Ctrip: Finally, a normal one among the "crazy" Chinese concept stocks!

Early on August 27th Beijing time, Ctrip Group released its second-quarter financial report for the 2024 fiscal year after the US stock market closed. In summary, weakened domestic business and strong inbound & outbound and overseas business offset each other, resulting in revenue volume and expectations being basically in line. However, non-GAAP profit significantly exceeded expectations. The detailed key points are as follows:

1. In terms of overall revenue, this quarter Ctrip achieved a net revenue of 12.8 billion yuan (excluding business tax), a year-on-year increase of 13.6%, which is largely in line with expectations. Compared to the nearly 30% growth in the previous quarter, the significant slowdown in revenue growth this quarter can be seen when looking at domestic and inbound & outbound and overseas businesses separately :

For domestic business, the company disclosed that the hotel booking volume on domestic sites this quarter increased by approximately 20% year-on-year, including local hotels and accommodations booked domestically for outbound travel. Therefore, the growth rate of domestic hotel bookings is likely in the mid-teens.

In contrast, the booking volume for outbound travel accommodations and flights this quarter has recovered to over 100% of the same period in 2019. The revenue growth rate for pure overseas travel business is as high as 70% year-on-year. The number of inbound tourists in the first half of the year also increased by as much as 150% year-on-year.

2. According to the disclosed revenue calculation in the financial report, the revenue from hotel bookings increased by nearly 20% year-on-year, slowing down by 9 percentage points compared to the previous quarter, but still maintaining a good growth rate. However, the revenue growth rate for ticketing business dropped directly to 1.2%, approaching zero growth. The company explained that the sharp decline in ticketing revenue growth was mainly due to the decrease in airfare prices and reduced sales of bundled insurance.

Among its business segments, revenue from other sources mainly advertising increased by 114% compared to the same period in 2019, further rising from 99% in the previous quarter, showing the strongest growth among new businesses. It can be seen that the company is making good progress in advancing its high-profit advertising business, which will contribute more to the company's profit than revenue.

3. In terms of expenses, this quarter marketing expenses amounted to 2.84 billion, an increase of about 20% year-on-year, significantly higher than the revenue growth rate. This indicates that under the slowdown of domestic business and the expansion demand of overseas and inbound & outbound businesses, the company's marketing expenses indeed face upward pressure. However, despite the significant increase in marketing investment, expenditure on other expenses remains relatively cautious. Research and development expenses decreased by nearly 2% year-on-year, and the growth rate of administrative expenses was only 6%. Overall, after the offset between higher marketing expenses and lower research and development and administrative expenses, the total operating expenses are basically in line with market expectations.

4. From a profit perspective, under the GAAP basis, since actual revenue, gross profit, and operating expenses are not significantly different from market expectations, the operating profit under GAAP is 3.56 billion, which is very close to the expected 3.48 billion.

And under the Non-GAAP measure, with an equity incentive expense of 670 million this quarter (compared to 450 million in the previous quarter), the actual operating profit of 4.2 billion also slightly exceeded the market's expectation of around 4 billion.

Dolphin Research Opinion:

From a strict perspective, Ctrip's financial report for this quarter is not considered a very strong performance. Revenue only met expectations, showing a significant decline in growth rate from a high base. Under the GAAP measure, the operating profit slightly exceeded expectations, with a small increase in quarter-on-quarter growth and a stable profit margin, not significantly surpassing expectations.

However, the rarity lies in the fact that in this quarter, almost all consumer sector companies covered by Dolphin Research have shown performance that is more or less in the "disappointing" category, with revenue growth mostly weaker than expected. In contrast, Ctrip not only met delivery expectations in terms of growth but also released higher profits than expected, making it a rare high-quality performance.

The logic behind this is that while the entire pan-hotel and travel market, including Ctrip, is affected by the weakening domestic demand, Ctrip is more able to benefit from the recovery of inbound and outbound flights and travel demand, as well as the recent favorable policies of visa-free entry we have seen with multiple countries. Therefore, relying on the rapid recovery of inbound and outbound travel demand has to a large extent offset the weakening of domestic business. Additionally, due to the higher average spending of inbound and outbound travelers, the platform has higher monetization potential, which is also beneficial for the company's profit release. This performance essentially validates the market's relatively bullish logic.

