Ctrip: Firm Business Trends Should Lead To Further Gains

Ashish R. Thadhani (Gilford Securities) sent a note to clients on Ctrip.com International's (NASDAQ:CTRP) recent earnings report (conference call available here) in which he maintained his estimates for the company going forward while raising his target from $57 to $68. Excerpts follow:

CTRP: Business Trends Firm; Raising Target

Investment Conclusion. We are maintaining our estimates as follows: 2007 GAAP EPADS at $1.20 on revenue of $143 million (45% YoY growth and up from our prior $137 million projection); and 2008 GAAP EPADS at $1.50 on revenue of $192 million (35% YoY growth and up from $179 million). Our model reflects strengthening hotel metrics and a successful e-ticketing transition (90% of total 4Q06 bookings) – offset by lower profitability on account the rising revenue contribution from Air ticketing services. Our estimates imply 40%/28% compound revenue/EPS growth in calendar 2006-08 – supported by rapid expansion of the consumer/supplier base and a stable competitive/economic environment. Future results stand to benefit from a 2007 e-ticketing mandate favoring online players plus recent corporate and international travel initiatives. Based on the quarterly step-up in forward EPADS and a higher valuation assumption, we are raising our target from $57 to $68. In 12-months, this would correspond to 45x forward GAAP EPADS of $1.50 and a discount to the current valuation (50x). We attribute recent price volatility to gains in the domestic market, tempered by conservative 2007 revenue and margin guidance.

4Q06 Results. GAAP EPADS of $0.26 on net revenue of $28.9 million (51% YoY growth) beat our $0.25 estimate on net revenue of $27.4 million. Non-GAAP EPADS of $0.31 vs. $0.24 a year ago also exceeded our $0.30 estimate. The overage stemmed from positive variances in core Hotel reservation and Air ticketing revenue – offset partially by low-end group tour activity and non-operating income. Importantly, operating income of $9.6 million (33.2% margin) surpassed our $8.9 million estimate (32.6% margin) by 8%. Excluding share-based compensation, operating income advanced 52% YoY. Highlights included strong volume growth in air tickets sold (up 62% YoY) and room nights booked (28%); higher commission of RMB 46 per air ticket (vs. RMB 44 in 4Q05) and RMB 71 per room night (vs. RMB 68); and continued expansion of the domestic hotel network (up 29% YoY to 4,400) and customer base (up 13% QoQ to 2.6 million). Net cash increased to $118.1 million from $104.7 million on September 30.

Noteworthy developments are summarized below:

January 2006. Ctrip promoted COO/co-founder Min Fan to the position of CEO. James Liang, former CEO, will continue to serve as Chairman.

October 2005. Ctrip announced that Ms. Jane Jie Sun will assume the position of CFO. Ms. Sun replaced former President/CFO Neil Shen, who joined VC firm Sequoia Capital but will continue to serve as a board member.

July 2005. The Chinese government changed its currency policy. Over time, anticipated RMB appreciation should translate into higher dollar-denominated operating income, offset by near-term currency translation losses.

February 2005. Ctrip disclosed that it will invest $19-20 million through mid-2007 for building a new IT and service center in Shanghai.

December 2004. Existing shareholders (including management) sold 3.8 million ADSs at $24.25 each.

June 2004. Ctrip attracted a $110 million investment at $16.50 per ADS from Rakuten.

December 2003. Ctrip raised net proceeds of $44.5 million from its IPO (at $9.00 per ADS).

Investment Thesis. Powered by rising GDP and disposable incomes, the Chinese travel industry is expected to sustain double-digit growth in coming years. Traditional agencies have been limited to a local/fragmented presence (due to licensing requirements) and focus primarily on tour groups. Pioneering consolidators like Ctrip offer selection plus savings to the individual traveler, and have become valuable aggregators of demand for the travel industry. Superior positioning includes the following: 95% of hotel reservation revenue is derived from bookings at three-to-five star hotels, where the commission per room is highest and room nights have grown 20%+ industry-wide in recent years. Ctrip boasts a nationwide supplier network, which assumes particular significance in a country with no hotel GDS. Market leadership has translated into a premium commission structure, i.e., 14% of the room rate or $8 per night. Ctrip has also sought to differentiate itself through service quality and innovation. Longer-term growth stands to benefit from continued expansion of hotel coverage and the air-ticketing delivery infrastructure, mandated e-ticketing, relaxation of travel restrictions and deregulation of the domestic airline industry.

CTRP is suitable for aggressive investors. In our opinion, principal risks include the following:

- Deterioration of economic conditions or a slowing of travel demand in China.

- Inability to secure adequate room availability under “guaranteed allotment” arrangements (that afford risk-free inventory and contribute three-quarters of hotel transaction volume).

- Competition could pressure future profitability by way of lower commission rates and/or higher marketing expenses.

- Disruptions affecting travel demand. This encompasses terrorist threats; geopolitical instability; catastrophic events; and spread of the H5N1 virus or a recurrence of SARS (necessitating closure of the Shanghai call center).

- Correction in the U.S. markets.

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