Trip.com Group Limited (TCOM) Q2 2012 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Q2 2012 Ctrip.com International, Limited earnings call. My name is Carla and I’ll be your operator for today. [Operator Instructions]. I would now like to turn the conference over to Ms. Michelle Qi, IR Manager of Ctrip. Please proceed.

Thanks, Carla. Thank you for attending Ctrip’s second quarter 2012 conference call. Joining me on the call today, we have Mr. James Liang, Chairman of the Board; Mr. Min Fan, President and Chief Executive Officer; Ms. Jane Sun, Chief Financial Officer; and Ms. Jenny Wu, Chief Financial Officer. We may during this call discuss our future outlook and performance, which are forward-looking statements made under the Safe Harbor provisions of the US Private Securities Litigation Reform Act of 1995. Forward-looking statements involve inherent risks and uncertainties. As such, our results may be materially different from the views expressed today. A number of potential risks and uncertainties are outlined in Ctrip’s public filings with the Securities and Exchange Commission. Ctrip does not undertake any obligation to update any forward-looking statements except as required under applicable law. Min, Jane, James and Jenny will share our business update, operating highlights, industry outlook and financial performance for second quarter of 2012, as well as an outlook for the third quarter of 2012. We will also have a Q&A session towards the end of this call. With that I will turn to Min for our business update.

Thanks, Michelle, and thank you to everyone for joining us on the call today. In the second quarter of 2012, Ctrip delivered historic results. Net revenues grew by 17% year over year, within the range of our guidance of 15% to 20% year over year. Net income decreased by 55% year over year, mainly due to the intensified investments in product development and marketing campaigns, as well as the withholding tax related to the USD300 million stock buyback plan announced in June. China travel market enjoys explosive growth, yet the competition still intensified, particularly in the low-end leisure travel market. Today I would like to take this opportunity to share with you Ctrip's strategy to win over the competition and enhance our leadership. Ctrip aims to build our business for the long term, where we strive to create most compelling value for our customers and partners. We will achieve our goal to comprehensive [and broad] offerings, convenient customer experience, competitive pricing, and confidence in Ctrip brands. We're investing heavily in product development this year. From comprehensiveness to diversity, we are very creative in new models and consistently improving our platforms faster than ever before. Our Smart Choice Hotels, new international air ticketing platform, luxury travel sites, HH Travel, Tujia vacation rentals, and [Sungko] hostel booking have all planted the seeds for the future growth and for long-term success. We are continuously improving our customer online experience. Beyond efficient online transactions, we also strive to provide the latest travel information available. Our team has made great efforts to enhance the edited content and pictures. The number of reviews posted by travelers has increased significantly. In addition to the online website, mobile platform is a clear priority in Ctrip's business development map. All these investments fuel the increase in online transactions. By end of the second quarter, hotel online transaction exceeded 50% of total bookings. On average, online transactions accounted for about 45% of Ctrip's total bookings. Offline service is still one of our core competencies that bring our high customer loyalty. We uphold a high level of service quality and strive for continuous improvement. Competitive pricing is important to enhance Ctrip's leadership. In our philosophy, price advantages have to be coped with strong products and services. While strengthening our existing advantages, we join the competition decisively. In July we launched a more aggressive marketing campaign with a series of comparing low-price products across all business lines. This will accelerate our penetration into price-sensitive market. With 12 years in the market, Ctrip is by far the most well-known travel brand in China based on service quality, reliability and integrity combined. Yes, China's travel market is fragmented and our market share is still very small. We have increased our investment in online marketing and actively explore all channels such as search engine optimization, social medium, online radio, web partnerships and other effective online platforms. By the end of the second quarter of 2012, our cumulative numbers of customers has increased to 17.4 million compared to 13.5 million at the same time in 2011. We will continue to improve our marketing efficiencies and take open-minded approach to enhance the Ctrip brand awareness. Our company always takes prudent steps to carefully evaluate the return on investment, timing and priorities for each investment. We are very excited about our future growth. Our team will focus on execution, monitoring the key investors, and delivering the best possible results. We are confident that our investments will ensure Ctrip's success in the coming decade. Now I will turn to Jane for the operating highlights.

Thanks, Min. Thanks, everyone. I would like to share with you the recent operating highlights. We accelerated the speed of our hotel network expansion. By the end of the second quarter of 2012, our hotel supplier network covered over 39,000 hotels compared with 19,200 hotels a year ago. While maintaining a dominant coverage of high-star hotels, we're glad to see the fast penetration into the low-star hotels. We strengthened our offers for competitive hotel prices in the market, especially towards the budget oriented segment. The [eco promotions] incentivize the economy customers to book low-star hotels through Ctrip. The new hotel product have made significant progress. [Sungko.com] expanded its network. Tujia won at China Hotel Charisma Awards as the Best Travel Service Provider early this quarter. Our air ticketing volume outgrew the industry average during the second quarter. The international ticket volume grew over 45% year over year in the second quarter. The air ticketing team fortified the product design [fortress] to offer more variety of products and to enhance the cross-sell with the other travel products. Meanwhile, the team had continuously improved operational efficiency to make Ctrip the most efficient sales channel for our airline partners. Ctrip's package tour business delivered another strong quarter with the revenue growth from Mainland China reaching over 40% year over year. Outbound travel is growing even faster, aided by enriched product offerings, R&D appreciation, and relaxed visa restrictions. In June 2012, Ctrip won the Best [Seller] Award from the Hawaii Tourism Authority. For the fourth time, Travel Weekly China named the Ctrip the best online travel agency of the year. High-end customers have expressed strong interest in our new luxury brand, HH Travel. Trip TM, which is a part of the HH Travel, won Travel Weekly Award for Best High-End Oriented Travel Club of the Year in May 2012. Ctrip's corporate travel service helps customers to save travel costs more efficiently in a challenging macro-economy. We continue to gain market share and expand our customer base. Our Ctrip team is excited about the new investments in every aspect of the business. We will continue to focus on our execution and work hard to deliver the solid results towards the right direction. Now I will turn to James for industry outlook.

