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Warm up for Ctrip.com 2010 Q3

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Bull_2 October 27, 2010 (Chinavestor) Chinavestor analyst Jiayu Tian took a close look at Ctrip.com International Inc. (NASDAQ:CTRP) before reporting 2010 third quarter financials later in November. This research report is focusing on the following aspects of the company:

  • Business review, revenue and earnings growth
  • Operational results & cash flow
  • Valuation
  • Risk & Opportunities- Wing On Travel (HKG:2986), Home Inns & Hotels Management (NASADAQ:HMIN)
  • Competition like eLong Inc. (NASDAQ:LONG), Expedia Inc . (NASDAQ:EXPE), Mango, AoYou Cendant
  • Recommendation

Ctrip.com International Inc. (NASDAQ:CTRP) is an online travel service provider for hotel, airline and packaged tours in China. The company went public on the NASDAQ on Dec 19, 2003. The stock price increased nearly 10 times from split-adjusted IPO price of $4.911 to current $50.07. The company’s third quarter data will be released in early November, this analysis is based on  forecasted data.

I believe Ctrip.com International Inc. (NASDAQ:CTRP) will keep growing both revenues and earnings, leveraging on its market position and abundant cash flow.

  • In the first and second quarter this year, Ctrip’s quarterly revenue grew 46.49% and 47.14% year-over-year (YoY), respectively. It is expected that fourth and third quarter revenue will continue grow at 40% on average. Annual revenue for Ctrip.com International Inc. (NASDAQ:CTRP) is expected to grow 42.9% to $590 million in 2010.
  • Ctrip commences over 50% of the Chinese online travel market. Ctrip has been eager to command more of the market by introducing new services and acquiring and taking over other traveling companies.
  • Ctrip.com International Inc. (NASDAQ:CTRP)has no debt, which cleaned off its balance sheet and decreased dramatically the business risk. Its cash per share was $5.99 at the end of quarter two this year and expected to be $7.69 by the end of this financial year.
  • It is expected that Ctrip’s EPS for Q3 and Q4 2010 will reach $0.90. Accumulated 2010 EPS is forecasted to hit $3.74, representing a growth of 36.4% from last year.
  • Ctrip.com International Inc. (NASDAQ:CTRP) is expected to return 19.45% in this year and the stock price is expected to grow to $61.49 by the end of 2011.

CTRP_2010Q2_tt1

 

 

 

 


Business Review & Revenue

Ctrip.com International Ltd. aggregates hotels and flights information and enables its customers to make hotel and flight bookings. It focuses on providing the cheapest travel services to Chinese customers. Ctrip.com International Inc. (NASDAQ:CTRP) has extended its business by acquiring and taking over competitors in recent years. (See Exhibit 8 as its consolidated entities).

The company commences over half of the Chinese online travel market. Total Revenue of Travel Industry of China in 2010 is expected to grow to $194 billion. The estimated Online Travel Booking in 2010 is RMB5.47 Billion ($750 million), according to the Data Center of China Internet, 2010. The online travel booking section is expected to grow rapidly in the next decade, which will continued to help Ctrip’s revenue growth.

Ctrip’s revenue is generated mainly from four divisions: hotel reservation, air-ticketing, packaged tour, and corporate travel.

CTRP_2010Q2_reve

In tandem with changes in the industry, Ctrip.com International Inc. (NASDAQ:CTRP) changes operation model as well. The proportion of hotel reservation has decreased, meanwhile, the air-ticketing component has increased.

Ctrip.com International Inc. (NASDAQ:CTRP) also looks for other investment opportunities to expand its business scale. It has acquired 6 companies since May 2009. By acquiring, the company protected market share and entered new segments of the market pursing additional revenues. (See exhibit) By taking over Wing On in Hong Kong, Ctrip.com International Inc. (NASDAQ:CTRP) expanded its packaged tours segment, which has increased the fastest compared with other services. In order to look for a breakthrough, Ctrip also acquired 8% of shares of Hantin Inns and Hotels, one of the most famous economic business hotel service provider, and 15% of shares of Beijing Jianguo Hotels. The industry took these hostile steps as Ctrip is integrating its industrial chain through acquisitions.

CTRP_2010Q2_tt2

 

 

 

 

 

 

 

 

 

 

 

 


Operational Results & Cash Flow

Revenue Growth

The natural growth of the online travel industry, buoyed by additional revenue generated by Ctrip’s target companies, have had a significantly positive impact on both revenues and earnings. Gross profit has grown following steady revenue increase from 2009 on. Looking forward, quarterly revenue growth is expected to slow down in the coming two quarters of 2010. The gross profit ratio decreased in the fourth quarter of 2009 and the first quarter 2010. Although this decrease may seem less significant, but given the huge base, the impact on gross profit was significant.


Improved Operation Efficiency

The operation cost ratio have decreased from nearly 50% to 40% since 2009 and is expected to continue to decrease in the following two quarters. This is a strong testament that Ctrip has improved management system and enhanced work efficiency. One special characteristics of the industry is that Ctrip doesn’t have inventory because the goods and services it provides. Therefore, the main cost for generating revenue is cost of revenue. The cost of revenue/sales ratio has decreased from 27.5% in Q1 2009 to 26.6% Q2 2010.


