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Ctrip (CTRP)

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WHAT HAS CHANGED?

  1. Expanding Presence
Ctrip is expanding its services, aggressively pursuing markets with growth opportunities, and catering to Chinese outbound travelers (which are the largest in the world in terms of spending and traffic). Ctrip’s gross merchandise value jumped 30% year-on-year to hit 725 billion yuan in 2018, surpassing that of international giants like Booking.com and Expedia.

Ctrip is growing twice as fast as the overall Chinese market. This growth is backed by the strong performance from Skyscanner, a leading global metasearch website. Skyscanner achieved a growth of over 250% year-over-year booking in the recent first quarter and is expected to drive Ctrip's results in the forthcoming quarters as well.

  1. Low-end Hotel Market

The company will continue to help hotel operators to boost their sales through its intelligent hotel booking system while strengthening its price competitiveness in a low-star hotel category. These efforts are expected to accelerate the company's volume growth in the low-end hotel market in the near term.

Currently, Ctrip is the undisputed OTA leader in China and the only Chinese markets it has been struggling to achieve dominance in are the lower tiered Chinese cities. Towards that end, the company had entered into a partnership with Traveling Bestone last year and with the help of its offline stores and its greater presence in these regions, Ctrip is slowly on its way to capture that market as well. In the international front, Ctrip wants to first tread into markets like East Asia where the preferred tourist destinations match those of the Chinese travelers. Its partnership with India's MakeMyTrip is to help it to further penetrate into the Indian market. Finally, after its big ticket acquisition of Skyscanner last year, now Ctrip is trying to expand the air ticket metasearch company to provide direct booking options, as well. If the transition is successful, Ctrip might capture a larger chunk of global air ticket booking market share, where it is already a global leader.

  1. Ctrip's growth strategy is reaping benefits

The domestic travel market in China reached 4.4 billion trips in 2016 and according to the government, it is expected to reach 6.7 billion by 2020, reflecting an 11% CAGR. Being the market leader with a 40% stake in two of its closest rivals, Qunar and eLong, Ctrip is expected to grow even further due to the secular trends in the Chinese market. Ctrip's strategic acquisitions and product launches will further help the company on its growth path.

  1. Ctrip's Recent Investments

Ctrip announced its acquisition of the Palo-Alto based travel recommendation website, Trip.com on November 2017. The start-up, having so far raised $39 million in funding, has investors like Expedia’s HomeAway, Redpoint, and Battery Ventures. The acquisition is expected to complement the services of Ctrip's Skyscanner by providing details and reviews about tourist attractions, restaurants, etc. The expectation is that users will also be able to add their reviews to the platform in the future. This might make the Skyscanner platform similar to TripAdvisor. This will surely help Ctrip not only with the growth of its air ticket sales but also with its global expansion ambitions in the future.

In October 2017, Tujia.com, Airbnb’s biggest competitor in China, raised $300 million to fund its international expansion efforts. Ctrip, along with All-Stars Investment Ltd. led the round of financing. Tujia is currently valued at around $1.5 billion, reflecting a 50% increase from its 2015 valuation. Being the market leader in China’s vacation rental market, Tujia’s platform includes around 650,000 listings, mainly catering to the Chinese tourists who incidentally enjoy the top position among both the international and domestic tourist populations in the world. This might be Tujia’s counter move to Airbnb’s latest move of quadrupling its Chinese tech team in order to capture a bigger portion of the China market. Tujia’s rivalry with Airbnb will transcend China and include other international markets, chiefly destinations that are popular among Chinese travelers. Going by the past trend, it is possible that Ctrip acquires Tujia sometime in the future, thereby strengthening its position in the alternative accommodation market even further.

