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Ctrip Leads Declines as Profit Margins Narrow: China Overnight

Nov. 15 (Bloomberg) -- Chinese stocks fell for the first time in three days in the U.S., led by International Ltd., the country’s biggest online travel agency, on concern rising prices hurt profit margins at Internet-based companies.

The Bloomberg China-US 55 Index fell 0.5 percent to 102.17 at the close of trading in New York and Ctrip tumbled 12 percent to a two-year low of $30.07. Shanda Games Ltd., the nation’s third-biggest online games operator, sank 7.8 percent, the most in two weeks, to $4.60, before it reports third-quarter earnings on Nov. 18.

Internet companies from Inc. to Renren Inc. reported higher operating costs in the third quarter as China’s consumer prices rose 5.7 percent on average in the first 10 months, above the government’s full-year target of 4 percent. International Monetary Fund Deputy Managing Director Zhu Min said China will have “pretty strong inflation for a period of years to come” at a forum in Honolulu on Nov. 13.

“China’s Internet companies have seen margin compression across the board last quarter due to increases in labor costs and rising sales and marketing expenses,” said Andy Yeung, an analyst at Oppenheimer & Co. in New York. “The challenges are mostly likely to continue even inflation started to ease. The pressure on the costs probably won’t ease until early next year.”

Increasing Costs

Ctrip’s third-quarter expenses for product development rose 31 percent from a year earlier, and its costs for marketing and management gained 39 percent and 37 percent, respectively, it said in a statement dated Nov. 13. The company’s increase in sales costs was also caused by its coupon program aimed at expanding its share amid increasing competition in the nation’s hotel booking business, Chief Executive Officer Min Fan said in a conference call.

China, the world’s second largest economy, grew 9.1 percent in the third quarter from a year earlier, the least in two years. IMF’s Zhu said China’s economy is heading for a “soft landing,” adding the economy is moving to be driven more by services and capital investment. Chinese President Hu Jintao said the nation will seek to boost imports in part to help stimulate economies around the world.

Most economists expect the government to loosen some fiscal or monetary policies without cutting interest rates as inflation stays above the government’s annual goal, a Bloomberg News survey last week showed.

Falling Margins

Ctrip’s non-GAAP operating margin fell to 41 percent in the three months ended in September, from 45 percent a year earlier due to higher labor costs and marketing expenses amid increasing competition, it said in the statement. The margin will narrow to 35 percent in the fourth quarter, Chief Financial Officer Jie Sun said on the conference call.

The margin decline “is larger than any bear case assumption in the market,” C. Ming Zhao, an analyst at Susquehanna International Group LLP, wrote in a research note. The company’s 2012 margin will be “a step down from low to mid 40s in the past three years. It takes at least four quarters for the margin to return to normal.”

Zhao downgraded his recommendation on Ctrip to “neutral” from “positive,” cutting the 12-month price target to $37, from $51. The Shanghai-based Ctrip expected fourth-quarter sales to grow as much as 20 percent to 944.4 million yuan ($148.6 million), less than $153 million in the prior quarter and the $149.9 million mean fourth-quarter estimate of seven analysts surveyed by Bloomberg.

Elong Inc.

Elong Inc., China’s second-biggest online travel company and Ctrip’s rival, jumped 16 percent, the most in three months, to $14.47 before reporting its third-quarter earnings after the close of U.S. trading.

Ctrip’s ADRs are trading at 10 times its trailing 12-month profit, compared with 21 for Elong. Eight analysts out of 18 rated Ctrip “hold,” eight gave it a “buy” and two rated it “sell,” according to data compiled by Bloomberg.

The Standard & Poor’s 500 Index dropped 1 percent to 1,251.78 yesterday as an increase in Italian borrowing costs deepened concern Europe will struggle to contain its sovereign debt crisis. The Shanghai Composite Index, which tracks the bigger of China’s stock exchanges, climbed 1.9 percent to 2,528.71.

The ishares FTSE China 25 Index Fund, the biggest Chinese exchange-traded fund in the U.S., retreated 1.3 percent to $37.31. The Chinese yuan weakened 0.2 percent to 6.3538 a dollar yesterday, according to the China Foreign Exchange Trade System. The currency has risen 4 percent this year, the best performance among the 25 emerging-economy currencies tracked by Bloomberg.

Yuan Appreciation

U.S. President Barack Obama kept up his pressure on China’s foreign-exchange policy and trade practices, saying “enough’s enough” on what the U.S. views as a too-slow appreciation of the yuan at a news conference concluding a summit with Asia-pacific leaders in Hawaii Nov. 13.

The U.S. trade deficit and unemployment are not caused by the yuan exchange rate and a “large” appreciation in the currency won’t solve U.S. problems, Chinese President Hu Jintao said in comments posted on the foreign ministry’s website on the same day.

China’s foreign exchange policy is a “responsible” one and the country will continue reforming its exchange rate mechanism, according to the statement, citing Hu at a meeting with the U.S. President.

E-Commerce China Dangdang Inc., the nation’s largest online book retailer, may report on Nov. 16 third-quarter sales of $143 million, less than its guidance of $144 million, the average estimate of eight analysts surveyed by Bloomberg showed. The company may incur a net loss of $6.2 million for the quarter, compared with a loss of $4.4 million in the previous three months, according to analysts’ estimates.

Sohu, Renren

Sohu, owner of China’s fifth-most visited website, said Oct. 31 operating expenses increased 66 percent in the three months ended in September from a year earlier and gross margin declined to 71 percent from 74 percent. The company sank 2 percent to $57.90 in New York.

Renren, a Beijing-based social networking website, said last week it expected revenue for the fourth quarter in a range of $31 million to $33 million, missing a $35.1 million analyst forecast. Gross profit will drop to 80 percent from 81 percent in previous quarter, the mean estimate of five analysts showed. Renren’s ADRs slid 4.2 percent to a record low of $4.75.

To contact the reporter on this story: Belinda Cao in New York at

To contact the editor responsible for this story: David Papadopoulos at

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