Description

This is a super simple idea and I'll be brief. The big sell off in Chinese equities have brought about many opportunities and this is where I've been spending a lot of time. It felt like a good idea to throw a few on VIC.

Travelsky is a government monopoly airline GDS system provider in China. It has about 98% share of Chinese airlines. Here's are the salient points about the business model:

• Not only are they the GDS, they also run the entire inventory management system for all airlines. It's almost impossible to switch from them.
• Government regulated. It's an SOE (which is both good and bad). But in this case the foreign companies are not allowed to compete
• They also charge for terminals / data feeds given to travel agents / OTAs
• Lastly, they make revenue from airport IT systems -- similar to Amadeus. They have a very large share of passenger management systems in China for instance. But this is not a quite monopoly business.
• There are significant tailwinds in China -- driven by airline travel. It's a volumetric business, like Amadeus / SABR. They get paid per pax.
• The GDS system in China is a lot more rational than in Europe/US. The system never evolved to be one where the GDS charges high booking fees, and gives subsidies / kickbacks to travel agents to encourage travel agent adoption. Instead, it's more like a pure utility. As a result, the per Pax charges are a fraction of the prices charged by Amadeus/Travelport/SABR. There are really no incentives for the airline to bypass the GDS.
• The only airline that I'm aware of that doesn't use Travelsky is Spring Airlines -- which is a budget airline that uses a direct model. But this is a very small airline.

Tailwinds / Headwinds:

• Airline travel in China is growing super fast. HSD at least. But this could be cyclical -- so if China goes into a financial crisis or something there is risk.
• Outbound travel is growing much faster. This attracts superior booking fees.
• At the same time, Travelsky gives volume discounts to airlines. This nets out the prior bullet point. So overall booking revenues grow roughly at Pax.
• There is operating leverage in the business. EBIT margins have expanded about 600bps in the past 6 years.
• There is currently an airport building boom in China. This really helps the airport IT systems segment (teens % of rev). There is risk if this stops at some point. Of course, more airports = more air travel.
• It's an SOE. This is good (monopoly) but also bad (not great capital allocation, probably not that innovative). In my talks with customers, I think they get the job done, but is not exactly on the cutting edge of technology. 

Risks:

• if government ends their monoply position
• Cyclical -- Pax, airport building
• They do something really stupid from a management standpoint

Valuation:

• For a company capable of growing EBIT in the HSD or even LDD, the stock trades about 17x NTM. If you exclude the large cash balance, it's much less (but that cash may never be freed up...)
• They pay about a 1.5% dividend

The stock is down about 16% YTD with the broader mkt. It's trading for the lowest valuation on true earnings in quite a few years. Prior, earnings quality was poorer because they got a "subsidy" from the Beijing city government, due to "innovative" companies. Lord knows why a company like this is deserving of a government handout... but oh well. Anyway, this subsidy went away recently, which actually cleaned up the story. The forward earnings are "true earnings". 

Despite being an SOE this has been a value creator. Since IPO in 2001, the stock is about a 13 bagger on total return basis.

Catalyst

None