Rising labor costs in China drag down profits even at an online company such as Ctrip.com
I sold Ctrp.Com International (CTRP) out of my Jubak Picks 50 portfolio http://jubakpicks.com/jubak-picks-50/ back on January 18, 2011 because I thought that the company’s operating margins were eroding as it had to spend more to fend off competition. (The stock is down 40.1% from January 18 through the close on December 5.)
That’s exactly what the company reported on November 14 when it released third quarter financial results. Operating margins for the third quarter of 2011 fell to 31% from 38% in the third quarter of 2010.
And you didn’t have to look far to figure out why. Product development costs rose 31% from the third quarter of 2010 and 18% from the second quarter of 2011. Sales and marketing expenses climbed 39% year to year and 23% from the second quarter. General and administration expenses grew 37% year to year and 13% from the second quarter.
But what I hadn’t anticipated was that Ctrip.com’s business model would leave it so vulnerable to rising labor costs in China. There’s a lesson here for investors in all of China’s stocks. Read more
Sell Ctrip.com International (CTRP)
Doing some catch up on this stock. I dropped it from the Jubak Picks 50 long-term portfolio on January 18, but this first time I’ve had the time to explain why in detail or to actually remove it from the portfolio. I’m working on explaining the other sells and buys from that group over the next week or so.
What worries me about Ctrip.com International (CTRP) in the long-term? Growth.
Oh, not the top line growth of revenue. That continues to hum along. In the third quarter of 2010, reported on November 2, Ctrip.com, the largest travel agent in China, reported total revenue of $129 million, a 48% increase from the third quarter of 2009.
No, it’s the growth in costs that troubles me, because it makes me wonder if Ctrip’s operating margins—which ran at a 38% level for the third quarter–are sustainable in the long term.
In the third quarter product development expenses climbed by 53% from the third quarter of 2009. Sales and marketing expenses rose by 33%. General and administration expenses increased by 69%.
What’s behind those increased costs? Part of the growth is perfectly normal and in fact what an investor would like to see. As a company’s business grows, it needs to add more sales and administration personnel.
But there are signs in these cost numbers that Ctrip.com is having to spend more money and to work harder for its revenue growth. Read more
Update Ctrip.com (CTRP)
It’s tempting to say that the 6% drop in Ctrip.com’s (CTRP) shares on August 10 after the company’s August 9 earnings report was just the usual selling on the news by momentum investors who are unhappy that the company only beat Wall Street estimates by 2 cents a share and didn’t raise guidance for its third quarter.
But when you’re looking at a stock that’s trading at 43.5 times projected 2010 earnings per share, I’m not sure there’s any “just” about an earnings report that didn’t shoot out the lights.
There’s just enough in the numbers to concern any investor counting on the company to keep growing earnings by 30%–at a minimum.
Here’s what the company reported.
For the second quarter Ctrip.com, a strong No. 1 in China’s online travel industry, reported earnings of 23 cents a share. That was two cents a share above Wall Street projections and represents year-to-year earnings per share growth of 35%.
Revenue climbed by 46% from the second quarter of 2009 to $103 million. That was above the Wall Street consensus for revenues of $98.9 million.
From there the numbers get a little disconcerting for an expensive growth stock. Read more
Update Ctrip.com (CTRP)
Ctrip.com, China’s biggest online travel company, has changed the ratio of its American depositary shares (ADS) to give holders a two-for-one ADS split. Holders of the ADS received one additional ADS for each ADS they owned on January 19 at the end business on January 20. Each ADS will now represent one-quarter of an ordinary share instead of the previous one-half of an ordinary share. Read more
