Ctrip (CTRP), China’s biggest online travel company, hit a 52-week high of $33.02 in the final 30 minutes of last Thursday’s trading. It has improved 45% year-to-date, and 76% in the past 12 months.
Historically, though, this is a stock that has underperformed both the S&P 500 and its lodging industry peers. This is only the second time in five years where it’s actually beating the index, so something must be driving the rebound.
Citigroup’s upgrade from “sell” to “neutral” in mid-May seems to have helped Ctrip’s cause — since the upgrade, the stock is up 7.3% through 14 days of trading. A half-percent per day isn’t too shabby, but it had already booked big gains before that. The really big gain came after announcing strong earnings after the close May 8; the stock jumped 26% the next day on seven times the average daily volume. Citigroup analyst Muzhi Li suggested Ctrip was experiencing a secular growth trend, which is a fancy way of saying it’s growing despite a slowing Chinese economy.
But before investors jump on the bandwagon, they should take a closer look at its earnings report to notice the cracks in CTRP’s armor. The top line revenues grew 27% year-over-year to RMB1.2 billion — much higher than the company’s estimate of 20% growth. However, the bottom-line figures leave a lot to be desired. Gross margins declined by 100 basis points to 74%, while operating margins dropped 500 basis points to 14%. And net income attributable to Ctrip shareholders declined 26% in the quarter to RMB153 million.
Morningstar gives CTRP a one-star ranking, which I imagine is because the stock has gone through the roof while having little control over its expenses, which all increased by double digits in the first quarter. In fact, its operating expenses increased 37% in Q1, 37% faster than its revenue. Ctrip will have to grow revenue at a much faster rate if it continues to ignore its expenses. And given its history, I’m not sure that’s possible. Any stumble on revenue growth will bring its stock tumbling back into the low $20s. For this reason, I’d be locking in profits pronto.