POTENTIAL UPSIDE & DOWNSIDE TO TREFIS PRICE

Air Ticketing

Air Ticketing EBITDA Margin: We currently forecast EBITDA Margins from Ctrip's Air Ticketing division to increase from 17% in 2018 to ~24% by the end of our forecast period. In 2014, Ctrip's aggressive investments led to a steep rise in operating expenditure. The company spent $870 million in operating expenses in 2014, a 167% year-on-year increase over the same period last year. As a result, there was an operating loss of $24 million as the increased revenue base failed to completely offset the higher costs incurred by the company. This led to around 18% Y-o-Y decline in EBITDA margin to 7%. However, given Ctrip's impressive bottom line recovery in 2015, the EBITDA margin grew by 7% to ~12%. There could be around 15% upside to the Trefis price estimate if the EBITDA margin reaches around 28% by the end of our review period.

Hotel Bookings

EBITDA Margin: We currently forecast EBITDA Margins from Ctrip's Air Ticketing division to increase from 17% in 2018 to ~24% by the end of our forecast period. In 2014, Ctrip's aggressive investments led to a steep rise in operating expenditure. The company spent $870 million in operating expenses in 2014, a 167% year-on-year increase over the same period last year. As a result, there was an operating loss of $24 million as the increased revenue base failed to completely offset the higher costs incurred by the company. This led to around 18% Y-o-Y decline in EBITDA margin to 7%. However, given Ctrip's impressive bottom line recovery in 2015, the EBITDA margin grew by 7% to ~12%. There could be around 15% upside to the Trefis price estimate if the EBITDA margin reaches around 28% by the end of our review period.

BUSINESS SUMMARY

China's online travel market grew by ~9% Y-o-Y in 2018 to stand at 975.4 billion yuan. Ctrip.com is the largest online travel company in China. Ctrip provides a variety of travel services ranging from hotel reservations, air ticketing, packaged tours, and travel management services for business and corporate travelers. Over the past few years, Ctrip has been aggressively partnering with travel portals across various geographies outside Mainland China such as EZ Travel in Taiwan, Wing on Travel in Hong Kong, and Trip TM, thereby further expanding its footprint in the Greater China region. Ctrip earns its revenues by charging travel suppliers a commission for every transaction booked on its websites. Since Ctrip operates under the agency model and doesn't derive revenues through bulk purchasing of inventory, it doesn’t assume inventory risk.

SOURCES OF VALUE

Historically, hotel reservations have contributed to a large chunk of Ctrip’s revenues. But over the last few years, revenue generated from the air ticketing business has been catching up with hotel bookings. Hotel and air ticket bookings amounted to 91.88% and 5.31% of Ctrip’s total revenues in 2002, respectively, but the gap shrank to ~5% by 2018 as per our calculations. Even the packaged tours business has been seeing an uptrend with consistent annual revenue growth over 2008-2018. Going forward, we expect these divisions to fuel Ctrip's growth and contribute to a higher percent of the total revenues earned.

A few factors that have contributed to Ctrip’s robust growth in the Chinese markets have been listed below:

  1. Growth potential in the Chinese travel industry
    • Rising disposable income levels and an expanding middle class are the key factors driving growth in the Chinese travel market. China is the biggest source of tourists, overtaking the U.S. & Germany in 2012. Outbound visits from China are growing at a CAGR of 20%, primarily because of the lift in visa restrictions in various countries. In 2016, the market was worth over $200 billion. By the year 2022, the number of Chinese outbound tourists is expected to be more than double from the outbound tourists’ number in 2016. Link

  2. Higher market share in the future
    • Ctrip has taken an aggressive stance with regard to acquisitions in the Greater China region and we expect such investments to increase its market share in the region. Coupled with the increasing number of outbound visits from China every year, we expect the global market share of Ctrip to eventually increase.
  3. Higher Proportion of mobile transactions
    • The mobile platform of Ctrip is contributing increasingly to the bookings of different segments.

