Trip.com Group Limited (TCOM) Q2 2013 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Second Quarter 2013 Ctrip.com International, Ltd. Earnings Conference Call. My name is [Amanda] and I'll be your coordinator for today. [Operator Instructions]. At this time I would like to turn the call over to your host for today Ms. Jade Wei, Investor Relations Director of Ctrip.com International. Please proceed, ma'am.

Thanks, [Amanda]. Thanks for attending Ctrip’s second quarter 2013 earnings conference call. Joining me on the call today we have Mr. James Liang, Chairman of the Board and Chief Executive Officer; Mr. Min Fan, Vice Chairman of the Board and President; Ms. Jane Sun, Chief Operating 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 U.S. 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. James, Min, Jane and Jenny will share our strategy and business updates, operating highlights, and financial performance for the second quarter of 2013, as well as outlook for the third quarter of 2013. We will also have a Q&A session towards the end of this call. With that, I'm turning this call to James for business updates. James, please.

Thanks, Jade. Thanks everyone for joining us today. We are very pleased to report solid results delivered in the second quarter of 2013. Net revenues grew by 28% year over year, mainly driven by strong volume growth. In the second quarter, hotel room nights grew 44% year over year and air ticketing volume grew 34% year over year. Over the past few quarters we have been investing heavily in enhancing our brand awareness, enriching product offerings and strengthening price competitiveness to make deeper penetration into the leisure market. We are pleased with our progress and our team's strong execution. Online migration, particularly mobile adoption, is evolving in a rapid pace. As of June 2013, China's internet population was approximately 600 million and mobile internet users exceeded 450 million. Online penetration for China's travel industry is still far behind of the level of the US and Europe. We expect to see continued strength of secular growth for the online travel sector. Ctrip team is working diligently to capture this unprecedented industry opportunity. Over the past several quarters, Ctrip has achieved accelerated growth for both of our PC-based internet and mobile internet platforms. By the end of the second quarter we had more than 50 million mobile app downloads, up from 35 million downloads last quarter and 10 million downloads last year. Over 55% transactions were booked through online and mobile channels compared to about 45% a year ago. For hotel booking, PC-based internet contributed about 45% of the total transactions and mobile internet contributed over 20%. For air ticket booking, PC-based internet contributed about 40% of the total transactions and mobile internet contributed close to 15%. Ctrip Travel app is now the number one mobile app in the travel segment in China in terms of transaction value. The peak transaction value today achieved over RMB50 million. Our one-stop platform with comprehensive products and [excellent] service empowers the growth of our mobile app. We will continue to focus our mobile strategy and take the leadership in the mobile travel market. Ctrip Travel app offers the most comprehensive travel products in the mobile space. Our offers range from domestic to international hotels, air tickets and train tickets. We also cover packages with cruise tours, local activity tickets, car rentals, last-minute commotions, destination information and user-generated reviews. We recently launched a dedicated app for our corporate travelers to book and manage their businesses. Ctrip apps could enable our customers to find all the important information for their travel needs. More importantly, we carefully study and improve our user experience. We are proud that through our innovative mobile functions on Ctrip Travel app, customers are able to book travel products in a more efficient way and through our PC and call centers. For example, using our innovative flight booking functionality on our mobile app, our customers could go from selecting a flight to making a payment within 10 seconds. Mobile is everywhere in Ctrip now. It is not only becoming a new interface for servicing travelers but also changing the way we run our business overall. Meanwhile we are running extensive marketing campaigns to enhance travelers' awareness of the unique value that Ctrip can provide, especially through our mobile app. In the second quarter we launched our new logo with the slogan "Ctrip Mobile, anywhere to everywhere." These new elements were created to ensure Ctrip's brand a better fit in the mobile and leisure markets. Based on our observation, once customers trust your brand, it's associated with every possible travel product at the most competitive prices, they will have no interest or need to jump between different mobile apps. Competitions remain intensive for the online travel market in China. Our competitors are still using price competition in order to gain market share. We will match the price competition dollar for dollar and ensure that we gain market shares aggressively. We are determined to create the best values in our industry to our customers by our restless efforts in building the best one-stop travel platform with the comprehensive products, industry-leading service and competitive prices. A new journey for Ctrip is just getting started. We are excited and confident about our future. With that, I will turn to Min for the industry highlights and investment opportunities.

Thanks, Jim. Thanks everyone. This is Min. China's travel industry is experiencing rapid growth along with the technology consistently [shifting in] that space. It creates opportunities and [we will add] challenges for industry leaders like Ctrip. While proactively embracing new trends, we're also working diligently with various players in this value chain and exploring opportunities to create more value to the industry and also enhance Ctrip's leadership. For example, travel insurance is an important product which adds value to customers by providing them additional travel convenience and assurance. In order to provide more options for travelers, Ctrip has participated in finding an online travel, online insurance companies with other key industry players to design and sell more innovative online travel products in the future. Recently Ctrip [invested] in the first quarter Express Application which is young but a leader of the mobile budget hotel booking sector. Although the financial impact of this transaction is immaterial, it's in a good start for Ctrip to work with mobile travel industry players and grow our future growth together. We will continue to pursue this path. With that, I will turn to Jane for the operating highlights.

