EUR 850.00 For Business Accounts Only

Morningstar | Expect Pressure on Ctrip's Earnings in Near Term Due to Weak Macro Environment

We anticipate a weaker macroeconomic environment to put some pressure on Ctrip’s revenue and margins. Nevertheless, cyclicality does not change our view that the network effect that Ctrip possesses will allow the company to reap the benefits from increasing traveling demand in China in the long term. We therefore do not foresee more than a 10% change in our fair value estimate of $57 per share. Net revenue growth guidance for the fourth quarter is 15%-20%, in line with 15% in the third quarter. We note that the base should be lower for the fourth quarter and weak macroeconomic conditions and a change in the revenue recognition standard offset the growth in the fourth quarter. Ctrip’s network effect continues to strengthen, in our view. We have seen increased sales of travel products across its customers’ travel itineraries, an indication of growing engagement and higher value for users. There was a 160% increase in number of hotels with guaranteed room allotments in the third quarter, supporting the thesis that more users will attract more sellers to the Ctrip’s platform.

Third-quarter net revenue was up 15% year over year, driven by an increase in accommodation reservation volume. GAAP operating margin on a net revenue basis was 15.8%, lower than 19.4% in the year-ago quarter mainly due to lower per air ticket revenue as a result of unbundling value-added services, partially mitigated by operating leverage. GAAP operating margin was higher than the 9.9% in the second quarter due to more favorable seasonality, partially offset by costs associated with upgrading service quality. Excluding share-based compensation, operating margin was 20.1% in the third quarter versus 24.2% in the year-ago period and 16.5% in the second quarter. The group registered a net loss of CNY 1.1 billion as a result of a CNY 2.6 billion fair value loss of equity securities investments.