After trading as high as $50 in early 2011, Ctrip.com International, Ltd. (ADR) (NASDAQ:CTRP) continues to languish in the low $20s. Even with a growing revenue base, the company faces margin pressures from online entrants to the travel market in China and a general lack of interest in Chinese stocks.
Ctrip is a leading travel service provider of hotel accommodations, airline tickets, packaged tours, and corporate travel management in China. It recently replaced the CEO due to the weak results even as revenue for the full year rose 19%.
Q4 2012 highlights
Ctrip.com International, Ltd. (ADR) (NASDAQ:CTRP) provided the following operational highlights for Q4 2012:
Net revenues were $177 million for the fourth quarter of 2012, up 19% year-on-year, versus our fourth quarter net revenue guidance of 15-20% year-on-year.
Gross margin was 74% for the fourth quarter of 2012, compared to 76% in the same period in 2011.
Income from operations was $19 million for the fourth quarter of 2012, down 48% year-on-year. Excluding share-based compensation charges (non-GAAP), income from operations was $38 million, down 28% year-on-year.
Operating margin was 11% for the fourth quarter of 2012, compared to 25% in the same period in 2011. Excluding share-based compensation charges (non-GAAP), operating margin was 21%, compared to 35% in the same period in 2011.
Net income attributable to Ctrip.com International, Ltd. (ADR) (NASDAQ:CTRP)’s shareholders was $31 million) for the fourth quarter of 2012, down 24% year-on-year. Excluding share-based compensation charges (non-GAAP), net income attributable to Ctrip’s shareholders was $49 million, down 12% year-on-year.
Diluted earnings per ADS were $0.22 for the fourth quarter of 2012. Excluding share-based compensation charges (non-GAAP), diluted earnings per ADS were $0.35 for the fourth quarter of 2012.
What sticks out with this story is the complete erosion of the margin base. The operating margin plunged from 35% last year to only 21% in Q4 this year. Maybe in fairness to the old CEO that level of operating margin is unsustainable. What operating margin is the world online travel leader achieving?
With the 19% increase in revenue, Ctrip only saw a 12% decline in net income even with the massive margin decline. The earnings did surge beyond the analyst’s estimates. Oddly, analysts use GAAP numbers for Ctrip.com and expected only $0.11, which the company doubled. In fairness share-based compensation charges are extremely high for the company, but those numbers should filter through to higher share counts.
For 2013, analysts expect earnings to slightly drop from the $1.28 earned last year.
Priceline.com Inc (NASDAQ:PCLN) growing faster
Priceline.com is the unquestioned global leader in online travel with a market cap approaching $35 billion and a revenue base of $6.5 billion. The company had operating margins of over 31% for Q4 2012 suggesting the past numbers from Ctrip.com International, Ltd. (ADR) (NASDAQ:CTRP) had the ability to be sustainable with a shift to online technology.
Priceline also forecast revenues to increase over 20% year over year in Q1 2013. Again, another sign that Ctrip is missing out on the opportunities to grow when a much larger firm is surpassing its growth rate.
Baidu.com, Inc. (NASDAQ:BIDU) charges into online travel
The biggest issue with Ctrip’s stock is that Baidu.com, Inc. now owns the largest online travel site in Qunar.com. Baidu expects to double revenue to $160 million this year with a rising using of mobile apps.
According to the Bloomberg article, only 15% of Chinese travel is currently booked online favoring strong growth for Qunar.com and questioning whether Ctrip can hit targets with a large focus on call-centers. While the Chinese market will see significant growth, Ctrip needs to show how it can compete with technology leaders such as Baidu. The one encouraging sign is that Baidu targets a profit margin of 40% due to the reduced staffing costs from the use of technology, but the technology is cutting into the commissions of the call-center bookings.
Stock chart
Amazingly over the last year, Ctrip.com International, Ltd. (ADR) (NASDAQ:CTRP) has actually held up well compared to Priceline.com Inc (NASDAQ:PCLN). When reviewing the results over the last two years, it clearly separates the winner. Both Chinese companies are down over 35% during that period. Whether this is a Chinese issue only or somehow related to the competition in the travel sector isn’t clear. See the chart below:
CTRP Total Return Price data by YCharts
Bottom line
The company has a substantial cash balance of $899 million and a solidly profitable business though facing declining margins. With an enterprise value of around $2.1 billion, Ctrip is much cheaper than apparent from a casual review of valuations. Combined with the use of non-GAAP earnings, the enterprise value provides an attractive valuation if the company can embrace the online model.
Competing with Baidu.com, Inc. (NASDAQ:BIDU) might be impossible now that it has the lead in the online travel sector and Ctrip has apparently lost its edge. Considering that Baidu is also a cheap stock, investors should invest in the online leader until Ctrip.com International, Ltd. (ADR) (NASDAQ:CTRP) can show the ability to compete in this medium as well.
The article Will Ctrip’s Stock Ever Fly Again? originally appeared on Fool.com and is written by Mark Holder.
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