Thanks, Min. Thanks to everyone. I'm very pleased to share the updates for Ctrip's main businesses with you. Ctrip has fully expanded its hotel coverage. By the end of the second quarter our domestic hotel supply network covered approximately 60,000 domestic hotels compared to around 39,000 hotels one year ago. Our international hotel network has been further extended to around 230,000 hotels. We achieved a strong volume growth of 44% year on year in the second quarter of 2013, driven by both business and leisure travel demand. Our international hotels are continuing to grow at the triple-digit growth rate in the second quarter. We have added prepaid option to more domestic and international hotels. Our opaque model smart hotels covers over 2,000 hotels with also significant discounts to the leisure travelers. Together with the group buy hotels and the flash sale model, our customers are able to enjoy a greater variety of hotel products from Ctrip. The air ticketing business grew strongly in the second quarter and reached 34% volume growth year on year, far exceeding the industry average growth rate. We continue -- we are continuing to methodically rolling out our air coupon plan and enhance our price competitiveness. Coupled with our consistent and reliable service, we are seeing solid market share gains and faster user acquisition. In the past year since our new international air ticket booking platform was launched, we have seen strong growth in the outbound ticket, which is more than 60% year over year. We believe our international air ticket platform has great potential to serve the emerging outbound travel needs for Chinese travelers. Our packaged tour business reported impressive results in the second quarter of 2013. The revenue from the Mainland China grew over 55% year over year. We have seen the customer are becoming more used to using online platform to book their summer vacations and also family trips. Packaged tour products are more complex and have higher barriers of entries for product design, supply management, IT infrastructure and backend operation. We are improving our systems and operations to ensure that our customer can book our product more easily and travel more cost efficiently and enjoy their vacations with peace in mind. In the second quarter we started to promote the [time and duration] system for all our product travel packages. This provides a transparent and a reliable ranking system to assist our clients in choosing products. At the same time it's created a standardization system in the industry which makes it easier for us to work with different suppliers and industry players. This is based on the expertise that Ctrip has developed over the past year and it is a good step for Ctrip to further extend our leadership in the leisure travel market. Ctrip's corporate travel services maintained at this growth rate in the second quarter. We're pleased that our corporate business has introduced an ATP designed for corporate travels. This is the first app in the corporate travel industry to serve corporate travelers in China. It will further enhance the effectiveness of corporate travel management and will help us to gain more competitive advantages over the traditional travel agencies. On top of the four major business lines, we continue to add more services and products to our one-stop shop and are elevating our service levels for these new businesses. We have added tickets and local daily tour activities to cover over 3,000 attractions globally and enable leisure travelers to enjoy their trips with added convenience and at more compelling prices. We have enhanced our booking engines for the car rentals including cars with or without chauffeur. We're working with the leading players in this segment on a series offerings and promotions. With our large-scale customer base and superior service [legacy], we believe we can add excellent value to both suppliers and customers. We're very proud to share good news that Ctrip has been awarded the title of the Best Online Travel Agency of the Year 2013 for the third consecutive year by Travel Weekly, recognizing the leading position of Ctrip in travel industry in China. I would like to take this opportunity to thank our customers for their business, our partners for their support and our teams for their hard work and commitment to make all of this happen. Now I will turn to Jenny for financial highlights.

Thanks, Jane. Thanks everyone. For the second quarter 2013 Ctrip's total revenues increased 28% year on year and 7% Q-on-Q. Hotel reservation revenues were up 25% year on year, primarily driven by 44% increase in volume and partially offset by 40% decrease in commission per room night which was in turn mainly due to promotional activities. Hotel reservation revenues increased 13% Q-on-Q, largely driven by the growth of the [inaudible] volume. Ticketing services revenues were up 29% year on year, mainly driven by 34% increase in volume and partially offset by 6% decrease in commission per unit. Ticketing services revenues increased 40% Q-on-Q, primarily driven by the growth of sales volume. Packaged tour revenues were up 40% year on year due to the increase in the leisure travel volume, and decreased 20% Q-on-Q largely due to seasonality. Corporate travel revenues were up 34% year on year, primarily driven by the increased corporate travel demand from business activities, and up 29% Q-on-Q, primarily due to seasonality. Total net revenues were up 28% year on year and 7% Q-on-Q. Gross margin was 75%, staying flattish year on year and up 1 percentage point Q-on-Q. Product development expenses were up 49% year on year and 60% Q-on-Q, primarily due to an increase in product development personnel related expenses. Excluding share-based compensation charges, product development expenses accounted for 22% of net revenues, up 4 percentage points year on year and [2] percentage points Q-on-Q. Sales and marketing expenses increased 25% year on year and 1% Q-on-Q, primarily due to an increase in sales and marketing related activities. Excluding share-based compensation charges, sales and marketing expenses accounted for 21% of net revenues, staying flattish year on year and decrease 1 percentage point Q-on-Q. G&A expenses increased 14% year on year and decreased 2% Q-on-Q. The year-on-year increase was primarily due to an increase in administrative personnel related expenses and share-based compensation charges. Excluding share-based compensation charges, G&A expenses accounted for 8% of net revenues, staying flattish year on year and Q-on-Q. Operating income went up 17 year on year and 22% Q-on-Q. Excluding share-based compensation charges, it was up 11% year on year and 13% Q-on-Q. Operating margin was 16% versus 17% a year ago and 14% a quarter ago. Excluding share-based compensation charges, operating margin was 25% versus 28% a year ago and 22% a quarter ago. The effective tax rate was 27% versus 45% a year ago and 32% a quarter ago. The year-on-year decline was primarily due to -- because Ctrip accrued a provision of 5% PRC withholding tax related to the dividends that our PRC subsidiaries would pay to our Hong Kong subsidiaries to fund the share repurchase program in second half last year. The Q-on-Q decline was primarily due to the decrease in the amount of non-tax-deductible share-based compensation as a percentage of our income as a whole. Net income attributable to Ctrip's shareholders increased 76% year on year and 37% Q-on-Q. Excluding share-based compensation charges, the growth was 41% year on year and 21% Q-on-Q. Diluted earnings per ADS was $0.24 or $0.36 excluding share-based compensation charges. As of the second quarter, the balance of cash and cash equivalents, restricted cash and short-term investment was $1.1 billion. Finally, business outlook. For 3Q 2013 the company expects the net revenue growth to be around 20% to 25%, likely at the high end. This forecast reflects Ctrip's current and preliminary view which is subject to change. With that, operator, please open the line for questions.

