Surprise, surprise. Yet another Chinese tech stock, Ctrip.com (NASDAQ:CTRP), reported healthy quarterly numbers against the backdrop of what is supposed to be a weakening Chinese economy.
CTRP’s strong Q2 report, which beat on the top- and bottom-lines and included a strong guide, underscores that the fundamentals in the Chinese tech sector remain strong. The market, however, isn’t paying attention to that. Instead, the market is focusing on rising trade tensions and a strengthening U.S. dollar, two headwinds which could slow the Chinese economy.
While such fears are speculation, they create uncertainty. And the market doesn’t like uncertainty. Thus, despite strong underlying fundamentals, China tech stocks continue to struggle, CTRP stock included (it is more than 30% off recent highs).
What is the investment takeaway? Bad optics from rising trade tensions and a strong dollar will hurt Chinese tech stocks in the near-term. But, longer-term, these tech stocks promise to be big winners thanks to robust growth in China’s consumer economy.
One of the big winners will inevitably be CTRP stock. Consequently, the investment strategy here is to wait-and-see, and buy CTRP as China’s economic fundamentals start to stabilize.
CTRP Reports Strong Q2 Numbers
The one takeaway from Ctrip.com’s second-quarter earnings report is that things are actually getting better for the online travel site, which is often referred to as the “Expedia (NASDAQ:EXPE) of China.”
Ctrip has been at the center of a huge, multi-year boom in Chinese consumerism, which has encompassed travel. Quite simply, as consumers urbanize and earn more, they naturally want to travel more and spend those new dollars seeing the world. Ctrip.com owns this market in China. Consequently, revenue and profit growth have been robust for the past several years, and CTRP stock has roared higher.
But, Ctrip stock hit a road-bump in late 2017 when the company was at the center of a child abuse scandal at one of its Shanghai daycare facilities. The PR backlash was bad, and financials were negatively affected.
But, second-quarter numbers affirm that Ctrip is bouncing back from that scandal. Revenue growth accelerated to 13% in Q2, versus 11% in Q1. Moreover, revenue growth is guided to be anywhere from 13% to 18% in Q3. Thus, revenue growth has trended from 11% to 13% to ~15% in 2018, a positive sign that indicates CTRP is getting back to its 20%-plus revenue growth trajectory.
Meanwhile, operating margins are also bouncing back, and they went from 14% in Q1 to 16% in Q2. Management reaffirmed its target to get back to 20% operating margins in the next one to two years, and scale them higher thereafter.
Further, Ctrip.com’s international business is doing quite well. Outside of Skyscanner, the company’s international flight meta-search site, both the international hotel and air businesses reported 40% volume growth in Q2. Skyscanner reported direct booking revenue growth of 600%. And, the company is finding great success in penetrating lower-tier cities in China, with user penetration rates in those cities increasing by 40% year-over-year in Q2.
Overall, CTRP’s second-quarter earnings report was quite good, and it underscores that things at Ctrip.com are actually getting better, not worse.
Chinese Tech Stocks Will Bounce Back
CTRP is the just the latest in a long line of China tech stocks that reported solid second-quarter numbers. Alibaba (NYSE:BABA), Baidu (NASDAQ:BIDU), Weibo (NASDAQ:WB), Baozun (NASDAQ:BZUN) and 58.com (NASDAQ:WUBA) all reported healthy double-beat quarters within the past several weeks.
But, Chinese tech stocks refuse to make a comeback because trade tensions linger and the U.S. dollar remains strong against the Chinese yuan.
Recent weakness in CTRP stock and other China tech stocks will persist so long as those two headwinds linger. It doesn’t seem like the U.S. and China are any closer to resolving current trade issues. Plus, the U.S. dollar, although not strengthening anymore, isn’t showing any signs of weakening, either. Therefore, CTRP and other China tech stocks will likely remain weaker for longer.
But, the underlying fundamentals for these stocks are quite strong. Eventually, bad optics will move to the side, and investors will focus on the fundamentals. The fundamentals here are that China’s per-capita-income and per-capita-household-expenditures remain a fraction of the developed economy norm, implying that as China becomes more developed over the next several years, the consumer economy still has a lot of firepower left.
That firepower will ultimately push Ctrip stock and other Chinese tech stocks way higher in a multi-year window.
Bottom Line on CTRP Stock
Second-quarter earnings were good. But, so long as trade tensions linger and the strong dollar sticks around, CTRP stock won’t rebound back to $50. The big rally in CTRP will have to wait until after trade issues get resolved and the U.S. dollar normalizes.
Until then, Ctrip stock won’t be a big winner.
As of this writing, Luke Lango was long BABA, BIDU and WB.