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Can Ctrip Expand Its Margins in 2016 and Beyond?

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Analyst estimates

For 3Q16, analysts are estimating that Ctrip.com International (CTRP) will report a loss of $34 million, with a net margin of -4%, as compared to its net margin of 76% in 3Q15. The company’s net income is expected to fall to -$15 million in 4Q16, with a net margin of -2%, as compared to its net margin of 3% in 4Q15.

For 2016, the company’s net income is expected to fall to -$352 million, with a margin of -12%, as compared to its margin of 23% in 2015.

Ctrip’s net margins are expected to rise to 6% in 2017 and then rise further to 12% in 2018. Its net income is also expected to grow to $237 million and $585 million in 2017 and 2018, respectively—higher than the growth seen in 2016.

Rival Priceline’s (PCLN) and Expedia’s (EXPE) margins are expected to rise in 2016, while TripAdvisor’s (TRIP) margins are expected to fall in 2016.

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Heavy investments

Ctrip.com is China’s leading online travel agency. To accomplish this, CTRP has had to spend heavily in building infrastructure, including manpower and technology. Ctrip’s sales and marketing expenses accounted for 33% of its net revenues and have increased by a whopping 114% YoY (year-over-year) in 1Q16, as compared to a 73% YoY growth in revenues in 1Q16, and by 97% YoY in 2Q16, as compared to 65% YoY growth in revenues.

Industry consolidation to help

China has seen tremendous growth in its online travel industry and is expected to continue growing this year. This has meant intense price wars as everyone tries to snatch a bigger share of the market pie. Ctrip.com’s response has been to consolidating the Chinese OTA (online travel agency) industry by acquiring a stake in China’s OTA rivals.

It’s expected that this move will help stabilize rates, which according to management, is already visible in high-end hotels. Coupons to customers have also been reduced, which should further help the company improve its margins.

Outlook

Ctrip.com’s spending seems to be easing off, while industry consolidation should help keep pricing wars at bay. Both of these trends are good news for investors because they mean that Ctrip.com will see strong margin expansion in the coming year. This prospect is visible in Ctrip.com’s improving gross margins—72% in 2Q16, as compared to 71% in 2Q15, and 72.8% in 1Q16, as compared to 69.5% in 1Q15.

Investors can gain exposure to Ctrip.com by investing in the First Trust NASDAQ-100 Ex-Technology Sector Index Fund (QQXT), which invests 1.5% of its total holdings in Ctrip.com.

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