No Leverage

Ctrip.com International Inc. (NASDAQ:CTRP) doesn’t have debt at all. Ctrip has only different kinds of payables as current liability and deferred tax as long-term liability. The high current ratio (2.45) and quick ratio (2.17) testify that the company is able to pay its short-term bills which are its main current liabilities.

Cash Flow

The company held $227 million cash by the end of Q2 this year and this is expected to grow to $277.7 million by the end of 2010. Cash flow per share was $5.99 at the end of Q2 and is expected to be $7.69 by the end of 2010. Cash flow from operations increased with revenue increase. In 2008 and 2009, the operating cash flow increased 30.1% and 64.2% respectively. Operating cash flow turned negative in 2010 Q2 due to $52.6 million payables and accruals expenses. Operating cash flow is expected to reach $47.4 million by the end of 2010, representing a 66% decrease from 2009. Cash flow from financing actives was a negative $10.6 million in 2008 due to dividend payment. In 2009, the company didn’t pay dividend turning to a positive CFF of $14.2 million. Furthermore, the company paid all its acquisitions in cash without issuing bonds or other types of loans.

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Valuation

Crip’s current year standard TEV is expected to be $1.5 billion. Based on the assumption of a 32.8% annual revenue growth in 2011, the standard TEV is expected to be $1.86 billion by the end of 2011. As a result, the stock price is expected to grow to $61.69 by the end of 2011. The stock return is expected to be 24% in 2011, much higher than the average market return.

Ctrip holds 18% of Home Inns & Hotels Management (NASDAQ:HMIN) public shares and 90% of Wing On Travel’s (HKG:2986) public shares, but Ctrip’s financial statements doesn’t consolidate the results from Win On Travel (HKG:2986). Therefore, those shares are Ctrip’s hidden assets. Besides, Ctrip.com International Inc. (NASDAQ:CTRP) have made $4.8 million business loans to some of its subsidiaries. After adjusted all of above, Ctrip’s TEV turns to be $2.4 billion and is 59% higher than its standard TEV. The stock price is expected to grow to $67.21 by the end of 2011 under these assumptions.

According to DCF valuation model, based on the assumption that Ctrip.com International Inc. (NASDAQ:CTRP) will continue growth but at a slower annually rate and eventually reaching the same as the GDP growth of China at 4% five years from now, the potential stock price is $157. The number changes depending on different assumption of market return and risk free rate.

The residual income model shows that the current return on equity is 19.45% and is expected to decrease in the next 20 years and eventually to reach its cost of equity which is 7.15%, and the stock price should be $88.

Ctrip’s current P/E ratio is 61.4 and expected to be 61.5 by the end of 2010. The increase is due to Ctrip’s expected net income growth in 2010, which is expected to be $135 million. That represents a 49.7% growth from 2009. Therefore, the PEG ratio turns into a negative ratio of -68.11%.

CTRP_2010Q2_tt4

 

 

 

 

 

 

 

 

 

 

 


Risk and Opportunities

The online travel market in China is only $80 million, representing no more than 1% of the whole Chinese travel market, meanwhile, US online travel market is $50 billion representing 20% of the US travel market.

The potential is huge in China's online travel market, therefore a lot of companies are trying to grab market share from Ctrip.com International Inc. (NASDAQ:CTRP) and eLong Inc. (NASDAQ:LONG). This latter is the second biggest player in the field (see market share in page 2). For example, CYTS and Cendant Corp established Aoyou, and CIT established Mango in order to enter this segment of the market. Companies with content rich materials are expected to grab some market share from traditional players like Ctrip and eLong Inc. (NASDAQ:LONG).

Going forward, Ctrip.com International Inc. (NASDAQ:CTRP) finds itself in a tight position. Main profit for the company is still coming from online travel services, a market full of new competitors such as Mongo, Aoyou, Qunar etc. This leaves Ctrip with the following options:

  • Continue expanding via acquisitions
  • Cost cutting

Ctrip has made some effect in cutting its operation expenses as mentioned in operating results section.

Elong’s parent company is Expedia Inc. (NASDAQ:EXPE). After Ctrip.com (NASDAQ:CTRP) overtook Kuxun, which is an accommodation and air ticket vertical search website, its territory has expanded into eLong Inc. (NASDAQ:LONG), Daodao, Kuxun and Egencia, and those companies provide whole online services including online booking, vertical search, user reviews and business travel.

Meanwhile, Mango has officially finished its acquisition over 1rest and launched a new brand Qmango, the first online booking website targeting new travelers and back-packages in China.

Ctrip’s older allies, airlines and hotels, are increasingly trying to break Ctrip’s control and establish their own sales channels. On Nov 2009, China Eastern Airline (NYSE:CEA) singed a strategic corporation agreement with Alibaba (HKG:1688) and opened a store on Ebay (NASDAQ:EBAY) which could directly bring it to the market.

China Eastern Airline’s action triggered the whole market to act similarly, and was following by China-SSS, Hainan Airline, Xiamen Airline, Shenzhen Airline and Shandong Airline. All these airlines signed an agreement with Alipay, which is an online paying service supplied by Alibaba (HKG:1688).


Recommendation

Based on the analysis above, it is expect that the stock price will continue go higher in the next year presumably to $67. If 2010 Q3 and Q result were better than the expectation, delivering over 40% revenue growth, the stock price may grow even higher than $67.

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