Ctrip Stabilizes, Growth Ahead 携程业绩企稳 利润有望恢复增长

When is a 24 percent drop in net profit a good thing? The answer to that question should usually be “never”, but in the case of online travel agent Ctrip (Nasdaq: CTRP), the company’s latest drop in quarterly profit appears to be encouraging investors that a recent round of price wars in the sector is starting to ease. That would be good news not only for Ctrip, but also for rivals like eLong (Nasdaq: LONG) and up-and-comers like Baidu-invested (Nasdaq: BIDU) Qunar, which have been engaged in a stiff battle for market share for much of the last year.

Let’s try to understand the latest state of the industry by taking a closer look at newly released quarterly  results from Ctrip, the industry’s oldest and largest player and thus a good sector bellwether. (results announcement) Ctrip shares rallied nearly 4.5 percent in after hours trade after the results came out, indicating investors like what they saw.

A quick look at the results doesn’t really show any obvious signs for encouragement. Revenue grew in the 15-20 percent range, continuing a trend for most of the past year, and Ctrip forecast the figure would continue to grow in that range in the current quarter. As I stated above, the company’s net profit fell 24 percent to 193 million yuan, or about $30 million, which doesn’t initially look that exciting. But a look at the Ctrip’s results from the previous quarter show that net profit fell a much larger 40 percent during that period, meaning the latest figure could reflect a moderation of the sector’s current price wars.

In another positive sign that points in a similar direction, Ctrip reported its sales and marketing expenses rose 52 percent in the fourth quarter to 281 million yuan, a relatively steep jump again reflecting the sector’s intense competition. But again, that rise marked a moderation of the 74 percent jump in marketing expenses from the previous quarter. At the same time, Ctrip’s margins continued to fall, but again the magnitude of the declines was relatively similar to that seen in the third quarter, again reflecting a stabilizing situation.

So the next question becomes: with the situation starting to stabilize, when will Ctrip and its peers return to profit growth? And equally important, is the sector set for a stock market rally? In answer to the first question, it does indeed appear that Ctrip will probably return to profit growth later this year, most likely in the second quarter if the current trends continue.

As to Ctrip’s stock and online travel shares in general, I said as early as last July that Ctrip’s shares, which were trading at around $14 per share at the time, looked like a good value. Those same shares are now trading at about $20 each, but it does seem like there’s still room for more upside if the current state of competition continues to moderate.

I personally like Ctrip for its position as industry leader, and also for its ability to focus on its core area of providing travel services, including a recent overseas tie-up with US discount travel specialist Priceline (Nasdaq: PCLN). (previous post) That’s a sharp contrast to many of China’s other major Internet companies, which often go into a wide range of services unrelated to their core business and end up losing money on those businesses.

Ctrip could also get a boost from positive buzz generated by Qunar, which is expected to make a New York IPO later this year, becoming the first major Chinese travel services firm to make an overseas listing in quite a few years. For all these reasons, look for business at Ctrip to stabilize and return to a growth track later this year, providing some strong potential upside for the company’s shares and shares of other travel-services firms in general.

Bottom line: Ctrip’s latest results indicate that overheated competition in China’s online travel sector is starting to ease, providing strong potential upside for company shares in the next 6 months.

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