Trip.com Group Limited (TCOM) Q4 2013 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Q4 and Full Year 2013 Ctrip.com International Limited Earnings Conference Call. My name is Glenn, and I will be your coordinator for today. [Operator Instructions] I would now like to turn the conference over to your host for today, Ms. Michelle Qi. Please proceed.

Thank you, Glenn. Thank you all for attending Ctrip’s fourth quarter and full year 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; Ms. Jenny Wu, Chief Strategy Officer; and Ms. Cindy Wang, 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, Jenny and Cindy will share our strategy and business updates, operating highlights, financial performance for the fourth quarter and full year 2013, as well as outlook for the first quarter of 2014. We will also have a Q&A session towards the end of this call. With that, let me turn to James for our business update. James, please.

Thanks, Michelle. Thanks for everyone. We are pleased to report strong results delivered in the fourth quarter of 2013. Net revenues grew by 31% year on year, primarily driven by strong volume growth. Hotel room nights grew by 55% year on year and air ticketing volume grew by 37% year on year. For the full year 2013, net revenues grew by 30% year-on-year. Hotel room nights grew by 46% year-on-year, and air ticketing volume grew by 33% year on year. The rapid smartphone adoption in China has unfolded great market opportunities. Ctrip's primary focus is to gain market share of the online and mobile travel market. To achieve this goal, we have made intensive investments in mobile internet, price competitiveness and our open platform. We are encouraged by the initial results and stepping up the investments in these key areas in order to gain market share at a faster pace. According to CNNIC [ph], over 80% of the Chinese internet users were accessing the internet via mobile devices in 2013. Mobile internet enables travelers and service providers to be always connected with each other anytime anywhere. This new situation also brings new challenges and opportunities to travel service providers for the service and technology capability. Positioning as the 24/7 one-stop travel platform at the traveler's fingertips, Ctrip's mobile application has become increasingly popular among travelers. By the end of the fourth quarter, the number of cumulative downloads for Ctrip Travel app was about 100 million, a significant increase from 70 million downloads last quarter and 20 million downloads a year ago. Ctrip team is constantly leading the mobile travel industry by introducing new features to improve user experience. In the fourth quarter alone, Ctrip Travel has released two versions of our mobile app and one version of our tablet app for both iOS and Android systems. The latest Ctrip travel smartphone app expanded our car rental channel, adding booking services, and introduced the new function to help users extend their booking in hotels simply by a few tabs on the mobile screen. In the fourth quarter 2013, over 65% of Ctrip's transactions were booked through online and mobile channels, compared to about 50% a year ago. For hotel booking, PC-based internet contributed about 40% of total transactions and mobile internet contributed nearly 35%. For air ticketing booking, PC-based internet contributed about 40% of total transactions and the mobile internet contributed over 20%. For many of our new businesses such as train ticketing, car rental and local activity tickets, mobile internet is now contributing about half of the respective total transaction. We're delighted to see the mobile channel growth has exceeded our expectations in 2013 and we'll persist in investing in mobile internet to expand our leading advantage. Our vision remains to be a one-stop travel service provider with the best product, best price and best services to travelers. We are proactively partnering with a variety of industry players to expand our product coverage and enhance price competitiveness in an efficient way. Though we are still at the early stage of developing our open platform, we have already seen positive progress. Ctrip's platform is comprised of trusted brands, about 30 million accumulated customers, industry-leading operational efficiency, and a travel-oriented customer service system and an extensive distribution and marketing network. Through our open platform -- through our open platform, we are committed in bring great value to partners which in turn will ultimately benefit our customers. Price and brand awareness are important factors to attract leisure travelers. Besides matching our peers on coupons, our team is actively exploring different approaches to enable our customers enjoy favorable prices such as group-buying model and customized package products. In the fourth quarter we launched the first multimedia marketing campaign featuring a famous movie star. The favorable audience feedback gave us confidence in continue building our brand recognition in the leisure travel market and lower-tier cities. We are aiming for the long-term customer recognition rather than immediate short-term transaction boost through these marketing efforts. Customers' dynamic demand have inspired many of our new initiatives, include Smart Choice hotels, group buying, location rental, train tickets, car rental, local activity tickets, to name a few. Many more are still in pipeline. Ctrip proactively incubates creative business ideas. We give great autonomy for internal new initiatives and keep independent operations for invested ventures. We believe many of them have the potential to become new growth engines for Ctrip in the future. As the new year unrolls, I would like to thank our employees for their hard work and commitment, thank our customers and partners for their strong support, and thank our investors for your great trust. 2013 will be a year of challenges and opportunities on many fronts. We will make even greater efforts to deliver the best value to our customers and investors. With that, I will turn to Min for the industry highlights and investment opportunities.

