Ctrip:Short-term concerns look priced in;Buy on long-term vi


What DB and the market both like: hotel volume and international growth


    Ctrip reported 3Q revenue of RMB7.9bn (+42% YoY, 3% ahead ofDBe/consensus) and a non-GAAP OPM of 22% (+4ppts YoY, beating DB/streetestimates by 1ppt/2ppts). Hotel revenue beat our number by a healthy 7%,thanks to penetration into lower-tier cities and expansion of its internationalpresence. For 4Q, management guided revenue growth of 25-30% YoY,supported by robust growth in hotel volume and the improving take rate ofSkyscanner.

    2Q17 revenue and non-GAAP net profit beat consensus by 3%/26% on solidrevenue growth and better-than-expected margin expansion – with non-GAAPGPM and OPM expanding 10ppts/14ppts YoY to 82%/18, respectively. Stronginternational business growth stood out and accounted for c.40% of Ctrip’s 2Q airticket revenue while user traffic from lower-tier cities sharply improved. We believestrong execution of its international expansion and lower-tier city penetration willhelp mitigate short-term regulation risk. Factoring in the negative regulatory impact,Ctrip guides to 35–40% YoY revenue growth in 3Q17, in line with consensus. Wereiterate our OP rating, and trim our TP to US$64 from US$67 on 1.0x PEG and37% FY18-21e earnings CAGR, as we cut FY18 EPS by 4%.

    What concerns the market but not DB: product changes on cross sales


    Ctrip is continuously changing cross-sale products to achieve a better userexperience, at the cost of short-term monetization. Management indicated thatthe process would most negatively impact revenue growth in 4Q17and 1Q18.We forecast a slowdown in organic revenue growth in 4Q17and 1Q18to 19-21% YoY. If we include Skyscanner’s contribution, 4Q revenue growth shouldbe 29% YoY. We believe the market is concerned about the revenueslowdown. We expect the negative impact to be short term, while the benefitsof gaining the trust of customers should be long term. Given the current lowservice quality in the travel and OTA industry, better VAS and cross-sale itemsshould benefit the company’s revenue and customers’ experience. Ctrip isalready a leader in service quality. The recent product change should enhanceits leading edge.

    2Q17 earnings beat. Net revenue increased 45% YoY to Rmb6.4bn, 2%/3%ahead of MQ/consensus on strong transportation growth. Transportation revenuegrew 49% YoY to Rmb3.0bn, driven by Skyscanner consolidation and triple-digitgrowth in train/bus/car rental. Accommodation increased 30% YoY to Rmb2.3bn ona rise in reservation volume; and corporate travel growth accelerated to 36% YoY,ahead of the company’s 15-25% YoY guidance. Non-GAAP net profit came in atRmb855m, 26% above consensus on improving efficiency.

    Takeaways from conference:

    International ticketing to mitigate regulatory risk. While Ctrip expects to see anegative impact from the recent CAAC regulation on bundle sales, we believe itsinternational business – which now accounts for c.40% of air ticket revenue – willhelp mitigate the regulatory impact on domestic ticketing. In 2Q, Ctrip’s internationaltransportation revenue outperformed domestic – achieving greater than 50% YoYgrowth, much higher than the 2% YoY growth for international air travel reported byTravelsky. Following consolidation, Skyscanner launched direct booking, and theconversion rate of its mobile traffic rose by 50%. Skyscanner contributed a mid-tohighsingle digit of Ctrip’s total revenue.

    For 4Q, management guided for 25-30% YoY revenue growth foraccommodation, +20-25% YoY for transportation, +30-35% YoY forpackaged tours and +10-20% YoY for corporate travel.

    Strengthen lower-tier city penetration. Ctrip targets to further gain market sharein lower-tier cities through a branding campaign and comprehensive productoffering. As of June-17, Ctrip covered 570k domestic hotels, up 25% YoY; and thecompany reported accelerating growth in lower tier city hotel bookings – room nightbookings in lower-tier cities reached 20m in July. User traffic of lower tier cities rose50% YoY in the quarter. For better penetration of lower-tier cities, Ctrip is buildingup its franchised offline network, and aims to have 6,500 offline stores by end-FY17, up from the current 5,500. Ctrip and Qunar had opened 400+ offline storesby the end of 2Q, and targets 600 stores by year-end.

    Ctrip continues to penetrate lower-tier cities via comprehensive productsand its offline franchise model partnered with Bestone. Qunar hotelrevenue in tier 3/4cities maintained over 80% growth in the past threequarters.

    Margin expansion ahead of expectation. GPM rose 10ppts YoY and 2ppts QoQto 82%, ahead of MQ and consensus. This was due to 1) margin lift fromSkyscanner, 2) rising revenue contribution from high-margin small business units,and 3) improving efficiency with automation and AI assisted chat-box, which forexample handles over 40% of booking inquires. We see further profitability gainsand forecast non-GAAP OPM to rise to 19%/25% in FY17/18 from 10% in FY16.

    International air ticketing achieved triple-digit growth, driven by 250%growth in ticket volume booked through Skyscanner after rolling out thedirect booking model. The strong momentum of Skyscanner could partiallyoffset the negative impact of product changes in 4Q.

    Earnings and target price revision

    Maintaining Buy rating and target price of USD62

    We trim our FY17/18 revenue by 1%/4% on regulatory impacts, and cut non-GAAP earnings by 11%/5% due mainly to higher tax expense. We lower ourTP to US$64 on 1.0x PEG and 37% FY18-21 earnings CAGR (unchanged.)Price catalyst

    We maintain a Buy rating on Ctrip and target price of USD62. We lower ourrevenue forecast by 4% for FY18due to the cross-sale model change yet raiseFY19E revenue by 1% on better user experience. Our target price is based on1.1x PEG against an FY17-19E EPS CAGR of 56% and USD1.01FY17E non-GAAP EPS. Key risks: 1) strong competition in the hotel market and 2)unsuccessful investment integration.

    12-month price target: US$64.00 based on a PER methodology.

    Catalyst: Margin recovery, and synergies with SkyscannerAction and recommendation

    Reiterate Outperform