We have been bullish on Ctrip.com (CTRP) and you might well ask what’s been going on with the stock today? As you probably noticed the stock tumbled 9.24% to $57.48 on weaker 2008 Q2 forecast.
We were not so much surprised by the actual results, in the last analysis of CTRP, released on 3/15/2008, analyst Lin Xu said “Snow Storm caused block of transportation and cancellations of travels which will reduce the profitability of Q1 2008, not to a large extent. Business will recover as the cold season ends.” (link to Research Reports)
At Chinavestor we put strong emphasis on the analysis of revenue and quality earnings growth. As the following chart demonstrates, Ctrip is lacking earnings growth relative to its revenue growth.
Looking at clues, we see a significant, 380%, surge in income tax that dented into earnings. Text from the official earnings release is as follows:
Net income for the first quarter of 2008 was RMB99 million (US$14
million), representing a 52% increase from the same period in 2007, and a
27% decrease from the previous quarter. Excluding share-based compensation
charges (non- GAAP), net income was RMB132 million (US$19 million),
representing a 58% increase from the same period in 2007, and a 16%
decrease from the previous quarter.
The effective tax rate for the first quarter of 2008 was 28%, as
compared to 16% in the same period of 2007 and 7% in the previous quarter,
primarily due to the application of a statutory tax rate of 25% under the
new PRC Enterprise Income Tax Law effective on January 1, 2008 and the
increase of share-based compensation, which is not tax-deductible.
We calculated the compounded effect of share-based compensation on earnings and found it substantial with a long-lasting effect.
As the following chart demonstrates, revenues-earnings-stock price have been on a constant rise however stock price seems higher than latest earnings would suggest. With that said we see further stock price softness as a possibility.
However, our overall view of the company remains unchanged. Ctrip.com is the dominant online travel company in China, with sustainable competitive advantages. As a result, any weakness might serves as a signal for buying opportunity for long-term investors.
Wish you successful investing.