Ctrip.com's Drop Offers Attractive Entry Point

Key highlights from 3Q 2011 results:

  • Revenue: $153 million (+20% y/y)
  • Sales from hotel reservation increased 17% y/y and 12% q/q, driven by higher volume.
  • Air ticket booking revenue increased 22% and was also driven primarily by volume (+16%) while commission rate increase (+6%) had a minimal impact.
  • Packaged-tour revenue increased 22% y/y and 58% q/q, due to seasonality.
  • Corporate travel revenue increased 28% y/y and 10% q/q.
  • Gross margin: 77% (-1% y/y)
  • Operating profit: $48 million, in which non-GAAP margin was down 5% y/y due to increased SG&A and product development cost. Excluding share-based compensation, operating income was $62 million
  • Net income: $51 million (+2% y/y).
  • For the fourth quarter, the company guided 15-20% revenue growth. As of most recent quarter, Ctrip has a total cash balance of $664 million.

What I liked:

Despite reporting from a higher base due to last year’s Shanghai World Expo, Ctrip still delivered a solid 20% y/y top-line growth. Commission rate for hotel bookings remained relatively stable and Ctrip expanded its hotel partners by 60% over the past year to 21,900, with 75% of them offering guarantee room allotment, compared to 70% last year.

Air ticketing sale exceeded management expectation of 15-20% and continues to grow at twice the speed as the industry. Packaged tour sales resulted from strong domestic sales, which grew 50% y/y, but experienced weaker sales outside of China, especially in Hong Kong and Taiwan. However, increased business activity offset this weakness with 28% y/y growth. Both leisure and business travel currently accounts for 20% of Ctrip’s total revenue compared to 17% a year ago.

Finally, Ctrip’s new initiative with train ticketing is gaining traction, expanding to a total of 14 provinces over the past three months, while rival eLong (NASDAQ:LONG), majority owned by Expedia, currently does not offer train ticketing services. Train ticketing initiative is critical to Ctrip’s future strategy of solidifying its dominance in China’s leisure industry, where there are approximately 1.4 billion railway passengers compared to 270 million airline passengers, implied ample growth opportunities ahead.

What concerned me:

As I mentioned in my earnings preview, I expect Ctrip to continue face macro headwind going into early 2012 due to deceleration in both air traffic and passenger volume growth.

Investors can also expect the weaker margin to persist as Ctrip ramps up spending to compete against eLong by matching eLong’s price offerings and rewarding customers with cash coupons and rebates. Ctrip is mimicking eLong’s strategy which started in fall 2009 when eLong began to offer cash coupons to customers. Since the program’s inception, eLong’s hotel booking volume rose from 30% of Ctrip’s level to 40% in a year.

But there might be silver lining behind the cloud.

Ctrip’s shares has fallen 20% since Monday, and are trading at 20x expected earnings for next year, which is near the lows during the financial crisis. While the company can face margin pressure and increased competition in the short term, I believe that Ctrip is investing in the future and is likely to price out its competitors because of its strong industry standing and brand equity. That said, Ctrip offers investors an attractive entry point in that the company is expected to grow between 20% and 25% per year over the next three years.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.