Theoretically, shares of Ctrip.com International (CTRP) should be in the gutter right now. It’s a Chinese company, and everyone on the planet knows Chinese stocks have been in a steep selloff since mid-June that may or may not be over yet.
But charts don’t lie. The Ctrip earnings report for its second quarter — posted yesterday afternoon — was more than solid, sending an already-unusually-resilient CTRP stock up 10% on Tuesday.
That gain raises the question — what makes Ctrip different than its Chinese peers?
The answer is a frustrating one, even if obviously true. That is, for better or worse, your use of ADRs (American depository receipts) as an easy means to invest in foreign stocks doesn’t always give you the same performance of that overseas market, or even of that stock’s overseas counterpart.
Of course, that disconnect has worked out for the better for owners of CTRP lately, as well as for U.S. shareholders of many other Chinese ADRs.
Ctrip Earnings, By the Numbers
Last quarter, China’s online travel-booking website Ctrip earned 15 cents per share (or 30 cents, non-GAAP) on $407.7 million in revenue. Not only did the top line beat expectations of $406.8 million, the bottom line trounced estimates for a profit of only a penny per share of CTRP stock. Even better, revenue grew a whopping 47% on a year-over-year basis during the company’s second quarter.
Better still, the online travel agent doesn’t see growth slowing down anytime soon, predicting revenue growth between 45% and 50% for the current quarter. That translates into a third-quarter top line of somewhere between $505 million and $520 million. Analysts had only predicted $495.7 million.
Where Ctrip really shined, however, was its margins. They’re improving rather than shrinking, much to the surprise of many.
How and why? It’s a deliberate effort, and one that’s apt to persist.
During the Q&A portion of the conference call, CFO Cindy Wang noted:
“On the bottom line, we improved our operational efficiency for our all business units and thanks to the heavy investment we made last year all baby tigers revenue ramped up which largely helped us to improve our operation margin. In the third quarter we will work very hard to achieve a non-GAAP operating income at about RMB400 million to RMB500 million which actually represents a year-over-year growth of about 80% to 120%.”
Later in the call, COO Jane Sun stated:
“Our margin will continuously improve as a result of the investment in technology and efficiency and also the yield management we diligently work on. So going forward in Q3 as Cindy mentioned, we will be able to generate [400 to 500] operating margin which represents 80% to 100% growth year-over-year. Our efforts will be kept on going forward into Q4 and next year.”
In other words, like any good company, Ctrip understands that greater scale means nothing if it’s not matched by widening markets.
But How Did CTRP Stock Defy Gravity?
While it was a solid quarter to be sure, it still doesn’t explain how CTRP escaped the fate that most other Chinese stocks have suffered since the Shanghai Composite Index peaked in mid-June and subsequently tumbled more than 30%. In fact, even with the bullish pushback since early July, the Shanghai Composite is still down 30% from its high hit on June 12.
Here’s an “aha” moment for ADR investors: The strength CTRP has exhibited lately isn’t especially unusual, since the connection between any ADR and its foreign-traded counterpart is tenuous.
While most investors anywhere understand that some stocks will rise and fall faster than others, broadly speaking, we can all reasonably expect all the stocks and ADRs from one country to rise and fall together.
However, that hasn’t been the case for U.S.-traded Chinese ADRs lately.
Just look at the performance comparison of the Shanghai Composite Index with the 10 largest U.S.-traded Chinese ADRs since June 15. It’s not clear the Chinese market and these instruments have any kind of decided connection.
The disconnect is made possible by the fact that, when it comes right down to it, U.S. buyers and sellers are the ones determining the price of an ADR — the price of the foreign counterpart has little to do with it.
Augmenting the disconnect between the Chinese market and Ctrip (and a whole slew of other Chinese ADRs) is the extreme bearish sentiment being felt by investors overseas. Chinese investors are awash in seemingly bad news there, spurring strong selling. The dissimilar sentiment being felt by investors of Chinese stocks and ADRs anywhere else in the world, however, is based on the recognition that China’s economic growth is simply slowing down. The country isn’t sinking into the Pacific Ocean.
Bottom Line for CTRP
In other words, while the China-traded version of Ctrip stock may have been hit hard over the past month and a half, the ADRs hasn’t. Here in the United States — where the selling of Chinese stocks isn’t as indiscriminate and fear-driven — CTRP actually still looks like a solid play with a decent tailwind.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities.
