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Shares of Chinese on-line travel agency Ctrip.com (CTRP 0.75%) were down more than 10% on Wednesday after the company released third-quarter results the day before that handily beat expectations. The main culprit for the dip was lowered revenue guidance for the fourth quarter.
Previously, management had been looking for 30%-35% revenue growth. But with the latest release, the outlook was limited to 30% growth.
Looking ahead, management sees price wars continuing for at least one or two years, but for long-term investors, there were lots of positives worth focusing on.
Just the numbers
Based solely on bottom-line numbers, Ctrip came out ahead of expectations. It was the 10th straight quarter where Ctrip's earnings beat analyst estimates.
|
|
Expected |
Actual |
YOY Growth |
|---|---|---|---|
|
Revenue |
$315 Million |
$347 Million |
38% |
|
EPS |
$0.20 |
$0.22 |
(45%) |
Source: SEC filings, E*Trade
The drop in earnings was fully expected, as Ctrip is aggressively spending to maintain its position as the largest on-line travel agent, or OTA, in China.
So why the dip?
No one likes when revenue estimates get lowered, and that's especially true when you're talking about a company that trades for 70 times earnings. Couple that with a noticeable spike in spending, and lots of short-term investors were fleeing on Wednesday.
Operating expenses grew 68% as management has focused on its open-platform technology, as well as increasing headcount -- which has jumped 70% in the past year to 30,000 employees.
CEO James Liang made it clear that competition -- and the ensuing price wars that have cut into profitability -- were taking their toll and would be around for at least a year: "looking ahead ... a year or two years, I think we'll face continued pressure as more players are putting more resource into this very promising high-growth market. As you know, [Alibaba's] Alitrip has recently entered this market with a new brand. And Amazon just entered [as well]."
What long-term investors should focus on
Despite the disappointing news, there was lots for long-term investors to get excited about. Ctrip's three largest segments -- Accommodations, Transportation, and Packaged Tours -- all showed robust growth.
|
Volume |
Revenue | |
|---|---|---|
|
Accommodations |
69% |
56% |
|
Transportation |
98% |
32% |
|
Packaged Tours |
52% |
12% |
Source: SEC filings
Management spent a good deal of time talking about the opportunity within Packaged Tours. Ctrip revealed just last week that it had entered into an agreement with Royal Caribbean Cruises (RCL +0.71%) to work jointly with SkySea to bring seafaring adventures to Chinese citizens. Management believes cruise travel in China will grow by 30% per year over the next five-10 years. The deal will start with one vessel -- Celebrity Century -- with the option to increase its fleet over time.
Just as important, downloads of the company's mobile app increased a whopping 75% from the previous quarter to 350 million. That's more important than many might realize, as management's overarching goal is to turn the app into the one-stop shop for all-things-travel within the Middle Kingdom.
Management has made it clear that capturing market share is the main priority right now, and the company is doing just that. Unfortunately, it's come at the cost of margins, as competition has been fierce. Eventually, consolidation will happen within the industry. If Ctrip remains on the same path its on now, shareholders should be well-positioned to benefit.
