EUR 850.00 For Business Accounts Only

Morningstar | Ctrip's 1H Results Record In-Line Expansion in Non-GAAP Operating Margin

We maintain our fair value estimate for narrow-moat Ctrip at $57 per ADR as non-GAAP operating margin (excluding share-based compensation) expanded to 16.35% in the second quarter versus 14.4% in the first quarter. The CNY 1.2 billion non-GAAP operating profit came in at the high end of management’s second-quarter guidance, although rising scale benefits were partially offset by a domestic ticketing process adjustment and strong investment to improve customer experience and loyalty. The margin expansion was in line with our expectation, and Ctrip is well on track to achieve about 18% margin for the full year. Despite slowing growth in core businesses including transportation ticketing and accommodation reservations income amid currency headwinds and a slowing economy, management retained its positive outlook, expecting non-GAAP operating margin to improve to 20%-30% by the end of 2020. With the investment in automation leading to a reduction in cost and Ctrip’s record of consistently reducing cost per booking in the past three years, we think this target is achievable.

We believe the shares are undervalued, trading at 32% discount to our fair value estimate as the market is overly pessimistic about slowing core business growth, competition from alternative accommodations, and new entrants including Alibaba’s Fliggy and Tencent-backed Meituan travel platforms. Despite rising competitive pressures, we think Ctrip’s large and quality customer base and its status as the largest consolidator of hotel accommodation and airline tickets remain largely intact.

Second-quarter revenue grew 14% from the year-ago period, at the median of management’s previous growth guidance. The 1% year-on-year growth in transportation ticketing revenue was a bit disappointing when compared with our prior 5% forecast. But on a sequential quarter-on-quarter basis, it improved to 5% growth from the first quarter versus a 1.3% decline in the first quarter. The slowing growth was attributable to lower pricing per ticket as a result of air ticketing revenue adjustment. Management expect growth will recover to 5%-10% as the negative impact of revenue adjustment will subside in the coming quarters.

Hotel accommodation revenue growth slowed to 22% from 23% in the past quarter, a bit lower than our 25% expectation. We keep our projected 25% growth in 2018 unchanged and we expect growth to be underpinned by volume growth and market share gains in both low-end and mid- to high-end markets.

Representing over 25% of total revenue, outbound travels became the primary growth driver across Ctrip’s four key business segments. International flight booking rose 40% and represented nearly 40%-50% of air ticketing revenue. Rising outbound travel demands also contributed to 20%-25% of accommodation revenue and most of its packaged tour revenue. As Ctrip cooperates with international travel providers and expands further into Tier 3 and 4 cities via the opening of around 7,000 offline stores, we expect robust growth in the less competitive outbound travel market will continue in the near term.