Skift Research Ctripand the China Confidential Online ... · •While mobile use has ramped up, other forms of internet usage have declined with ... •In order to justify this multiple,

Ctrip and the China Online Travel Market

Skift Research

Confidential for Skift Research Subscribers Only

AIR TRAVEL’S RAPID GROWTH • Better infrastructure and

increased travel demand has led to tremendous growth in air travel in China.

• The U.S. is still the leader at over 800 million passengers, but this is clearly a mature market with growth in the low single-digits.

• China has been booming with 15-20% growth over the past decade and steady low double-digit growth since 2010.

Source: International Civil Aviation Organization, Civil Aviation Statistics of the World and ICAO staff estimates. 2

AIR TRAVEL’S RAPID GROWTH • IATA forecasts that China will

surpass the U.S. as the largest market by 2024 with 927 million people by 2025 and 1.3 billion by 2035.

Source: Bloomberg, IATA 3

FORWARDKEYS DATA

Source: ForwardKeys 4

• Skift partnered with ForwardKeys, which predicts future travel patterns by crunching and analyzing 14 million booking transactions per day.

• The ForwardKeys.com database is fed daily with air reservation information (GDS) processed by 180,000 online and offline travel agencies worldwide, for a total of around 25 billion reservations.

• The data excludes direct bookings with airlines, charter flights, and some online reservations.

• Due to this exclusion, the data should not be taken as the entire market sizing, but rather an indication of the rate of change and where things are trending.

FORWARDKEYS – INBOUND• The largest markets have been

Taiwan, South Korea, the United States, Hong Kong, and Japan.

• After steady mid-teens growth from the U.S, things have slowed down this year with H1 coming in at up less than 5%.

• Amid conflict over THAAD, travel from South Korea is down 7.7%.

• The Hong Kong market remains sluggish and is down 2.5%.

• Canada and Australia are up over 25%.

• Japan and Spain are up over 10%.


Inbound China from: ProjectionOrigin Market: 15 vs. 14 16 vs. 15 2017H1 2017H2

Japan 6.6% 7.2% 13.3% 5.2%South Korea NA 16.2% -7.7% -28.1%

Taiwan 4.0% 4.7% 6.7% -2.6%Hong Kong -0.3% 1.8% -2.5% -3.2%

Macau 10.6% 16.9% 3.7% -1.0%Thailand 1.8% -2.2% 4.6% 0.4%Australia 3.8% 10.9% 27.1% 11.6%

U.S.A. 14.8% 16.0% 4.4% -1.6%Canada 11.7% 17.3% 30.7% 3.3%

U.K. 6.9% 10.6% -0.2% 1.3%France 1.6% 3.4% -3.1% 1.2%Spain 8.3% 14.8% 12.2% 2.7%

Germany 1.4% 3.4% 2.3% 3.0%Italy 3.3% 10.4% 9.4% 2.1%

FORWARDKEYS – OUTBOUND• Prior to the massive decline post

THAAD controversy, South Korea was the most popular place to visit. After roughly a 50% drop, it is no longer in the top three with Thailand, Japan, and the U.S. now taking those positions.

• The rapid outbound growth seen in 2014 and 2015, has slowed a bit with 2015 up 45% on aggregate, but 2016 up only 2.0% with Hong Kong and Macau weighing on things as the largest markets. Ex-greater China, other industry data shows double digit growth for the outbound market.


Outbound China: ProjectionDestination Market: 15 vs. 14 16 vs. 15 2017H1 2017H2

Japan 57.6% 11.1% 2.0% 6.2%South Korea NA 9.7% -47.5% -22.1%

Taiwan 2.1% -8.4% -23.4% -5.0%Hong Kong -16.8% -8.1% -0.5% -7.1%

Macau -8.7% 1.1% 13.0% -12.7%Thailand 71.4% 1.1% -2.9% 9.8%Australia 11.1% 16.6% 11.3% 8.9%

U.S.A. 8.0% 1.7% -8.5% -13.3%Canada 7.0% 17.0% 39.1% 18.4%

U.K. 20.4% 12.0% 19.0% 6.5%France 17.4% -16.9% 0.5% -3.7%Spain 44.9% 11.3% 41.0% 9.0%

