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Morningstar | Revising Ctrip’s FVE to USD 47 Per Share; Refocusing on Services Helps Maintain Its Narrow Moat. See Updated Analyst Note from 26 Nov 2018

We have reduced narrow-moat Ctrip’s fair value estimate to USD 47 per share from USD 57 per share, and 40% of the reduction was due to weakening CNY, with the rest reflecting the weak guidance of 0% to 1% non-GAAP operating margin in the fourth quarter, near-term weakness in travel demand due to slowing economy, increasing competition from Meituan and Fliggy, and investment in increasing customer service standard. Our 10-year net revenue CAGR estimate has been revised to 12% versus 13% previously. In our current model, we assume a pick up of net revenue growth to 15% in 2021 and 17% in 2022 as the economy recovers, following a reduced net revenue growth of 14% in 2018, 16% in 2019, and 13% in 2020. In the third quarter earnings call, Ctrip did not reaffirm its guidance of 20% to 30% non-GAAP operating margin in 1-2 years. We previously assumed non-GAAP operating margin would reach 18% in 2018 and the 30% level around 2022 to 2023, and this has been revised to 13% in 2018, 18% in 2020, and the 30% level around 2024 to 2025. In the long term, we think the margin expansion story remains as the higher margin international business will increase in business mix, Ctrip gains bargaining power against hotels, and operating leverage increases over time.

In our opinion, Ctrip has made the right decision to focus on increasing customer service levels to increase customer loyalty and maintain its narrow moat in the long run. Its network effect will help ensure its investment will pay off in the long run, and this is reflected in our solid 10-year net revenue CAGR of 12% and non-GAAP operating margin expansion from 7% in 2017 to 34% by 2027. According to the online media quoting Trustdata, in the second quarter of 2018, the market share of Meituan and the combination of Ctrip, Qunar, and Ctrip-backed Tongcheng elong was 46% and 44%, respectively, in terms of domestic room night market share. However, Ctrip still has a much stronger positioning in the high-end and business hotel market, which means Ctrip would have a much higher market share in terms of profit. We think Ctrip’s various scandals over its customer services level in the past were one of the reasons that gave rise to Meituan.