Ctrip Q2’14 Pre-Earnings: With The Stock Near All-time Highs, Revenue Looks Ready To Beat Guidance

CTRP: Ctrip logo
CTRP
Ctrip

Chinese Online Travel Agency (OTA) Ctrip International (NASDAQ:CTRP) is scheduled to report second quarter results on July 31, 2014. The company’s stock is currently trading close to life-time highs, ending trade at $66.73 on Monday, July 28. Ctrip expects second quarter revenues to grow between 30%-35% on a year-on-year basis. This amounts to approximately $264-$274 million in revenues for the quarter.

Our revenue estimate stands significantly higher at $289 million, representing a 43% expansion in revenues for the quarter. The company guided a 25%-30% growth in Q1FY14 revenues during its Q4FY13 earnings call and delivered a 36% increase in revenues. A similar conservative estimate from the company’s management for Q2FY14 could result in a revenue growth touching 40% at least.

However, the accelerated revenue growth for the company is expected to result from a contraction in operating profits. Operating profit margins contracted the most in Q1FY14, reaching 4.5% compared to 13.8% in Q1FY13. The strong contraction in operating margins is a result of over 60% increase in product development, and sales and marketing related expenses, which is expected to continue this quarter as well. In fiscal 2013, operating profit margins in the second quarter increased by approximately 2 percentage points to reach 15.85%. For the quarter, margins are expected to sequentially expand but remain lower than similar figures from a year prior period.

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See Our Complete Analysis For Ctrip International

Increased Product Offerings Should Expand Customer Base and Bookings

Ctrip’s revenue acceleration from the guided 25%-30% to 36% last quarter was facilitated by the addition of new reservation options in hostels and vacation rentals into its existing hotels bookings business. The newly formed accommodation reservation business achieved a 67% growth in year-on-year revenues, partly due to the addition of new offerings. A similar strategy in the transportation ticketing services division resulted in a 71% year-on-year growth in revenues. New product offerings such as ticketing services from trains and long-haul buses increased total volume growth, resulting in strong year-on-year growth.

This strategic shift to being an end-to-end travel services provider is expected to result in booking volume growth in the near term. With Internet penetration rapidly increasing in China and smartphone access growing at exponential pace, companies in the Chinese OTA industry have embarked in fierce price wars to attract and rapidly expand their customer bases. A recent PhocusWright report indicates close to 47% of Chinese households with a smartphone. [1]

These new product offerings are expected to expand customer base by targeting tier 2/tier 3 households with a lower discretionary income base. The company states that the number of bus trips completed in 2013 stood at approximately 30 billion compared to 2 billion rail transits and 300 million air trips. [1] This expands Ctrip’s addressable market by many fold, which could lead to an acceleration in revenue growth as it gains users onto its platform. These products offerings have lower price points and hence, lead to a lower average commission earned per booking in the near term. However, the potential growth in its customer base should more than offset the decline in average commission per booking.

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Notes:
  1. Ctrip.com International’s (CTRP) CEO James Liang on Q1 2014 Results – Earnings Call Transcript, Seeking Alpha, May 2014 [] []