Conclusion    2Q17 revenue and non-GAAP net profit beat consensus by 3%/26% on solidrevenue growth and better-than-expected margin expansion – with non-GAAPGPM and OPM expanding 10ppts/14ppts YoY to 82%/18, respectively. Stronginternational business growth stood out and accounted for c.40% of Ctrip’s 2Q airticket revenue while user traffic from lower-tier cities sharply improved. We believestrong execution of its international expansion and lower-tier city penetration willhelp mitigate short-term regulation risk. Factoring in the negative regulatory impact,Ctrip guides to 35–40% YoY revenue growth in 3Q17, in line with consensus. Wereiterate our OP rating, and trim our TP to US$64 from US$67 on 1.0x PEG and37% FY18-21e earnings CAGR, as we cut FY18 EPS by 4%.    Impact    2Q17 earnings beat. Net revenue increased 45% YoY to Rmb6.4bn, 2%/3%ahead of MQ/consensus on strong transportation growth. Transportation revenuegrew 49% YoY to Rmb3.0bn, driven by Skyscanner consolidation and triple-digitgrowth in train/bus/car rental. Accommodation increased 30% YoY to Rmb2.3bn ona rise in reservation volume; and corporate travel growth accelerated to 36% YoY,ahead of the company’s 15-25% YoY guidance. Non-GAAP net profit came in atRmb855m, 26% above consensus on improving efficiency.    International ticketing to mitigate regulatory risk. While Ctrip expects to see anegative impact from the recent CAAC regulation on bundle sales, we believe itsinternational business – which now accounts for c.40% of air ticket revenue – willhelp mitigate the regulatory impact on domestic ticketing. In 2Q, Ctrip’s internationaltransportation revenue outperformed domestic – achieving greater than 50% YoYgrowth, much higher than the 2% YoY growth for international air travel reported byTravelsky. Following consolidation, Skyscanner launched direct booking, and theconversion rate of its mobile traffic rose by 50%. Skyscanner contributed a mid-tohighsingle digit of Ctrip’s total revenue.    Strengthen lower-tier city penetration. Ctrip targets to further gain market sharein lower-tier cities through a branding campaign and comprehensive productoffering. As of June-17, Ctrip covered 570k domestic hotels, up 25% YoY; and thecompany reported accelerating growth in lower tier city hotel bookings – room nightbookings in lower-tier cities reached 20m in July. User traffic of lower tier cities rose50% YoY in the quarter. For better penetration of lower-tier cities, Ctrip is buildingup its franchised offline network, and aims to have 6,500 offline stores by end-FY17, up from the current 5,500. Ctrip and Qunar had opened 400+ offline storesby the end of 2Q, and targets 600 stores by year-end.    Margin expansion ahead of expectation. GPM rose 10ppts YoY and 2ppts QoQto 82%, ahead of MQ and consensus. This was due to 1) margin lift fromSkyscanner, 2) rising revenue contribution from high-margin small business units,and 3) improving efficiency with automation and AI assisted chat-box, which forexample handles over 40% of booking inquires. We see further profitability gainsand forecast non-GAAP OPM to rise to 19%/25% in FY17/18 from 10% in FY16.    Earnings and target price revision    We trim our FY17/18 revenue by 1%/4% on regulatory impacts, and cut non-GAAP earnings by 11%/5% due mainly to higher tax expense. We lower ourTP to US$64 on 1.0x PEG and 37% FY18-21 earnings CAGR (unchanged.)Price catalyst    12-month price target: US$64.00 based on a PER methodology.    Catalyst: Margin recovery, and synergies with SkyscannerAction and recommendation    Reiterate Outperform

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