EUR 850.00 For Business Accounts Only

Morningstar | CTRP Updated Star Rating from 05 Mar 2019

Narrow-moat Ctrip’s fourth-quarter results beat our estimate and company guidance, and we see management's reaffirmation of its midterm non-GAAP operating margin guidance of 20%-30% in one to two years despite weaker momentum to be a positive. Net revenue in the fourth quarter increased 22% year on year, beating our estimate of 17.5% and guidance of 15%-20%. Non-GAAP operating margin for the fourth quarter was 3.5% versus our estimate of 0.5% and guidance of 0%-1%. For the first quarter of 2019, guidance is for net revenue year-over-year growth of 18%-23% and, excluding share-based compensation, non-GAAP operating income of CNY 1 billion-1.1 billion. Ctrip expects to see operating leverage and to outperform the market in 2019; we now forecast a 2019 non-GAAP operating margin of 14.9%, reaching 16.4% by 2020, more conservative than the midterm guidance. We maintain our fair value estimate of $47 per share and believe Ctrip is undervalued.

Ctrip made an interesting point on ensuring it leaves no room for other players when there is a price war. Meituan as a whole is loss-making with an operating margin of negative 18% as of September 2018 (the fourth quarter is not yet reported) and negative 11% for 2017. On the other hand, Ctrip is profitable, with operating margin at 8% for 2018 and 11% for 2017. Ctrip has a stronghold in higher-end markets where profitability is higher; we think this will give it the firepower to compete with Meituan and gain market share.

Non-GAAP operating margin in the quarter was approximately 3.5% compared with 11.4% in the same quarter in 2017 and 20.3% in the third quarter. The large decrease was mainly due to weaker seasonality. Non-GAAP operating expenses increased 3.6% sequentially due to higher personnel costs.

Net income margin for the full year was 3.6%, mainly because of recording the change in the fair value of available-for-sale equity securities through the income statements as per the new accounting standard. Excluding that, net margin would have been 18%.

Gross merchandise volume reached CNY 725 billion excluding Skyscanner in 2018, up 30% from 2017, gaining market share. Higher-margin international business accounted for 30%-35% of revenue in the quarter. The GMV of offline stores that mainly target lower-tier cities grew by triple digits in the fourth quarter, accelerating from over 80% in the third quarter.

Ctrip’s investment in customer service and technology has yielded positive results; further penetration into in-destination travel should enhance Ctrip’s status as a one-stop shop and provides added convenience to travelers. By the end of 2018, Ctrip’s customer satisfaction score (NPS) improved on average approximately 35% year over year across its major business units. We believe this has to do with easier cancellation services, removal of default value-added services when purchasing flight tickets, and improved service in call centers. In the past three years, although GMV has more than doubled, overall head count at Ctrip’s call centers has been flat. In December, Ctrip connected via the Ctrip app with suppliers such as small and medium tour operators, individual trip planners, and tour guides, which are harder to reach and account for 80% of the in-destination travel supply.