Ctrip's "Spring" has finally arrived, but the stock price has just skyrocketed too quickly.

Ctrip released its financial report for Q4 recently. The significance of observing revenues during the COVID-19 pandemic that has oscillated between extremes of "lying flat" and "standing up" this quarter is minimal.

There are only two key pieces of information that really count in this report:

1) After years of extreme survival challenges, Ctrip's current operational efficiency corresponds to the amplification of future revenues. This speaks to the additional margin expansion potential. To a certain extent, one can find clues by examining Ctrip's cost control level in Q4.

2) How far along is the recovery after the pandemic? Especially in terms of higher gross margin contributions from international businesses (including outbound travel and pure overseas operations), as well as the recovery of high-end hotels in China?

1) Cost control capability

In terms of the first issue, Ctrip's Q4 revenue and profit both slightly exceeded market expectations. Revenue was 5 billion yuan, exceeding market expectations by around 100 million yuan. In these special times, plus or minus 100 million yuan can only be considered within the margin of error.

The main source of confidence, however, comes from Ctrip's cost control. Its gross margin was higher than expected (higher by one percentage point), and its cost rate was lower than expected (lower by nearly three percentage points).

This confidence is due to the fact that Ctrip's extremely slimmed-down operations during the pandemic will result in higher operating efficiency and profit margins for each of its business units as revenue rapidly recovers. The company has indeed conveyed this message during subsequent conference calls.

As a result, Ctrip's adjusted net profit (Non-GAAP) for Q4 was not the negative value the market had expected, but a positive net profit of 500 million yuan. For comparison, the company's GAAP net profit of over 2 billion yuan was mainly due to unrelated investment floating income, which is not very meaningful. The profit generated from its main business was -240 million yuan, compared to a market expectation of -500 million yuan.

2) Business progression:

The answer to the second issue is not in the financial report, but in the conference call after it (click here for the minutes).

Based on Ctrip's conference call, we think the transportation sector has performed relatively well in terms of recovery progress. For outbound travel, bookings have already reached over 40% of pre-pandemic levels, with airline ticket supply restored to 20% of 2019 levels. The ability to increase this further will depend on the rate of reopening of Japan and South Korea as travel destinations. Outbound travel (especially airline tickets) may have significantly surpassed levels seen in Q4 of 2019.

3) Incremental progress:

In addition to its main business, which has generated recovery in recent years in the wake of the pandemic, Ctrip's Trip.com business has seen very rapid growth in flight bookings, which increased over 200% after being opened up in December and now surpasses 300%. The recovery of the hotel business has been slower due to the weaker localization inventory. In addition to another key business, the main information on domestic hotel bookings is that long-distance travel bookings have rebounded strongly and exceeded pre-pandemic hotel booking levels in 2019, but ADR has not yet returned to comparable levels due to the increase in the proportion of low-end hotel room nights.

4) Discussion on Valuation:

The above three issues represent the three major valuation points affecting the new Ctrip after the epidemic:

1. Whether the profit margin can step up again, for example, from the previous level of 20% to the long-term target level of 25%-30%;

2. With retaliatory travel and entertainment consumption accompanying epidemic repair, how much upper elasticity does the existing business have;

3. After the logic is completed, how much incremental revenue growth can be brought by the incremental plate (mainly pure overseas business) after years of hibernation and cultivation.

The current market's logic for Ctrip's valuation is mainly threefold: 1) the supply-side clearance during the epidemic + retaliatory consumption after the epidemic make the surviving and still industry-leading companies more resilient to short-term revenue growth; 2) the development of incremental markets during the epidemic can bring additional valuation imagination space; 3) the cost reduction and efficiency improvement over the past few years can bring higher operating profit to Ctrip;

Ctrip's current valuation is close to USD 25 billion, and the stock price is close to the high point of the pandemic. This has fully incorporated the logic of repair and cost reduction and efficiency improvement. Under Dolphin Jun's optimistic estimate, the company is expected to have a operating profit of RMB 10 billion (compared to RMB 5 billion in the same period in 2019) this year, a net profit of RMB 8.5 billion, and a valuation of USD 30 billion based on a PE ratio of 25 times. Compared with the current market value of USD 24-25 billion of the company, there is not much room left.

However, currently domestic travel (especially cross-border travel) is still in the early stage of recovery, and in the subsequent stage of rapid performance recovery and high market sentiment, the company's stock price may significantly exceed Dolphin Jun's valuation of USD 30 billion.

But in other words, when the valuation exceeds USD 30 billion, it gradually departs from the range supported by performance and enters the emotional range. In the medium and long term, the further upward value of the company may need to see incremental businesses such as significant growth in overseas Trip.com.

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