Launch of Trefis Coverage on Ctrip: $47 Price Estimate

Ctrip (NASDAQ:CTRP) is a leading Chinese Online Travel Agency (OTA) which offers hotel bookings, air-ticketing services and packaged tour programs to individual leisure travelers. It also offers corporate travel management services to individuals and businesses. The company derives its revenues in hotel bookings and air-ticketing divisions through an agency booking model wherein commissions are earned per booking made through Ctrip. Revenues from the packaged tour division are generated by the sale of bundled tour products to travelers wanting an individual experience.

The company has a market leadership position in the domestic Chinese travel market. However, it faces strong competition from larger OTA players such as Expedia (NASDAQ:EXPE) and Priceline (NASDAQ:PCLN) on the International map. In this note, we provide a brief discussion on Ctrip’s business performance. We are launching coverage of Ctrip.com International with a $47 Trefis price estimate, which is at a 10% discount to its current market price of $52.

Business Performance And Key Revenue Lines:

Ctrip is a dominant player in the Chinese travel market, with a domestic market share of approximately 46% in 2013. The stock has outperformed indices last year, growing 125% in 2013 in contrast to 28% for the Dow and 41% for the NASDAQ respectively. The stock also outpaced its competitors Expedia and Priceline in 2013, which registered gains of 17% and 91% respectively.

Revenues for the company grew at a CAGR of approximately 36% from 2002 to 2013, while net income grew 39% annually over the same period. Ctrip derived $668 million and $890 million in net revenues in 2012 and 2013 respectively, with gross and operating margins of 75% and 74%, and 15.7% and 15.6% respectively. However, operating margins dipped sharply from 30.5% in 2011 to 15.7% in 2012 due to an increase in new product development and sales & marketing related expenses to counter increasing competition in the Chinese travel industry.

Strengthening its foothold in China, Ctrip incurred additional capital expenditures on property acquisitions and building projects which trimmed existing cash balances for the company in 2012 and 2013. Capital expenditures for the company expanded from 5% of revenues in 2011 to 12% of revenues in 2012 and 2013. Additionally, product development and sales & marketing expenses as a percentage of revenue increased from 16% and 19% respectively in 2008 to over 23% each by 2013.

Aggressive investments into developing and marketing its online platform resulted in an expansion in Ctrip’s domestic market share over the years. This is evident in its GAAP EBIT margin deterioration. We expect further expenditures in marketing and promotional campaigns as well as investments into property and software from the company, to further strengthen its position in the region as spending in China on leisure travel increases, attracting many other OTAs into the market. We expect the company’s margins to remain under pressure going forward, primarily due to the strengthening competition in the Chinese OTA industry.

Here’s a detailed overview of the major business lines for Ctrip:

1. Hotel Bookings: This division provides room reservation services to hotels listed in Ctrip’s network for individual leisure travelers. Revenue contributions from hotel bookings shrank from more than 90% in 2002 to 38.7% in 2013 as other business segments grew at a faster pace. However, hotel bookings continues to be a major revenue source for the company with more than 40 million hotel room nights booked in 2013, 46% higher than the number of room nights booked in 2012.

Hotel booking revenues increased by 34% over 2012 to $366 million as the company continued to increase its offerings in terms of the number of hotels in its network. Revenue expansion continued to lag year-on-year growth in hotel room night bookings for Ctrip due to the company’s penetration into tier 2/ tier 3 cities. Hotels in these lower tier cities operate at a lower price point and hence, commissions generated per booking for Ctrip are lower as well, thus lowering revenue growth.

Ctrip’s network increased from about 39,000 domestic and 200,000 international hotels in 2011 to 70,000 domestic and over 275,000 international hotels by 2013. With increasing competition from international OTAs in Asian markets, Ctrip has chartered a growth strategy through partnerships and acquisitions to increase its global market share, in addition to venturing into lower tier cities. Its acquisition of various travel agencies such as Wing on Travel has provided the company with additional growth prospects in Hong Kong and Macau.

We expect further expansion in its network and an increase in the global hotel bookings market share for Ctrip as the company tries to expand its international footprint going forward. A revival in the global travel market due to strengthening economies worldwide should drive demand for outbound travel from China.

2. Air-ticketing Services: This division provides airline ticketing services to individual travelers arriving and departing from China to many top destinations in the world. Revenue contributions from the air-ticketing division increased from 5.32% in 2002 to 37.8% in 2012, fueled by the growth in outbound travel from China. In 2013, tickets sold by Ctrip grew 33% over 2012 to approximately 52 million tickets.

However, average commissions from air ticketing services remained fairly consistent with 2012 levels as airline operators were cautious about the macroeconomic environment worldwide, resulting in a slower growth in revenues for the division. Ctrip generated net revenues of $357 million in 2013, approximately 32% over 2012 from its air-ticketing business. Recent acquisitions such as Hong Kong’s Wing on Travel and Taiwan’s ezTravel have helped boost international ticket sales for Ctrip in recent years.

We forecast the number of tickets sold to be about 161 million by the end of our forecast period, contributing to revenue CAGR of 17% till 2020 on account of the following factors:

• Outbound travel continues to increase further from the world’s largest outbound travel market with the rise in incomes and a rapidly urbanizing lifestyle in China.

• Further penetration into surrounding geographies by Ctrip, providing opportunities for a larger customer base.

3. Packaged Tours: Revenues from the packaged tours division grew from $52,300 in 2002 to $155 million by 2013, a compounded growth rate of 107% over the period. Major factors contributing to this high growth in the segment are aspirations in the Chinese customer to have better lifestyles and rapid urbanization. Owing to these trends, customers wanting personalized travel experiences have been on the rise and Ctrip’s large footprint in China has enabled strong growth rates in this division.

Recently, it partnered with the Shangri-la group to provide luxury holiday packages for China’s affluent to Maldives through its subsidiary HH Travel. We expect packaged tours’ revenues to cross $600 million by the end of our forecast period as growth prospects for individual travel in China remain strong.

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