Ctrip: Cashing into China's Booming Tourism Scene

Ctrip (NASDAQ:CTRP) stands as the market leader in China’s Online Travel Industry. It has a strong value proposition as a one-stop online travel platform for the Chinese consumers.

Thanks to the rise in disposable income, China’s burgeoning Middle Class, alongside young and travel-hungry Chinese millennials, demand for travel services is growing rapidly.

With the ease of online booking and a comprehensive catalogue of travel services, we think that Ctrip is the best contender to capitalise on China’s booming tourism Industry.

We value Ctrip at USD 52.19 with potential upside of 20%.

Company Description

Ctrip.com International (NASDAQ:CTRP) is the leading domestic online travel agency in China. It is estimated to account for about 60% of China’s online travel market, bringing in revenue in excess of RMB 26.7 billion in 2017. The company generates about 80% of sales by serving as an online travel platform for accommodation reservations (hotels, serviced apartments, etc.) and transportation ticketing (airlines, railway, bus tickets and rental vehicles). The rest of Ctrip's revenue comes from package tours and corporate travel. Most of its customers access Ctrip’s travel services through three online websites and mobile applications – Ctrip.com, Trip.com and Skyscanner.com.

1. Bright Outlook on China’s Tourism Industry

China has become one of the fastest-growing travel markets in the world, thanks to its burgeoning middle class and their growing affluence. Fuelled by rising disposable income over the last decade, the Chinese are travelling more and spending more on their travels, especially for leisure. China’s expenditure on international travel has risen six fold from 2009 to 2016, driven by the 10% year-on-year growth in disposable income per capita, and is likely to continue its growth momentum (Chart 1).

Chart 1: China International Tourism Spending against Disposable Income Per Capita (2008-2016)

Travel and tourism industry is fast becoming an essential part of the China’s economy. The industry is projected to reach RMB 14 trillion market by 2027, amounting to 11% of whole economy GDP, driven primarily by China's domestic tourism market. Over 5 billion inbound trips were made across China last year – an average of 3.7 trips for every Chinese person.

2. Rapid Construction of China’s Transportation Network to Boost Tourism

The rapid development of China's transportation network, especially its high-speed rail network helped contribute to the boom in domestic tourism market. Railway in particular, is China’s primary medium for domestic travel. It delivered more than 7 billion passengers last year, a 40% surge from 2016. As new rail lines open across 2017, many travellers in eastern China opted to use the rail network to reach destinations in the central and western parts of the country.

With the government’s support, construction of China’s transportation infrastructure is progressing rapidly. Its largest high-speed rail network has been diligently extending its range and is projected to cover over 38,000 km by 2025, almost double that of 2015. China is also ramping up its construction of civil airports to cater to the growing demand for domestic flights. Last year, China’s airports handled over 1 billion passengers for the first time. As regions in China become increasingly interconnected, its domestic tourism industry will thrive, along with travel agencies like Ctrip profiteering from the rising sales of airline and railway tickets.

(Related Article: China’s Railway Industry On Cusp Of Strong Upturn)

3. Shift in Consumer Preference towards Online Travel Aggregators

Online travel agencies (OTAs) have quickly penetrated the travel habits of China’s vast young population. Chinese travellers have become accustomed to using mobile devices to research for travel options and make reservations online when planning their domestic or overseas trips, thanks to the ubiquity and widespread use of mobile digital services in China. To travellers, online booking makes planning for trips convenient and efficient.

OTAs are rapidly gathering market share in China’s travel industry, as more mobile users shift online to settle their travel bookings. The penetration rate for online travel services grew quickly from just 4.8% of China’s tourism industry in 2009 to 13.4% in 2017 and is set to continue its ascend. As a result, the online travel market grew 44% year-on-year from 2009 to 2017 and is projected to continue growing to RMB 1.6 trillion by 2022E. (Chart 2)

Chart 2: China Online Travel Market Gross Market Value (2009-2022)

While traditional offline travel agencies focus more on packaged group tours with little flexibility on travel itineraries, OTAs like Ctrip provide for a highly customisable ‘Do-It-Yourself’ travel experience. Through its travel fare aggregator and metasearch engines – Trip.com and Skyscanner.com – Ctrip provides vital online resources for travellers to pick every aspect of their travel plans, enabling their perfect blend of accommodation and transport options. As Chinese travellers become more experienced and more sophisticated in their travel preferences, they will tend toward OTAs like Ctrip to better tailor their travel plans to fit their needs. Moving forward, we believe Ctrip will be taking even more market share away from the traditional brick-and-mortar travel agencies.

4. Ctrip is King in China’s Online Travel Industry

Ctrip is the largest online travel booking platform in China, having acquired Qunar (one of its main rival) in 2015. Ctrip accounted for 58% of all air ticket bookings and 60% of all hotel bookings transacted online in China in 2016 (Chart 3). Started in 1999, Ctrip has grown from just a booking platform for hotel rooms and air tickets to a dominant online travel powerhouse encompassing nearly all aspects of the tourism industry in China. Among OTAs, we think Ctrip is best-positioned as the primary beneficiary of the China’s booming tourism trend.

