Ctrip Tops Worst Weekly Drop in 2 Months: China Overnight

Chinese equities in New York dropped, extending the longest stretch of declines since November. Ctrip.com International Ltd. tumbled on concern plans to offer discounted plane tickets will reduce profit.

The Bloomberg China-US Equity Index of the most-traded Chinese shares in the U.S. fell for a third day, sliding 0.9 percent to 99.61 yesterday to drop 2 percent this week, the most in two months. Ctrip, China’s largest web travel agency, sank the most since July 2010, triggering a short sale restriction from the Securities and Exchange Commission. China Life Insurance Co. slipped after an industry regulator said insurers face the most difficult year in 2013 while NetEase Inc. rallied.

Ctrip, which revealed yesterday that it plans to cut about 500 employees, plunged after Travel Daily reported that the Shanghai-based company will extend a program of cash rebates for airline tickets, citing a Ctrip statement. This means the continuation of a “price war” in the Chinese travel industry, Muzhi Li, an analyst at Citigroup Inc., wrote in a report reiterating a sell rating on Ctrip.

“Ctrip’s cash rebate program in air tickets is even more negative to its stock than its layoff news,” Henry Guo, a senior analyst at ABR Investment Strategy LLC, which focuses on technology and media companies, said by phone from San Francisco yesterday. “Ctrip’s promotional program in air tickets will be followed by its biggest rivals as well as smaller agencies, causing a price war that will hurt its earnings.”

Stock Valuations

The China-US Index followed the Hang Seng China Enterprises Index and the Shanghai Composite Index lower this week, as valuations approached the highest levels in eight months.

The Hang Seng China Enterprises gauge fell 0.8 percent to 12,001.81, bringing its drop in the week to 0.9 percent. The Shanghai Composite measure of domestic Chinese shares slid 0.5 percent to 2,291.30 yesterday, slumping 1.1 percent in the week

Companies on the China-US gauge trade at an average 13.5 times estimated earnings, within 3.6 percent of the highest valuation in two months, reached Jan. 10. The measure has added 0.4 percent this year after surging 6.9 percent in December.

“We’ve been riding this wave of optimism on China, so this pullback is probably a little bit of profit-taking,” Win Thin, global head of emerging-markets strategy at Brown Brothers Harriman & Co. in New York, said by phone yesterday. “Decent Chinese numbers are pretty much baked into the cake for the first and second quarters. It’s not a great growth story but it’s better than what people were worried about two months ago.”

‘Particularly Challenging’

Ctrip’s American depositary receipts tumbled 13 percent to a one-month low of $19.64, the biggest rout since July 2010. An SEC restriction on short selling was imposed after ADRs dropped 10 percent. In a short sale, an investor borrows a security and sells it, expecting to profit from a decline by buying it back at a lower price.

“Ctrip’s additional price cut is roughly 10 percent of ticket prices, which couldn’t be covered by 4 to 5 percent of commission rates,” Citigroup’s Li wrote in a note yesterday. “Therefore, Ctrip would lose money on each discounted ticket sale.” Hong Kong-based Li maintained a price target of $11.4 for Ctrip’s ADRs.

Ctrip is scheduled to report fourth-quarter results on Jan. 31. Its profit margin fell to 16.5 percent in the third quarter of 2012 from 33.4 percent a year earlier, data compiled by Bloomberg show.

The first quarter of 2013 could be “particularly challenging” for Ctrip due to the air ticket discounts, as profit margin will come under pressure, Tian X. Hou, founder of T.H. Capital LLC said in a report yesterday. “We expect the impact from the new round of air price competition to be worse than the previous hotel promotions.”

Ambow’s Earnings

ADRs of China Life, the nation’s biggest insurer, based in Beijing, dropped 2.9 percent to $50.09, the steepest slump since Oct. 17.

Xiang Junbo, Chairman of the China Insurance Regulation Commission, said 2013 could be the most difficult year for the insurance industry due to lower investment returns and rising operation costs, the Xinhua News Agency reported Jan. 24 on its website, citing Xiang’s speech at a work conference. The primary task this year is for the companies to stabilize growth, he said, according to Xinhua.

Ambow Education Holding Ltd., a private tutoring service provider based in Beijing, slipped 2.6 percent on its fifth straight day of declines to a record low of $1.91. Its ADRs have lost 15 percent this year.

The Beijing-based company, which last released earnings in July for the quarter ended in March, is a “foreign private issuer” under SEC regulations and is not required to file quarterly reports or financial statements with the U.S. regulator, Ambow media manager Mandy Li said in an e-mail on Jan. 24.

Kerosene Prices

ADRs of China Eastern Airlines Corp., the second-biggest domestic carrier, sank 3.1 percent, the most in a month, to $22.52. Its ADRs traded 1.1 percent below its Hong Kong-traded shares, the widest discount in a month. Each ADR is equivalent to 50 underlying shares in the Shanghai-based company.

Li Xiaolu, a Taipei-based analyst at Capital Securities Corp., said Jan. 25 demand for air carriers will improve “slightly” this year, while the positive impact may be offset by a fuel price surge.

Jet kerosene prices rose for a seventh straight day in Singapore to a three-month high of $129.45 a barrel yesterday, an index compiled by Bloomberg showed.

NetEase Inc., operator of China’s second-largest online games website, gained 3.7 percent to a two-month high of $46.88, the biggest gainer on the China-US gauge. The Beijing-based company is scheduled to report fourth-quarter earnings on Feb. 6.

ETF Drops

The iShares FTSE China 25 Index Fund, the largest Chinese exchange-traded fund in the U.S., slipped 1 percent to $40.1 yesterday, capping a weekly loss of 1.4 percent which was the most in 10 weeks. The Standard & Poor’s 500 Index climbed 0.5 percent to a five-year high of 1,502.96, as Starbucks Corp. and Procter & Gamble Co. reported increased profit and German business confidence beat forecasts. The U.S. gauge completed its fourth weekly gain, advancing 1.1 percent.

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