China Eastern Airlines Corp. Ltd. (ADR) (CEA), China Southern Airlines Co Ltd (ADR) (ZNH), Ctrip.com International, Ltd. (ADR) (CTRP): Separating the Winners from the Losers in China’s Turbulent Markets

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China, once considered the hottest growth market in the world, has had a rough year. Food safety problems, a new bird flu outbreak, stagnant wages, the rising cost of living, and bank liquidity problems have all contributed to the lackluster performance of Chinese stocks this year. Over the past twelve months, the SSE Composite in Shanghai has declined 2%, although the Hong Kong-based Hang Seng has risen 8%. However, both have woefully underperformed the S&P 500 in the U.S., which is still up 16%.

However, in any market there are still winners to follow and losers to avoid. Although the Chinese market can be a tricky one to navigate, there are still some promising growth sectors to consider.

Ctrip.com International, Ltd. (ADR)

Avoiding the airlines

The Chinese travel sector has been hit the worst by avian flu fears and rising fuel prices. Over the past six months, shares of China Eastern Airlines Corp. Ltd. (ADR) (NYSE:CEA) have fallen more than 26%. China Eastern Airlines Corp. Ltd. (ADR) (NYSE:CEA) flies passengers domestically and internationally, and also offers cargo and mail delivery services.

In 2012, China Eastern Airlines Corp. Ltd. (ADR) (NYSE:CEA)’s profit dropped 29.8% year-over-year, a precipitous drop that was slightly better than the 48.2% decline that China Southern Airlines Co Ltd (ADR) (NYSE:ZNH), experienced, and the 33.8% drop that Air China reported.

Together, China Eastern Airlines Corp. Ltd. (ADR) (NYSE:CEA), China Southern Airlines Co Ltd (ADR) (NYSE:ZNH) and Air China are considered the “big three” airlines in China, controlling 80% of the market between them. The three companies are also heavily funded by the Chinese government, receiving $650 million in state subsidies in 2012.

All three airlines have reported bottom line declines for three consecutive years, after reporting strong earnings growth in 2010. 2013 hasn’t been much better–year to date, China Eastern Airlines Corp. Ltd. (ADR) (NYSE:CEA)’s revenue has edged up 1.9%, but its earnings have fallen 14.8%.

AIRYY Chart

Customer satisfaction with Chinese airlines is also at an all-time low. According to FlightStats, only 18% of flights from Beijing’s Capital International Airport are taking off on time. Protests and violent incidents have occurred across the country as a result of the travel delays. According to the Chinese media, the problem has become so severe that several airports have stopped announcing delays over the PA system altogether to avoid antagonizing travelers.

Although the numbers behind those crowds — 296 million domestic passengers in 2012, an 8.8% year-over-year increase — should generate healthy revenue growth for airlines, the competition between the three airlines causes some major markdowns in ticket prices and some slim margins. China Eastern Airlines Corp. Ltd. (ADR) (NYSE:CEA) and China Southern Airlines Co Ltd (ADR) (NYSE:ZNH) only reported profit margins of 2.9% and 2.4%, respectively, which led to lackluster profit growth. Air China fared slightly better, with a profit margin of 4.7%.

Sticking with Ctrip

Although Chinese airlines have performed terribly, shares of Ctrip.com International, Ltd. (ADR) (NASDAQ:CTRP), the country’s largest online travel agency, have surged 130% over the past six months, handily outperforming its closest competitor, eLong, Inc. (ADR) (NASDAQ:LONG), which has only gained 1.5% over the same period.

CTRP Chart

In the second quarter, Ctrip.com International, Ltd. (ADR) (NASDAQ:CTRP)’s net income rose 76% year-over-year to $34 million, as its revenue rose 28% to $203 million. eLong, by comparison, reported a 27% year-over-year rise in revenue last quarter, but it reported a net loss of $12.43 million, compared to a profit of $2.6 million a year earlier.

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