Thanks, James. The rapid growth of China's travel industry and fast-evolving technology have opened great opportunities ahead. Ctrip has been very open and proactively exploring new territories by working with internal teams and external industry players. Our investments follow several principles. Firstly, we're focused on travel and travel-related business. Secondly, we work with peers that can add value to travelers. Last but not least, we share the same pursuit for the best customer experience. With these principles in mind, we recently made several investments to enhance Ctrip's service scope and depth. In Q4 2013, we became a significant shareholder for e-Hi, the second largest rental car company, and Yongche.com, a leading online and mobile business car booking platform in China The two investments have ensured a high level of trust and cooperation that we'll work together to provide local transportation service, while Ctrip platform remains open to all other industry players. We've also acquired Tours4Fun.com, one of the top online suppliers of vacation packages, sightseeing tours, and day trips for Chinese travelers traveling within the United States. This will expand our offerings of DIY tools for Ctrip customers. These investments help Ctrip be more resilient in an industry with ever-changing dynamics. We continue to pursue more opportunities in this direction. With that, I will turn to Jane for the operational highlights.

Thanks, James and Min. Thanks for everyone. I'm very pleased to share the updates of Ctrip's main business with you. Ctrip has upgraded its hotel channel to provide our customers with more accommodation choices. In addition to the mainstream hotels, we also offer Smart Choice hotels, group buy hotels, hostels, vacation rentals, and other accommodation choices. By the end of the fourth quarter of 2013, customers can choose their accommodation from around 70,000 domestic hotels and hostels, 277,000 international hotels, and over 87,000 vacation rental properties around the world. We achieved strong hotel volume growth of 55% year on year in the fourth quarter of 2013, setting our new growth record since 2005. In the fourth quarter, our international hotel volume nearly tripled the number in the same period a year ago. Air ticketing business continued the impressive upward trend in the fourth quarter and reached 37% volume growth year on year. International air ticket volume grew 90% year on year. Our in-depth cooperation with airlines and airline industry partners enables Ctrip to provide the most comprehensive products, competitive prices and convenient and ancillary services. We will continue our investments in supply relationships, technology and customer services to enable the best booking experience across Ctrip's mobile, online and offline platforms. Market share gain continued to be a priority for packaged tour. To achieve this goal, Ctrip puts great effort in enriching the selection and flexibility of the packaged tours. Our new business also made the impressive launch in the fourth quarter. Local attraction tickets grew over 10 times year on year. We are pleased with the positive customer responses and will make further investments into this area. Ctrip's corporate travel services maintained a strong growth in the fourth quarter of 2013. Supporting such performance, technology has played a critical role in streamlining the bookings and authorization processes on mobile services and on PC, as well as efficiently leveraging Ctrip's wide product coverage for individuals. The solid results that Ctrip team accomplished across all business lines demonstrated the team's strong execution. We will work hard in the new year to bring more value to our customers, our partners and our shareholders. Now I will turn to Jenny for financial highlights.