Yes, ma'am. [Operator Instructions]. Your first question comes from the line of Philip Wan of Morgan Stanley. Please proceed. Philip Wan – Morgan Stanley: Hi, good morning. Thank you for taking my question, and congratulations on the very strong quarter. First of all, yeah, could you please share with us a little bit more about the third quarter outlook by business line please? And then I have a follow-up question. Thank you.

Sure. For second -- third quarter, the total revenue growth would be around 20% to 25%. If we look at the detailed breakdown for each business line, for hotel, revenue growth will be around 25% to 30%. The unit price will decline by 5% year on year. And the commission rates and the promotional activity impact will be largely flattish. So the total revenue growth for hotel will be 20% to 25%. For ticketing business, the volume growth will be 20% to 25%. The unit commission per ticketing will be largely flattish, and the revenue growth will be 20% to 25%. For our packaged tours, the year-on-year increase will be 25% to 30%. And then for our corporate travel business, the volume growth and the revenue growth will both be around 20% to 25%. Thank you. Philip Wan – Morgan Stanley: Thanks, Jenny. And could you also provide us some update about the competition? In particular, are you seeing the price competition stabilizing in both hotel and also air ticketing booking? Thank you.

Yeah. Thanks, Philip. From a price competition perspective, yeah, we will see stabilizing. However, our team is very well prepared to respond to any irrational price competition at any time. Philip Wan – Morgan Stanley: Thank you.

Thanks.

Your next question comes from the line of Jiong Shao of Macquarie. Please proceed. Jiong Shao – Macquarie: Thanks for taking my question. Congrats for the very strong results and guidance. Just following up on the competition question, obviously sometimes competitors can be partners as well. I think you may have done something recently more with [Chuna] in terms of a partnership interestingly. Could you elaborate a bit on what are you doing with [Chuna] or other meta-search providers to bring more traffic to Ctrip? That's my first question and I have a follow-up.

Yeah. In general we like to work with any marketing partners like [Chuna] or other online search price comparison websites. So we're working with, including [Chuna], different types of [monitoring] partners to reach more customers. Jiong Shao – Macquarie: Okay. Thanks. My next question is on the margins, clearly you did really well on the margins the last couple of quarters. I know previously you conservatively guided 20% margin for the year, but that looks very conservative at this point. I was just wondering what your current thinking is going forward for the operating margins for the rest of the year. Thank you.

Sure. Just one correction, my guidance is for the full year where OP margin will be no lower than 20%. And the way our Ctrip team are always trying our best to deliver the best. And for [inaudible] cost this year, you'll see our overall OP margin non-GAAP basis will be around 24%. And for 3Q we target largely Q-on-Q flattish performance. And if normal seasonality played out, it implies that for the full year our OP margin will be largely around 24% to 25% which is I think largely similar to the level we delivered on the year on year last year. And I think this year is still a year of investment for Ctrip and our top priority is still to gain more market share and faster pace. And we see there's a lot of opportunity in the market and also a lot of challenge. So the Ctrip team [inaudible] efforts to try to capture the opportunity and to handle the competition in more effective way. And also we see a lot of innovations and change in the market, so we will continue to invest in the key strategic areas such as our [IT] technology and our mobile internet. And on the other hand, we will continue to implement innovative ways to improve our operation efficiency and to conduct very tight cost control to avoid losing any money. And one -- first half stronger than expected margin performance we delivered so far [could partially] demonstrate our efforts. So going forward the Ctrip team will continue to work in this practice and to try our best. Thank you. Jiong Shao – Macquarie: Great. Thanks for the very helpful comment and great results. Thank you guys.

