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Sunday, February 26, 2006

Asiatravel @ 23 cts (Internet / Singapore) 1 comments

Final Poll Results: 2:2

(P.S: Sorry for any disturbances the advertisements above may have caused you)

Main issues

1.Unattractive valuation vs bigger peers

2.Poor profits and high P/NTA

3.Limited barriers to entry

4.Limited Asia-Pacific presence

5.May be affected by tightening controls on hotel room allocation in local market

I was considering whether to classify this stock as a travel stock or an Internet stock, and finally decided that Internet would be more appropriate because Internet companies have unique operating models that are asset-light and typically are somehow valued differently by brokers. Also, I had previously categorised Mediaring as an Internet stock and not a telecommunications stock. Incidentally, I had called for a not-to-buy on Mediaring at 22 cents, and now have egg on my face given the last-traded quote of 33 cents for the stock. So, readers should beware my cynical comments and note that my Internet stock valuation technique may not be up to scratch. :-)

One wonders how a company which has just suffered a debilitating full-year loss (albeit due to a series of investment writedowns), and experiencing drastic management changes after seeing two of its executive directors (one of them its CEO)leave during the year, could still have bounced back from below 15 cents in late 2005 to its current 23 cents, a full >50% gain rebound. I will give a full perspective of its valuation metrics below, but just let me identify what I see as the key catalyst here: the purchase of 90% of a peer by US travel giant Travelocity (to complete its original 10% stake) in late January 2006 for US$34M. Earnings figures are not available for but its purchase illustrates the attractiveness and potential of the online travel business in the Asia-Pacific, where Asiatravel has taken pains to explain that online hotel reservation in Asia has only achieved 5% of the total pie compared to 15% in North America (although conveniently forgetting to point out that Internet penetration rates and e-commerce acceptance in Asia are nowhere near that in North America). Anyway, let's assume somebody wants to buy Asiatravel. At today's price of S$0.23, multiplied by outstanding shares of 193M, Asiatravel would cost US$27M, compared to implied 100% stake value of Zuji US$38M. Somehow I don't think Asiatravel is worth 70% of, which had (before the acquisition) strategic partnerships with 16 major airlines and a strong pan-Asia presence and reputation (voted best online travel agent in Asia-Pacific by TTG Media).

Now let's get down to the company financials. Considering operating financials alone, FY05 operating profits (before tax) was $1.7M vs FY04 operating profits of $3.3M, a near-50% drop. Revenue had actually increased 10% year-on-year, but cost of services (ie. mainly the hotel rates) had increased 20%, hence implying that Asiatravel had been unable to pass rising costs to consumers. Of course, I guess this is a better situation than a stagnant revenue/steady margins scenario (no growth-->the bane of Internet stocks) but then it still illustrates the lack of bargaining power of the middleman (this is exactly what Asiatravel is). Actually, the writedowns were quite substantial cutting NTA by 40% --- at its current NTA of 5.8cents Asiatravel's P/NTA is 4X --- that's why Warren Buffett doesn't like Internet stocks. As for the ex-writedowns P/E, it's ~25X. Let's get a perspective in case bricks-and-mortar valuations are outdated: major Internet travel commerce companies in the US, comprising Sabre Holdings (parent of Travelocity), Expedia (owned by Microsoft), and Priceline (yes, remember this stock from the dot-com days?), trade at forward PEs of 12-15X. Looking at the operating figures for FY05 and execution problems arising from its management changes, I'd be hard-pressed to see Asiatravel double operating profits in FY06 so that it can be rated at 13X forward PE, say.

I also have doubts about the supply side of the chain, as well as the competition within the online reservation sector. It is my observation that the market often focuses its attention on the demand side, which is often not in question --- as long as there are no major catastrophes, it is a fact of life that people always want better and more. Yet margins can be compressed by an increase in number of service providers, and Asiatravel's niche is not difficult to penetrate. There are so many current and potential competitors: there are competitor sites that offer better room rates (,,, hotels entering the fray to offer direct reservations (Starwood) (PS: the above two observations extracted from Oldman's comments on Shareinvestor), Internet companies that are not already doing online travel but having the reputation to instantly garner customers and networks should they decide to join the fray. Of course, there are the traditional travel agents which Asians might still prefer given the more personalised and "secure" service. It is always possible to present a dim view of the competitive picture in any industry as I have done above, but it should be pretty obvious to any Internet user that the entry barriers to e-commerce sites are really not that high.

As for the supply side, one might note from the FY05 annual report that about half of Asiatravel's business derives from the Singapore market. Besides suggesting that its ex-Singapore Asia-Pacific presence is really not that big, one may also note a key local trend which might impact Asiatravel over the next few years given the importance of the Singapore market to Asiatravel: the limited supply of hotel rooms locally. This deficiency has been reported for several months now, and it has two implications: the hotels have greater bargaining power given that they control the limited assets, and also they are likely to tighten room allocations to the various travel agencies, online or otherwise, to optimise their income in the face of a strong demand/limited supply situation (by the way, the corollary of this is: buy hotel stocks). That would put a cap on Asiatravel's local hotel accommodation reservations revenue growth, as well as its profit margins. Also, since tour packages are often tied to hotel reservations, that segment would also be affected.

Given such limitations, the Asiatravel shareholder would have to place a lot of faith/hope that a major player might become interested in Asiatravel. I don't know, maybe the Chairman knows better? He's been buying up some shares since the CEO left. That, I offer as the positive sign in this rather gloomy portrayal of Asiatravel :-)

(1) Valuation figures on Sabre Holdings, Expedia and Priceline
(2) article dtd 25 Jan 2006: Travelocity eyes China, India with portal purchase




Blogger Gallen said...

Daniel, lunch time greetings!!

2/28/2006 2:19 PM  

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