KEY TRENDS

The following factors determine the fate of the online travel industry:

  1. Macroeconomic Environment
    • Due to its discretionary nature, the online travel agencies (OTAs) are highly dependent on macroeconomic conditions such as disposable income levels, inflation rates, etc. During a recessionary period, both corporate and leisure travel plummets. Amid rising unemployment and declining disposable income levels, the consumers cut back on their travel plans first before making adjustments to other expenses.
    • The continuing contribution of advertising and other revenue sources depends on the level of business activity. During recessionary times, businesses cut back on their media and advertising spending and this translates into lower online advertising revenue for all travel portals.
  2. Foreign Exchange
    • The lack of any forward contracts or currency borrowings for Ctrip to hedge its exposure to foreign currency puts the company in a risky position. Revenues from international operations would be recognized in the respective international currencies, while operating expenses are recognized in the domestic Renminbi currency. Margins are therefore at stake as the domestic Renminbi currency appreciates against international currencies.
  3. Fuel Prices
    • Rising fuel prices has the immediate impact of increasing airfares, which discourages travel. This not only impacts Air Ticket bookings but reduced travel also negatively impacts hotel bookings and destination services such as car rentals and cruises. A decline in overall bookings impacts travel service providers' revenues.
  4. Impact of Unforeseen Events
    • Any natural calamities (like hurricanes, earthquakes, etc.), adverse weather conditions, or any unforeseen events (like the recent outbreak of H1N1 influenza or avian flu or any terrorist or violent activity) tend to have a detrimental effect on revenues of OTAs.
  5. Internet Penetration
    • China currently has an Internet penetration of over 50%. Chinese young professionals who represent about 6% of the total population have an internet penetration of more than 99%. The fastest growing user segment in China in the coming years will be the urban consumers aged 51 and above.
  6. Airline Industry
    • The aviation industry in China has strong growth potential as is witnessed by its double-digit growth in the number of aircraft as well as flight hours since 2001. Consumer aviation has been growing at a CAGR of 21% since 1996, and with a supportive government policy framework that has enabled strong growth in the previous decade, China has started to emerge as a dominant player in the global aviation market. Currently, more than two-thirds of the airports under construction worldwide are present in China, indicating the ambitious plans chalked out by the Chinese government in developing its aviation industry.
    • The entry of international players into Chinese airspace is limited by the following constraints:
      • High Operating Costs: Foreign aircraft are levied an additional foreign tax over Chinese-made aircraft that adds to their operating costs. Thus, the amount required to operate, maintain, and repair an aircraft for a foreign airline is considerably higher in the country. Additionally, landing charges levied on aircraft in China are higher compared to other countries.
      • Unfavorable Operating Environment: Most of the approval processes in China are often plagued by bureaucracy. The lack of proper maintenance, repair, and overhaul (MRO) facilities further inhibit the development of the aviation aftermarket and service capabilities in China.
    • The above factors erode the margins of the domestic as well as international airlines in China, as they are forced to resort to higher ticket prices to cover the operating expenses. This impacts the travel and the airline ticketing business significantly as OTAs face tepid profit margins.
  7. Hotels and Lodging Industry
    • Ctrip has an extensive network that includes over 75,000 domestic hotels within Mainland China and about 275,000 international hotels. Revenues from the hotel reservations business have registered strong double-digit growth since 2007 and even during the recessionary period of 2008 and 2009, Ctrip’s hotel bookings grew by 24% and 36%, respectively.
    • In a fragmented hotel market such as Asia, where the presence of large hotel chains is limited in comparison to the U.S., individual hotels are likely to have higher bookings by listing their hotels on online travel websites. Ctrip has stated that it has plans of expanding into lower-star hotels and lower-tier cities. We expect Ctrip to continue expanding its hotel network across China and Greater China, thereby further scaling up their operations.
  8. Threat from Online Search Engines
    • Large, established, Internet service portals with substantial resources and expertise in developing online commerce, and facilitating Internet traffic, are creating and intend to create, further inroads into online travel in the Chinese market. Currently, some of these ‘meta-search’ engines including go.QQ.com, Qunar.com, and Kuxun.cn account for a large percent of the market share by total visits. A “meta-search” engine searches the query regarding specific airline tickets and fares and hotel booking online across various supplier and travel agent portals and lists them according to the user’s choice.

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