Thank you.

Your next question comes from the line of Jin Yoon of Nomura. Please proceed. Jin Yoon – Nomura: Hey. Good morning everyone. Just a couple of questions on the mobile front. First of all [inaudible] transactions in the quarter is about 20% of hotels and 15% of air. Now, how much do you think that is really incremental compared to the PC? And what's the incremental margins on the mobile side versus the PC side? That's my first question. The second question is on your guidance, you know, historically what we've seen you guys do is kind of take the midpoint and add 10. That's kind of what it seemed like you've been doing over the last couple of quarters. Now, should we expect that going forward as well? When you guide 20% to 25%, is that -- should we just add a little bit [inaudible] on the upside, how much visibility do you have on that? Thanks.

Okay. We don't have exact number what percentage of the new customers were actually existing customers from other channels, what percent of the new customers are in fact new customers to Ctrip. But we believe even with the -- even those customers were existing customers who were using either phone, call center or website to both transactions, once they get to the mobile, they were probably more loyal, so they will have more transactions transacted with us because mobile is more convenient and because of strengthening our mobile products, they are probably more loyal and also their transaction will have lower marketing costs for us because we don't need to pay for example search engine costs. So I think whether or not these are existing customers, the fact that we are having more people transacting us with the mobile app is a plus for us.

Okay. On the guidance, we always try to be very prudent because we believe that what we promised to our investor, no matter what happens, we need to deliver. So on the guidance we try to stay conservative. And also in the travel industry, the visibility is limited. There are uncontrollable events politically and naturally, if we run in to natural disaster or some unexpected event, we try to make sure no matter what happened our guidance is good once we promised to our investors. So the guidance we give has historically been very prudent, but obviously our team works very hard to try to achieve good results. Jin Yoon – Nomura: Thanks for [inaudible]. Thanks guys.

Thanks.

Your next question comes from the line of Eddie Leung of Merrill Lynch. Please proceed. Eddie Leung – Bank of America-Merrill Lynch: Good morning guys. Thank you for taking my questions. I have two questions. Firstly, could you give us an update on the pricing trends of ticket and hotel room nights in the quarter? And how much of that are coming from mix shifts, through the lower-tier cities? And then secondly, could you also share with us your thoughts about competition from e-commerce companies? It seems like some of them are making some moves into the travel industry more aggressively recently. Thank you.

Sure. For the first one, for the pricing for hotels, you see in second quarter it declined about 5% year on year basis. That is partially due to the -- our efforts to make for the penetration into the lower-tier cities and higher contribution from lower-star hotels. And another 50% of this impact is due to the pricing decline for the similar hotels on the like-to-like basis. And for the air ticketing pricing, it declined roughly 8% year on year. And I think for the second quarter -- for the third quarter so far we see the pricing become largely stabilized. And the competition, many companies throughout the years have come and many tried, many withdrawed, because the barrier for entry for the hotel business is very high. We are partners with many of the e-commerce companies. So the front-end customers can find travel channel but on the back-end we fulfill all the orders for them. If some other company would like to try, it's difficult to be breakeven if they run their whole fulfillment process. So we monitor them but so far I think we focus on our own strategy to remain strong on product offering, service and branding. Eddie Leung – Bank of America-Merrill Lynch: Got that. Thank you very much.

Your next question comes from the line of Alicia Yap of Barclays. Please proceed. Alicia Yap – Barclays Capital: Hi, good morning, James, Min, Jane and Jenny. Thanks for taking my questions and congratulations on the strong results. My first question is regarding your air ticketing volume. Just wanted to get a sense, your 34% volume growth this quarter, and how much is due to good tractions of your air ticketing coupon program and how much is due to the overall industry demand? And I have a second question. Thanks.

Sure. Alicia, I think when you see the growth rate, it's very hard for segmented by, you know, certain percentages due to coupons, certain percentages, due to certain levels. But what we can see is the industry grew about 10%. We did more than three times of the industry growth rate. And also I think the air coupon program does give us some advantage on the pricing in case some customers are really price-sensitive, we're able to attract them to our website. But it's very hard to quantify down to percentage. Alicia Yap – Barclays Capital: I see, I see. So my second question is regarding kind of like the overall landscape. What is your conversion rate for your mobile platform right now? And how much do you expect your mobile traffic as a percentage of contribution to increase in the next like two to three years' time? And just wanted to get management sense, will there be any difference in terms of the landscape evolving in China versus the developed countries on the mobile front? Thank you.

I'm sorry, what -- conversion rate, what you're referring to is -- Alicia Yap – Barclays Capital: The actual -- so in terms of -- for example, if we, you know, have the traffic coming through, are they actually transact through the mobile and through the payments inside the mobile?

Okay. Well, there's different products and there's different ways of calculating the conversion rate. In general, mobile -- actually we see the conversion rate is apples to apples to comparisons, different rates -- different ways calculating the rates. In general, in a lot of mobile, the conversion rate is a bit higher than the online website because usually these are [inaudible] contrary to other most commonly -- believe that mobile customers actually in certain products, actually higher-end, actually even I think more business customers will likely be transacting on mobile. And most of them are actually last-minute travelers. So actually their booking pattern is a little different but actually have higher conversion rates than on the websites. Alicia Yap – Barclays Capital: I see. Thank you. And just wanted to get a sense in terms of the China market versus developed countries in terms of the mobile usage. Would that be a much higher percentage in China longer term than the developed countries?

