Ctrip com International:Buy,Super app strategy drives strong results

Travel super app well positioned against competition: Over the past 18years,Ctrip has established itself as the one-stop shop for all travel needs of domestictravellers through product innovation and the development of an ecosystem in Chinaand abroad. In hotels, the Ctrip brand targets business and high-end travellers, andQunar is growing rapidly in lower tier cities. Indeed, hotel revenue in tier 3and 4citeshas grown over 80% y-o-y for three straight quarters. In its ecosystem, it is thelargest investor in Tujia, the domestic rival to Airbnb, with 650,000online listings,growing booking volume at 300% y-o-y. In air ticketing, Ctrip experienced a 250%y-o-y increase in tickets sold through Skyscanner due to direct bookings. Skyscanneritself grew transactions 3x from May to September due to direct bookings. In packagetours, franchise Bestone stores in lower tier cities are a differentiated approach togrow brand awareness and volume in the medium term. In our view, better-thanexpected3Q17results affirm Ctrip’s super app strategy is working. Separately,Priceline’s (PCLN US, Not Rated) recent investment in Meituan is intended tostrengthen Agoda; Ctrip’s partnership with Priceline remains strong, particularly withBooking.com for non-Asia hotel inventory.

    3Q17results better than expected. Net revenue grew 42% y-o-y to RMB7.9bn, withaccommodation revenue up 36% y-o-y, transportation ticketing up 41%, packagetours up 27%, and corporate travel up 22%. As of 3Q17, transportation ticketingmade up 43% of total revenue, hotel reservations 35%, packaged tours 13%,corporate travel 3%, and 6% for other services. Adjusted OPM was 22% vs 18% ayear ago, in line with our estimate, driven by operating efficiency and continuedsynergies with Skyscanner. Adjusted EPS of USD0.41beat our estimate by 50%,helped by subsidies and an investment gain. Ctrip is currently offering all its valueaddedservices (VAS, including such as hotel vouchers, insurance and VIP lounges)on an opt-in basis. This will likely negatively impact air ticketing and Ctrip expects4Q17net revenue to grow 25-30% y-o-y vs consensus of 29%. Adjusted OPM isguided to be 14% (vs our estimate of 12%). Ctrip expects the impact to lift in 2Q18.

    Estimate changes. We reduce our EPS estimates to reflect lower margins from airticketing, while leaving our revenue estimates unchanged. For 2017e, we raise OPM by49bp to reflect strong 3Q17results but trim 2018e OPM by 126bp to reflect weakmargins in 1H18e due to air. Better-than-expected 3Q17EPS leads us to raise our2017e EPS by 31% but lower margins lead us to reduce 2018e EPS by 4%. For 2017-18e, we expect net revenue to grow 40% and 23%, with OPM stable at 18%, butreaching 25% by 2019e. Maintain Buy and trim our DCF-TP to USD54from USD56.