Ctrip Q3 2014 Earnings Show Aggressive Investment and Dampened Margins

CTRP: Ctrip logo
CTRP
Ctrip

Leading Chinese online travel agency, Ctrip International (NASDAQ: CTRP), announced its Q3 2014 earnings on November 25th. The company displayed above guidance revenue growth, though margins still remain dampened for Ctrip. The main reason for the weak margin were Ctrip’s expenses in areas related to branding, product promotion, serving lower tier cities, and increasing headcount.

At $347 million, net revenues for the third quarter experienced a year-on-year growth of 38%, exceeding the guidance of 30% to 35% growth. The main contributors to this growth were accommodation (contributing to 56% of the revenue) and transportation ticketing (contributing 32%). Ctrip has expanded its hotel coverage to approximately 170,000 domestic hotels and 510,000 international hotels. Air tickets contributed majorly to the booking volume of the transportation ticketing business. Over Q3 2014, Ctrip added more than 160 international airlines. This brought the number of its total international air partners to over 300. The year-on-year growth for accommodation and transportation revenue was 69% and 98% respectively.

The revenue boost came at the cost of margin contraction, due to a surge  in spending. There was around 83% year-on-year growth in product development, which amounted to $100 million, and sales and marketing expenses increased by 69% to $97 million. As a result, the margins were adversely impacted.

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There was a 71% year-on-year decline in operating income, which amounted to $14 million in the third quarter of 2014. The operating margin swooped down to 4% in the Q3 2014, as against a 19% in the same period last year. The net income for third quarter was $35 million representing 42% year-on-year decrease. The company expects the margins to remain weak in the next quarter as well.

The Chinese travel website reports that its mobile application has been downloaded more than 350 million times, with more than 150 million of these applications being activated. This strong adoption of the mobile platform has also translated into bookings growth. During the third quarter of fiscal 2014, mobile contributed to 45% and 35% of hotel and air ticket bookings respectively (compared to 30% and 15% in Q3 2013). Around 80% ticket booking in rail, bus and truck segment was done via mobile platform. The company states that over 5 million daily users access the Ctrip application on peak days.

Ctrip’s main strategies are to provide the entire universe of travel related products on its platform at the best available price. It follows a two pronged approach to achieve this:

  • Investments in technology and branding efforts to strengthen the flagship brand and gain a greater share of the online travel market
  • Striking strategic partnerships with market leaders in all its product segments to expand its domestic and global presence

So far, Ctrip has been able to gain market share across all its segments through its investments and joint ventures. The company expects the Chinese income growth to be higher in 2015 than 2014, which will translate to accelerated travel consumption, especially in the high end of the market such as outbound travels and luxury hotels. Ctrip also predicts that the focus areas for travel business in China are business travelers and the second and third tier cities, where there is immense growth potential. [1]

Our price estimate of $54.55 for Ctrip is marginally lower than the current market price. We will update our valuation shortly.

See Our Complete Analysis For Ctrip International

Strategic Partnerships Will Further Ctrip’s Dominance In China And Also Expand Its Global Footprint

On November 21, Ctrip announced a partnership with Royal Caribbean Cruises Ltd., a global cruise vacation company operating 40 ships in over 490 destinations. The joint venture aimed at serving the Chinese cruise market will operate through SkySea Cruises, with each of the two entities owning 35% of the new company. The remaining portion will be owned by SkySea management and a private equity firm. The new cruise line is expected to start service with one vessel from mid-2015 and will and additional ships in the future. Chinese cruise market is expected to be the world’s second largest by 2017. In 2013, around 530,000 Chinese tourists took cruises beyond the mainland, more than double the previous year. The Chinese government is aiming at 4.5 million cruise traffic by 2020. [2] The Ctrip management stated that cruise travel in China is expected to grow by an average of 30% over the next five to ten years. Ctrip’s aim is to create a synergy between international expertise and tailor-made products through SkySea Crusies. [3] Ctrip’s cruise booking business delivered three digit growth in Q3 2014. Ctrip launched a new cruise booking platform in September 2014 with which Ctrip became the world’s largest cruise reservation platform in Chinese language. The partnership with Royal Caribbean and the size and prospect of the cruise market in China, is expected to accelerate Ctrip’s growth in the cruise market even further.

Earlier this year, Priceline (NASDAQ:PCLN) strengthened its commercial partnership (initiated in 2012) with Ctrip, by investing $500 million in the company. Through the investment, both the companies intend to increase the cross-promotion of each other’s hotel inventory and other travel services. This expanded partnership will allow Ctrip to access Priceline’s global hotel network comprising of over 500,000 accommodations. This should contribute to revenue acceleration and market share gains for Ctrip.

Focus On Open Platform To Provide Comparative Advantage To Ctrip

Ctrip is focusing on the development of an open platform which will enable it to consolidate all its partner operations on a single platform. Consequently, this will lead to more pricing transparency and a greater array of available products. Ctrip’s partners and users alike will benefit from this seamless offering and competitive pricing, thus generating greater sales for Ctrip. Though open platform  is still in its early stage, it generated business worth $163 million (RMB 1 billion) in Q3 2014. Open platform lends an unique comparative advantage to Ctrip over  its competitors, as open platform offers an entire gamut of travel related products, from small hotels to whole sellers, all in a  single platform. The pricing advantage and the market coverage due to this is unparalleled. During Q3 2014, open platform contributed to 60% of air revenues, 5%-10% of hotel revenues, and 15% of packaged tour revenue.

Investments In Technology, Branding, and Promotional Activities In Second Tier Cities Will Further Depress Margins

Ctrip plans to continue its investment in mobile internet, open platform, technology, brand awareness, and innovation. Hence, it expects further erosion of its bottom line in Q4 2014 with non-GAAP operating margin expected to reach negative 17%. The main contributors to this slowdown would be:

  • Increasing branding campaigns and product promotions
  • Lower seasonality
  • Product development initiatives which include hiring more R&D and business development personnel
  • Increasing headcount to promote products in the lower tier cities
  • New business unit expansion

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Notes:
  1. Ctrip’s third quarter 2014 earnings transcript, Seeking Alpha, Nov 2014 []
  2. Fast Sailing: China’s Cruise Market To Become World’s Second Largest By 2017, Forbes, April 2014 []
  3. Ctrip.com International (CTRP) Q3 2014 Results – Earnings Call Webcast, Seeking Alpha, Nov 2014 []