Yeah, I think in China in the long run will have probably higher mobile penetration than most other countries in the world because not -- people have more they call fragmented time when they are even going to work or commuting, they usually go on up the transportation so they have more time with their mobile phones. And in China also, when you travel short distance or median distances, people go by train, and on the train they will have a lot of time to working on the mobiles, and there's a lot more lines than other developed countries, they probably have more time to play with their mobiles. So in general I think in China, mobile applications in general, not just travel apps, all kinds of apps, will have more -- will capture more user time than other developed countries. Alicia Yap – Barclays Capital: Okay. Thank you so much.

Your next question comes from the line of Andy Yeung of Oppenheimer. Andy Yeung – Oppenheimer: Good morning. Thank you for taking my questions. I have two quick questions. One is that, you know, obviously your volume growth was very strong, much stronger than underlying travel market growth. So what do you see is the big driver for the shift from offline to online? And also do you think the mobile transition would actually accelerate that process? And I have a follow-up question.

Yeah, sure. I think the market is moving very much from offline to online and mobile is the leading player in the online shift. And also I think with more and more young people getting to the level that they can travel, they like to spend their time on the ATPs and also that helps us to move more volumes to online platform as well as the mobile ATPs. And the peak time for us, average we have disclosed, the number is around -- over 20% already. For certain popular days before the national holidays or on the weekend, the percentage of contribution from mobile can even be higher. So very much in the near future we can see that percentage of the weighting will be much higher. Andy Yeung – Oppenheimer: Good. That's great. My next question is also a follow-up question on mobile. As you mentioned that mobile users tend to be more sticky and have higher conversion rate perhaps than PC users. Also do you see there are greater repeat purchases from your mobile users? And how is overall [inaudible] you mentioned will be more business users, but how is the overall demographic compared to your mobile users versus your desktop PC users?

Yeah. Currently, actually all mobile users are the most loyal customers and frequent business or frequent business and leisure travelers. They tend to have more booking frequency, they tend to be more loyal. Part of it is because they're frequent travelers in the first place, part of it is because they were, you know, Ctrip loyal customers, more willing to accept our booking platform. But also because I think it's increasingly more so in the future will be due to our strength in our mobile app. So we believe we have the best functionality and the best user experience for mobile app. We are thinking, increasingly, once our customers start to play with -- start experiencing our mobile apps, they will become more loyal and more frequent transactions. Thank you. Andy Yeung – Oppenheimer: Thanks, Jim. Thanks, Jane.

Thanks.

Your next question comes from the line of Fei Fang of Goldman Sachs. Please proceed. Fei Fang – Goldman Sachs: Hi. Thanks for taking my question. Congratulations on the great results. It seems by now, you know, Ctrip has navigated through the intense pricing competition and emerged stronger. So my question is, looking ahead, what is the big-picture opportunity in front of Ctrip, meaning what investors that are taking a fresh look at the sector. When they allocate capital to Ctrip, what is the risk/reward in the long run? Then I have a follow-up question. Thank you.

Well, I think -- I wouldn't say the price competition is over. As you know, there will be more competition especially from some of the bigger internet players coming to this marketplace. So there's some uncertainties whether or not the price competition will accelerate or would intensify in the future. But we are well-prepared to match our competitors if there is such a competition. I think the big opportunity for us is actually taking advantage of this new industry paradigm that the mobile and [inaudible] fit with the new kind of last-minute travel behavior that we are seeing right now on our mobile platforms. So we will continue to invest heavily into our mobile apps, continue to invest heavily in brand awareness, especially our strength, to -- especially to market our strengths in our mobile platforms, and lastly, to continue to invest in our services. So we, Ctrip has been offering the best service and we'll continue to invest heavily to -- in this area and to especially tailor with our new kind of a travel customer's travel behavior last-minute kind of travel. And if we can do these things successfully, we believe we will have -- we will increase our market share despite the intensified price competition.

And also your question on the investors, why do they decide to invest in this company or not, I think from a bigger picture, the GDP growth rate for China is growing at the fastest level among all the other countries. And also as a percentage of total GDP, travel is increasing its weight in China's total GDP growth. And as a leading player in this market, we are very determined to further extend our leadership in this market. So we are very confident, if we keep up with our strong execution, the opportunity for Ctrip is very good. So we'll keep up our hard work. Fei Fang – Goldman Sachs: Thanks, Jane and James. Just a quick follow-up question to that, I think the 2Q margin was [inaudible] and this is in spite of the substantial R&D spending. I think this quarter Ctrip spent about 22% of the revenues on R&D, which was probably the highest level in the reporting history. So other than mobile, do you have any other key projects in the pipeline?

