Ctrip's a Buy Heading Into Beijing Olympics

Excerpts from Gilford Securities analyst Ashish R. Thadhani's recent note to clients on Ctrip.com International, Ltd. (CTRP):

CTRP: Posts 69% YoY Growth [US$] & 36% Operating Margin

Investment Conclusion. Driven by broad-based revenue momentum (notwithstanding fallout from a weather disruption in late-January) and scale efficiencies – offset by stepped-up taxation pending approval of preferential treatment accorded hi-tech entities – we are adjusting our estimates as follows: 2008 GAAP EPADS remains at $0.95 on net revenue of $245 million (53% YoY growth and up from our prior $233 million projection); and 2009 GAAP EPADS is also unchanged at $1.25 on net revenue of $338 million (38% YoY growth and up from $330 million previously). Our estimates imply 45%/41%/27% compound revenue/EBITDA/EPS growth in calendar 2007-09, including a one-time jump in the tax-rate. Results should continue to benefit from rapid expansion of the consumer/supplier base; incremental corporate, international and leisure travel initiatives; successful implementation of the e-ticketing mandate favoring online players; high emphasis on service quality and innovation; and visibility afforded by the 2008 Beijing Olympics. At this time, we are increasing our target price from $64 to $69. In 12-months, this would correspond to 55x forward GAAP EPS – in line with the current valuation (58x).

4Q07 Results. GAAP EPADS of $0.27 vs. $0.13 a year ago on net revenue of $48.8 million (69% YoY growth) easily beat our $0.19 estimate on net revenue of $45.9 million. Non-GAAP EPADS of $0.31 vs. $0.15 also exceeded our $0.23 expectation. EPADS included a 2.5 cent benefit on account of government subsidies. Ctrip posted positive variances in operating income ($2.7 million driven by revenue), as well as interest/subsidies/taxes ($3.0 million). Operating income of $17.4 million (35.7% margin) advanced 81% YoY and surpassed our $14.7 million estimate (31.9% margin) by 18%. Metrics showed enduring volume growth in air tickets sold (up 59% YoY) and room nights booked (up 41% YoY); plus further expansion of the domestic hotel network (up 36% YoY to 6,000) and active customer base (up 62% YoY to 4.2 million). Results reflect a robust domestic economy (and seasonally slower business travel), augmented inventory, strong contribution from Tier-II cities and a widening gap over rival eLong. Net cash increased to $185.1 million from $176.9 million on September 30.

Noteworthy developments are summarized below:

• January 2008. To support growth in 2010 and beyond, Ctrip indicated that it will invest $40-50 million through 2011 for building a second call center in Nantong (110 kilometers north of Shanghai).
• August 2007. Rakuten sold its 13.3 million ADSs for $38 each to lock-in a 360% return over three years.
• January 2006. Ctrip promoted COO/co-founder Min Fan to the position of CEO. James Liang, former CEO, continues to serve as Chairman.
• October 2005. Ctrip announced that Ms. Jane Jie Sun will assume the position of CFO. Ms. Sun replaced former President/CFO Neil Shen, who joined VC firm Sequoia Capital but remains a board member.
• July 2005. The Chinese government changed its currency policy. Over time, anticipated RMB appreciation should translate into higher dollar-denominated operating income, offset by near-term currency translation losses.
• December 2004. Existing shareholders (including management) sold 7.7 million ADSs at $12.13 each.
• June 2004. Ctrip attracted a $110 million investment at $8.25 per ADS from Rakuten.
• December 2003. Ctrip raised net proceeds of $44.5 million from its IPO (at $4.50 per ADS).

Investment Thesis. Powered by rising GDP and disposable incomes, the Chinese travel industry is expected to sustain double-digit growth in coming years. Traditional agencies have been limited to a local/fragmented presence (due to licensing requirements) and focus primarily on tour groups. Pioneering consolidators like Ctrip offer selection plus savings to the individual traveler, and have become valuable aggregators of demand for the travel industry. Superior positioning includes the following: 85% of hotel reservation revenue is derived from bookings at three-to-five star hotels, where the commission per room is highest and room nights have grown 20%+ industry-wide in recent years. Ctrip boasts a nationwide supplier network, which assumes particular significance in a country with no hotel GDS. Market leadership has translated into a premium commission structure, i.e., 15% of the room rate or $10 per night. Ctrip has also sought to differentiate itself through service quality and innovation. Longer-term growth stands to benefit from continued expansion of hotel coverage and relaxation of travel restrictions, as well as implementation of an e-ticketing mandate.

CTRP is suitable for aggressive investors. In our opinion, principal risks include the following:

• Deterioration of economic conditions or a slowing of travel demand in China.
• Inability to secure adequate room availability under “guaranteed allotment” arrangements (that afford risk-free inventory and contribute three-quarters of hotel transaction volume).
• Competition could pressure future profitability by way of lower commission rates and/or higher marketing expenses.
• Disruptions affecting travel demand. This encompasses terrorist threats; geopolitical instability; catastrophic events; and spread of the H5N1 virus or a recurrence of SARS (necessitating closure of the Shanghai call center).
• Correction in the U.S. markets.

CTRP 2-yr chart

Comments

[kkin365]

I thought all 5-star hotels in Beijing are fully booked through Olympics -- meaning that commission, if any, has been booked by CTRP or other travel agencies already.