Thanks, Jane. The travel market is growing rapidly. The competition in the mid to high-end travel market focus is down to service and branding, and Ctrip continues to enjoy a solid dominant position in the segment. And in the price-sensitive segment, Ctrip is very determined to fight off any competition and to keep our leadership position, leveraging our effective strategy, dedicated teams and strong balance sheet. We believe the investment-making today will ensure us to realize long-term values for our customers and shareholders. Now I will turn to Jenny for financial update.

Thanks, James. I'm pleased to report solid results for the second quarter 2012. For the second quarter 2012, Ctrip's total net revenues were RMB974 million, up 17% year on year and 7% Q-on-Q. For hotel, hotel reservation revenues amounted to RMB410 million for the second quarter, up 12% year on year, primarily driven by an increase of 20% in hotel reservation volumes and partially offset by 7% of decrease in commission per room night. The decrease of commission per room night was mainly due to promotional activities. Hotel reservation revenues increased by 12% Q-on-Q largely due to seasonality. Air ticket booking revenues for the second quarter were RMB404 million, up 16% year on year, mainly driven by an increase in air ticketing sales volume. Air ticket booking revenues increased 12% Q-on-Q, primarily driven by seasonality. Package tour revenues for the second quarter were RMB134 million, up 24% year on year, due to the increase of leisure travel volume. Package tour revenues decreased 20% Q-on-Q, mainly due to seasonality. Corporate travel revenues for the second quarter were RMB49 million, up 25% year on year, mainly driven by the increased corporate travel demand from business activities. Corporate travel revenues increased 27% Q-on-Q, primarily due to seasonality. Gross margin was 75% in the second quarter 2012 compared to 77% in the same period last year and 75% in the previous quarter. Product development expenses for the second quarter were RMB208 million, up 52% year on year and 6% Q-on-Q, primarily due to an increase in product development personnel related expenses and share-based compensation charges. Excluding share-based compensation charges, product development expenses accounted for 18% of total net revenues, increased from 14% in the same period last year and remained flattish Q-on-Q. Sales and marketing expenses for the second quarter were RMB217 million, up 64% year on year and 18% Q-on-Q, primarily due to an increase in sales and marketing related activities and personnel related expenses as a result of our recently launched intensified marketing campaign and as well as our efforts to expand in the leisure travel market. Excluding share-based compensation charges, sales and marketing expenses accounted for 21% of net revenues, increased from 16% in the same period last year and 19% in the previous quarter. General and administrative expenses for the second quarter were RMB139 million, up 44% year on year and 8% Q-on-Q, mainly due to an increase in administrative personnel, share-based compensation charges and incremental turnover tax due to the newly launched value-added tax reform. Excluding share-based compensation charges, general and administrative expenses accounted for 8% of net revenues, increased from 5% in the same period last year and remained consistent Q-on-Q. Income from operations for the second quarter were RMB168 million, decreasing 37% year on year and 5% Q-on-Q. Excluding share-based compensation charges, income from operations were RMB277 million, decreasing 22% year on year and remained flattish Q-on-Q. Operating margin was 17% in the second quarter compared to 32% in the same period last year and 19% in the previous quarter. Excluding share-based compensation charges, operating margin was 28%, decreasing from 43% in the same period last year and 30% in the previous quarter. The effective tax rate for the second quarter was 45%, increased from 16% in the same period last year and 28% in the previous quarter, primarily due to the provision of 5% PRC withholding tax related to the -- related to dividends that our PRC subsidiaries were paid to our Hong Kong subsidiaries to fund the recently announced share repurchase program, which was partially offset by the preferential tax treatment of two PRC consolidated identities. These two identities were approved to apply the preferential tax rate of 15% under the corporate income tax preferential policies for China's western region. This preferential status is effective retroactively as of January 1, 2011. Before the company could obtain the official approval for the preferential tax treatment, these two identities applied as statutory tax rate of 25% for 2011 and the first quarter this year. Net income attributable to Ctrip shareholders for the second quarter was RMB120 million, representing a decrease of 50% from the same period last year and 29% from the previous quarter. Excluding share-based compensation charges, net income attributable to Ctrip shareholders was RMB228 million, representing a decrease of 35% from the same period last year and 15% from the previous quarter. Diluted earnings per ADS were RMB0.81 for the second quarter. Excluding share-based compensation charges, diluted earnings per ADS were RMB1.56 for the second quarter or 24 cents in US dollars. As of June 30 this year, the balance of cash and cash equivalents, restricted cash and short-term investments was RMB5.3 billion. Now, turning to the business outlook. For the third quarter of -- for the third quarter this year, Ctrip expects net revenue to grow approximately 15% to 20% year on year. This forecast reflects Ctrip's current and preliminary view which is subject to change. And finally, I would like to give you update on Ctrip's share repurchase program. As of July 24 this year, Ctrip's cumulatively purchased approximately 11.3 million ADS, with a total consideration of USD202 million from open market under three existing share repurchase plans adopted in 2008, 2011 and 2012. With that, operator, we are opening the line for questions.