Yeah, I think R&D is a line that we invest in the future product. So there are more products in the pipeline that we're exploring, including the rental cars and ticketing for local activities. These are the other we call baby tigers that we want them to take up in the future. So did that in R&D. And obviously also the other important element is the IT investment, because in order to build a very strong platform for mobile and online, we need very good engineers to help us to build the IT system. So we would like to maintain or even increase this line if it brings us more opportunities in the future. Fei Fang – Goldman Sachs: It's very helpful. Thank you.

Thanks.

Your next question comes from the line of Mike Olson of Piper Jaffray. Please proceed. Mike Olson – Piper Jaffray: Thanks. Good morning. You know, you kind of just touched on this, but while it seems to have stabilized, maybe the competitive environment would probably still be characterized as more intense than it was a couple of years ago. Similarly, I think, you know, China travel fundamentals seem to have stabilized recently. Just in general, how could you describe the current environment for this overall China travel now as we go on to the second half '13 compared to maybe where it was two or three years ago? Would you describe it as being as strong as it was two to three years ago or would you describe as you're still in a recovery process to get back to those levels?

Well, I think you have to look at the two segments, the leisure and the business travel. Business travel in general will have a slower growth going forward. Business growth is in line with the overall GDP growth. As you know, China's overall GDP growth will be slower going forward compared to a few years ago, but still at a healthy rate, you know, 7% is not bad. But the leisure travel is growing much faster because increasingly China is shifting to consumption and shifting to high-end service consumption. So, increasingly travel market will have -- especially, leisure travel market will have a bigger portion of the overall consumption. So the leisure travel market that we see will continue to grow at least double digits and probably high end of double-digit, especially for the high-end leisure travel. And Ctrip is very well-positioned to take a big part -- a big chunk of this market. Mike Olson – Piper Jaffray: Okay, thank you. And then I'm sure it's very small, but could you share what percent of revenue is coming from the opaque channel now? And do you expect opaque will ever become a major revenue driver or will it kind of remain more of a small or niche offering? Thanks.

Yes. It's very small, Mike. I think it will remain to be a very special and unique segment which is supplemental to our main product. Mike Olson – Piper Jaffray: Thank you.

Thanks.

Your next question comes from the line of Vivian Hao of Deutsche Bank. Please proceed. Vivian Hao – Deutsche Bank: Hi. Thank you for taking my question. Just a quick question on your customer demographic mix. Could you provide us more update customer mix in terms of leisure and business, especially on the mobile traffic? Can we understand the majority of the traffic on mobile are from leisure? Thank you.

Leisure versus business we have to estimate because it's impossible for us to ask every customer what the purpose of their business. But based on our estimation, the leisure part has increased because we see the weekend bookings have increased significantly in our booking. So right now I think about 30 or even, on the weekend, even higher number are contributed by leisure travelers, and the rest is from business segment. Vivian Hao – Deutsche Bank: Right. And also on the mobile end?

Mobile, similar -- similar split. Vivian Hao – Deutsche Bank: Thank you.

Thanks.

Your next question comes from the line of Ida Yu of CICC. Please proceed. Ida Yu – CICC: Hi. Thank you very much for taking my questions. I just have a follow-up question on the current China OTA competitive landscape. So as Ctrip competition is currently not only coming from the players from the OTA market I think but also from those internet giants such as BAT, so they are proactively stepping to the OTA market in order to provide one-stop services on the platform. So where do you see this trend going forward? And what do Ctrip's management think about this competitive pressure coming from that? UCR: Yes. I think everybody see this as very attractive market, high growth and relatively high margin. But this is also a market where you need a lot of domain expertise. So we have, over the years, we have built a very strong platform and also very strong supplier relationship. So these things are -- take time to build and also to create the kind of brand awareness that we enjoy now. So I cannot predict what it would do, but it's not an easy job. Ida Yu – CICC: Okay, thank you.

Your next question comes from the line of Tian Hou of T.H. Capital. Please proceed. Tian Hou – T.H. Capital: Morning everyone. I have a couple of questions. One is regarding the air cash rebate program, and so air rebate program actually started somewhere after Chinese New Year, and starting from 3,000 routes, you know, expanded to [5,000] routes. I wonder what's your intention going into Q3. Are you going to increase the scale or maintain the same, or, you know, what's your plan in that? The second question is also related to your cash rebate. And a look at cash rebate actually serve the purpose to promote your mobile apps download and activation. So I wonder, if you continue your cash rebate program in Q3, so are you going to continue to use the air rebate towards your mobile? So that's number two. Number three will be, you know, among your mobile downloads, what's the split between the iOS system and Android system? That's all my questions.

Okay. On the price competition, our strategy is always very consistent. We will match up any competition in the market to make sure our price is competitive. So if in the market some players increasing the cash rebate, we'll match it. But if they're willing to reduce it, we'll match it too. Secondly, on the mobile rebate, all our sales and marketing dollar amounts has weighting for different channels, and mobile as the most important strategy for our company will get more allocation than other channels. Your third question, sorry? Oh, the split -- Tian Hou – T.H. Capital: Uh-huh. Hello?

