Ctrip.com International, Ltd. (ADR) (NASDAQ:CTRP), also known as Ctrip, is the biggest Chinese online travel agency, and that should be enough to watch it closely. The past 12 months have been wonderful for Ctrip shareholders; the annual return is close to reaching 200%. Yet, not everything has been bright in the history of Ctrip.com International, Ltd. (ADR) (NASDAQ:CTRP). A quick view at the historical stock performance shows the stock price is still far from reaching its historical price record (mid 2010). Fierce competition coming from Baidu.com, Inc. (ADR) (NASDAQ:BIDU)‘s travel website Qunar.com and Expedia Inc (NASDAQ:EXPE)’s eLong, Inc. (ADR) (NASDAQ:LONG) took the market share of Ctrip.com International, Ltd. (ADR) (NASDAQ:CTRP) down to the 40%-50% level and hurt its margins severely.
Despite these issues, Ctrip has been doing great recently. This week the company posted $0.36 EPS for the second quarter, beating the Street estimates by a wide $0.07 surprise margin. Revenue of $203 million beat the consensus by $12.59 million. Are we going to see more surprises? And, more importantly, How did Ctrip manage to keep its competitive advantages in motion, recover market share and increase margins in an increasingly fierce arena?
Ctrip’s recovery explained
It was mid-2012 and Ctrip.com International, Ltd. (ADR) (NASDAQ:CTRP) was trading at $13 per share. The company had just hit its 52-week low despite an announced $300 million stock buyback. Investors were more afraid of the low barriers to entry that the online traveling business has and the contraction of Ctrip’s market share (around 40% by then) and monopolistic price power.
Source: China Internet Watch, Enfodesk
Macroeconomics wasn’t helping either. Words like “Chinese economic growth slowdown” were popular those days. As a result, about 10 million shares, or 7% of the float, were shorted, representing the strong skepticism over the firm.
But the market was wrong. In the most populated country in the world, still less than 10% of clients book their holidays online. No matter from what perspective you see this, the proportion is expected to increase, as mobile penetration, internet speed and average income rises. Chinese bears were also wrong. A global growth rebound caused by policy actions both in the monetary and fiscal field is boosting demand for Chinese exports, and the recovery of the local market for properties is helping local governments, moving a probable bailout out of the near-term agenda. In terms of equity, it seems that the structural reforms have been taken as a catalyst for a revaluation of Chinese equity by investors. New market valuations shall reflect better the improved market sentiment and expectations on new leadership.
In this way, what is happening is not a general slowdown but a transition from an export driven company to a more balanced one, were consumption plays a more important key in GDP generation.
The increase in consumption per household is a key positive catalyst for Ctrip.com International, Ltd. (ADR) (NASDAQ:CTRP). As the largest consolidator of airline tickets and hotel rooms in China, they couldn’t be happier to know private consumption is set to raise. Add to this the fact Ctrip has been in this business since 1999; the brand is so strong that many travelers have its number or website address registered. This has helped Ctrip to triple net sales over the past five years to CNY 4.2 billion. Most revenue comes from online bookings, but corporate travel management and tours are starting to show promising growth rates also. Corporate travel revenue for the second quarter were RMB66 million (US$11 million), representing a 34% increase year-on-year, primarily driven by the increased corporate travel demand from business activities.
What about profit margins?
Well, Ctrip.com International, Ltd. (ADR) (NASDAQ:CTRP)’s recovery has not been caused by a decrease of competitors. Competition remains fierce and this keeps hurting profitability, although the decrease in margins has been controlled. As a result, operating margin was 16% for the second quarter compared to 17% in the same period of 2012, a minor decrease.
Competitors, competitors… and more competitors
So who are these competitors? One of the strongest is Qunar.com, backed up by Baidu.com, Inc. (ADR) (NASDAQ:BIDU) and other venture capitalists. Having Baidu on your side is a great advantage. In 2011, Baidu integrated Qunar’s search results into Baidu’s travel vertical, to increase traffic and prepare the road for a successful IPO. According to Tech In Asia, Qunar is aiming to rake in $160 million in revenue this year, still far away from Ctrip’s $668 million in 2012. Baidu.com, Inc. (ADR) (NASDAQ:BIDU) has invested a lot on Qunar, $306 million in 2011 and a second round in April, but a successful IPO valuing Qunar.com at 15 times annual revenue (a $2.4 billion market cap) could finally bring meaningful returns to the Chinese giant.
Backed up by giants Tencent and Expedia Inc (NASDAQ:EXPE), eLong, Inc. (ADR) (NASDAQ:LONG) is another important competitor. In 2012, eLong, Inc. (ADR) (NASDAQ:LONG) held an important 16.2% of the total market. Yet, its (quarterly) revenue growth rate is much higher: 44.08% for the first quarter. The downside? Gross margin is 56.1%, while operating margin is -9.4% and net margin is -1.1%.
The bottom line
Although the scenario is highly competitive, I keep a bullish view for Ctrip. With a strong brand, it’s the largest travel agent and has more than 12 years in the business. As the biggest travel agency, Ctrip enjoys bargaining power and economies of scale. Also, considering the high correlation between Ctrip.com International, Ltd. (ADR) (NASDAQ:CTRP)’s stock price and the overall Chinese economic performance, I predict a further increase in price, backed up by improvements in private consumption and better market sentiment.
The article Why the Biggest Chinese Online Travel Agency Will Keep Growing originally appeared on Fool.com and is written by Adrian Campos.
Adrian Campos has no position in any stocks mentioned. The Motley Fool recommends Ctrip.com International. The Motley Fool owns shares of Ctrip.com International. Adrian is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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