Bottom line: Ctrip’s profits could double or more this year following its successful digestion of Qunar, providing some upside to its stock.
As earnings season for US-listed Chinese stocks hits full throttle, I thought I’d take a look at the latest results from Ctrip (Nasdaq: CTRP), which are sending mixed but generally positive signals. That’s because Ctrip is in the process of digesting former archrival Qunar (Nasdaq: QUNR), which was the industry’s second largest player but is also losing quite a bit of money.
Ctrip pulled off the coup of the century a couple of years ago when it forged a deal that gave it a controlling stake of Qunar, acquiring the shares from former majority shareholder Baidu (Nasdaq: BIDU). I personally thought that deal should have received some regulatory scrutiny since it combined the top two players in the space. But the regulator apparently thought otherwise, or simply approved the deal if it was even asked.
Of course all of that is in the past, and Ctrip began consolidating Qunar’s results into its own quarterly financials last year. That explains why for all of last year, Ctrip reported sharply higher revenue but less stable profits, as it absorbed both Qunar’s big business base but also its major losses.
But now that a year has passed, we’re getting a clearer picture of how Ctrip will perform going forward with better year-on-year comparisons starting in the current quarter. Those comparisons don’t look extremely exciting from a revenue perspective, at least based on the first-quarter guidance Ctrip has given in its latest results. But a huge jump in fourth-quarter profit looks a bit more encouraging, and is probably the direct result of sharply lower competition with the merger of the two former rivals.
Before we go further with the longer term outlook, let’s review the actual results, starting with the headline figure that saw the company’s revenue grow 76 percent to 5.1 billion yuan ($750 million) in last year’s fourth quarter. (company announcement) Qunar is in the process of de-listing and hasn’t reported results for the third or fourth quarters. But it posted about 1 billion yuan in second quarter revenue, so perhaps we can roughly assume that it would have would have added a similar amount to Ctrip’s fourth-quarter results.
That would mean that without Qunar’s business, Ctrip’s revenue would have risen a more modest 41 percent. That’s significant, because Ctrip is forecasting its revenue will grow at a 40-45 percent rate in the current quarter, which will be the first quarter that includes Qunar’s results in both the current and year-ago period. Thus 40-45 percent revenue growth looks like it could be the norm for this year.
Profit Growth Revs Up
Next we can look at Ctrip’s profit, which soared 8-fold to 645 million yuan in the fourth quarter. A big part of that rise looks attributable to one-time accounting issues. But even at the operating level the company saw its profit double. That compares with around a 10 percent gain in operating income in the third quarter, and a huge operating loss in the second.
The big theme here is that Ctrip has effectively neutered its main competitor, and several of its other rivals as well, by buying strategic stakes in them. Having done that, it spent much of last year making sure that all of its pieces were acting in sync with each other, rather than the former state of competition. That’s why we’re now seeing the marked improvement in profits at the end of the year.
The bottom line is that Ctrip could easily see profits double or more this year, even as revenue growth looks set to settle in at the 40 percent level. Ctrip shareholders don’t seem to mind that scenario, bidding up the company’s stock by 5 percent to nearly $50 after the latest results came out.
Even at its current levels, the stock is still less than half of its all-time high reached back in 2015, when it was the clear industry leader and Qunar wasn’t considered a major threat. Despite my concerns about its competition-eliminating tactics, I do have quite a bit of respect for Ctrip’s management and expect it will be able to right the Qunar ship, which it’s already showing signs of doing. Accordingly, it does seem like there could be room for some upside in Ctrip’s stock this year, especially if it consistently shows that profits are growing far faster than revenues.