As for the weak point in this quarter - the almost zero growth in air ticketing business - one of the reasons behind it is Ctrip reducing the sales intensity of bundled products such as insurance. In Dolphin's view, this choice, partly made by the company in the context of overall business expansion, is to actively balance the contradiction between platform ticket monetization and user experience, and is not considered very serious bad news.

Looking ahead, the company expects that in the next quarter, with a higher base, the revenue growth rate of the domestic business will further slow down, especially from the perspective of Average Daily Rate (ADR). However, similarly, the recovery of inbound and outbound business compared to the second quarter will further increase, and pure overseas business (Trip.com) will also maintain high double-digit growth. With these two factors offsetting each other, the growth in the next quarter will be roughly the same as this quarter, while the profit will further increase.

From a valuation perspective, due to the significant previous pullback, the company's pre-market capitalization corresponds to approximately 17 times the after-tax operating profit for the year 2024. This valuation is not cheap compared to other Chinese concept stocks, but considering Ctrip's "forward-looking" layout in inbound and outbound businesses and the rarity of relatively good performance, it is not considered expensive either. The future stock price performance will still depend on whether the overseas business can deliver stronger growth and profit than expected.

On the buyback front, the company repurchased $300 million this quarter, slightly less than 1% of the current market value. Compared to the buyback efforts of other Chinese concept stocks, the intensity of Ctrip's buyback is not high. Of course, the company's current market value is not significantly undervalued, and the urgency of the buyback is not high either. According to management, the current buyback is more to offset the dilution of shares caused by equity incentives Below is a detailed analysis:

I. Domestic Market Calming Down, Overseas Taking Over, No Need to Panic

In terms of overall performance, this quarter Ctrip achieved a net revenue of 12.8 billion RMB (excluding business tax), a year-on-year growth of 13.6%, generally meeting expectations. Against the backdrop of a higher base in the previous quarter, the significant decline in revenue growth this quarter compared to the nearly 30% growth in the previous quarter, still validates the normalization of overall domestic travel demand.

While domestic travel demand is slowing down, the significant recovery in inbound and outbound tourism is the market's consensus and default judgment for this quarter's performance. So, what is the actual situation?

Firstly, in terms of domestic business, Ctrip's hotel bookings on domestic sites increased by approximately 20% year-on-year this quarter, including bookings for local hotels and accommodations booked domestically for outbound travel. In other words, the growth rate of domestic hotel bookings is likely only in the mid-teens.

In comparison, bookings for outbound travel accommodations and flights this quarter have recovered to over 100% of the same period in 2019. Revenue growth for pure outbound travel business has reached 70% year-on-year. Additionally, the number of inbound tourists in the first half of the year also increased by as much as 150% year-on-year.

It is evident that while domestic local travel is gradually returning to normal, the growth in inbound and outbound travel, as well as pure outbound travel, has shown relatively strong growth, to some extent offsetting the slowdown in domestic business.

According to the disclosed revenue calculation in the financial report, revenue from hotel bookings grew by nearly 20% year-on-year, slowing down by 9 percentage points compared to the previous quarter but still maintaining a good growth rate. However, revenue growth for ticketing business dropped directly to 1.2%, approaching zero growth. Combining the company's explanation and industry feedback, the significant drop in airfare prices is likely one of the reasons for the sharp decline in ticketing business growth. Additionally, as explained by the company, the sale of bundled insurance with air tickets decreased this quarter, which is one of the reasons for the slowdown in revenue growth, but it also helps enhance consumer experience.

II. Advertising Business Growth Remains Strong

Apart from the two main pillars of business mentioned above, Ctrip's other three business segments:

1) Corporate travel business grew by approximately 105% compared to the same period in 2019, slightly slower than the 115% growth in the previous quarter. As a new business that the company is focusing on, the volume of corporate travel business has doubled compared to pre-pandemic levels, and the degree of slowdown this quarter is not significant, indicating relatively weak demand elasticity for corporate travel.

