Ctrip stock rating from shareholding to increase to overweight

Morgan Stanley today released its investment report, raising the NASDAQ:CTRP rating from "holding" to "overweight", but lowered its target share price from $55 to $50.50.

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Ctrip's aggressive investment has brought short-term profit pressures, but we support Ctrip's strategy and believe that the bleak profitability outlook has already been reflected in the current stock price. Through steady implementation, Ctrip profits are expected to be upgraded in the second half of fiscal year 2014 or 2015.

To increase the rating to overweight, the target share price reduced to 50.5 U.S. dollars: Since the release of the third quarter of fiscal year 2013 Last November 6, Ctrip has slipped about 30%, and the Nasdaq has fallen by 7% per cent in the period. In our view, this is mainly due to investor concerns about intense market competition and short-term profit pressures. We anticipate that Ctrip's profit margin will decline this year, but Ctrip is right to win market share, capture the mobile market and market opportunities for leisure tourism.

First-quarter results expected: Ctrip estimates that revenue for fiscal year 2014 will grow 25% to 30% year-on-year, above Wall Street's expected 24%. But operating margins are expected to be relatively weak, down 14% per cent year-on-year. We expect that, based on non-US GAAP, Ctrip's operating profit margins will fall to about 15% this year, compared with about 24% in 2013, but expected to rebound to 21% in 2015. We will carry Ctrip for the 2014 fiscal year and 2015 per share of the diluted income forecast to reduce the 41% and 18% respectively.

Investment is committed to future growth: with the provision of competitive prices, Ctrip is also strengthening the brand, expanding business (such as car rental and group purchase). We expect these investments to help Ctrip gain market share faster and to leverage potential operations. In view of the stable historical performance, we are full of confidence to the Ctrip management team.

Valuation: We move the Ctrip stock rating from the "hold" to "overweight", but the target share price from 55 U.S. dollars to 50.50 U.S. dollars.