Germany 13.8% -0.7% 8.0% -7.0%Italy 33.0% -13.2% 9.1% -2.4%

FORWARDKEYS – OUTBOUND SEASONALITY -


FORWARDKEYS – OUTBOUND SEASONALITY – SOUTH KOREA


FORWARDKEYS – OUTBOUND SEASONALITY – THAILAND


FORWARDKEYS – OUTBOUND SEASONALITY – JAPAN


FORWARDKEYS – OUTBOUND SEASONALITY – GREATER CHINA


FORWARDKEYS – OUTBOUND SEASONALITY – GREATER CHINA


FORWARDKEYS – OUTBOUND SEASONALITY – NORTH AMERICA


FORWARDKEYS – OUTBOUND SEASONALITY – WESTERN EUROPE






CHINA IS A MOBILE-FIRST WORLD

Source: CNNIC 17

• In China, mobile penetration has rapidly increased in the past ten years, going from 24% in 2007 to 95% in 2016 and users jumping from 50 million to 696 million over the same time period.

CHINA IS A MOBILE-FIRST WORLD

Source: CNNIC 18

• While mobile use has ramped up, other forms of internet usage have declined with desktop and laptop use falling.

• This trend is one example of why Chinese online travel companies along with hotel groups need to design their websites for a mobile world and make sure there is a focus on building a strong app along with participating on WeChat.

TOP APPS IN CHINA

Source: CNNIC 19

• Tencent’s WeChat dominates usage at 80% followed by its own QQ at 60%.

• Travel companies need to embrace WeChat as a platform to advertise to and communicate with customers.

CTRIP FINANCIALSREVENUE• Ctrip is clearly still in a rapid revenue

growth phase with 2014, 2015, and 2016 revenue growth at 36%, 48%, and 76%.

• Stripping out the Qunar acquisition, Ctrip’s constant currency revenue growth in 2016 was around 27%.

Source: Company Filings, Skift Estimates 20

CTRIP FINANCIALS• Transportation represented the

largest part of the business whereas it was equal to accommodations prior to Qunar.

• The reason is that for Qunar, flights represented 53% of the business and accommodations were 35%.

• With the Ctrip brand driving more growth, we expect accommodations revenue as a percent of business to rise over time. This will help boost margins and profitability.

Source: Company Filings 21

CTRIP POTENTIAL MARGIN PATH

• Ctrip has guided to it reaching an operating margin of 20-30% in the next few years. While it seems like a stretch at first glance, it is a very reasonable goal with both revenue growth growing faster than fixed costs and synergies from M&A taking effect.

• In Q1’17, operating margin hit 15% already. For context, Priceline’s operating margin is currently around 35%. Expedia is lower at 18%, but its core OTA business is close to 30%.

Source: Company Filings, Skift Estimates 22

CTRIP VALAUTION FRAMEWORK• Ctrip should be able to maintain its

current 2017 price to sales multiple at around 7-8x given steady 20%+ growth. As a reasonable comparison, Priceline trades at 7x, Alibaba at 10x, Tencent at 10x, and Baidu at 4-5x.

• Assuming a 7x multiple and 22.5% revenue trajectory, we see Ctrip growing meaningfully to become a $50-60 billion company in the next five years. If we want to look at current present value, discounting this at a 12% discount rate gets to a $34-39 billion present value.

• In order to justify this multiple, the company needs to achieve strong revenue growth and ramp margins.

Source: Skift Estimates 23

CTRIP VALAUTION FRAMEWORK• On an EV/EBITDA basis, the

valuation implies a high-teens multiple, which is just below the big three Chinese internet players in Baidu, Alibaba, and Tencent and above Priceline, which is around 16x.

• The higher multiple than Priceline is not about quality of business, but about timing in growth where Ctrip is earlier in its trajectory so investors will pay a higher multiple of future cash flow.

Source: Skiift Estimates 24

CTRIP M&A

Source: Company Filings 25

DOMESTIC TRAVEL• The number of trip occurrences

for individuals grew from 524 million to 4 billion.

Source: National Bureau of Statistics of China 26

DOMESTIC TRAVEL• At a 10% CAGR through 2025,

we would hit 10 billion occurrences.


DOMESTIC TRAVEL• Using Ctrip’s year-end exchange

rate to normalize currency (just under 7 RMB/USD), spending has gone from $15 billion to almost $500 billion from 1994 to 2015.

• At a 15% growth CAGR through 2025, domestic travel could hit $2 trillion in spending.


DOMESTIC TRAVEL• Not only are people traveling

more domestically, but they are also spending more when doing so.


