China's biggest OTA Ctrip has reported a "solid" operational performance in Q3, although cost increases are hitting margins, spooking the market.
But this is not a big concern, according to chief strategy office Jenny Wu. During the Q&A with analysts, when the prepared remarks have been used up and the execs are let loose, she said:
"We decided that to gain market share at a faster pace should continue to be our top priority in the coming year.
"We will continue to make bold investments to further strengthen our achievement in mobile internet, open platform, technology, brand awareness, and innovation.
"After careful evaluation, management believes, at this moment, rather than relax, we should feel the momentum to further lift the entry barriers and to further strengthen our leadership. Although it means the margin recovery will be prolonged...we believe through this effort we can effectively reach a solid foundation for Ctrip to achieve sustained market leadership."
For the financial markets, this translates to big drops in operating margin in this quarter and the next - hence a 10% drop in its share price. But Ctrip is still on target to grow top-line revenues by 30% next quarter, ending the year.
Operational insights confirm the shift to and scale of mobile penetration in China. For hotels in the quarter, around 40% were booked through PCs and 45% through mobile. Compared with the same quarter last year, PCs' share is the same but mobile has leapt from 30%.
A slightly different picture emerges in air, where PCs are still the dominant channel, accounting for 45% of bookings against mobile's 35%. Last year the PC/mobile breakdown was 40%/15%.
Ctrip's app has also had a strong quarter. James Liang, CEO, said:
"By the end of the third quarter, accumulated downloads for the Ctrip travel app reached 350 million and activated accumulated downloads reached 150 million, increasing 75% and 50% quarter over quarter, respectively.
"Over 5 million daily unique users access to the Ctrip travel app on peak days."
The top-line takeaway for mobile is that "total mobile transaction in the third quarter of 2014 nearly tripled from the same period a year ago."
"Nearly tripled" is a big number, and there are some other three-digit year-on-year highlights. The biggest one highlighted is a 600% increase in local activities bookings, followed by a 300% increase in train bookings.
The jump in rail bookings contributed to transportation seeing a 98% volume increase. Air still has the biggest share of this, but Ctrip pointed out that the size of the rail market is ten times that of air. Online booking for bus journeys is identified as another area of interest.
In terms of the bigger picture, there are no issues around demand, according to Liang. He told analysts
"We think the income growth is going to be higher than GDP growth, but travel consumption will be at least double the GDP and income growth. Particularly on the high end of the market where we have an advantage, for example, outbound travel or high-end hotel, air ticket consumption...So we are still very optimistic of the travel demand."
Competition is another bigger picture question, with the market waiting to see how Alibaba's Alitrip pans out. Liang even referred to Amazon's recent moves into travel and joked that "we may see them at some point in China."
"I think we'll face continued pressure as more players are putting more resources into this very promising high-growth market. But I think at some point, as certain parts of the market mature, I think all the players will start to think more rationally, it's time to make some profit, and at that point we'll see some consolidation in the market."
And when that consolidation comes, Ctrip is ideally placed to swoop down on any potential acquisition targets. At the end of the quarter, its cash, cash equivalents, restricted cash and short-term investment were worth $1.8 billion.
See also:
Tnooz coverage of eLong's Q3s.