Ctrip.Com International Ltd (ADR) Stock Looks Risky

Advertisement

CTRP stock - Ctrip.Com International Ltd (ADR) Stock Looks Risky

Source: Thomas Galvez via Flickr

Investors certainly gave Ctrip.com International Ltd (ADR) (NASDAQ:CTRP) the benefit of the doubt last week. CTRP stock opened down on Thursday, after what looked like disappointing guidance in conjunction with fourth-quarter earnings. Yet, a Friday rally moved Ctrip stock higher, with the stock touching a five-month high during the day.

For the most part, the market seems to accept Ctrip.com’s explanation that revenue growth was hit by short-term factors that will reverse as 2018 plays out. On that front, management had better be right. CTRP stock isn’t cheap and, if growth doesn’t rebound, it likely has downside ahead of it.

Q4 Earnings

On their own, Ctrip.com’s Q4 results look rather solid. Revenue rose 26% year over year in RMB — a still impressive clip. But the figure represents a notable deceleration from the 40%+ growth seen through the first nine months of the year, and came in at the low end of 25-30% guidance given after Q3.

More concerning on the top line is the fact that Q1 guidance is even worse, with Ctrip.com projecting just a 9-11% increase in revenue. A regulatory change surrounding VAS (value-added services), notably insurance, is having an impact. So is a scandal that arose last November surrounding incidents at a Ctrip daycare center (which the company itself didn’t operate).

But those two issues alone don’t explain all of the deceleration. On the Q4 conference call, Ctrip.com CFO Cindy Wang forecast a “flattish” quarter for transportation — due largely to the loss of VAS bookings. Accommodation revenue, too, is guided to slow its growth, as are packaged tour sales.

All told, there’s clear reason for concern on the top line. CTRP management seems confident that growth will accelerate in the second half — and, so far, investors seem to be taking that projection at face value.

On the margin side, the news was a bit better. Gross margin rose 5 points to 83% in the quarter, thanks in large part to increased usage of artificial intelligence in customer support. But Ctrip.com invested those benefits in operating expenses: non-GAAP operating margin declined to 14% from 16% the year before.

Overall, it’s a questionable quarter at best. It doesn’t, on its own, break the growth story for Ctrip stock. But it certainly raises some concerns.

The Bull Case for CTRP Stock

And, for now, investors are focused on that growth story. Q4 performance and Q1 guidance aside, Ctrip still has posted extremely impressive performance. Revenue still rose 39% in 2016. Non-GAAP operating income more than doubled. Non-GAAP earnings per ADS rose 83%, despite a higher income tax rate.

So if Q4 and, in particular, Q1, are just a bump in the road, there’s still a lot to like about Ctrip stock. FY18 analyst estimates suggest a 41 P/E for a company still growing at a fast rate. Ctrip still has a low take rate, as management pointed out on the Q4 call; taking a large share of ticket bookings could help both revenue and margins. Demand in China should rise as the middle class expands. Ctrip has the opportunity to expand into adjacent countries as well.

There’s a reason why investors are willing to give Ctrip the benefit of the doubt. There’s still an attractive growth story here — if it continues.

Caution Toward Ctrip Stock

Coming out of Q4, however, that seems like a big “if”. It’s not clear that the child care scandal — fairly or unfairly — will dissipate as quickly as management believes. The lost VAS revenue was high-margin, and could provide more gross margin pressure into 2018. Margins already weakened in 2017, with some of the gross margin expansion coming from the acquisition of Skyscanner Ltd.

But the most obvious risk here is in terms of competition. That was a clear focus of the Q4 conference call. Booking Holdings Inc (NASDAQ:BKNG) owns a $500 million stake in Ctrip — but also has made Chinese expansion a focus itself. Fliggy, backed by Alibaba Group Holding Ltd (NYSE:BABA), is trying to take share.

Co-founder James Liang said on the Q4 call that Ctrip itself only had 10% market share, with that market big enough for everyone. An expansion into physical travel stores should help drive revenue growth as well.

But those stores also could further pressure margins. And if revenue growth doesn’t return in the second half of 2018, that would suggest relatively modest earnings growth this year. At 41x 2018 earnings, “modest” growth probably isn’t enough.

All told, there simply seem too many risks here. And it’s not as if Ctrip’s story isn’t available elsewhere. I still like JD.com Inc(ADR) (NASDAQ:JD) as a play on the Chinese consumer. Macau-facing gaming stocks like Wynn Resorts, Limited (NASDAQ:WYNN) and Las Vegas Sands Corp. (NYSE:LVS) both offer exposure to tourism growth.

Those stocks have similar valuations — and seemingly fewer risks. And all, right now, seem more attractive than CTRP stock.

As of this writing, Vince Martin has no positions in any securities mentioned.

After spending time at a retail brokerage, Vince Martin has covered the financial industry for close to a decade for InvestorPlace.com and other outlets.


Article printed from InvestorPlace Media, https://investorplace.com/2018/03/ctrip-com-international-ctrp-stock-risky/.

©2024 InvestorPlace Media, LLC