Ctrip: Time to Take a Ride? 携程：行到柳暗花明处？
I’m going to break with my usual style of starting each posting with the news, and say that shares of leading online travel site Ctrip (Nasdaq: CTRP) look like quite a bargain to me based on the non-stop sell-off of a stock for what looks like quite a solid company to me. That sell-off continued on Wednesday, when Ctrip shares lost 10 percent of their value after the company reported earnings that showed the overheated competition in China’s online travel space continues. (earnings announcement)
Sure, I understand that earnings are taking a hit right now, as Ctrip contends with competition not only from established rivals like eLong (Nasdaq: LONG), but also from up-and-comer Qunar, and from new travel sites set up by e-commerce companies like Jingdong Mall. Adding to its woes, Ctrip was dropped from a major Nasdaq index a couple of weeks ago due to its shrinking market cap. (previous post)
Let’s look at the latest numbers, which certainly don’t look pretty. Clearly the most alarming figures were on the bottom line, which saw Ctrip’s profit drop 55 percent as income from operations fell 37 percent. Those big drops came as Ctrip’s revenue from commissions — one of its main revenue sources — also fell due to intensifying competition. In one slightly positive sign, Ctrip forecast its revenue for the current quarter would grow 15-20 percent, roughly comparable to the second quarter’s 17 percent growth, meaning that revenue growth will at least be steady for now.
So, now that we’ve looked at all the scary numbers from the second quarter, let’s take a look at the bigger picture. Shares of Ctrip, which I consider one of China’s more solid non-state run companies, have been in a virtual free-fall for the last year, partly due to the larger confidence crisis ravaging US-listed China stocks. At their current levels, the company’s shares now trade at about a quarter of their highs at the end of 2010. The company’s current price to earnings ratio of 12 for the current year is also quite modest by most standards, though it’s roughly in line with eLong’s.
So the big question becomes: what does the future hold for Ctrip? Obviously no one knows the actual answer, otherwise we would all be rich. But based on my knowledge and perceptions of the company, Ctrip looks quite solid and is almost guaranteed to survive the current round of intense competition.
I’ve always liked the company for its strategy of focusing on its core expertise in the travel sector, unlike many other Chinese web companies that often start up new businesses that are far removed from their origins. I also like Ctrip’s relatively conservative approach to new businesses, which has seen it launch a slow but steady stream of usually 1 or 2 major new initiatives a year.
All of these factors, plus its market leading position, lead me to believe that Ctrip will once again emerge as one of the strongest players once the current competition subsides, which could be soon. If that’s the case, look for Ctrip to start to post some nice profit gains when the situation calms down, potentially as soon as the middle of 2013.
Bottom line: Ctrip is positioned for health profit growth after the current cutthroat competition subsides in the online travel space, which could happen as soon as the middle of next year.
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