Ctrip.com: Raising Estimates On Strong Revenue Outlook

Ashish R. Thadhani (Gilford Securities) recently sent a note to clients on Ctrip.com International's (CTRP) latest earnings. Excerpts follow:

• Investment Conclusion. Based on accelerating Hotel reservation momentum, we are raising our estimates as follows: 2007 GAAP EPADS to $0.62 on revenue of $150 million (53% YoY growth) from $0.61 on revenue of $147 million; and 2008 GAAP EPADS to $0.80 on revenue of $212 million (41% YoY growth) from $0.78 on revenue of $199 million. We are also introducing a 2009 GAAP EPADS estimate of $1.05 on revenue of $287 million (35% YoY growth). Our estimates imply 43%/32% compound revenue/EPS growth in calendar 2006-09. Results should benefit from rapid expansion of the consumer/supplier base (note current 5% market penetration); incremental corporate, international and leisure travel initiatives; and successful implementation of an e-ticketing mandate favoring online players. Our target price is $46. In 12-months, this would correspond to 50x forward GAAP EPADS – or a PEG of 1.6x and discount to the current valuation.

• 2Q07 Results. GAAP EPADS of $0.17 vs. $0.11 a year ago on net revenue of $37.8 million (59% YoY growth) comfortably beat our $0.14 estimate on net revenue of $35.1 million. Non-GAAP EPADS of $0.22 vs. $0.12 also exceeded our $0.18 expectation. Ctrip posted positive variances in operating income ($1.5 million driven by Hotel reservation revenue), as well as interest/taxes ($0.3 million). Operating income of $12.5 million (33.1% margin) surpassed our $11.0 million estimate (31.4% margin). Metrics showed strong volume growth in air tickets sold (up 71% YoY) and room nights booked (up 42% YoY and the best gain in over two years); plus further expansion of the domestic hotel network (up 39% YoY to 5,300) and customer base (up 57% YoY to 3.3 million). Results reflect a robust domestic economy and seasonally strong business travel following the Chinese New Year holidays, augmented inventory, contribution from Tier-II cities and a widening gap over rival eLong. Ctrip continues to emphasize service innovation, e.g., recent loyalty card launch with Bank of China and upgraded booking functionality. Net cash increased to $143.8 million from $123.1 million on March 31.

• 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, mandated e-ticketing and relaxation of travel restrictions.

• 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.