[Operator Instructions]. We do ask that you limit your question to two only. If you have more questions, please rejoin the queue. [Operator Instructions]. Our first question comes from the line of Richard Ji with Morgan Stanley. Please proceed. Richard Ji – Morgan Stanley: Thank you. Min, James, Jane and Jenny, good morning, and thanks for taking my call.

Thank you. Richard Ji – Morgan Stanley: Let me start with two questions, and the first is regarding your hotel operation and the throughput the past quarter, and we saw hotel commission decline. Can you provide us with more granularity about the impact from coupon program versus the organic commission rate -- commission rate? And also so far, what are the feedback from your hotel partners regarding your ongoing coupon program? Thank you.

Thanks, Richard, for your questions. For the first question, hotel commission per room night, for second quarter, our commission per room night declined. It's really for several reasons. Firstly, for the hotel pricing, it's largely declined by 1% year on year. And the nominal commission rate is still very flattish. And currently we obtained about 14% to 15% commission rate from hotels, which is still very sustainable. But our various kind of promotional activities, largely this e-coupon, impact our effective tax rate. And that's mainly the key reasons. And going forward, we still foresee this, for the pricing-wise, because we are -- become more aggressive in penetrating into [lower staff] hotels and in the western areas, so this, on a blended basis, average pricing will see the downward trend. But on the other hand, for our existing hotels, especially for the four-star and five-star hotels, the room rate still have the upward trend largely due to the inflation. So, on a blended basis we will see there will be a slightly downward trend for the pricing per room. But for the nominal commission rates, our best visibility so far is still very sustainable, about 14% to 15%. And on the second question, for the hotel partners, we can pass to Jane for the answer.

Sure. I think, the hotels, I think as long as we bring quality customers to the hotels during the seasons that hotels relatively have fewer people, our hotel partners welcome the volume. So we work very hard to drive the customer volumes to our hotel partners. Richard Ji – Morgan Stanley: And also we observed an increase of your costs in the past quarter. Can you give us a little more color on your headcount target for the year? And how should we be looking at the margin trend? And when should we expect that to be stabilized? Thank you.

Yeah. For the -- indeed we see the costs -- the total costs and expenses is climbing up on a year-on-year basis. For the full year on the headcount-wise, we are still very disciplined. We will not allow the headcount growth to exceed the top-line growth. But this year we have already communicated with the investor community that this year our margin will be on a downward trend. And previously we are talking about for the full year the OP margin will be largely around 30%, which imply about 10 percentage points drop, and 4% is related to the new business development, and 4% is due to sales and marketing, largely due to this e-coupon program, and 2% is due to this labor cost. And since late part of second quarter, we launched a more aggressive sales and marketing campaign where we're beginning to utilize those kinds of efforts in terms of product offering, sales and marketing and internal operation efficiency to continue to expand our leadership. So, as a result, we will -- we foresee to incur additional expenses mainly on sales and marketing. So for the second quarter we see probably the OP margin will be lower than second quarter. So it will be I think probably around 25% to 27%. This additional decline in margins will be largely due to the additional sales and marketing expenses, which is 50% is largely for the e-coupon and the rest half percent is for the -- the rest is for our normal advertising efforts. And for the full year, I think, for the fourth quarter, seasonality-wise, it will have a lower margin than 3Q. But for the full year, on our best judgment so far, would be it will be still around 25% to 30% range. Richard Ji – Morgan Stanley: Thank you. That's helpful.

Thanks.

Our next question comes from the line of Jin Yoon with Nomura. Please proceed. Jin Yoon – Nomura Securities: Hi, good morning, everyone. Thanks for taking my question. So I guess my first question is regarding the dividend. You talked about buying back stock on three different tranches over the last few years. Can you just talk about how -- where we are in the process in terms of the last couple of tranches that you talked about? Are we completely done with that? Are we going into the recent USD300 million realm that you just launched? Can you kind of divide that up for us in terms of where we are in the process of the dividend? And I have one more follow-up questions regarding the margin. Thanks.

Okay, thank you. Yes, we have three share buyback programs adopted in 2008, 2011, 2012, and so far we pretty much utilized all of the [quotas] under the first two programs. And for the recently announced share buyback program, we target to buy back around USD300 million shares. And as of July 24, we already used about close to USD100 million for this new program, and we are -- we believe -- our management team believes the current stock price heavily undervalues the Ctrip value. So we will be very -- we will continue this buyback mode. Jin Yoon – Nomura Securities: All right. And just going back to margins, I may have missed it, you said your margin target for the year now is 25% to 30%? And so, if that's the kind of the new range now, what should we -- where should margins fall assuming that the top line is, in the second half of the year, isn't as strong as what we've seen in the first half of the year and given the fact that your cost structure continues to go up? Should we assume that you probably come in at the 25% if we don't see the top-line leverage that we should expect in the second half of the year?

Firstly, for the third quarter, for the top line we guided total revenues will grow 15% to 20% year on year. And we believe our guidance is prudent and also feel that, because, firstly, you see currently, although the visibility is still limited for the second half this year, a slower economy is more likely to happen, and our business, especially business travel domestic part, it's quite [sensitive] to the macro and will be impacted. And on the other hand, of course, the [travel] industry has inherent uncertainties and risks such as weather conditions. And for us, Ctrip team always try our best. And based on our track record so far, we can continue to outperform the market. But indeed there are a lot of uncertainties. And on the other -- meanwhile, we also put a lot of efforts in building the new products and in [inaudible] users, and every effort that we put into so far, it will take sometime for them to see the full-fledged result. So we still believe there should -- inherently there's operating leverage blended in our model, but it takes sometime. And therefore the last half of the year we have no guidance for the top-line growth, and we believe it will largely -- it depends on the market response to our marketing campaign and also our internal execution.

