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Can Ctrip’s Margins Turn Positive in 2016?

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2Q16 performance

Ctrip saw losses throughout 2014 due to heavy investments in development that increased its costs and caused intense pricing wars, reducing revenue. This changed in 2015, when its operating income rose to $59 million from its $24 million loss in 2014.

However, in 2016, CTRP has reported losses again due to its continued heavy investments. In 2Q16, CTRP reported a loss of $78 million. In 1Q16, it reported a loss of $245 million.

The good news is that the company’s margins have improved substantially compared to 1Q16. In 2Q16, CTRP reported an operating margin of -9% compared to -44% in 1Q16 and 2% in 2Q15.

Ctrip’s non-GAAP (generally accepted accounting principles) operating margins improved to 4% in 2Q16 from 0% in 1Q16. They were, however, below the 8% margin reported in 2Q15.

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Reduced couponing and price wars have helped

Intense competition in China’s online travel market has led to pricing wars, reducing margins. This has prompted CTRP to buy a stake in many of its rivals, including Qunar (QUNR) and eLong (LONG), the two major players apart from CTRP.

As a result, pricing wars and travel coupon rates have subsided. Hotel coupons have reduced from their peak of 20% to the high single digits.

Operating efficiency

The introductions of technologies such as automated customer support have helped to reduce costs. Ctrip’s sales and marketing expenses have fallen by 33% compared to 1Q16, while its general and administrative expenses have remained constant.

Outlook

Ctrip’s margins are expected to improve, given that pricing rationality has returned to the online travel market. CTRP, too, is focused on reducing its costs. Its management’s mid- to long-term aim is to bring the company’s non-GAAP operating margins back up to 20%–30%, a level seen before the intense pricing wars among OTAs (online travel agency) began.

For 3Q16, a peak season for the company, management expects an operating income of 700 million–800 million Chinese yuan.

CTRP forms 1.7% of the First Trust NASDAQ-100 Ex-Technology Sector ETF (QQXT). The ETF also holds 1.6% in Priceline (PCLN), 1.6% in Expedia (EXPE), and 1.5% in TripAdvisor (TRIP).

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