Exploded again! Does Ctrip see a rainbow after the prolonged rain?

After experiencing three years of major disasters, Ctrip, which seemed a bit old-fashioned before, has undergone a complete transformation. So, has Ctrip really rejuvenated or just recovered after the epidemic?

Dolphin Research carefully analyzed the second-quarter performance released on September 5th to give everyone a quick overview of the key figures:

I believe that after reading it, everyone's impression is the same as Dolphin Research's. Whether it's the year-on-year comparison, which is relatively abstract, or the comparison with the same period in 2019, Ctrip's revenue recovery is quite strong.

However, from the perspective of expectations, the strong performance is already in line with the high market expectations. The actual results are indeed good, but they did not significantly exceed market expectations.

In this situation, Ctrip's outlook in the conference call becomes particularly important. Dolphin Research will explain it in detail later. In terms of specific analysis, Dolphin Research will still follow the three logical threads of Ctrip's post-epidemic investment:

The supply reduction during the epidemic and the rebound in demand after the epidemic will bring dual elasticity of income growth and market share improvement to leading companies like Ctrip.

After actively improving efficiency and reducing costs in extreme environments, Ctrip has achieved a "permanent" increase in operational efficiency and profit margins.

The development of pure overseas business brings incremental profits and upward valuation potential.

I. Is Ctrip the leader in outbound travel?

In terms of revenue, Ctrip achieved a net income of 11.2 billion yuan this quarter, which is slightly better than the market's estimated 10.8 billion yuan, although the difference is not as significant as in the first quarter. The degree of revenue recovery reached 129% of the same period in 2019, further expanding the recovery compared to the first quarter.

The two main sources of revenue are: 1) ticket booking revenue, including flights and train tickets, which reached 4.8 billion yuan, recovering to 141% of the same period in 2019, which is a good recovery. 2) Accommodation booking revenue reached 4.29 billion yuan, recovering to 126% of the pre-epidemic level, which is not surprising.

The key is to look at the sources of growth:

a) In terms of outbound travel by Chinese tourists, the industry's flight recovery rate is less than 40% of 2019, but Ctrip's outbound business has already recovered to 60% of the pre-epidemic level, showing a very obvious growth rate. Moreover, outbound flight and hotel packages have higher average prices but similar service costs, so the faster recovery of outbound business will bring higher profit elasticity.

b) Pure overseas business (mainly Trip.com and Skyscanner); flight bookings have doubled compared to 2019, and hotel business, with a lower base, has more than doubled compared to 2019. However, overall, although the growth rate of pure overseas business is fast, its proportion is still relatively small.

c) Domestic business is still the main source of revenue - the restoration of domestic travel during several holidays is evident to all. Ctrip's domestic hotel revenue is 60% higher than the same period in 2019, which is also outperforming the industry.

II. Other businesses: How much potential does business travel have? Can "content" bring Ctrip a second spring in advertising?

In addition to these two core businesses, Ctrip has three other major businesses - package tours, business travel, and primarily advertising.

a) Among these three businesses, group tours have already surpassed the same period in 2019, although the recovery of outbound group tours is slower.

b) Business travel has undergone significant changes in product services compared to before the pandemic, but its impact is small due to its small base.

c) Advertising, which is primarily focused on, accounts for a relatively large proportion of these three types of businesses. Due to continuous expansion during the pandemic, advertising revenue has exceeded pre-pandemic levels by 160%.

Overall, the recovery space and progress of outbound group tours will determine the future of these three businesses.

Based on the above content, Ctrip's performance in the second quarter is still impressive. However, after two consecutive quarters of strong performance, market expectations have already been raised. Although the second quarter performance is very good and better than market expectations, it did not significantly exceed market expectations.

III. Most importantly, how long can the short-term travel recovery last?

In terms of the current market valuation of Ctrip, it actually needs to consistently deliver performance that exceeds expectations, not only in terms of current performance but also in terms of performance guidance.

Based on the content of the conference call, there is still a high probability of exceeding expectations in the third quarter, and the fourth quarter is unknown, but there may not be a need to be overly pessimistic.

Let's first look at the third quarter:

Third quarter: In July, domestic air ticket bookings reached 110-115% of the 2019 level, and the hotel industry's RePAR reached 110% of the 2019 level. As for Ctrip itself,

a. As of the end of the third quarter, domestic hotel bookings reached 70% of the same period in 2019 (driven by room nights and ADR), and during the peak summer season, it reached 100% of the same period in 2019.

b. Most of the revenue from the National Day holiday will be accounted for in the third quarter, and the recovery level should be comparable to the peak summer season, with a year-on-year growth rate of 100% compared to 2019.

At the industry level, China's outbound international flights have recovered to over 50% of the 2019 level (less than 40% in the second quarter). As for Ctrip,

a. Outbound flight and hotel business has recovered to 80% of the 2019 level (60% in the second quarter). The same industry recovery will bring higher growth elasticity in outbound revenue for Ctrip. b. Compared to the low base in 2019, pure overseas business still maintains a high growth rate of over 100%.

Now let's look at the fourth quarter:

For Ctrip, the travel during the National Day holiday is counted in the third quarter, and after the National Day holiday, the weather becomes colder and the holiday period is shorter. Historically, the fourth quarter has always been a weaker season compared to the first quarter (Spring Festival travel + shorter season).

However, it is worth noting that there may be some differences in this fourth quarter:

a. When the weather is cold, although domestic tourism is seasonally quiet, outbound travel to warmer regions (such as Southeast Asia) performs relatively well.

b. According to the information from the China Air Transport Association, the number of outbound travel flights in the second half of this year will further recover from 50% during the summer vacation to 60-65%, indicating a greater recovery potential.