And Jin, just to add on Jenny's comments, on the top line the revenue growth is guided at 15% to 20%. But if you break down to volume versus revenue, volume growth will be stronger. For hotel, I think the volume growth will be at 20% to 30%, which will be accelerating from the current level due to our investment in the sales and marketing. But on revenue side, the revenue will be partially offset by the e-coupon program. So that's what you see in the blended revenue growth. But if you break into two parts, I think the volume growth is accelerating. Jin Yoon – Nomura Securities: Perfect. Thanks, guys.

Sure. Thank you.

Our next question is coming from Chenyi Lu with Cowen & Company. Please proceed. Chenyi Lu – Cowen & Co.: Thank you. I have two questions. First question regarding the guidance. Again, just give us a little bit detail about the hotel volume growth. Can you guys just, you already gave a little, [just want you to give] the full picture as to what airline volumes [inaudible]? That will be great. And then I have a follow-up.

Sure. The top-line growth, as we mentioned, will be 15% to 20% year on year. And the breakdown will be on the year-on-year basis. And firstly for hotel, we forecasted revenue will grow by 10% to 15% year on year. As Jane mentioned, we'll see the very strong volume growth which will be around 20% to 30% year on year, but the commission per room night will largely -- will trend down by 10% to 15%, mainly due to our promotional activities such as e-coupon and group buying. And for airline part -- ticketing part, total revenue growth will be around 15% to 20% year on year, which is largely driven by the volume growth which is also 15% to 20%. Commission per ticket will be flattish year on year. For the package tour, revenue growth will be around 20% to 30%, and for Ctrip organic part, the growth will be around 30% to 40%. And for the corporate travel, revenue will be around 15% to 20%. Chenyi Lu – Cowen & Co.: Okay, great. Thank you. And then one more question regarding the hotel business. I think the volume pretty much mainly in line with the [guidance], but the commission rate actually declined faster than the last time when company got 9%. Can you give us a view as to why the commission actually declined faster? Is it because the company offered more coupon or is it because the overall market was softening that the hotel [inaudible] the customers? And also, can you give us a view to overall hotel business as to which segment is doing better? Is economy hotel doing better or is the higher-star hotel doing better? Thank you.

For the commission rate, I think you referred to the effective commission rate, which is commission per room night. It's comprised by three elements. First one is the price for the room night, which is largely flattish and will be flattish in the third quarter. And the second element is nominal commission which we foresee will be still flattish, as we talked at the beginning of this call. And we still see 40% to 50% commission rate will be achievable in the coming years. And for the third, the last component, is promotional impact, which is largely from the e-coupon and group buying. And it will impact our growth by 10% to 15%. And we believe this -- we noticed the intensified industry competition and also the [inaudible] from the leisure travel markets where our team is very determined to be in the competition and to gain more market share for the leisure travel products. So I think we're very committed on that, and it will impact our commission -- effective commission rates for several period of time. But over the long run, we believe industry will go back to the very rational level. And sorry, I forgot the second question. Chenyi Lu – Cowen & Co.: The second question is, let's break the hotel business into two, where is the economic hotels, where is others? Which one gets actually -- which one has better growth compared [inaudible]?

We have seen the economic hotel as well as the high-end hotel all growing healthily in the market, although the whole market is influenced by the GDP growth rate. But I think 7%, 8% GDP growth rate still enable the hotel to grow at a very reasonable level from our perspective. Chenyi Lu – Cowen & Co.: Okay, great. Thank you.

Thanks.

Our next question comes from the line of Alex Yao with Deutsche Bank. Please proceed. Alex Yao – Deutsche Bank: Hi, good morning, everyone, and thank you very much for taking my call. I have two questions. The first one is about your M&A strategy. In the past when you guys talked about the M&A target, you guys mentioned you will be radical leaders in travel-related area but not necessarily overlapping to your core OTA business. Now, given that the competition in the online travel agent market is intensifying, would you consider leverage the capital resource to consolidate the market, which means that you buy the similar business model companies? And second question is regarding the e-coupon program, can you share with us the progress and achievement of the program? And also in using what metrics do you evaluate the effectiveness of the program? If possible at all, would you be able to share with us any relevant operating metrics, for instance, percentage of redemption rate, percentage of redemption treated as operating expense versus the [contract] revenue, et cetera? Thank you.

Sure. So I will walk you through these two questions. First of all, M&A strategy, Ctrip historically has been very disciplined in terms of teaming up with another company. So we mainly have three types of goals. The first one is, if the company can extend our product line into the market, we'll be very interested in talking with them. Secondly, if a company can speed up our penetration into a market that we do not have a presence in, we will be very interested also. And thirdly is a very long-term investment that will extend our leadership in the long term. And normally the teams that we team up with are very strong in execution and share the same philosophy with Ctrip team. Only if these criteria are met, then we will make a move. So we will keep up with our disciplined philosophy in executing our M&A strategy. So that's the first thing. The second thing is, on the e-coupon, I think, first of all, we very much like to maintain a very healthy [eco] environment. However, if the competition becomes a little bit irrational, we reserve our available funds to strengthen our sales and marketing campaign. Right now, as we disclosed, we have USD800 million on the balance sheet, USD300 million is allocated for our buyback program, more than USD500 million available funds is available for our sales and marketing activities and other operational activities. Whatever will extend our leadership into the market, we will decisively do it. So, for e-coupon program, it is an example for us to extend our leadership into the market share. The [TPR] we're looking at is the volume growth into the market and market share gain. So, a comparison between us and the other players in the market is being very carefully monitored. And we will keep up with our efforts to make sure our presence into the high-end as well as low-end customers is strengthened. Alex Yao – Deutsche Bank: That's very helpful. Thank you very much.

