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Can Ctrip Remain Profitable in 2016 and Beyond?

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Nov. 30 2016, Updated 8:05 a.m. ET

3Q16 performance

For the first half of 2016, Ctrip.com (CTRP) reported losses due to heavy investments. For 1Q16, it reported a loss of $245 million and for 2Q16, the Chinese online travel agency (or OTA) reported a loss of $78 million.

Ctrip.com saw losses throughout 2014 due to heavy investments in development that increased its costs, as well as intense price wars that reduced revenues. This changed in 2015, as its operating income increased to $59 million, up from a $24 million loss in 2014.

Ctrip became profitable in 3Q16, reporting an operating margin of 8% compared to -44% in 1Q16 and 13% in 2Q15. Ctrip’s non-GAAP[1. generally accepted accounting principles] operating margins improved to 18% in 3Q16 compared to 17% in 3Q15, 0% in 1Q16, and 4% in 2Q16.

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Operational efficiency

Introducing technologies such as automated customer support have helped Ctrip reduce its costs. Sales and marketing expenses in 3Q16 fell 33% compared to 1Q16. The company’s general and administrative expenses have remained constant.

Reduced couponing and price wars helped

Intense competition in China’s online travel market led to price wars, which reduced industry margins. This prompted CTRP to buy a stake in some of its rivals, including Qunar (QUNR) and eLong (LONG). Qunar and eLong were two major industry players.

As a result, price wars and travel coupon rates have subsided. For example, hotel coupons have fallen from their peak of 20% to the high single digits.

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Outlook

The online travel market’s margins are expected to improve now that pricing stability has returned to the industry. CTRP is focused on reducing costs. Ctrip management’s mid-term to long-term aim is to return non-GAAP operating margins to 20%–30%, a level seen before the intense price wars among the OTAs began.

Investors should note that 3Q16 is the peak travel season for the company, which helped it achieve decent margins. Comparably, 4Q16 is a slow travel season. For 4Q16, the company’s management expects an operating income of 400 million–500 million yuan compared to 700 million–800 million yuan in 3Q16.

Priceline (PCLN), the leading OTA player in the US, has a stake in CTRP. Expedia (EXPE) is also trying to gain a foothold in the Chinese OTA industry. Investors can gain exposure to the Chinese OTA market by investing in the PowerShares Golden Dragon Halter USX China ETF (PGJ), which invests ~11% of its holdings in Chinese OTA players.

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