We maintain narrow-moat Ctrip’s (CTRP) fair value estimate at $57 per ADR and believe shares are undervalued. Net revenue from the first quarter met the high end of guidance, with accommodation reservation (37% of revenue) beating guidance. Excluding share-based compensation, non-GAAP operating margin was 14.4%, only 40 basis points down from the year-ago quarter, despite a drop in revenue and operating deleverage in the air ticketing business. Second-quarter net revenue growth guidance accelerates to 12%-17%, versus actual growth of 11% and guidance of 9%-11% in the first quarter. We expect to see increasing revenue growth in the rest of the year as comparisons become easier. After several scandals regarding Ctrip’s service quality, management will invest in improving customer services, which will reduce short-term earnings, in our view. Nevertheless, we believe that in the long-term, brand image associated with high customer satisfaction is a key asset; we thus agree with Ctrip’s initiatives. We are also more relieved by management’s continual commitment to the 20%-30% non-GAAP operating margin target in the next one to two years, versus 17% in 2017. Also, with the investment in automation leading to a reduction in cost of revenue and Ctrip’s track record of consistently reducing cost per booking in the past three years, we are optimistic that Ctrip can achieve the targeted margin. We still see the international business driving the company’s results, which is a key element of our investment thesis, with hotel room nights and international air ticketing volume growing about 3 times and 2-3 times the industry, respectively.
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Chelsey Tam does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.