For Ctrip.com International, Ltd. (ADR) (NASDAQ:CTRP), however, the results were disastrous. Ctrip panicked and responded with its own hotel rebate system in the second quarter of 2012, causing operating margins to plunge from its IPO high of 40% to 23% in its most recent quarter. In addition to hotel cash rebates, Ctrip.com International, Ltd. (ADR) (NASDAQ:CTRP) also started offering airline ticket rebates, doubling its margin pressure in a bid to fend off eLong, Inc. (ADR) (NASDAQ:LONG) and smaller competitor
. As a result of this prolonged pricing war, Ctrip lost over half of its market cap over the past two years.
However, Ctrip.com International, Ltd. (ADR) (NASDAQ:CTRP)‘s recently reported first quarter earnings show that there is still some life left in this lagging market leader. Although Ctrip’s first quarter profit declined 26% year-on-year to $24.7 million, or $1.37 per ADR share, revenue soared 27% to $198 million, easily topping the consensus estimate of $172.6 million.
In other words, Ctrip.com International, Ltd. (ADR) (NASDAQ:CTRP) has been able to consistently grow its top line despite posting steep margin and profit declines, flexing its muscles to show that it doesn’t plan to lose its dominant market share to smaller, hungrier rivals. In the meantime, Ctrip has been focusing on higher investments in mobile apps to further grow its market share.
In my opinion, Ctrip’s simple strategy to outlast eLong could work.
eLong, Inc. (ADR) (NASDAQ:LONG) recently reported that its first quarter profit plunged 62% year-on-year to $0.12 per ADR share, or $11.8 million, indicating that its prolonged war against Ctrip.com International, Ltd. (ADR) (NASDAQ:CTRP) is about to send the company diving straight into unprofitability. Revenue also plummeted 77% to $163.89 million. Although both eLong’s top and bottom line topped analyst estimates, the company is clearly playing a dangerous game of chicken with Ctrip, which the latter is more likely to survive.
Therefore, after the smoke clears and Ctrip asserts its market dominance once again, the company should ease off on its refunds and start growing its margins again. When that happens, I believe Ctrip will rally.
Analysts have forecast that China will surpass the United States as the world’s largest travel market by 2020. Approximately 22% of total global traffic will be entering and exiting China, while a third of the world’s travel spending will come from the Asia-Pacific region.
Those are huge macro growth catalysts for the Chinese travel sector, despite recent concerns of an avian flu outbreak or an economic slowdown. Therefore, the largest hotel chain, Home Inns & Hotels Management Inc. (ADR) (NASDAQ:HMIN), and the largest online travel booking site, Ctrip.com, could be excellent long-term investments to hold over the next few decades.
The article Is it Time to Invest in Chinese Travel Stocks? originally appeared on Fool.com is written by Leo Sun.
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