Thanks.

Our next question comes from the line of Eddie Leung with Merrill Lynch. Please proceed. Eddie Leung – Merrill Lynch: Hi, good morning. Thank you for taking my questions. Just a follow-up to Alex's question. I wonder if you guys can share with us any rough proportion of the hotel volume related to the so-called promotional programs, including e-coupons as well as group buy. And then my second question is about the ASP trend of air tickets. You guys mentioned the ASP trend for hotels are. I'm just wondering how the other things are going on for air tickets. Thank you.

Yeah. Jane, you go.

Sure. For the hotel growth, I think the e-coupon program influenced the budget customer more than the high-end customer. So, for high-end customers, the growth is still very healthy. I think they will book with or without e-coupon. For the lower-end customer and the budget segment, customers redemption rate for the e-coupon is much higher, and we are very glad to see the redemption rate is keep up with our expectation, which means we are winning over the customers through our campaign and the market share is being expanded. The 20% volume growth for this quarter reflects the accelerated volume growth from previous year. In the air ticket?

Yeah.

Yeah, air ticket is 16% year over year, mainly driven by the volume. The other elements remain very steady. Eddie Leung – Merrill Lynch: Thanks.

Thanks.

Okay. Our next question comes from the line of Jiong Shao with Macquarie. Please proceed. Hello, your line is open. You may proceed with your question. Jiong Shao – Macquarie Securities: Sorry, I was on mute. Can you hear me now?

Yes. Jiong Shao – Macquarie Securities: Hello.

Hi. Jiong Shao – Macquarie Securities: Hello?

Hi. We can hear you. Jiong Shao – Macquarie Securities: All right. Sorry, I was on mute. Thanks for taking my questions; I have a couple of questions. First, on the margins again. I heard you saying 25% to 27% operating margin. Was that for second half or was that just for Q3? And a follow-up on that is that the delta previously was roughly, say, around 30% the delta. How much of that delta is going to be sales and marketing? And where exactly the pressure points are coming from in terms of the competition? Is it coming from your pure OTAs, is it coming from wholesalers? Where exactly are the biggest pressure points? This is my first question. Thank you.

Okay, sure. I will talk about the margin, and Jane, can you elaborate on the competition part? Firstly, yes, Jiong, thanks for the question. For the 25% to 27% OP margin guidance is largely for Q3. And for the fourth quarter, seasonality-wise, 4Q will have lower margin than Q3. So, on a blended basis for the three-year, we forecast about 25% to 30% for the 2012. And this additional data, as you mentioned, compared with our previous targets, is mainly due to our more aggressive coupon program and sales and marketing campaigns. And compared with our previous target about 30%, we have additional 3% to 5% spending which is -- should -- attributable to the promotional activities, and 50% of that can attribute to the e-coupon and the rest for the additional sales and marketing and advertisement efforts.

And your question, the second part, where the competition pressure coming from, I think we manage the market very carefully, to an extent if it is on the price, we will make sure we invest our money very wisely to make sure we do not have any price depreciation and make Ctrip products very competitive in terms of pricing. In terms of sales and marketing, I think we need to penetrate into the lower-end cities. These are the cities that enjoy such growth in GDP growth rate, and we will penetrate into these markets. Jiong Shao – Macquarie Securities: Okay. Thanks, Jane and Jenny. And my second question is on the whole sort of cloud over the Chinese ADR listing in the states and all the concerns around the VIE. I was just wondering, firstly, do you have plans in the top line to restructure VIE? And secondly, given the low multiples Ctrip and other Chinese ADRs seem to be trading at, have you thought about potentially to do listing in Hong Kong perhaps?

Our VIE structure is very common and consistent with the other VIE structures Chinese companies adopted, which are listed on the US market. And we have disclosed our 20-F for related information. Regarding the listing, we don’t have any plan in the foreseeable future to do that. Jiong Shao – Macquarie Securities: Okay. Thank you, guys.

Thanks.

Our next question comes from the line of Andy Yeung with Oppenheimer. Please proceed. Andy Yeung – Oppenheimer: Good morning, everyone. Thank you for taking my question. My question is about competitive landscape and your present strategy. You mentioned that you have roughly USD500 million on your balance sheet that is available for more aggressive pricing and marketing activity. So, perhaps you can, you know, help us understand what's your view on competition, especially price competition.

Sure. I think if you look at the competitive landscape, Ctrip generates 1 billion on the bottom line almost every year, and we want to use our fund to best enhance our leadership and increase the value for our shareholders. But this fund, the priority for this usage of the fund is to strengthen our operational activity and to extend our leadership into the market. So, to an extent, the market has intensified competition. I think since our market share right now is still very small, we are very determined to make the right investment. So in the long run, our branding, our product offering and also our services are enhanced in the long run. So the USD500 million is available for sales and marketing and other activities which can extend our leadership into the market. But obviously when we use this money, we will use it very carefully to make sure every dollar we invest will generate very good return in the long run. Andy Yeung – Oppenheimer: Great. If I may, if I can follow up with one more question regarding product development, can you also give us some idea what kind of mobile product you're developing right now?