Chart 3: Ctrip Market Share in The Top 3 Segments of China’s Online Travel Market (2016)

As the major market player, Ctrip has been effective in utilising its dominance to positively influence its financial performance. From 2012-2017, Ctrip generated solid five-year revenue CAGR of 45.1%, with FY2017 revenue at RMB26.8 billion. With the inherent lucrative nature of OTAs, Ctrip also garnered a high FY17 gross profit margin of over 80%. We expect the growth momentum for Ctrip to continue well into next 3-5 years, especially after the acquisition of its biggest rival Qunar (the 2nd largest OTA) in October 2015. The move enables Ctrip to monopolise China’s online travel market and obtain greater clout on the prices of its travel services, ultimately improving profitability in the process (Chart 4).

Chart 4: Ctrip non-GAAP Operating Margin from 2013 to 2017

5. Venturing Beyond China

Ctrip took its international travel services to the next level following the acquisition of the UK-based travel firm, Skyscanner in 2016. By operating flagship websites Skyscanner.com and Tour.com, Ctrip is looking to expand its operations beyond the primary domestic travel market. The move is not a surprising one, for it serve to extend its catalogue of overseas travel service to China’s growing demand for outbound tourism.

Outbound travel is a key growth driver for Ctrip. This comes as China is the world’s biggest source of outbound travellers. Chinese people made 129 million overseas trips in 2017, a rise of 9.17 percent compared with the previous year. Increasingly favourable visa policies and greater access to travel options are among key catalysts fuelling the Chinese's enthusiasm for overseas travel. Tourist numbers have grown significantly in countries, like Rwanda and South Korea, which have recently relaxed their visa policies.

Acquiring Skyscanner and its partnerships with various downstream travel providers enables Ctrip to expand its catalogue of international air-ticketing, overseas hotel bookings and tour packages options to the Chinese masses. Touting a greater variety of travel option also adds immense value to Ctrip as an online travel aggregator, which we think will entice more Chinese travellers to adopt its travel services.

Investment Risks

a. Disruption and Competitions from New Entrants

With the travel industry on an explosive growth, many competitors may launch aggressive strategies to grab market shares, especially Alibaba (AliTravel), Tuniu and Tencent. The major tech players entering the online travel industry may not care much about the profits of their travel businesses, because they are platform companies that extract value from their consumers in different ways. If the competition ramps up, Ctrip may have to engage in another bout of price war, which will lead to a dip in its margins and profitability.

b. Tighter Regulations on Travel Industry

Prompted by customers’ complaints, the Chinese regulators (China Civil Aviation Authority) has prohibited the shady sales practice of bundling air tickets with optional services, such as insurance and airport pickup services. After the restrictions were in place, Ctrip saw a decline in its revenue growth, especially since the bundled sales account for 30-40% of air ticket revenue. Since the company still bundles its VAS products with the railway/bus ticketing segment, potential further de-bundling action may impose headwinds to Ctrip’s topline growth.

Fair Valuations

We value Ctrip at US$ 52.19 per share, using a Discounted Cash Flow (DCF) analysis, suggesting a 20% upside. Based on our 2018E earnings-per-share of US$1.39, this implies a forward 2018E P/E ratio of 37.4X. We estimate the 5-year revenue CAGR at 21% and 5-years EBIT CAGR at 40% (from 2017E to 2022E).

Since Ctrip has been consistently generating free cash flow, we believe that a DCF model is the most appropriate valuation method. The use of free cash flow to firm (FCFF) is preferred as we expect Ctrip may take on additional debt in the future, on top of its free cash, to maintain and strengthen its leading position in China. We believe that moving forward, Ctrip will actively acquire any new disruptors (or their technology) and strategically invest in business verticals (hotel chains, airline groups, car rental firms, etc.).

The following DCF analysis assumes a weighted average cost of capital (WACC) of 7.84%, which we use as the discount rate for the free cash flow. The terminal value was calculated using one-stage Gordon Growth model with a sustainable growth rate of 2%. We summarise our 5-years free cash flow projections in Table 1 and our subsequent DCF calculations in Table 2.

Other key valuation assumptions include:

600 million share count (ADS - American depository shares) in 2018E – was 560M in 2017

Risk free rate is assumed to be 3.05%, based on the current US 10-year treasury yield

Effective exchange rate (RMB per USD 1) is estimated at 6.35 – was 6.51 in 2017

Table 1: 5-Year Free Cash Flow to Firm Projections (2018E-2022E)

Table 2: Discounted Cash Flow (DCF) Calculations

Table 3: Peers Comparison – Global Online Travel Companies

Investing into China’s Booming Tourism!

With the boom in the tourism industry, we believe that Ctrip.com International (NASDAQ:CTRP) is set to be one of its biggest beneficiaries. As China becomes wealthier and travelling more, the wanderlust generation of Chinese millennials will be key in driving Ctrip’s explosive growth for the years ahead. Not only do they have the propensity to travel more, they are generally more experienced and sophisticated to utilise Ctrip’s online travel platforms extensively.

Beyond an increasingly affluent Chinese consumer base, Ctrip is also venturing out into the global stage with the acquisition of Skyscanner.com and Tour.com, which ultimately serve to expand its total addressable market. Thus, we believe Ctrip is a great stock to invest into for China’s surging travel market!

Declaration:

For specific disclosure, at the time of publication of this report, IFPL (via its connected and associated entities) and the analyst who produced this report hold a NIL position in the abovementioned securities.

The Research Team is part of iFAST Financial Pte Ltd.