Posted On 2014/08/05 By In Business, News With 575 Views

CTrip’s Earnings reflect how China’s Tourism Industry evolves

The market’s immediate reaction to CTrip’s second quarter earnings release on July 30 was a 3 percent drop in after-hours trading, despite beating analysts’ expectations on the top and bottom line. The reason was because the company posted year-on-year declines in profits and falling margins. Yet looking at the reasons for these, we can see that CTrip is making strong progress in the industry, and is consolidating its position as the market leader in China’s online travel agency (OTA) industry.

In terms of profit margins, gross margin was 72 percent in the second quarter, down from 75 percent a year ago, and operating margin was 5 percent, down from 16 percent a year ago. At the same time, net revenues saw 38 percent year-on-year growth. The reason for this is because the average selling price for accommodation is falling.

On first view, this seems concerning, but the reason for the fall is because CTrip is expanding its presence in Central and Western China. The average price of a hotel in these cities is lower than in the richer coastal cities like Shanghai and Beijing. So as the proportion of accommodation revenues from these regions increases, the firm’s ASP decreases.

Industry trends

There are two major trends dominating the industry. Firstly, consumers are moving away from the traditional call centres and brick and mortar stores to online and mobile transactions. CTrip is finding that 80 percent of its transactions derive from online or mobile sales, compared to 60 percent a year ago. As these two revenue sources continue to grow, CTrip is likely to wind down its call centre operations. This is a common theme in the industry. As call centre costs reduce, more money will be available to invest in mobile services.

The second trend is that firms are actively diversifying their services. The traditional OTA model was for firms to offer flights and hotel accommodation. However, firms have been adding complementary services, such as local attraction tickets, bus and train tickets, and tour group packages. Not only does this create new revenue sources, but it allows firms to offer comprehensive vacation packages. CTrip chief executive James Liang commented that the addition of train and bus tickets allows CTrip to cover every mile of a customer’s journey. It also provides alternatives in the event of plane and train delays or cancellations.

Looking forward

Across the industry, we are likely to continue to see year-on-year decreases in profit from hotel accommodation, as firms compete for market share in Central and Western China. The growing middle class and wealth in these areas will continue to increase the demand for both consumer and business travel services. CTrip’s aim is to increase its market share in these regions, and with its investments in several large domestic hotel chains, it allows the firm to attain immediate access to these regions. It was also encouraging to see that CTrip’s profit margins have stabilised quarter on quarter, which should suggest a bottoming out. As this year has been designated as a year of investment, CTrip investors should see gains in the long run.

The company has about $1.5bn of cash on its balance sheet which it will use to pursue acquisitions and strategic investments. CTrip has previously discussed that it will focus on internal investment for its core businesses, while acquiring firms to add complementary services. One of these complementary services is the tour package business. CTrip made a $15m investment in tour operator Tuniu prior to its IPO this year. The industry itself is still dominated by the offline entities, but online agencies are making gains. As the online operators’ market share grows, it would be strategically viable for CTrip to invest further in Tuniu in order to remove price competition and to create synergies across several business lines. For example, by the end of the second quarter, CTrip had expanded its air ticketing business so that it now works with over 160 international airlines, covering over 3600 cities in 220 countries. Given the scale of this business segment, Tuniu could add a lot of value by offering its services in these destinations.


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Sources:

Article: Saxo Group / Image: Jake Johnson

The market’s immediate reaction to CTrip’s second quarter earnings release on July 30 was a 3 percent drop in after-hours trading, despite beating analysts’ expectations on the top and bottom line. The reason was because the company posted year-on-year declines in profits and falling margins. Yet looking at the reasons for these, we can see that CTrip is making strong progress in the industry, and is consolidating its position as the market leader in China’s online travel agency (OTA) industry. In terms of profit margins, gross margin was 72 percent in the second quarter, down from 75 percent a year ago, and operating margin was 5 percent, down from 16 percent a year ago. At the same time, net revenues saw 38 percent year-on-year growth. The reason for this is because the average selling price for accommodation is falling. On first view, this seems concerning, but the reason for the fall is because CTrip is expanding its presence in Central and Western China. The average price of a hotel in these cities is lower than in the richer coastal cities like Shanghai and Beijing. So as the proportion of accommodation revenues from these regions increases, the firm’s ASP decreases. Industry trends There are two major trends dominating the industry. Firstly, consumers are moving away from the traditional call centres and brick and mortar stores to online and mobile transactions. CTrip is finding that 80 percent of its transactions derive from online or mobile sales, compared to 60 percent a year ago. As these two revenue sources continue to grow, CTrip is likely to wind down its call centre operations. This is a common theme in the industry. As call centre costs reduce, more money will be available to invest in mobile services. The second trend is that firms are actively diversifying their services. The traditional OTA model was for firms to offer flights and hotel accommodation. However, firms have been adding complementary services, such as local attraction tickets, bus and train tickets, and tour group packages. Not only does this create new revenue sources, but it allows firms to offer comprehensive vacation packages. CTrip chief executive James Liang commented that the addition of train and bus tickets allows CTrip to cover every mile of a customer’s journey. It also provides alternatives in the event of plane and train delays or cancellations. Looking forward Across the industry, we are likely to continue to see year-on-year decreases in profit from hotel accommodation, as firms compete for market share in Central and Western China. The growing middle class and wealth in these areas will continue to increase the demand for both consumer and business travel services. CTrip’s aim is to increase its market share in these regions, and with its investments in several large domestic hotel chains, it allows the firm to attain immediate access to these regions. It was also encouraging to see that CTrip’s profit margins have stabilised quarter on quarter, which should suggest a bottoming out. As this year has…

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About

Glenda

Glenda (a California native who began her hospitality and tourism career in Hawaii) has been in the travel and tourism industry for over 25 years and is currently a marketing consultant with the California Travel and Tourism Commission. Glenda’s experience in travel trade training and development was pivotal to the success of opening new tourism offices in Brazil, China, Mexico, Australia, and Korea. In her tenure at the CTTC, Glenda organized sales missions, travel trade and media events worldwide.

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