S&P Analyst Initiates Coverage of Ctrip with "Hold" Rating (CTRP, LONG)

Hong Kong-based S&P analyst David So initiated coverage of Ctrip (ticker: CTRP) today with a "hold" rating and a 12-month price target of $65. So believes that Ctrip's earnings growth is already reflected in its share price. Key extracts from So's research note:

We are initiating coverage on Ctrip with a 3-STARS (Hold) recommendation. Our 12-month target price of US$65.00 is based on Discounted Cash Flow (DCF) analysis with assumptions including WACC of 11.7%, free cash flow CAGR (2006-2020) of 20% and terminal growth rate of 2%. Our strong growth forecasts for free cash flow is largely due to strong volume growth (from a rather low base) in online bookings combined with low capex growth due to the scalability of the Internet platform. Given the stock is trading at 2005 PER of 36.4x and generating a 3-year EPS CAGR of 42%, we believe the stock is fairly valued based on its PEG (Price-to-Earnings Growth) of 0.9x. In addition, we do not expect the current high profitability to be sustainable over the medium to long term in the advent of increased competition. Hence, while the size of its market will grow, this may be at the expense of returns.

We note that Ctrip’s rapid growth rates for the next three years is due to a very low revenue base as the penetration rate of online air ticket and hotel bookings in China is estimated to be less than 2%, which mirrors Internet penetration in China. Our projected net revenue 3-year CAGR of 40% is largely driven by its airline ticketing business that is expected to grow at a CAGR of 78%. With middle-class professionals and SME-driven travel emerging on the back of a booming Chinese economy that results in higher disposable incomes, we expect traveling to represent an increasing proportion of one’s leisure and business time. In addition, as people get increasingly comfortable with transacting over the Internet, we believe online booking to rapidly increase at the expense of the highly fragmented “brick and mortar