Therefore, Dolphin Research believes that the industry needs to be observed, but there is no need for excessive concern for Ctrip.

IV. Operating leverage is still being released, but marketing expenses have increased

From a profitability perspective, first, the gross profit margin remains stable at 82.2%, which is still significantly higher than the pre-pandemic level of less than 80%. However, despite the significant growth in revenue, the gross profit margin did not continue to increase.

On the expense side, both the administrative expenses and research and development expenses have only slightly increased compared to the first quarter. Under the dilution effect of revenue scale, the research and development expense ratio, excluding equity incentives, decreased from 27% to 24.2% on a MoM basis, and the administrative expense ratio decreased from 7.9% to 6.5%.

However, as the popularity of tourism increases, the company has also increased its promotional investment, resulting in a significant increase in Ctrip's marketing expenses from 1.72 billion to 2.31 billion on a MoM basis. The expense ratio also increased from 18.7% to 20.5%.

Due to the stable gross profit margin, the increase in marketing expenses partially offset some of the benefits from cost control, resulting in a further increase of 2.4 percentage points in Ctrip's operating profit margin on a MoM basis. However, the magnitude is not astonishing. The GAAP operating profit reached 2.98 billion, slightly exceeding the expected 2.8 billion.

Therefore, Ctrip's operating efficiency and profit margin continue to improve, but the magnitude is no longer as astonishing.

On the net profit front, although Ctrip's net profit for this quarter is only 630 million under GAAP, it appears to have declined significantly. However, this is mainly due to the company's recognition of approximately 2.35 billion in investment losses this quarter (specific reasons can be expected to be explained by management in subsequent conference calls). Excluding this impact, the net profit under the Non-GAAP measure, which reflects the true profit capability, still reached 3.43 billion.

Fifth, the soul-searching question: What is Ctrip's long-term growth?

The current profit expectations have already been significantly raised (with a baseline of 10 billion RMB in net profit for 2023), and in addition to the certainty of exceeding current EPS expectations, the further increase in valuation also depends on the long-term sustained growth expectations. Ctrip has provided its own answer to this question, with a long-term growth target of 15-25%.

The specific deduction process is as follows:

Assuming that the post-epidemic GDP normal growth rate is around 5%;

The tourism industry usually outperforms GDP by a few percentage points, corresponding to an industry growth rate of about 7-8%;

Online travel agencies (OTA) generally slightly outperform the overall tourism industry;

Ctrip's outbound travel has growth potential, and both ADR and air tickets will be relatively more expensive;

Dolphin Research believes that the overall judgment is still reasonable, but one factor that has not been particularly considered here is domestic competition: although Ctrip has a relative monopoly in outbound travel, there are still competitors like Meituan in domestic travel, and the actual realization path may not be smooth. Perhaps a target of less than 20% is more realistic.

Sixth, Longbridge Dolphin Research's viewpoint

First of all, from Ctrip's second-quarter performance, both revenue growth and profit release are progressing "by leaps and bounds," which also verifies that Ctrip's recovery is clearly ahead of the industry's recovery.

Looking at the certainty of short-term EPS growth, based on the current recovery situation in the third quarter, there is still a high possibility of exceeding expectations in the third quarter. The fourth quarter will inevitably experience seasonal decline, but whether there will be a decline beyond the seasonal norm remains uncertain. However, Dolphin Research tends to believe that it may not be necessary to be overly conservative about Ctrip's fourth quarter, after all, compared to tourism peers that focus on domestic travel, Ctrip still has outbound travel (flights) to provide support.

As for the current stock price position, for Ctrip's stock price to further rise, in addition to the certainty of short-term EPS (with a baseline of 10 billion RMB in net profit for 2023, which currently seems to be not a big problem), it also depends on the judgment of long-term growth. This question involves how much PE is appropriate for a normalized profit of 10 billion RMB.

The company's current long-term growth target is 15-25%, and Dolphin Research tends to be within 20%. In terms of profit margin, based on the adjustment of the revenue structure of domestic and outbound travel, there may still be some room for upward growth, and the profit has the potential to achieve an annualized YoY growth of over 20% based on a normalized profit margin of 20%+. And landing on short-term judgments, Dolphin Research believes that a profit of 10 billion yuan, corresponding to a PE ratio of 20 times, should be a reasonable valuation, which is the current valuation of 200 billion yuan.

And in the short term, during the process of the third quarter performance surge, the PE ratio may have the potential to exceed 20 times, such as reaching 25 times, or annual profits exceeding 10 billion yuan, corresponding to 250 billion yuan (approximately 34 billion US dollars, with a 30% upward elasticity). However, once this position is reached, Dolphin Research believes that the implied long-term growth requirements behind the valuation have become relatively high and it is necessary to lock in profits in a timely manner.

Dolphin Research's historical Ctrip research

June 8, 2023, conference call: "Ctrip Summary: 'Trends Remain Unchanged, Demand Recovery Still Strong'"

June 8, 2023, earnings report review: "Ctrip: Surviving the Hard Times, There Will Be Good Fortune"

March 8, 2023, conference call: "Ctrip: How Far Has the Travel Recovery Come?"

March 8, 2023, earnings report review: "Ctrip's 'Spring' Has Finally Arrived, But the Stock Price Has Run Too Fast"

Risk disclosure and statement for this article: Dolphin Research Disclaimer and General Disclosures