Ctrip.com International Ltd. will extend its rally after reaching a record last week as China’s biggest travel website boosts its share of the hotel reservation market at the expense of smaller competitors, JG Capital says.

American depositary receipts of Ctrip rose 13 percent to $67 last week, pushing the year’s gain to 35 percent. The shares are outperforming a 6.6 percent year-to-date increase in online travel company Qunar Cayman Islands Ltd. and a 1.9 percent drop in Elong Inc., whose top shareholder is Expedia Inc. The Bloomberg China-US Equity Index for the most-actively traded Chinese companies in the U.S. advanced 6.3 percent last week, the most since December 2011.

Henry Guo of JG Capital says Ctrip’s investments in mobile products and marketing are helping it benefit from China’s rising incomes and growing middle class which boost demand for travel reservations and packaged tours. The Shanghai-based company is expanding its hotel booking business where transaction volume jumped 67 percent last quarter while Elong reported a 43 percent increase.

“Ctrip’s fast growth in the hotel segment shows it’s grabbing market share from Elong, and that explains its big rally over the past few months,” Guo, a San Francisco-based analyst at JG Capital, said by phone July 24. “I am bullish on China’s travel sector for its long-term growth outlook.”

Guo has a buy rating on the stock with a $70 price target. The company reports second-quarter earnings on July 30.

Mobile Spending

Ctrip stepped up investments in mobile Internet and new products as mobile devices surpassed desktop computers to become the most important hotel booking platform, Chairman and Chief Executive Officer James Liang said on a May 7 conference call.

The company will report revenue of $270 million for the April-June period, up 33 percent from a year earlier, 11 analyst estimates compiled by Bloomberg show. The average projection is 5.4 percent higher than it was six months ago.

While Ctrip’s second-quarter operating profit may drop 5 percent from a year earlier to $30.3 million, it will grow 8 percent this quarter and 32 percent in the last three months of the year, according to the average of seven analyst estimates compiled by Bloomberg.

Chinese hotel revenue per available room increased 7 percent in May, the highest since 2010, according to a Bloomberg Intelligence note. This may indicate a return of higher domestic leisure and business travel offsetting a corruption crackdown that’s crimped lavish official spending, the report said.

Costly Innovation

Ctrip’s new products and features have come at a price as development expenses for the first quarter surged 65 percent from a year earlier, according to a company statement in May.

Rising competition in the web-based travel sector has “depressed” Ctrip’s operating margin, a measure of profitability, according to Michael J. Olsen, an analyst at Piper Jaffray Cos.. Ctrip said its adjusted operating margin narrowed to 12 percent in the first quarter from 23 percent a year earlier.

“It’s unclear when the intensifying competitive China travel environment will abate,” he wrote in a note dated June 26. “We have modeled margins below the 20 percent level for the next several quarters.”

Olson has a neutral rating on the company ADRs and a price target of $50.

Ctrip faces less competition from smaller rivals in the transportation ticketing business, where it posted 71 percent growth for the first quarter. High volume in both hotel booking and transport ticketing is likely to continue and Ctrip’s margins will improve in the second half of the year, according to Tian X. Hou, the founder of TH Capital LLC, a research firm focusing on the Chinese Internet sector.

“Its volume will keep going up at a very fast pace driven by investments in product and branding,” Hou, who has a buy rating, said by phone from Beijing July 24. “We expect the operating margin to start improving from the third quarter as investments stabilize.”

To contact the reporter on this story: Belinda Cao in New York at lcao4@bloomberg.net. To contact the editors responsible for this story: Nikolaj Gammeltoft at ngammeltoft@bloomberg.net. 

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Photo Credit: Trip's English-Language website. PlaceIt by Breezi