2) Packaged tour products are still 2.5% lower compared to the same period in 2019, with further improvement compared to the previous quarter, but still showing the weakest performance.

3) Revenue from other businesses mainly driven by advertising has grown by 114% compared to the same period in 2019, showing a continuously increasing trend, and it is the strongest growth among the three new businesses It can be seen that the company is making good progress in its advertising business, and the profit margin of the advertising business is very high, making a greater contribution to the company's profit than the revenue ratio.

III. Marketing expenses growth offset by other expenses, resulting in a significant increase in adjusted net profit

In terms of profitability, this quarter Ctrip's gross profit margin continued to increase slightly by 0.7 percentage points to 81.9% on a month-on-month basis, although it is still a bit away from the peak in 23, it has been steadily increasing over the past three quarters. Dolphin Research believes that the month-on-month increase in gross profit margin should be attributed to the higher proportion of outbound business with higher profits. The absolute amount of gross profit is close to 10.5 billion, completely in line with market expectations, with a year-on-year growth of 13%, which is basically consistent with the revenue growth rate.

On the expense side, this quarter's marketing expenses amounted to 2.84 billion, an increase of about 20% year-on-year, significantly higher than the income growth rate. It can be seen that under the slowdown of domestic business and the expansion demand of overseas and inbound and outbound businesses, the company's marketing expenses indeed face upward pressure.

However, despite the significant increase in marketing investment, other expenses are still relatively cautious. Research and development expenses decreased by nearly 2% year-on-year, and the growth rate of management expenses was only 6%. Among them, the expenditure on equity incentives this quarter reached 300 million, an increase of 80 million year-on-year.

Overall, after the offset between higher marketing expenses and lower research and development and management expenses, the total operating expenses are basically in line with market expectations.

Under GAAP, since the actual revenue, gross profit, and operating expenses are not significantly different from market expectations, the operating profit under GAAP is 3.56 billion, which is close to the expected 3.48 billion.

Under the Non-GAAP measure, with the addition of stock-based compensation expenses of 670 million in this quarter (compared to 450 million in the previous quarter), the actual operating profit of 4.2 billion also slightly exceeded the market's expectation of around 4 billion.

Dolphin Research's previous analysis on Ctrip:

May 21, 2024 conference call " Ctrip: Grasping the Overseas Market and Inbound Tourism"

May 21, 2024 financial report review " Ctrip: Traveling Overseas with Joy, But Fear of the Cold at High Altitudes"

February 22, 2024 conference call "Ctrip: International Business, Inbound Tourism, AI - 3 Major Strategic Directions in 2024](https://longportapp.com/zh-CN/topics/11690918?app_id=longbridge)"

February 22, 2024 financial report review " Ctrip: Can Domestic Stability be Maintained in 2024, Can Overseas Take Over?"

November 21, 2023 conference call " Ctrip: 15% Growth Next Year, Outbound & Overseas are the Driving Forces"

November 21, 2023 financial report review " After the Violent Recovery, How Far Can Ctrip Go?"

September 5, 2023 conference call " Ctrip: Leisure Travel Trend Will Continue, Incremental Growth Overseas"

September 5, 2023 financial report review " Another Explosion! Is Ctrip a "Rainbow" After the Rain or a "Long Rainbow"?"

June 8, 2023 conference call " Ctrip Minutes: "Trends Unchanged, Demand Recovery Still Strong"" Financial Report Review on June 8, 2023: "Ctrip: Surviving a Great Calamity, Good Fortune Will Follow"

Telephone Conference on March 8, 2023: "Ctrip: How Far Has the Travel Recovery Progressed?"

Financial Report Review on March 8, 2023: "Ctrip's 'Spring' Has Finally Arrived, But Stock Price Surged Too Quickly"

Risk Disclosure and Statement for this Article: Dolphin Research Disclaimer and General Disclosure