Reasons Behind Our Ctrip Stock Price Estimate of $43

CTRP: Ctrip logo
CTRP
Ctrip

We recently reduced our price estimate for the leading Chinese online travel agency, Ctrip International (NASDAQ: CTRP) from $55 to $43. Our revised forecast for the company’s EBITDA margin is the main reason behind the 20% decline in our valuation. Though the company continues to see strong top-line growth, its margins remain under pressure. Ctrip announced its Q3 2014 earnings on November 25th. (Read our Q3 2014 earnings article here.) For the first nine months of fiscal 2014, the company’s revenue stood at $879 million, 37% higher compared to the same period last year.The main contributors to this growth were volume growth in the accommodation and transportation ticketing divisions. Ctrip has expanded its hotel coverage to approximately 170,000 domestic hotels and 510,000 international hotels. Air tickets contributed strongly to the booking volumes of the transportation ticketing business. However, due to a surge in its operating expenses, Ctrip’s EBITDA margin for the first nine months of 2014 declined to 12% as  against a 26% percent growth in the same period last year.

The main reasons for Ctrip’s margin contraction are:

  • Increase of branding campaigns and product promotions
  • Investments towards strategic partnerships
  • Development of an open platform
  • 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

We expect Ctrip’s EBITDA margin to increase over our review period, as investment levels come down in the next few years, but believe that this margin will remain well below the historical high of over 40%.

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See Our Complete Analysis For Ctrip International

CTRIP’s EBITDA Margins To Decline To 12.4% In 2014

In our updated model, we expect Ctrip’s EBITDA margin to decline to 12.4% in fiscal 2014, which is significantly lower than our initial estimate of 21.4%. The company’s adjusted EBITDA margin (adjusted EBIDTA margin is adjusted EBITDA/Revenue, where, adjusted EBITDA = Income from Operations + Stock-based Compensation + Depreciation & Amortization) for the first nine months stands at 12.4% as against 25.8% for the first nine months of 2013.

2014 seems to be yet another year in Ctrip’s history, after 2012, when the company is aggressively pursuing investments to gain a lion’s share of the expanding Chinese travel market and to expand its global footprint. Ctrip is the market leader in the Chinese online travel market with 55.9% share in revenues, followed by Elong and TongCheng with a revenue share of 9.7% and 6.3% respectively. [1].  The company spent $593 million in operating expenses in the first nine months of 2014, a 59% year-on-year increase over the same period last year. Product development and sales and marketing related expenses grew by 68% during the period. As a result EBIT declined by 63% as the increasing revenue base failed to completely offset the higher costs incurred by the company.

In 2012, Ctrip underwent a similar high investment phase. As a percentage of the net revenues, operating expenses grew from 47% in 2011 to 59% in 2012, as per our calculations.

Ctrip’s Aggressive Investments Will Dampen Short-Term Margins But Long Term Growth Is Forseeable

Ctrip is pursuing investments and strategic partnerships to gain domestic and international market dominance by providing the entire universe of travel related products on its platform at the best available prices. 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

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. An open platform lends a unique competitive advantage to Ctrip over its competitors, as itavailable through the open platform is expected to be significant. Ctrip will gradually experience better margins, as these investments bring in positive returns.

On the flip-side, the price competitiveness can erode Ctrip’s margins. This, coupled with continuous influx of competitors in the OTA space (a recent addition being Alibaba‘s (NASDAQ:BABA) Alitrip), can limit Ctrip’s margin expansion.

Ctrip plans to continue its investment in the mobile internet, its open platform, technology, brand awareness, and innovation. Hence, it expects further erosion of its bottom line in Q4 2014, with the non-GAAP operating margin expected to reach -17%. The company has given guidance to flat margins in 2015, along with a 30% increase in revenue.

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Notes:
  1. China Online Travel GMV Grows to 70 Bn Yuan, iReasearch Views, November 2014 []