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Morningstar | Ctrip Reports Stellar 1Q Results

Net revenue at narrow-moat Ctrip was up 21% year over year versus guidance of 18% to 23%. Second-quarter revenue growth guidance is 16% to 21%, versus our full-year estimate of 16%. Operating profit was up 50% year over year as the operating margin increased 200 basis points to 10.8% in the quarter, versus our full-year assumption of 100 basis points margin increase. We maintain our earnings assumptions as Ctrip’s expenses to sales ratio have fluctuated significantly quarter to quarter and it could happen again in the rest of the quarters over 2019. Management previously guided 20% to 30% non-GAAP operating margin by 2020 and believes that 20% by 2020 is achievable. This compares with our assumption of 16% in 2020 and 14% in 2018. Given Ctrip’s need to continuously invest in better customer services and the uncertainty over the trade war and macroeconomic environment, we are comfortable with our more conservative margin assumption for 2020. We maintain Ctrip’s fair value estimate of USD 47.

Revenue from the higher-margin international business, most of which is outbound travel business, was 35% of total revenue in the first quarter, compared with 30% to 35% as reported in the fourth quarter. In terms of penetration in lower-tier cities in China, Ctrip branded low-star hotel room nights were up approximately 60% year over year, an acceleration from 50% in the fourth quarter, helped by new products such as high-speed railway packages, and increased numbers of offline stores that both cater to lower-tier cities. The gross merchandise value of offline stores continued to grow at a triple-digit-rate year over year.

Lower sales and marketing and product development costs to sales ratio more than offset the 221-basis-point reduction in gross profit margin over the quarter. Sales and marketing expenses to sales ratio was down 385 basis points year over year. The product development headcount was largely the same as the fourth quarter, the product development cost to sales ratio was down 480 basis points sequentially and down 90 basis points year over year. We believe the gross margin decline is a result of investment in customer services.

Long-term investments increased to CNY 34.2 billion from CNY 26.9 billion sequentially. Monthly active users were up by 10 million to 210 million.

Growth will come from further penetration, increasing income levels in China and higher average spending per user. About 70% to 75% of the population in the first-tier cities and less than 80% in lower-tier cities have not been reached by Ctrip. According to Ctrip’s five-year cohort data, average spending per user on the platform increased at about 10% CAGR, reflecting customer loyalty and increased product offerings from Ctrip.

TripMoment, which is similar to Instagram for travelling, had more than one million daily active users during the first quarter. Ctrip will add booking functionality in the posts of the users to monetize the platform.