Yeah. I would like to add some color on mobile development. I think for Ctrip, we are probably the leading OTA to enter into this 3G market, and our mobile platform is one of the leading apps in China among our target customers, and we do continue to give high priority to the development of mobile apps as well as building the backend supporting system. As you probably know that in the market there are some mobile apps provided by some smaller players, but I think the advantage for Ctrip, not only we have very good brand awareness, we also have very strong exclusion service capability. So I think in the near future Ctrip will prove itself as the very clear leading player in this field. Andy Yeung – Oppenheimer: Great. Thank you.

Thank you.

Thanks.

Our next question comes from the line of Mike Olson with Piper Jaffray. Please proceed. Mike Olson – Piper Jaffray: Good morning. Just to summarize what you've said on the buyback authorization, you've already used up the first two buyback authorization as well as USD111 million of the new USD300 million authorization. So at this point you have about USD90 million buyback authorization left, is that correct?

Yeah, it's largely correct. We still have like close to [USD200 million] last quarter for the buyback. Mike Olson – Piper Jaffray: USD200 million?

Yes. Mike Olson – Piper Jaffray: Okay. And then high-level question here following on somebody else's question about top-line growth. You suggested in the past that one of the major factors negatively impacting revenue growth in recent quarters is just the weakness -- the weaker China macro environment. So, is there anything other than an improving China macro environment that could re-accelerate revenue growth?

I think if the Chinese economy is maintained at a very healthy level, GDP growth rate is around 7% to 8%, although it's not as high as double digits two years ago, but we believe the 7% to 8% is a sustainable level and we will make sure our investment is kept up with the GDP growth rate. And our CEO can also add some color to it.

Yeah. I think the Chinese GDP growth is slower than the previous years, but China still continues outperforming most of the leading nations in the world. And as one of the major consumption industries -- travel industries in China, we'll continue to deliver robust growth aided by the increase of household incomes and enhanced paid vacation systems. So I think in the near to middle term, still there are some -- probably some macroeconomic issues, but still travel, especially leisure travel, is growing fast in China. And it is expected to become the next growth driver for the travel industry. So I think for Ctrip, we definitely will grab this opportunity to make [even big] success. Mike Olson – Piper Jaffray: All right. Thank you.

Thanks.

Thank you.

Our next question comes from the line of Alicia Yap with Barclays. Please proceed. Alicia Yap – Barclays Capital: Hi, good morning. Thanks for taking my questions. I just have housekeeping questions on your balance sheet, I thought that there is a line item of about USD60 million on the short-term borrowing. So, can you clarify what is the purpose of that and if that is in the USD borrowing or the RMB borrowing? And also if you can disclose the operation tax for the quarter.

Yeah. Thanks, Alicia. For the short-term borrowing, it's related to the [mechanism] so as to facilitate the share buyback. Firstly, you will also notice that in the -- for restricted cash, this quarter we increased by RMB500 million. It's mainly due to offshore credit facilities secured by [inaudible] by letter of credit as collateral. In Chinese it's called (Chinese language spoken). And this short-term borrowing of RMB300 million and RMB81 million is due to this mechanism to borrowing offshore to support share buyback. The reason for us to do this is because it takes sometime for us to get government [special] approval to [wire] USD300 million out of Mainland China. And that's why we entered into agreement with Merchants Commercial Bank in China that they would lend US dollar to us offshore so that we can buy back stocks. And we need to use about RMB500 million in China as a collateral to secure this loan. So it is merely a balance sheet process.

Yeah, to add to Jenny's comments, I think this arrangement on a net-net basis is at no cost for the company because the deposit we placed in Mainland China generates interest income and the lending offshore has some interest expense. Each number offsets each other, the cost is zero. So for us, we have more available cash offshore to buy back stock timely without any cost on a net basis for the company. Alicia Yap – Barclays Capital: I see. And can I follow up on another question on the other income line? There is a gain of about RMB8.8 million this quarter. Can you elaborate off that? And then lastly, just on the gross margin impact for the 3Q, you give out the operating margin but I just wanted to get a color on the gross margin. Is that going to maintain at 75% for 3Q? Thank you.

Firstly, for other income, it's largely the government tax subsidy and other miscellaneous income. For the gross margin wise, in this quarter our gross margin for the second quarter is largely flattish around the 75% Q-on-Q. And for the third quarter it will be lower than that level. It's mainly due to the e-coupon program. And over the long run, we still believe 70% to 75% is still a sustainable level that we can achieve. Alicia Yap – Barclays Capital: Okay, great. Thank you.

Thanks.

Our next question comes from the line of Fawne Jiang with Brean Murray. Please proceed. Fawne Jiang – Brean Murray: Good morning. Thank you for taking my questions. First question is actually regarding the hotel promotions you're running in 3Q and its implications for your margin guidance for 3Q. It seems like you're running aggressive for promotion all segments of the hotels -- group buy for five-stars or three-stars hotels. Just wonder, what's the percentage of each of segments are currently under promotion, such promotion? And secondly, given you guided 3Q operating margin at 25% to 27%, what's the assumption for the promotion level? Will the current promotion continue for the rest of the quarter? Or it seems like most of your promotion are due to expire in July.

Yes. For the hotels, I think we want to make sure our price remain to be very competitive in the market. So we adjust our strategy based on the market condition. To an extent we see our price has some differentiation in the market, we'll adjust our promotion to make sure in each segment every hotel price remain to be very competitive. Our current 25% to 27% operating margin reflects that strategy, including the intensified e-coupon and also intensified sales and marketing campaign that will allow us to penetrate further into the untouched customer pool. Fawne Jiang – Brean Murray: Okay. Jane, just a clarification on that, so you basically say the 25% and 27% margin guidance is actually the worst case for your promotion? That means you're already factoring [inaudible] promotion for the fourth quarter? Is that fair?

