After a violent recovery, how far can Ctrip continue to go?

On the morning of November 21st, Ctrip announced its third-quarter performance. Overall, the growth in revenue and profit remains impressive, but on the other hand, the surprise compared to expectations is gradually narrowing. Specifically:

Total revenue has recovered to 131% of 2019, but the recovery rate compared to the previous quarter's 129% has not significantly increased, and it is almost indistinguishable from market expectations.

In terms of the two main pillars of the business, the recovery rate of ticket revenue for flights/trains and other transportation in this quarter has slightly increased by 3% compared to 2019, which is not a significant difference. However, the recovery rate of hotel booking revenue has increased by 10% compared to the previous quarter. Combined with industry data, this is mainly due to the increase in hotel occupancy rates in the third quarter.

In other businesses, the MoM growth rates of business travel and advertising revenue are only 1% and 2% respectively. The income growth during the peak season is quite limited, which to some extent reflects that the growth potential of these two businesses seems to be not high. At the same time, the absolute revenue is also relatively low, and their contribution to the overall performance is small. On the other hand, the revenue of group tour business has grown by over 90% compared to the previous quarter and has not yet recovered to the pre-pandemic level, indicating that there may still be room for growth in the future.

In terms of operating leverage and profit improvement, the gross profit margin did not continue to increase but instead decreased by 0.2% compared to the previous quarter. The three expense items have basically grown in proportion to the scale of revenue, with the marketing and management expense ratios slightly diluted, but the magnitude is not significant.

In the end, Ctrip's operating profit margin (excluding equity expenses) increased slightly by 1.3% compared to the previous quarter, further narrowing the increase (2.4% in the previous quarter). The adjusted operating profit was 4.42 billion, which was about 7% higher than market expectations. The short-term rapid recovery of domestic business seems to have come to an end in terms of operating leverage and profit margin.

Dolphin Research's viewpoint:

Looking solely at Ctrip's financial report for this quarter, the continued significant growth in revenue and profit indicates a further improvement in business conditions, which can be described as strong. However, from the perspective of marginal changes and deviations from expectations, the performance in the first quarter greatly exceeded expectations, in the second quarter it slightly exceeded expectations, and in this quarter it basically met expectations. At the same time, the growth rate of revenue and the improvement in profit margin in the third quarter compared to the second quarter have also narrowed.

Therefore, the period of the strongest recovery in domestic travel demand is likely a thing of the past, and the market has long anticipated this, as reflected in the previous stock price correction.

The focus and trading logic going forward will shift to the pace of recovery in the fourth quarter and beyond for domestic travel, as well as the growth of outbound and purely overseas businesses. Compared to the third-quarter performance, the outlook provided by management during the conference call will be more critical (we will release the minutes later). From the data that has been disclosed, outbound tourism may be the key going forward.

The revenue from pure overseas business (mainly Trip.com and Skyscanner) has seen an increase of over 100% compared to the same period in 2019 and 2022. However, the growth rate remains consistent with the previous quarter, without any acceleration.

Domestic outbound travel has recovered to 80% of the same period in 2019, further increasing from 60% in the previous quarter. At the same time, Ctrip continues to lead the industry with a recovery rate of 50%.

From a valuation perspective, Ctrip is expected to achieve an operating net profit of around RMB 9.5-10 billion in 2023, which is not a significant issue. After excluding cash, the corresponding current market value PE multiple is around 16x, which is not as high as the peak stock price. The company has also announced a small-scale share buyback of $120 million since September, which, although small in scale, signifies the company's commitment to shareholder returns (although the scale is unknown). Therefore, if the overseas business continues to recover strongly or the slowdown in domestic economic conditions is not significant, Dolphin Research believes that the current position still presents an opportunity.

I. Future growth lies in Outbound tourism and overseas business

In terms of revenue, Ctrip achieved a net income of RMB 13.7 billion this quarter, reaching a new historical high. The revenue recovery rate reached 131% of the same period in 2019, slightly higher than the 129% in the previous quarter, but it is completely in line with market expectations without any surprises.

The two main sources of revenue are: 1) ticket booking revenue, such as air tickets and train tickets, which reached RMB 5.4 billion, recovering to 144% of the same period in 2019, similar to the second quarter; 2) accommodation booking revenue reached RMB 5.6 billion, recovering to 136% of the pre-epidemic level, significantly higher than the previous quarter. Combined with other high-frequency data, this is attributed to the higher hotel occupancy rates in the third quarter.

In terms of operation data:

Reflecting the recovery of domestic travel, the amount of domestic hotel bookings has increased by 70% compared to the same period in 2019, far exceeding the overall revenue recovery rate of the company.

The pure overseas business (mainly Trip.com and Skyscanner) has seen an increase of over 100% in booking amounts compared to the same period in 2019 and 2022, but the growth rate remains consistent with the previous quarter, indicating no further acceleration.

Domestic outbound travel has also recovered to 80% of the same period in 2019, further increasing from 60% in the previous quarter, and is also higher than the industry's 50% recovery rate. The company continues to lead the industry.

2. Other Businesses: How much potential does the business travel industry have? Can "content" bring a second spring for Ctrip's advertising?

In addition to its two core businesses, Ctrip also operates in three other sectors: package tours, business travel, and primarily advertising-based businesses.

Following a trend that has persisted for three quarters, there has been a clear increase in domestic travelers' preference for independent travel after the pandemic, while demand for group tours has recovered relatively slowly. In this quarter, the revenue from package tours has only recovered to 81% of the same period in 2019.

Although revenue from business travel continues to rise, the MoM growth rate is only 1.2%, indicating limited growth potential in the future.

Revenue from primarily advertising-based businesses reached 880 million yuan this quarter, continuing to rise, but the MoM growth rate was only 2.3%, suggesting that it has entered a plateau phase.

Overall, in terms of absolute revenue and future growth potential, the recovery of group tours may still have the greatest growth potential compared to pre-pandemic levels.

From a revenue perspective, Ctrip's performance in the third quarter remains strong, but there are no significant surprises. The driving force of domestic business recovery has passed its peak, and the focus now is on the recovery of outbound tourism and the growth of purely overseas businesses.

3. Operating leverage continues to improve, but the magnitude narrows

From a profitability perspective, first, the gross profit margin has slightly decreased to 82% MoM, but the change is minimal and has little impact. Therefore, the gross profit has increased in line with revenue to reach 11.3 billion yuan, setting a new record high, but it is about 3% higher than expected, which is also a small difference.

Similar to the gross profit margin, the three operating expenses have generally increased proportionally with revenue and business scale. Among them, the growth rate of marketing and administrative expenses is slightly lower than that of revenue, resulting in a diluted expense ratio. The investment in research and development is significantly higher, indicating that the company is intensifying the development of new businesses/features.

Overall, the short-term rapid recovery of domestic business seems to have reached a turning point for operating leverage and profit margin.

Due to the slight decrease in gross profit margin and the limited dilution of the three operating expenses, Ctrip's operating profit margin (excluding equity expenses) has increased slightly by 1.3 percentage points MoM, but the increase is narrower compared to the 2.4 percentage points in the previous quarter. Final adjusted operating profit was 4.42 billion, although it increased by about 1/3 MoM, the difference from market expectations did not exceed 10%.