Ctrip.com (CTRP) made losses throughout 2014 due to heavy investments in development that increased its costs and intense pricing wars that reduced its revenue. That changed in 2015.
For 4Q15, Ctrip.com reported operating income of $15 million—compared to a $65 million loss in 4Q14. The operating margins increased to 3% in 4Q15—compared to -21% in 4Q14.
For fiscal 2015, the operating income rose to $59 million in 2015 from a $24 million loss in 2014.
Cost discipline helps
Ctrip.com’s cost discipline helped it achieve margin improvement. One important change was the disciplined increase in the call center headcount. In the past two years, Ctrip.com’s call center efficiency improved significantly.
Industry consolidation helps too
Intense competition in China’s online travel market led to pricing wars. This reduced the margins. This prompted Ctrip.com to buy stakes in many of its rivals including Qunar (QUNR) and eLong (LONG)—the two major players apart from Ctrip.com. As a result, the pricing wars subsided.
This is evident from the gross margin improvement. The gross margins improved to 72% in 2015—compared to 71% in 2014.
In the last conference call, Ctrip.com’s management emphasized the fact that pricing rationality returned to the online travel market. This will help boost its margins. Management’s mid to long-term aim is to bring the non-generally accepted accounting principles operating margins back up to 20%–30%. This level was seen before the intense pricing wars started among OTAs. For 1Q16, management expects an operating loss of $15 million to zero loss.
Analysts expect Ctrip.com’s margins to increase to 8% in 2016. Expedia’s (EXPE) EBITDA margins are expected to increase to 19% in 2016 and 21% in 2017. Priceline’s (PCLN) margins should increase to 41% in 2016 from 40% in 2015. TripAdvisor’s (TRIP) margins will likely be constant at 31%.
Ctrip.com is the fourth-largest holding of the EGShares Emerging Markets Consumer ETF (ECON). It accounts for 4.3% of ECON’s portfolio.
Currently, Ctrip.com (CTRP) is trading at a forward PE (price-to-earnings) multiple of 85.5x. This is higher than its average valuation of 37x since April 2004.
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