Yeah. It is a prudent guidance based on our best visibility so far. Fawne Jiang – Brean Murray: Okay, got it. Second question is actually regarding the air commission rate for second quarter. If I remember correctly, I think at some point in the quarter, management actually communicated you saw some air commission reach -- caught pressure from the airlines, which kind of negatively impact your air growth for the second quarter and I'd say third quarter. It seems like -- I just wonder whether you -- that has happened, and so how -- what's the outlook for 3Q on the air commission rate side -- on air commission rate?

Okay. Thank you for the question. First of all, for air ticketing commission rate, they were still ranging in the range of 4% to 5%. And yes, as you mentioned, we -- indeed some downward pressure for our commission rate. In 1Q, air commission rate dropped by 2% to 3% year on year and in late June we see that the commission rate dropped around -- about 5% year on year again. And in 3Q, this time our current visibility, this trend will very likely to continue in July and August. So for the second quarter, we believe that this nominal commission rate will drop by another -- by about 5% year on year again. But for the full year, based on our kind of visibility, this 4% to 5% will still be achievable and it will -- and in the next one to two years, and this will also be the level that -- where it can be sustained. And for the long run, we believe airlines will make [inaudible] on our side, we'll continue to do the best, everything we can control. Especially we will continue trying our best to improve our service quality and efficiency to make to run the business at the lowest of cost but deliver the best services. And in this way, we can help both airlines and the customers to achieve higher benefit. Fawne Jiang – Brean Murray: Jenny, just to follow up on that, I think in your third quarter guidance you mentioned that you are going to see volume growth by 15% to 20%, but revenue per ticket is flat. So if we're going to be 5% year on year on commission rate cut pressure, are we assuming a 5% tightening up year on year?

Correct.

Yeah, largely. Fawne Jiang – Brean Murray: Okay. Also for the airline commission rate cut, do you see that like one single airline or you're pretty much seeing that from major airlines? What's the, yeah, the coverage?

For the major airlines for the major [inaudible] we believe the airlines will adjust the commission rate from time to time depending on the demand and their own financial status. And that's what we've seen in the past, quarter on quarter we see this level vary from time to time. But [inaudible] for the full year is still within 4% to 5%. Fawne Jiang – Brean Murray: Got it. You're predicting that's more seasonal than structural change on the airline side, right?

So far, yes.

So far, yes. Fawne Jiang – Brean Murray: Okay. Thank you very much.

Thanks.

Our next question comes from the line of Catherine Leung with Goldman Sachs. Please proceed. Chenyi Lu – Cowen & Co.: Hi, good morning. I was wondering if you could elaborate a little bit more on the more aggressive sales and marketing campaign that you discussed starting from the late second quarter. Are there any additional products or business lines that you're focusing the additional marketing efforts compared to the first half of this year? And then also related to this, for 50% of the increased sales and marketing expenses that you discussed is related to the e-coupon. Is this effectively the contra-revenue portion or is this the proportion of e-coupons that are actually recognized in the sales and marketing cost line? Thank you.

For the product offerings, our belief is a pure sales and marketing is not enough. It has to be coupled with strengthened product offerings and service level. So our goal is three -- we need to achieve three number ones. Product offering needs to be number one, service needs to be the best, and price needs to remain very competitive. So when we have launched this intensified sales and marketing, the product offering needs to be extended as well. So as we discussed, we launched a few new products. Tujia is similar to home-away model. Our [Sungko.com] is targeted at low-end budget customer, similar to hostel world in the world, and we also have [Quixi] which is Smart Hotel Choice that's also similar to a model that's very popular worldwide. So with all the strengthening products coupled with the strengthening sales and marketing, we believe our market share will be extended very effectively. So that's the first thing. And your second question is on the split on the sales and marketing. For e-coupon, if the customer redeem it for our products, then it's a contra-revenue, and two-thirds of the e-coupon is accounted as a contra-revenue. If a customer would like to redeem this e-coupon by exchanging this e-coupon for a gift, for example, a lamp or a luggage, then it's a regular sales and marketing activity. That's about one-third that's capitalized -- captured in the sales and marketing line. Chenyi Lu – Cowen & Co.: And I'm sorry, in terms of the e-coupon, are you considering at all, I know that previously you've sort of matched what was available in the marketplace, are you considering sort of expanding above and beyond what competitors are offering in terms of e-coupons in the second half of this year?

I think we are very careful making sure we stay very competitive in the market. Meanwhile, we kept a balance of the healthy ecosystem. So, largely, I think we monitor the market and make sure our price is maintained at a healthy level, at a very competitive level, but we do not want to do anything that is irrational. Chenyi Lu – Cowen & Co.: Okay, understood. Thank you.

Sure. Thanks.

Our next question comes from the line of [Tien Hao] with [TH Capital]. Please proceed. [Tien Hao] – [TH Capital]: Thank you, management, for taking my question. My question is regarding your promotion programs. So I wonder what percentage of your inventory, hotel inventory are you using for this promotion program, e-coupon, cash rebate or any other type of rebate program? And is that only summer or not? If it's not only for summer, how long is it going to last? So that's the second part of the question. The third part of the question, do you see a potential risk that those kind of price war eventually merging to higher-rated hotel area such as four-star hotels or even five-star hotels? That's the first question. And the second is really -- I saw an increase in product development. So I wonder, what are some new products and offerings in the pipeline you're going to put up in the market which could actually help the company to resume the path of growth and as well as maintain the margin [sustainability]?

