In Q2 2015, Ctrip Achieved One Of Its Highest Organic Growth Rates In Recent Years, And Promised An Even Better Future

Ctrip International (NASDAQ:CTRP), the leading Chinese online travel agency (OTA), announced its Q2 2015 earnings on August 3rd. The company was successful in recovering its recent bottomline losses in the second quarter, and is currently the most profitable OTA in China. The management is confident that the strong top line growth rate and the healthy bottom line recovery will continue in the future, as well. In Q2 2015, Ctrip achieved its highest organic growth rate since 2008. The growth was broad-based across its accommodation, air ticketing, and transportation business. Mobile has assumed paramount importance in Ctrip’s business with around 85% of business transactions in the second quarter being generated through mobile. Ctrip’s mobile transaction values have increased by 120% on a year-on-year basis in Q2 2015.

At $408 million (RMB 2.53 billion), net revenues for Q2 2015 grew by 47% year on year. Starting from Q2 2015, the company started reporting net commission earned (non-GAAP) calculated by deducting cost of transactions (where the company undertakes a majority of business risks, including the inventory risk) from the revenues. The net commission earned (non-GAAP) for Q2 2015 amounted to RMB 2.49 billion, displaying a 45% year-on-year growth. ^[1]

The growth drivers for Ctrip were accommodation (contributing to ~44% of the revenue) and transportation ticketing (contributing ~42%). Ctrip’s accommodation reservation volume increased 55% year on year and revenues from accommodation reservation increased 47% year on year to reach $178 million. Transportation ticketing volume increased 106% year on year and revenues from transportation ticketing increased 45% year on year reaching $170 million. ^[1]

In Q2 2015, Ctrip’s net income attributable to shareholders stood at $23 million as compared to $22 million in Q2 2014 and a net loss of $20 million in Q1 2015. ^[2] The company had guided to a 45% to 50% net revenue growth for Q3 2015. ^[1]

We are in the process of updating our price estimate of $66 for Ctrip.

See Our Complete Analysis For Ctrip International

The Secret Behind Ctrip’s Impressive Growth Story

Ctrip followed a two-pronged strategy for maintaining its top line growth as well as recovering and growing its bottom line. For the top line growth, the company focused on aggressive market share gains as well as investing in projects which deliver positive returns on investments. According to the management, even if the landscape for online travel is severely competitive in China, most players are adopting a “burning money” strategy wherein they opt for projects delivering zero to negative returns on investment, just in order to gain market share. Currently, Ctrip is the only profitable OTA in China, and with its deep pockets, it will apply prudence in opting for profitable investments, even while being an aggressive competitor. Ctrip currently uses the money it generates from the mid to high end travel segment (which isn’t very price sensitive) to invest in the low-end or the budget segment, where the company is trying to gain more hold. Hence, Ctrip is trying to cross-sell its products to the budget customers with an aim of acquiring a loyal customer base in the long run. ^[3]

For its bottom line growth, Ctrip heavily invests in IT to achieve greater efficiency. Hence, the company tries to maximize the number of automated processes in its transactions. However, at the same time, it focuses on hiring a skilled-employee base to give it an edge under special circumstances, like disaster managements. For example, recently when there was a typhoon in China, Ctrip’s customer care officials were proactive in reaching out to the company’s users and rearranging their travel plans, sending updates about the situation, and so on. Recently, Ctrip has been the only Chinese OTA company to be awarded as one of the top internet based enterprises in China by CNNIC. ^[2]

China’s Future Looks Poised For Future Travel Growth

Last month, China had been given the go-ahead to host the 2022 Winter Olympics. Being an international level sports function, Olympics generate a significant amount of growth for the travel industry. Ctrip’s management sees a huge potential for future travel growth in China due to the Olympics.

Also recently, China’s state council emphasized the need for investment into the travel sector as a growth driver for the Chinese economy. Hence, government support is predicted to increase in the tourism industry. The Chinese government is also trying to improve the paid vacation rules in China in order to encourage more employees to travel.

