Shares digital

Et-china.com International (ETC:AIM) – 115p, stop loss 92p

SHARES SUMMARY

Offers direct exposure to the thriving travel market in China. It has had a choppy time since floating in 2007 but now looks to be more comfortable.

Business:

Chinese travel services group

Vital stats:

Market value: £37.9 million

Historic PE 2007: n/a

Prospective PE 2008: n/a

Prospective PE 2009: n/a

Sector PE: 11.5

1-month relative strength: 30.8%

1-year relative strength: n/a

Yield 2008: n/a

NMS: 2,000

Spread: 6.5%

China will become the second largest economy for travel and tourism in 2008, generating around £592 billion. This is according to the World Travel & Tourism Council which estimates that Chinese travel will nearly quadruple in value to $2.4 trillion over the next ten years.

Adding to the strong domestic travel market will be a sharp rise in overseas visitors, attracted by China’s economic strength, culture and expanding infrastructure.

Travel services provider Et-china is well placed to benefit from this trend. The company, which is set to move into profit this year, is based in the south China province of Guangdong, relatively close to Hong Kong and Macau. South China accounts for around 30% of the country’s GDP and houses over 450 million people. Et-china is among the largest travel services group in this region and caters for business and consumer travellers.

It has a wide distribution network, offering plane tickets and hotel reservations online, via a call centre, through payment kiosks and city offices. Et-china has an exclusive e-ticketing deal with China Southern Airlines, the country’s largest carrier.

An investment in government-owned GZL is broadening exposure to group travel. It currently owns 53.95% of GZL, which provides tour packages through 160 high street stores and a call centre. Et-china chief executive Matthew Ng says the company will seek to increase its holding further, although permitting the government to keep some exposure to the business. ‘Having a shareholder partner like the government would be beneficial in terms of securing major events such as the coming Asian Games in 2010 in Guangzhou,’ says Ng.

A more immediate driver for business is the Olympic games this summer in Beijing, although this may be a last-minute rush for domestic travellers. Ng reveals that preference over hotels and flight allocations are being given to overseas visitors. ‘The Chinese people are concerned about a lack of transparency over hotel and air fares for the Olympics, as the prices keep changing. We should get a better idea by May, but come June or July there will certainly be rush among Chinese people for bookings,’ he comments.

China has made significant investment into expanding air travel capacity. While Heathrow’s Terminal 5 is currently dominating UK media, a more impressive facility is Terminal 3 at Hong Kong, which opened in February. It is 17% larger than all five of Heathrow’s terminals combined. Regional hubs are also expanding including Guangzhou, where Et-china is based, only 90 minutes by train from Hong Kong but still requiring a second runway to support air travel demand. ‘Within a 200 kilometre radius of Guangzhou, we have three airports which can handle over 80 million passengers a year and are close to capacity,’ says Ng.

Competition is strong among Chinese travel operators but Et-china believes its focus on brand strength and service rather than pricing will stand it well. House broker Seymour Pierce believes the company will report £1.5 million pre-tax loss when 2007 accounts are published in late April or early May, reflecting high marketing costs. This should turn into £4.2 million profit for 2008 and £8.9 million gain the year after.

The shares in Et-china listed at 127p in August 2007 but quickly fell to 79.5p, dragged down by the wider stock market weakness. A trading update in October pushed the stock back up 57% over two days, but a lack of subsequent news left the shares drifting back downwards. Two trading statements in February revived the stock, resulting in a 66% rise to 127p. With the company having learned its lesson over the need to keep the City updated and short-term investors having since taken profits, the stock price should become less volatile. One to buy now and tuck away for several years.

by: Dan Coatsworth