Ctrip.com: Industry-wide Slowdown Could Linger

Excerpts from Gilford Securities analyst Ashish R. Thadhani's recent note to clients on Monster Worldwide (MNST):

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Investment Conclusion. Our Hold rating remains in effect on the basis of a fullish valuation (43x forward GAAP EPS) and headwinds in the form of a slowing economy, high fuel prices and severe short-term disruption around the Olympics, i.e., security/visa restrictions and deferral of discretionary travel, even though this event should serve as an unparalleled advertisement and catalyst for future travel to/within China. In fact, May and June recorded a YoY contraction in monthly air traffic – a trend not witnessed since the SARS outbreak in 2003. Based on a sharp revenue deceleration – cushioned by expense control and non-operating income – we are adjusting our estimates as follows: 2008 GAAP EPADS remains at $0.90 on net revenue of $223 million (40% YoY growth but down from our prior $244 million projection); and 2009 GAAP EPADS drops to $1.20 on net revenue of $304 million (36% YoY growth) from $1.25 on net revenue of $335 million. We are introducing a 2010 GAAP EPADS estimate of $1.55 on net revenue of $398 million (31% YoY growth). Our estimates imply 36%/35%/26% compound revenue/EBITDA/EPS growth in calendar 2007-10.

2Q08 Results. GAAP EPADS of $0.25 vs. $0.17 a year ago on net revenue of $54.7 million (45% YoY growth in spite of the Sichuan earthquake) beat our $0.20 estimate on net revenue of $56.8 million. However, results did include a forex gain of $3.6 million (+$0.04 EPS impact). Ctrip posted variances in net revenue (-$2.1 million with weakness most pronounced in the hotel reservation segment) – offset by lower operating costs (+$2.2 million) and non-operating items (+$3.2 million). Operating income of $18.6 million (33.9% margin) rose 48% YoY and matched our estimate. Management noted continued expansion of the domestic hotel network (+32% YoY to 7,000) and active customer base (+52% YoY to 5.0 million). Results mask slowing momentum through the quarter but also reflect a widening gap over rivals. Net cash stood at $207.4 million. Ctrip plans to launch an alliance for independent hotel operators nationwide that will offer branding support plus greater accommodation choices for traveling clients.

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: 85% 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., 15% of the room rate or $10 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 relaxation of travel restrictions, as well as recent implementation of an e-ticketing mandate.

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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ANALYST CERTIFICATION

I, Ashish Thadhani, certify that all the views expressed in this research report accurately reflect my personal views of the subject companies. I certify that I have not and will not receive compensation with respect to the issuance of this report.

Comments

[moneysurf:]

In the given circumstances I wonder if we can base the analysis on higher fuel prices which already are seeing a down trend. Oil expected to touch a level betweem $30 & $50!

2008 Aug 15 04:51 PM