Ctrip: The Best Remains The Best

Summary

CTRP beat on revenue and EPS with positive Q2 outlook that should alleviate investor concerns over commission policy.

Take-rate stabilization a positive catalyst for Q2 while cross-selling should offset domestic policy changes.

Hotel pricing increasingly rational on lower coupon expense.

Ctrip (NASDAQ:CTRP) reported a solid set of results with revenue beating consensus, while earnings were less than expected on better than expected integration and synergy. Q2 guidance should give investors confidence in the near-term outlook and that the recent commission policy should have limited impact on volume growth. Additionally, cross-selling across Qunar (NASDAQ:QUNR) and eLong (NASDAQ:LONG) is achievable per management and I expect the company to execute given its solid market power in China's OTA space. Remain bullish on the stock and continue to see CTRP being a solid Chinese OTA candidate that could potentially rival Priceline (NASDAQ:PCLN) in this decade.

Revenue of $648m was a +80% y/y growth and was ahead of consensus $630m with higher gross margin (73% vs. 70% a year ago) due to strong revenue growth and limited promotional activities. Non-GAAP earnings was above consensus with EPS $0.09 vs. consensus -$0.04. More important, revenue guidance of +70-75% y/y growth was in-line with consensus 70% growth and this should give comfort to the investors over the commission and integration/synergy impacts. Management's guidance on hotels (+70-75% y/y), transportation (+95-100% y/y), packaged tours (+45-50% y/y) and corporate (+10-20% y/y) are certainly positive and suggest that the near-term growth outlook remains intact. All things considered, a relatively good quarter.

Going forward, we could see stabilization in take-rate at roughly 3-5% post the change in commission policy. I note that effective July 1st, the commission rate on domestic air tickets will change from volume to fixed dollar which makes cross-selling and air segment fees increasingly important to offset the negative headwind from the lack of volume rebate. The good news is that this rate only applies to domestic tickets so overseas tickets (which accounts for 30% of CTRP's air ticket revenue) will be left immune to the policy change. This is certainly important as it gives CTRP a chance to ramp up on its overseas ticketing, thereby gradually building up its platform to rival that of PCLN on a global basis.

Finally, given the consolidation among the OTAs, hotel coupon will continue to decline as rational pricing takes shape. I note that both QUNR and LONG saw coupon ratio declining to the high single digit compared with low double digit previously and this should drive medium-term margin stabilization as well as healthy revenue growth. Additionally, outbound travel will be a key to drive CTRP's hotel segment due to the growing tourism demand, lower visa restriction and China's V-shaped demographic in which empty-nesters are increasingly investing in travel services.

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