• Geopolitical tensions taking a toll on guidance
• Going into lower-tier cities and abroad
• FV of US$40

Above Expectations

Ctrip.com International’s (Ctrip; CTRP US) 2Q19 results were broadly above expectations. Net revenue rose 19% YoY to RMB 8.7b, which was 0.4% above consensus expectations. This was on the back of a mix of increased accommodation choices, an improving consumer experience, strong international air ticketing demand and an increase in ground transportation.

Gross margin came in at 79%, comparable to the 80% registered last year. Non-GAAP PATMI came in at RMB1.4b, which was 3% above consensus expectations, which we attribute to lower-than-expected sales and marketing spend.

3Q19 Guidance Soft

Management has guided for 3Q19 net revenue to grow 10-15% YoY, of which the mid-point implies another 3.6% downside to consensus estimates. We note that this has already incorporated an impact of about 400-500 bps on the growth rate, largely due to the geopolitical situation in Hong Kong and Taiwan (~1/3 of total outbound revenue), as well as a drop in outbound air ticket prices.

However, management signalled some optimism in being able to capture incremental outbound market share, given its position as the market leader. Management has guided for a non-GAAP operating profit of RMB 2.3-2.6b for 3Q19, which implies an OPM of 22-25%.

Long-term Story Intact

Management shared that international revenue accounted for over 35% of total revenue (of which ~20%pts to 25%pts / 10%pts to low-teens are from its outbound travel and pure international business, respectively), and hopes to grow this to 40-50% in the next 3-4 year years. This should be supportive for margins, given ASPs for outbound products are typically higher than domestic ones.

Interestingly, management highlighted that Ctrip’s transportation revenue is diversified across both domestic and global train ticket products (including TrainPal), which we believe implies limited impact on its domestic train ticketing takerate from 12306’s introduction of its free ‘waiting queue’ service.

In the lower-tier cities, we believe Ctrip has been holding its own, despite competition from Meituan and Tongcheng-Elong. In 2Q19, we observed that Ctrip branded low-star hotel room nights increased 50% YoY, on the back of effective promotions. Management has also observed a continued increase in travel consumption within the lower-end hotel segment.

Despite the near-term headwinds, we remain constructive on the long-term prospects of Ctrip, and expect partial mitigation from outbound destination switches away from HK. We employ a DCF-based valuation, and derive a FV of US$40.

Source: OCBC Research - 11 Sept 2019