Ctrip 2Q14 Preview: Volume And Mobile To Drive Growth

Summary

Ctrip to report 2Q14 results on Wednesday after market.

Expect strong volume gain to offset weakness in ASP. Margin at risk from investment in mobile.

Tuniu is an attractive takeover target for Ctrip to increase scale and pricing power.

Ctrip (NASDAQ:CTRP) will report 2Q14 earnings on Wednesday after market close. The dial-in details for the conference call: 1877-299-4502 for US investors and 1617-597-5442 for international investors. Passcode for the call is "85282121#".

Consensus expects EPS of $0.11 on $269m in revenue, and guidance of $334m for Q3. Heading into the quarterly report, I am positive on CTRP's topline growth driven by volume growth in both the transportation ticketing and accommodation segments, which offsets the decline in commission rates. Like Baidu (NASDAQ:BIDU), I expect investment in mobile to weigh in on the margins as CTRP builds its mobile platform. Finally, leisure travel and outbound tourism present the next phase of growth. Given CTRP's investment in Tuniu (NASDAQ:TOUR), I recommend investors be constructive on these two names due to CTRP's dominance in China's OTA market and TOUR's potential of becoming a takeover by CTRP on better synergy in terms of product portfolio between the two companies. (Please see my note: Tuniu: Your Vacation Package Is Ready".

Volume offsetting ASP, but the risk is in the margins

CTRP reported a solid set of Q1 results driven mostly by higher volume from hotels and transportation ticketing services that offset the weakness in commission rate. Given that commission rate has yet to recover in Q2, I expect CTRP to continue to surprise on the upside by leveraging new product launches to drive volume growth. However, while I expect topline to be strong, margin contraction from mobile investment remains a concern.

Mobile is becoming increasingly important for Ctrip, as users prefer to look up travel packages, transportation tickets and hotel accommodations on their mobile devices. The proliferation of AliPay facilitates mobile ecommerce, which explains the increase in mobile transaction for CTRP. I note that in Q1, mobile transaction value was up 4x in the quarter and contributing to 40% of total hotel transactions and 30% of ticketing services. We can expect rising mobile contribution this quarter, as CTRP rolled out certain mobile exclusive products in the ticketing service and accommodations segments, which should boost its already solid 1mn daily active user base.

While mobile will undoubtedly be strong, investors should expect continued margin pressure from the increase in investments. Management has indicated that the company could expand its capex on the mobile platform, and I expect this investment cycle to last into at least early next year, when CTRP's mobile engagement begins to ramp up.

M&A in the play?

While management dismissed the idea of M&A in the Q1 call, one cannot help but wonder what CTRP will be doing with over $1.7bn in cash and short-term investments. CTRP's management prefers start-ups, given its creative culture, but I would argue that CTRP needs to use its cash to consolidate the larger and more established peers before they are bought out by the financially strong players such as Tencent (OTCPK:TCEHY) and Alibaba. That said, TOUR is a good name for investors to look into given its leadership in the niche outbound tourism market, an area that CTRP is keen on developing. TOUR's product portfolio would create synergy with that of CTRP and expand/solidify CTRP's offerings to the consumers. The scale and product offering because of the merger could give CTRP tremendous pricing power over both the suppliers and the customers. It is recommended that investors to accumulate TOUR on the back of solid growth in the core business and an M&A optionality.

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