Sure. First of all, on the coverage of the e-coupon, I think we do not set a target, for example, we have a certain percentage of the hotel that needs to be covered by e-coupon. I think we compare our price with the market price and to make sure every hotel that's listed remains to be very competitive in the market. So it's adjusted on a daily basis. But for the high-end customers, they normally do not use the coupon as much as the budget customer. So the three-stars and below hotels, the redemption rate for the e-coupon is higher, and that's the target market we are after to extend our leadership into this are as well. Secondly, in the product line, the increased product investment covers many folds. We have already disclosed a few new products that have been launched, including the Tujia, [Sungko] [secret] hotel offerings. And going forward, there are more hotels -- more products in the pipeline which we'll be rolling out continuously. But we would like to take a very prudent view, because once it's launched, we want to make sure it's a successful launch. So the investment in product line is a long-term investment in terms of technology, product offerings and services. And it's reflected in our guidance already. [Tien Hao] – [TH Capital]: So, how long does the new incentivized price is going to last? Is it just for the summer or it's for whatever, you don't really know?

I think our commitment to make sure we extend our leadership in the market is a long-term investment. So as long as it takes, we will make sure we have sufficient fund, the USD500 million fund is available to run any effective campaign to make sure our leadership is extended. [Tien Hao] – [TH Capital]: Yes. So what's the effective tax rate for the rest of the year?

Yeah. For the effective tax rate, on a non-GAAP basis it will be around 17% to 18%, for the second half.

But on a GAAP basis, I think it's about 28% year over year. [Tien Hao] – [TH Capital]: Got it. Thank you so much.

Thank you.

Our next question comes from the line of [Ming Zhao] with [86 Research]. Please proceed. [Ming Zhao] – [86 Research]: Thank you, thank you for taking my question. Jenny and Jane, so, I have a technical question here. So if you have the e-coupon issued to the customers, how do you record on the right-hand side of your balance sheet? Is it in the provision [inaudible] program or is it in the other payable and [accruals]? Because if you look at those two lines, the customer [inaudible] actually increased very little quarter over quarter, but the other line went up a lot. So I just want to -- how you record that in accounting.

Sure. It is debit expense and credit contra-revenue if it is -- the customer redeem it for our products. So it's not in the liability, rather it hits our contra-revenue directly.

So, for the balance sheet you mentioned, it will be largely falling to other payable line. [Ming Zhao] – [86 Research]: Yes. So if the customer redeems that, that's become a contra-revenue item. But if it's not redeemed, you put it to the accruals, right?

Correct. [Ming Zhao] – [86 Research]: Okay, got it. Okay. So my second question is, if we look at the price wars going on [inaudible] doing it, you guys said you're going to be more aggressive. Is there any point you're going to say, you know, we're going to stop it even if it reduced the market share? Are you looking at the competitors to make that statement or regardless you're just going to do it?

It's a dynamic environment. First of all, I think as we discussed, we want to make sure our price stay very competitive. Meanwhile, we always would like to see a healthy industry environment. So if the market becomes very healthy, obviously we'll welcome that move, and that's good for the industry and good for the player. But if the price remains to be under pressure, Ctrip is always willing to take up any challenges to make sure our price also stays very competitive. [Ming Zhao] – [86 Research]: Okay. All right. Thank you.

Our next question is coming from the line of [Mosai Lee] with Citigroup. Please proceed. [Mosai Lee] – Citigroup: Hi. Thank you for taking my questions. Well, I would like to ask about, firstly, the sales and marketing expenses, how much of the increase of the sales marketing dedicated to online versus offline? And I have a follow-up question. Thank you.

Yeah, we try to diversify our sales and marketing in all available channel. So as you see in the major traffic hubs, we have direct-to-sales team. We also team up with major corporations to establish corporate alliance. And then we also spend quite a lot online. So all these channels are fairly diversified. We want to make sure our sales and marketing campaign channel are very well-balanced. [Mosai Lee] – Citigroup: Yeah, but for the increase of the sales and marketing expenses, which part of the online corporate alliance or the distribution of the membership card at the hotel or airlines distributed, how did they rank in terms of the amount of money you spend on?

Yeah, again, I think we try to run a very balanced campaign. We try not to put our investment in one bucket. So as we discussed before, the direct-to-sales, strategic alliance, online marketing, PR, advertisement, all these channels are very balanced when we invest our sales and marketing dollars. [Mosai Lee] – Citigroup: Fair enough. One follow-up question regarding the gross margin. You said that the gross margin down mainly because of the e-coupon contra-revenue. Any other reasons why the gross margin will come down?

Yeah, as we have communicated with investors so far, you see this year there would be several components why decrease our margins. One of them, the labor cost. So, for the gross margin wise, except for this e-coupon program, the decrease is also related to the labor cost increase. [Mosai Lee] – Citigroup: I see. I see. And how many of your 39,000 hotels are in your prepaid program?

Currently not many. It's --

Yeah. The prepaid model in China --

Very little. It's a small number so far.

Yeah, it's still a supplementary product. [Mosai Lee] – Citigroup: Okay. Thank you very much.

Sure. Thank you.

I would now like to send the call back to Michelle Qi for closing remarks.

Thank you, Carla. Thank you, everyone, for joining us on the call today. A replay of the call will be available at -- on the IR website shortly after the call is completed. We appreciate your interest in Ctrip and look forward to convening with you again next quarter.

Thank you very much for your time.

Thank you.

Thanks.

Bye-bye.

Ladies and gentlemen, that concludes today's conference. Thank you for your participation. You may now disconnect. Have a great day.