C-Trip Could Be Worth the Long Haul

As the Chinese economy has slowed, so has the remarkable growth of Ctrip. Gone are the days when Ctrip (CTRP) management guided conservatively to 35% net revenue growth while reporting net revenue growth over 50%.

In their most recent quarter, Ctrip reported net income of $18 million, or $0.26 per ADS. Net earnings were down approximately 10% as compared to their prior year. Net revenues for their fourth quarter were $58 million, up 11% as compared to their prior year.

For the year, net revenue was $217 million, up 24% as compared to 2007. Net income was $65 million for the year, or $0.95 per ADS, up 11% as compared to 2007. Share-based compensation seems excessive, as diluted earnings per ADS were $1.22 prior to share-based compensation expenses.

Margins remain impressive at Ctrip, though they have contracted slightly. Gross margins were 78% for 2008 as compared to 80% for 2007. Operating margin was 31% as compared to 34% for 2007. Margin compression seems to be more a result of revenue mix than any deterioration in their business as lower margin businesses such as air ticketing grew at a faster rate than other businesses.

Most important for Ctrip is their outlook. The company projects net revenue growth in the 5-10% range for 2009. Following that, valuing the company becomes more difficult. In the past Ctrip’s growth has been coupled with the expanding Chinese middle-class. If this growth resumes at even half the previous pace when the economy recovers, Ctrip will see some gains in their shares.

As a quick valuation, I assume Ctrip grows earnings per ADS at 6% over the next two years, followed by 10% growth in year three and 15% growth in years four and five. Based on this projection, ending year five earnings per ADS would be $1.55. Assuming a 15% growth rate and a price to earnings growth ratio of 1.5, the year five P/E would be about 22.5x. This results in a stock price of about $35, approximately an 85% gain over current prices.

All of this is purely speculative. The Chinese economy could well crash harder than the U.S. Or, they could continue GDP growth. Ctrip certainly seems well-positioned to take advantage of any growth that may occur. I will likely hold remaining shares of Ctrip as there is still a good deal of potential for growth. The company is strong with over $175 million in cash and no debt. Long-term trends are in the company’s favor. A small speculative long-term position certainly looks worthwhile.

Disclosure: The author currently holds shares of Ctrip

Comments

[willc:]

What do you think about Expedia? I am not sure about Expedia's historical growth, but its stock price is not very encouraging and I am hesitant to think highly of Ctrip, even though I know a lot of people in China use the services

Mar 05 06:50 AM

[rlirph:]

In China Expedia owns Elong.net. Ctrip has been distancing itself over Elong for the past several years.

My concern is that management also owns Home Inn (HMIN) on the side. In China where there is little transparency one is not sure where the money goes...

Mar 05 10:16 AM

[User 371097:]

Remember that CTRP had the Olympic Games last year to bolster their numbers as millions of Chinese traveled to the venues. Lacking that big event, plus the inevitable downturn in tourism and business travel because of the weakening economy, HAS to have an effect on CTRP and other Chinese travel companies.

Mar 06 11:17 AM