Yeah. The other -- third. I think for the downloads, we have allocations for all kinds of forms, so we do not have a detailed split for our -- no, we don't have that number, sorry. Tian Hou – T.H. Capital: Okay. So the first question was not how much rebate you gave but rather the scale, how many routes. Currently you have 5,000. I wonder if that 5,000 will be increased or decreased, what's the plan?

We monitor these routes on a daily basis. So if other players are decreasing these routes, we will match it. If they increase, we'll match it. So our -- internally, we have a system to monitor these routes carefully. Tian Hou – T.H. Capital: Okay. Thank you.

Okay. Thanks.

Your next question comes from the line of Muzhi Li of Citibank. Please proceed. Muzhi Li – Citibank: Hi, good morning. Thanks for taking my questions. Would you please kindly share the revenue from the train ticket and the related services like insurance? And would you also provide a quarter-over-quarter comparison? Thank you very much.

The train related to service right now is recorded in the ticketing business line. It just started a very small, insignificant. But we believe if we execute well, we should provide the travelers who need the service with a very good product. Muzhi Li – Citibank: Can I also clarify that last quarter the line was named as air ticket and this quarter is ticketing services. So I suppose last quarter there's no train ticket revenue related, right?

Very small -- Muzhi Li – Citibank: And is booked in other items.

Yeah. That is mainly contributed by the air ticketing business, but from this quarter the train product starts to generate some revenue, very small, so we changed the title to cover both, air ticketing and train. But still in terms of dollar amount it's very small. Muzhi Li – Citibank: Okay, thank you.

-- I mean from the second quarter we start this reclassification. So from second quarter, the ticketing business line, that's including the contribution from train, but the overall impact and contribution is immaterial. Muzhi Li – Citibank: I see. Thank you. And one question about the product development, could you explain why the product development expenses increased in such a big scale while the other line items stayed pretty much like flattish quarter over quarter. Thank you.

Sure. As we discussed before, product development line represents our investment for the future products. So anything that we put in the pilot program will be captured in this line. And also our IT investment, our mobile investment are all in this line. So this is the line we will protect and, you know, increase if it generates more opportunities for us in the future. Muzhi Li – Citibank: Okay, fair enough. Thank you very much and congratulations on a good quarter.

Your next question comes from the line of Wendy Huang of Standard Chartered Bank. Please proceed. Wendy Huang – Standard Chartered Bank: Thank you. I think in your prepared remarks you mentioned that you are expanding your market share quickly as well. So could you maybe provide some detail points that we can refer to in terms of market share in the hotel market, packaged tour market as well as air ticketing market?

For the market share, what we look at is compared to the industry growth rate versus our own growth rate. So air ticket has a very transparent market number. There are major airlines published data. It's about 10 percentage. And we grow about 34%. The excessive portion above the industry growth represents the market share gain. So you can look at it that way. For the hotel business it's more fragmented. But we, based on our survey of the different hotels, we believe we are also increasing our hotel market share. For travel group -- travel packaged group, also I think the industry growth probably between 10%, 15%, we grew more than 40%. Mainland China we grew about -- more than 50%. So again the excessive portion we grow is a market share gain. Wendy Huang – Standard Chartered Bank: Okay. And also I have two housekeeping questions on the margins. For the mobile investment, you mentioned that the R&D cost will be included in the product development. So how about the IT infrastructure cost, would that be included in the cost of services?

No. So IT -- this IT line is allocated to different product lines. So for example, if the IT equipment is used for call center, it's in the call center. If it is used for backend supporting department, then it's allocated to SG&A. But we do have a research team and IT department. That is captured in our R&D line. Wendy Huang – Standard Chartered Bank: I guess -- and also -- I think Jane also mentioned that there will be some cost efficiency for the mobile transaction. So can you give us some color on maybe the long-term margin difference between the mobile booking and also the PC booking?

I think the margin on the mobile, on one hand I think you don't need people to answer the call. So that's lifted a burden on the personnel hiring, so that's one saving. Secondly, it's also sales and marketing because in online platform, a lot of time we work with other online players to get the traffic. So that's ongoing expenses. Versus in apps, once you download it, the customer will look at it automatically. So sales and marketing in the long run has some advantage if the customer is loyal to ATPs. So these are the savings we can think of. Wendy Huang – Standard Chartered Bank: Okay. Thank you, Jane.

Sure. Thanks.

Your next question comes from the line of Alex Yao of JPMorgan. Please proceed. Alex Yao – JPMorgan: Hi, good morning everyone. Thank you very much for taking my question and congratulations on a strong quarter. I have two questions on the mobile internet strategy. Number one is a follow-up question on the previous questions. For the mobile user acquisition strategy, you guys mentioned you guys don't need to pay for the search engine and the mobile get the higher priority allocation among your marketing dollar and marketing budget. So can you elaborate more on the mobile user acquisition strategy and maybe share with us the mobile user acquisition cost versus the user acquisition cost on the PC? Number two question is, what is the mobile unique value proposition you guys can offer to the consumers? Currently, I think the -- by looking at the functionalities that featured app is able to offer, the most value proposition seems to be shifting the booking process from PC environment to mobile and adding a little bit location-based information. In addition to these, what are the mobile unique value proposition you guys can offer perhaps, you know, if we look at next one to two years, what are you thinking to add to the consumers? Thank you.

