Long-term Trends Still Favor Ctrip
As the Chinese economy has slowed, so has the remarkable growth of Ctrip. Gone are the days when Ctrip management guided conservatively to 35% net revenue growth while reporting net revenue growth over 50%.
In their most recent quarter, Ctrip reported net income of $18 million, or $0.26 per ADS. Net earnings were down approximately 10% as compared to their prior year. Net revenues for their fourth quarter were $58 million, up 11% as compared to their prior year.
For the year, net revenue was $217 million, up 24% as compared to 2007. Net income was $65 million for the year, or $0.95 per ADS, up 11% as compared to 2007. Share-based compensation seems excessive, as diluted earnings per ADS were $1.22 prior to share-based compensation expenses.
Margins remain impressive at Ctrip, though they have contracted slightly. Gross margins were 78% for 2008 as compared to 80% for 2007. Operating margin was 31% as compared to 34% for 2007. Margin compression seems to be more a result of revenue mix than any deterioration in their business as lower margin businesses such as air ticketing grew at a faster rate than other businesses.
Most important for Ctrip is their outlook. The company projects net revenue growth in the 5-10% range for 2009. Following that, valuing the company becomes more difficult. In the past Ctrip’s growth has been coupled with the expanding Chinese middle-class. If this growth resumes at even half the previous pace when the economy recovers, Ctrip will see some gains in their shares.
As a quick valuation, I assume Ctrip grows earnings per ADS at 6% over the next two years, followed by 10% growth in year three and 15% growth in years four and five. Based on this projection, ending year five earnings per ADS would be $1.55. Assuming a 15% growth rate and a price to earnings growth ratio of 1.5, the year five P/E would be about 22.5x. This results in a stock price of about $35, approximately an 85% gain over today’s prices.
All of this is purely speculative. The Chinese economy could well crash harder than the U.S. Or, they could continue GDP growth. Ctrip certainly seems well-positioned to take advantage of any growth that may occur. I will likely hold remaining shares of Ctrip as there is still a good deal of potential for growth. The company is strong with over $175 million in cash and no debt. Long-term trends are in the company’s favor. A small speculative long-term position certainly looks worthwhile.
Disclosure: I currently hold shares of Ctrip
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