Way, way back on March 1 I wondered when it would be time to trim some China positions. Then the Shanghai market as a whole was up more than 14% in the last month. Sure, a potential U.S.-China trade deal offered the chance of a rally on the news, but Wall Street was starting to think that much of that as priced in and that there was no more than a 9% or 10% bounce on that positive news.
Well, as of the close on March 6, the Shanghai Composite is now up 18.48% in the last month and 24.39% for 2019 to date (and to date, I’d remind you, is less than two-and-a-half months.)
And the signs of speculative froth are even more visible: Shares quoted below 2 yuan (30 cents) at the start of 2019 have on average jumped 40%, according Bloomberg. For example, shares of Shanghai Zhongyida are up 132% this year despite reporting consecutive annual losses that threatened to get the stock delisted in Shanghai. Th companies main business operations have been shut down and some executives have gone silent. No matter. Up 132%.The problem, of course, is that we know how this all comes out since we saw the same penny stock rally in the 2015 stock boom. That year the Shanghai Composite peaked at 5166 on June 12. It hit a low of 2738 on January 29, 2016. That’s a drop of 47% from the high.
Which brings me to Ctrip International .com (CTRP), a member of my Jubak Picks Portfolio. (The position is down 22.98% since I added it to the portfolio on October 10, 2017.) The stock soared more than 19% yesterday as the company reported fourth quarter earnings per ADS of 13 cents, 17 cents better than the Wall Street consensus. Revenue climbed 11.6% year over year to $1.10 billion versus an expected $1.04 billion in earnings. The company, China’s largest online travel operator, guided investors to revenue growth of 18% to 23% in the first quarter. That works out to revenue of $1.25 billion to $1.30 billion vs the current consensus of $1.16 billion. The big gains came in Ctrip International’s international air and hotel business, which made up 30% to 35% of company revenue in the quarter. The company’s Skyscanner direct booking program delivered 200% year over year revenue growth.
The problem is that Ctrip is already up 68.5%, as of the close today, March 6, at $42.59, from the November 13, 2018 low at $24.27.
And it’s legitimate to ask How much higher can Ctrip go in the short-term before giving something, and possibly a lot, back?The stock still has some momentum. The ADS were up 1.62% today, a good showing after the huge post earnings move. And it picked up significant upgrades from JPMorgan and Morgan Stanley (to overweight), and Citigroup and Deutsche Bank (to buy)My inclination is to give this a bit longer to run but I would sell on the first sign that momentum has faltered in either this stock or the Chinese market as a whole. You’ll not that I move my own rating on Ctrip International to neutral from bullish today.