As mentioned in the previous article, we believe there’ll be substantial headwind to China’ travel industry in the short term. While the company reported splendid revenue growth (42% from same quarter of last year) and income growth (104% from same quarter of last year), we believe these results were heavily distorted by the World Expo.
China is a big country, so when its citizens flocked in to the World Expo, many stopped in other cities for sightseeing on their way to Shanghai. Therefore, while Shanghai was the magnet drawing people to travel, it has a multiplying effects in getting people to travel.
Aside from the ending of the World Expo, China is trying to rein in its red hot economy. So far it has raised interest rates, raised banking reserve ratio, and initiated policies to cool the real estate market. These tools have already caused quite a bit of market correction in the Chinese stock market. The Chinese travel industry would not be able to escape its wrath if China successfully cools down its economy.
After eLong’s latest report, its forward P/E ratio is now ~70 and its Price/Sales ratio is ~7. These multiples imply that investors are looking forward to similar splendid upcoming reports. While eLong is certainly on a growth path, we are not convinced that its growth path will be as smooth as anticipated, and we believe the upside is limited in the short term, while downside can be substantial if the headwind turned out to be too much for momentum investors.
This article originally appeared on benzinga.com