In terms of the sales and marketing dollars, I think in an ongoing business in the future, once the ATP is downloaded by a customer, you do not have to spend as much dollar amount to remind these customers to use our ATP as well as -- as long as our products remain to be very strong and very convenient to be used. But the first time to introduce the ATPs to the customer is very critical to us. So we work with all the mobile companies, we use all kinds of branding campaigns. Our branding is focusing on the mobile. And also we use our coupon program which is focusing more on the mobile downloads. So the allocation currently is geared towards the mobile, encouraging customers to download ATPs. But that's more a one-time cost, because once the customer download it and if they use it for the first three times with very good experience, they tend to be very sticky to our product. And I will turn to James on the mobile strategy and what we can offer better than the other players.

Compared to our competitors, we have most complete product offerings and complete service offerings. Most of our competitors have one product or have a few products and only do certain parts of the service, not complete service. So by tackling -- integrating all different products and different services, including pre-travel or post-travel, for example, air ticketing, if there's anything changed with the flight plan or refund or the changing the ticketing -- changing the flight schedule, all this complete range of the flight services either through mobile, through our call centers, through our other types of services, we can offer the complete range of all the services. By bring all these things to mobile app offer a unique advantage compared to our competitors.

As James mentioned, because we control end-to-end service processes, the fulfillment cycle is much, much shorter than the other players. So if you try on our mobile, you know, a lot of time you can make a reservation with 10 seconds. If you're family with the ATP, even 5 seconds. That is very hard to beat if you do not have a very strong execution team to support its ATP. So that's a very good advantage for us to have. Alex Yao – JPMorgan: Got it. That's very helpful. Thank you.

Your next question comes from the line of Richard Wei of UBS. Please proceed. Richard Wei – UBS: Hi, morning. Thanks for the very good second quarter results. Just want to ask one question. [inaudible] Chinese airline companies, the management setup, the e-commerce sales related to ticket which is their direct sales are also increasing very fast on a year-on-year basis. So it seems that both Ctrip and airline companies e-commerce business are rapidly gaining market share. So can you tell us the current situation of the traditional [inaudible] what their current situation? Do you see a fast deterioration of the business nationwide? Thanks.

Yeah. There's some overlaps how we're calculating this. Some of our tickets actually do -- actually our tickets do some of the traditional air ticketing [inaudible].

I think if you look at the market, there majorly three segments [inaudible] airline sales. I believe -- we believe the airlines will gain market share through their online services. And I think what the data shows [inaudible] shows has demonstrated the ability to gain more market share. And we work very hard also to support the airlines to sell more tickets. So you're right, both airlines and Ctrip are growing well. Naturally in any market, companies with strong execution will grow faster. So traditional travel agencies, normally the scale is smaller so their growth rates will be relatively lower. Richard Wei – UBS: Thanks.

Your final question is a follow-up question from Jiong Shao of Macquarie. Please proceed. Jiong Shao – Macquarie: Great. Thank you for taking my follow-up question. I have actually two. The first one is on the margin impact from air couponing. I think you may have mentioned it in the past that air couponing may have 2 to 3 points impact on your operating margins. I was wondering, in Q2, incrementally, how much was that impact? And regardless you reach a very strong operating margin, I was -- just want to see what was the end-result for the air couponing in Q2. And second question is on macro. As you know, some skeptics are saying that Chinese macro is slowing down, which is probably true, and travel is cyclical. But despite all these perceived challenges you delivered pretty strong results. Could you share some light on why you were able to achieve that, why some of the skeptics, the concerns have not panned out? Thank you.

Sure. For the air couponing margin impact and the one we previously communicated with the investors and analysts, and that we said that air couponing is one of the many marketing tools that we are using to proactively optimize our overall ROI for the marketing campaigns. And the way we designed is very carefully and methodically to make sure we can have the positive impact. And so far it works well to our expectation, we see the stronger volume growth, new user acquisition, and especially the speed-up in the online migration. And for the margin impact, what we discussed before is that the maximum impact, our best judgment would be no more than 2% to 3% -- 2 to 3 percentage points for the margin erosion. And so far we executed very well, so overall margin impact on this quarter is very much under control. And for the second quarter it's had a very small impact. Going forward we will continue to evaluate each marketing program and to make sure for the overall -- the overall ROI will be optimized and have the best returns.

I'd like James to take the first question -- second question.

Yeah. I think I already mentioned that even though the overall GDP is slower, business traveling is probably going to be slowed, but the leisure travel market is continuing to grow very robustly, and Ctrip is very well-positioned to take advantage of that. Jiong Shao – Macquarie: Okay. Great. Thank you very much all.

Thank you

Thank you.

This concludes today's question-and-answer session. I'll now turn the call back over to Jade Wei for closing remarks. Please proceed.

Thanks, operator. Thank you for everyone joining us on this call today. We look forward to talking to you next quarter. Thanks very much.

Thank you.

Thank you.

This concludes today's presentation. You may now disconnect. Have a good day.