Bull in China, he includes a chapter entitled "Tourism: Up, Up, and Away". In it, he discusses tourism inside and outside China by the Chinese themselves. Rogers suggests that the flood of Chinese tourists will be astronomical as they explore the world now that travel restrictions are lifting and affluence is growing. Rogers likens this trend to one from the past: when the Japanese first started shopping on Madison Avenue. China is a nation 10-times the population of Japan so you can imagine the explosion in travel spending that will occur as they take flight. Travel companies operating in China look to benefit from this spending.
Let's take a look at one micro cap that is actively pursuing the Chinese tourist and the eventual money train that will follow.
Borderless Profits
The micro cap in question is Universal Travel Group (OTCBB:UTVG), a holding company that owns the various travel-related businesses operating in China. Although it does have a Los Angeles base address, most of its operations are in Mainland China. In 2007, the company went through a major transformation buying four companies. Acquisitions included the purchase of an air cargo business; a travel package tour operator; a hotel reservation specialist; and a multi-purpose personal and corporate travel agency. Jiangping Jiang, CEO and owner of 31% of the outstanding stock, wants to transform the company into China's largest travel operation, and judging results to date you'd have to say she has a chance for success. (To learn more, see Investing In China.)
Fast Growth
Although incorporated in 2004, the company only started to generate revenue in 2006, building first year sales of $10 million with $3.1 million in pre-tax income. In 2007, revenues grew (remember the four acquisitions) to $44.3 million with pre-tax income of $10.5 million. Pre-tax margins came down in 2007 to 23.7% from 31% due to lower margins at some of the acquired companies. That's a good thing in this case because the added businesses made Universal a more complete travel operator, fully capable of accommodating the most discerning traveler.
Corporate guidance for 2008 includes revenues between $69 and $73 million; net income between $12 and $14 million. In short order this little company has got itself within shouting distance of its major competitor in China, Ctrip.com (Nasdaq:CTRP). In 2007, Ctrip's net revenues were $164 million, $120 million more than Universal and its operating margins were higher as well - so, Universal has some work to do. The market is certainly big enough for multiple players including online travel giants Expedia (Nasdaq:EXPE) and Priceline.com (Nasdaq:PCLN).
Discounted Price
Let's assume that the company is able to meet the low-end of its 2008 guidance. This would give us a forward price to sales ratio of 0.94 and a price to earnings ratio of 5.4. Considering it currently is growing earnings at a 40% clip, and most likely will do so for at least the next few years, its stock price is trading at a severe discount. Compare its numbers to those of Ctrip and you'll know what I mean. Ctrip's stock is currently trading at 21-times sales, in comparison to Universal's rather meek-looking 1.5-times sales.
By every metric possible Universal is a steal.
Bottom Line
Investing in China isn't easy. We're talking about a country that has embraced capitalism for less than 30 years, all while still being run by a communist dictatorship. The economy grows in fits and starts; however, I don't think you can dispute the sheer massiveness of its growth. It's an unstoppable force with so much potential, which I'm guessing is where Jim Rogers' interest lies. Where this money train ends is anyone's guess but I can't imagine the Chinese government stopping this express anytime soon - especially when it benefits both the people and the government coffers.
Jim Rogers, co-founder of the Quorum Fund with George Soros, is a big China supporter, and has moved his family from New York to Singapore to be closer to the action. In Rogers' book, A Bull in China, he includes a chapter entitled "Tourism: Up, Up, and Away". In it, he discusses tourism inside and outside China by the Chinese themselves. Rogers suggests that the flood of Chinese tourists will be astronomical as they explore the world now that travel restrictions are lifting and affluence is growing. Rogers likens this trend to one from the past: when the Japanese first started shopping on Madison Avenue. China is a nation 10-times the population of Japan so you can imagine the explosion in travel spending that will occur as they take flight. Travel companies operating in China look to benefit from this spending.
Let's take a look at one micro cap that is actively pursuing the Chinese tourist and the eventual money train that will follow.
Borderless Profits
The micro cap in question is Universal Travel Group (OTCBB:UTVG), a holding company that owns the various travel-related businesses operating in China. Although it does have a Los Angeles base address, most of its operations are in Mainland China. In 2007, the company went through a major transformation buying four companies. Acquisitions included the purchase of an air cargo business; a travel package tour operator; a hotel reservation specialist; and a multi-purpose personal and corporate travel agency. Jiangping Jiang, CEO and owner of 31% of the outstanding stock, wants to transform the company into China's largest travel operation, and judging results to date you'd have to say she has a chance for success. (To learn more, see Investing In China.)
Although incorporated in 2004, the company only started to generate revenue in 2006, building first year sales of $10 million with $3.1 million in pre-tax income. In 2007, revenues grew (remember the four acquisitions) to $44.3 million with pre-tax income of $10.5 million. Pre-tax margins came down in 2007 to 23.7% from 31% due to lower margins at some of the acquired companies. That's a good thing in this case because the added businesses made Universal a more complete travel operator, fully capable of accommodating the most discerning traveler.
Corporate guidance for 2008 includes revenues between $69 and $73 million; net income between $12 and $14 million. In short order this little company has got itself within shouting distance of its major competitor in China, Ctrip.com (Nasdaq:CTRP). In 2007, Ctrip's net revenues were $164 million, $120 million more than Universal and its operating margins were higher as well - so, Universal has some work to do. The market is certainly big enough for multiple players including online travel giants Expedia (Nasdaq:EXPE) and Priceline.com (Nasdaq:PCLN).
Discounted Price
Let's assume that the company is able to meet the low-end of its 2008 guidance. This would give us a forward price to sales ratio of 0.94 and a price to earnings ratio of 5.4. Considering it currently is growing earnings at a 40% clip, and most likely will do so for at least the next few years, its stock price is trading at a severe discount. Compare its numbers to those of Ctrip and you'll know what I mean. Ctrip's stock is currently trading at 21-times sales, in comparison to Universal's rather meek-looking 1.5-times sales.
By every metric possible Universal is a steal.
Bottom Line
Investing in China isn't easy. We're talking about a country that has embraced capitalism for less than 30 years, all while still being run by a communist dictatorship. The economy grows in fits and starts; however, I don't think you can dispute the sheer massiveness of its growth. It's an unstoppable force with so much potential, which I'm guessing is where Jim Rogers' interest lies. Where this money train ends is anyone's guess but I can't imagine the Chinese government stopping this express anytime soon - especially when it benefits both the people and the government coffers.
by
Will Ashworth
Will Ashworth lives and works in Toronto, Canada. He's worked in and around the financial services industry for much of his adult life. He loves investing and is passionate about helping others learn how to put their money to work.
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