CHINA HOLIDAY CALENDAR

Source: China Travel Guide 30

OFFLINE TO ONLINE IS A LARGE TAILWIND

• iResearch, a leading Chinese research firm, shows online sits at only 12% of total GMV (gross bookings)with Ctrip online share at almost 80% (including all of its brands).

Source: iResearch, Company Filings, Skift Estimates 31


• Constant currency USD

Source: iResearch, Company Filings, Skift Estimates 32


• Air ticketing is the largest part of industry bookings with the major airlines being government owned and having an online presence versus the fragmented hotel market where many hotels do not have online booking sites yet.

• The hotel part of the pie should continue to grow.

• That trend will help Ctrip and other OTAs given the much higher profitability of hotel bookings versus air.

Source: iResearch, Skift Estimates 33

OFFLINE TO ONLINE IS A LARGE TAILWIND• These are not “market penetration”

numbers in the traditional sense, but rather how much of the travel ecosystem is booked online for domestic, outbound, and inbound travel.

• The difference is subtle, but makes the denominator different than what some may expect based on other penetration numbers in the market at around 30-40%. We do not dispute those, but instead, we are focusing on the opportunity to increase travel related revenue for Ctrip.

• Regardless of how you view the denominator, there is a long way to go with the move from offline to online travel.

Source: Skift Estimates, Company Filings, WTO, Travel China Guide, Chinese State Council 34

OUTBOUND TRAVEL

Source: Source UNWTO 35

OUTBOUND TRAVEL

Source: UNWTO 36

• According to the United Nations World Tourism Organization (UNTWO), “2016 was another strong year for outbound tourism from China, the world’s leading outbound market. International tourism expenditure grew by US $11 billion to US $261 billion, an increase by 12% (in local currency). The number of outbound travelers rose 6% to 135 million in 2016. This growth consolidates China’s position as number one source market in the world since 2012, following a trend of double-digit growth in tourism expenditure every year since 2004.”

• The leaders were as follows:• China $261 billion• USA $233 billion• Germany $81 billion• UK $64 billion• France $41 billion• Departures have grown steadily over time. Data from the World Bank shows that Chinese

departures have doubled since 2010. The rapid pace has matured, but it is still growing in the neighborhood of 10%. That, plus increased affluence, should keep the value of these departures growing well above 10% into the end of the decade.

OUTBOUND TRAVELTop 10 destinations in 2016

COTRI Jingdaily – data taken from individual NTOs

Country Arrivals in Millions Country Arrivals in Millions Yoy %

1 Hong Kong 42.8 Hong Kong 35.4 -8.2%

2 Macau 20.5 Macau 16.9 -0.4%

3 Thailand 8.8 Thailand 7.7 +16.5%

4 South Korea 8.1 South Korea 6.9 +39.5%

5 Japan 6.4 Japan 5.5 +28.7%

6 Taiwan 3.5 Taiwan 3.1 -11.7%

7 USA 3.1 USA 2.6 +14.8%

8 Singapore 2.8 Singapore 2.4 +38.2%

9 Vietnam 2.7 Vietnam 2.2 +55.2%

10 Malaysia 2.2 France 1.8 -29.6%

11 Malaysia 1.7 +23.1%

12 Germany 1.1 -5.6%

Source: COTRI, Dragon Trail Interactive, Jingdaily 37

SOUTH KOREA CASE STUDY • South Korea inbound travel from China had

been flourishing in 2016 with average monthly growth in the 40-50% range and share of travelers at 45%. However, on March 2, 2017, China stated it would ban group travel to South Korea in response to South Korea deploying the U.S. THAAD missile system.

• After this happened, travel to South Korea from China plunged with it down 40% and 67% in March and April. The declines have continued into the summer.

• Outbound as a whole is a huge opportunity, but individual destinations must be careful relying on China for sustainable growth as a macro or geopolitical shock can change things quite quickly.

• The opportunity should be pursued, but investments should be made carefully in sustainable and variable cost areas.

Source: Korean Tourism Organization (KTO) 38

INBOUND TRAVEL• Inbound travel is not growing

much from a visitor perspective.

• 2016 picked up a bit, but that was only in the 3-4% range.

• Prior to that, 2015 grew 4%, 2014 was down slightly, 2013 was down 2.5%, 2012 was down 2.2%, and 2011 was up 1%.

Source: Travel China Guide, 2016 Data is only through H1, Skift uses the year/year growth rate to estimate the whole year number 39

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Skift Research Ctripand the China Confidential Online ... · •While mobile use has ramped up, other forms of internet usage have declined with ... •In order to justify this multiple,