As regards China’s recent economic slow down, Ctrip’s management stated that the travel industry is not significantly affected and the more traditional industries, such as manufacturing, were hit due to the slowdown. China’s outbound travel is growing at over 20% on a year-over-year basis, and Ctrip’s growth rate is significantly higher than that. ^[2]

Some Recent Mergers And Acquisitions That Can Impact Ctrip’s Future Performance

• In July 2015, Ctrip acquired Suanya, a train ticket purchase application for around RMB 100 million ($16 million). Suanya aids travelers in the online browsing and booking of train tickets. In China, the official government website 12306 is the only way through which train tickets can be bought, so Suanya allows users to put in their 12306 login and payment details in its mobile application. The application in its turn does the actual booking through 12306’s system, (which is known to be slow and unreliable), hence easing the process of train ticket booking for users. ^[4]
  • Ctrip’s main motivation behind acquiring Suanya is to merge one of its chief rivals in this segment, into its own entity, as well as provide its users with greater ease of booking, as Suanya’s user interface is known for its excellence. Ctrip’s leadership in the transportation ticketing is consolidated as a result of this acquisition. According to Ctrip’s management, the train ticket market is around 6-7 times larger than the air ticket booking, in terms of volumes. As a result of this acquisition, Ctrip’s users will get a separate application just for booking train tickets. This is useful because though Ctrip has an all in one application for all its travel bookings, those are mostly concentrated on leisure travels. Train ticket users might just book tickets for daily commute etc., hence this focused experience might let Ctrip earn further brownie points from its customers.
• In June 2015, Ctrip announced a $1 billion convertible debt offering. Along with helping it in the repurchase of ADRs, this fund might help Ctrip in its acquisition plans and technological developments. ^[5]
• Ctrip’s erstwhile main rivals in China were eLong and Qunar. In May 2015, Expedia sold its 62% stake in eLong and Ctrip bought 40% of the eLong shares. Ctrip had also made an offer to acquire Qunar, which the latter rejected. As a result of Expedia’s eLong sell-off, Ctrip and Expedia entered into a collaboration to share inventories in some geographies, mainly in the packaged tour and air ticket segments. ^{[6] [7]}
• Shortly after the Ctrip-Expedia partnership, Priceline further invested $250 million in Ctrip. Earlier in August 2014, Priceline expanded its partnership (initiated in 2012) with Ctrip by investing $500 million in the company. Post the investment, Priceline gained access to Ctrip’s 100,000 accommodations in the Greater China region, while Ctrip could access Priceline’s global portfolio of over 500,000 accommodations. ^[8] Hence, after the completion of the May 2015 deal, Priceline could gain up to a 15% stake in Ctrip. Priceline is the primary non-China hotel partner for Ctrip. ^[9]

 In conclusion, China’s tourism prospects seem bright in the near future and Ctrip seems to be ruling the market with aggressive investments and efficient bottom line growth. Hence, it is no wonder that global OTA leaders are showing interest in Ctrip.  Consequently, with the expansion of its global footprints along with the leadership in the soon to be world’s largest travel market, China, we can expect Ctrip to grow into a significantly larger entity in the future. In fact, Ctrip emerging as a leading global OTA player might also be a possibility in the long run.

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1. Ctrip Reports Unaudited Second Quarter of 2015 Financial Results, Ctrip Investor Relations, August 3, 2015 [↩] [↩] [↩]
2. Ctrip Reports Unaudited First Quarter of 2015 Financial Results, Ctrip Investor Relations, May 13, 2015 [↩] [↩] [↩]
3. Q2 2015 Ctrip.com International, Ltd. Earnings Conference Call, Ctrip Investor Relations, August 3, 2015 [↩]
4. Ctrip buys train ticket app Suanya for US$16M, Tech In Asia, July 23, 2015 [↩]
5. Ctrip turns to market to raise $1 billion, tnooz, June 18, 2015 [↩]
6. Expedia sells stake in eLong to Ctrip and others for $671 million, tnooz, May 22, 2015 [↩]
7. Expedia Reverses Course and Sells eLong Stake, Priceline Snubbed, Skift, May 22, 2015 [↩]
8. The Priceline Group and Ctrip Expand Partnership, Ctrip Investor Relations, August 6, 2014 [↩]
9. The Priceline Group Announces Additional Investment in Ctrip, Priceline Press Release, May 26, 2015 [↩]