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Steady on Ctrip, says Nasdaq exchange, but with good reason?

As the fastest growing outbound travel market in the world, should Ctrip worry about impatient investors? Sally White takes a look

Growth is great! But not if it’s at the expense of margins! And not when the pay-off for investors could be a couple of years ahead! That was Nasdaq’s message last week to the management of China’s largest on-line travel group International. Investor unhappiness at being caught in the Chinese travel industry’s on-going price war shows all too clearly in share price – $69 back in September and now very near $50. has been one of the best Chinese performers. Its $944m 2013 sales figure gave it 46% and leadership of its domestic market. The founders have steadily driven growth by ploughing back profits. Over the last three years, in particular, they’ve stepped up sales marketing investment and capital expenditure for promotional discounts and coupons to customers.

Recent Q3 results, while beating forecasts, were dented by that policy. Although sales were strong, the operating margin was down at 11% (similar to Q2) against 27% a year ago. According to management this is because 2014 is an ‘investment year’. The strategy has been to create not just demand, but high barriers to entry against competition.

For investors, so far so not so good – the shares are, after all, rated at a stratospheric 70x times earnings. But things are going to get worse! 2015 is to be another year of ‘investment’ and with a vengeance! The guys are keeping up the punishment, so Q4 margin recovery is not going to happen. The company expects to go into the red with margins of minus 12-17%.  Set that against stock market hopes of recovering profits and positive margins of 14% and you can see why the share price fell. is unrepentant. “Rather than taking a little relax, we should fuel that momentum to further invest in the entry barriers,” Chief Strategy Officer Jenny Wu said in a broadcast to market analysts. Rubbing salt into it, she seemed to think investors should be “patient”.

But for how long? Her boss, co-founder, chairman and CEO James Liang made it quite clear to journalists that it was for some time yet, and has been widely quoted as saying “maybe a year or two”. For him, clobbering the competition was the priority as global travel players such as Alibaba and Amazon look at joining a fast-expanding group of locals in China’s rapidly growing e-travel market.

Long term he still expects margins to get back to the 20-30% that attracted investors. Right now, however, the steer is, 2015 Q1margin growth is likely to be flattish with the year delivering at much the same level as 2014 (low to mid-single digits). However, the company does tend towards the over-conservative in its statements.

Will investors be patient? As of close of play last week few ‘sell’ recommendations were out there (a bull point since the analysts have a history of over-caution on the stock). Not surprisingly, perhaps, given China’s massive demand, with in-going and out-going travel rising at an annual 10%.

Sally White is an independent economist, consumer market and financial analyst and writer who works in the UK and western and eastern Europe and travels extensively. She has published in national newspapers, magazines, radio and television, and on web-based media, and has run programmes for the BBC and edited sections of the Times, Telegraph and Evening Standard.

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