Slicing Ctrip's Fair Value, Shares Still Attractive

We have reduced narrow-moat  Ctrip’s (CTRP) fair value estimate to USD 47 per share from USD 57 per share, and 40% of the reduction was due to weakening CNY, with the rest reflecting the weak guidance of 0% to 1% non-GAAP operating margin in the fourth quarter, near-term weakness in travel demand due to slowing economy, increasing competition from Meituan and Fliggy, and investment in increasing customer service standard. Our 10-year net revenue CAGR estimate has been revised to 12% versus 13% previously. In our current model, we assume a pick up of net revenue growth to 15% in 2021 and 17% in 2022 as the economy recovers, following a reduced net revenue growth of 14% in 2018, 16% in 2019, and 13% in 2020. In the third quarter earnings call, Ctrip did not reaffirm its guidance of 20% to 30% non-GAAP operating margin in 1-2 years. We previously assumed non-GAAP operating margin would reach 18% in 2018 and the 30% level around 2022 to 2023, and this has been revised to 13% in 2018, 18% in 2020, and the 30% level around 2024 to 2025. In the long term, we think the margin expansion story remains as the higher margin international business will increase in business mix, Ctrip gains bargaining power against hotels, and operating leverage increases over time.