Thanks, Jane. Thanks everyone. For the fourth quarter, Ctrip's total revenue of RMB1.5 billion increased 31% year on year and decreased 7% Q-on-Q. For the full year, total revenue were RMB5.7 billion, up 30% year on year. Hotel reservation revenues for the fourth quarter increased 37% year on year and 5% Q-on-Q, primarily driven by volume growth. On a year-on-year basis, hotel reservation volume increased 55%. For the full year, hotel reservation revenues increased 30% year on year, accounting for 39% of total revenues in 2013 and 2012. Ticketing services revenues for the fourth quarter increased 29% year on year, primarily driven by a 37% air ticketing volume growth and partially offset by the decreasing of commission for tickets. Ticketing services revenues decreased 4% Q-on-Q, primarily due to the decrease of commission per ticket. For the full year, ticketing services revenues increased 28% year on year, accounting for 38% of total revenues in 2013 and 2012. Packaged tours revenues for the fourth quarter increased 17% year on year due to the leisure travel volume growth. Packaged tour revenues decreased 39% Q-on-Q, mainly due to seasonality. For the full year, packaged tour revenues increased 36% year on year, accounting for 16% of the total revenues in both 2013 and 2012. Corporate travel revenues for the fourth quarter increased 36% year on year and 9% Q-on-Q, largely driven by the increased corporate travel demand. For the full year, corporate travel revenues increased 34% year on year, accounting for 5% of total revenues in 2013 and 2012. For the fourth quarter, net revenues were RMB1.4 billion, up 31% year on year and down 7% Q-on-Q. For the full year, net revenues were RMB5.4 billion, up 30% year on year. Gross margin was 73% in the fourth quarter versus 74% a year ago and 75% a quarter ago. For the full year, gross margin was 74% versus 75% a year ago. Product development expenses for the fourth quarter increased 26% year on year, primarily due to an increase in product development and personnel related expenses. Product development expenses for the fourth quarter decreased 1% Q-on-Q. By excluding share-based compensation charges, on a non-GAAP basis, product development expenses was 21% of net revenues, staying flattish year on year and up 1 percentage point Q-on-Q. For the full year, product development expenses increased 37% year on year. On a non-GAAP basis, product development expenses were 21% of net revenues, up 2 percentage points year on year. Sales and marketing expenses for the fourth quarter increased 34% year on year and 6% Q-on-Q, primarily due to an increase in sales and marketing related activities. On non-GAAP basis, sales and marketing expenses were 25% of net revenues, up 1 percentage point year on year and 2 percentage points Q-on-Q. For the full year, sales and marketing expenses increased 29% year on year. On non-GAAP basis, sales and marketing expenses were 23% of net revenues, up 1 percentage point year on year. General and administrative expenses for the fourth quarter increased 1% year on year and decreased 11% Q-on-Q. On a non-GAAP basis, G&A expenses were 6% of net revenues, down 2 percentage points year on year and 1 percentage point Q-on-Q. For the full year, G&A expenses increased 13% year on year. On non-GAAP basis, G&A expenses were 7% of net revenues, down 1 percentage year on year. Income from operations for the fourth quarter was up 53% year on year and down 39% Q-on-Q. On non-GAAP basis, income from operations was up 24% year on year and down 29% Q-on-Q. For the full year, income from operations increased 28% year on year and on non-GAAP basis increased 17% year on year. Operating margin was 13% in fourth quarter versus 11% a year ago and 19% a quarter ago. On non-GAAP basis, operating margin was 20% versus 21% a year ago and 27% a quarter ago. For the full year, operating margin was 16%, consistent year on year. On non-GAAP basis, operating margin was 24% versus 26% a year ago. The effective tax rate for the fourth quarter was 26% versus 25% a year ago and 22% a quarter ago. The Q-on-Q increase was primarily due to the increase in the amount of non-tax deductible share-based compensation as a percentage to our income as a whole. The effective tax rate for the full year was 26% versus 31% a year ago, primarily because Ctrip accrued the provision of 5% PRC withholding tax related to the dividend that our PRC subsidiaries would pay to our Hong Kong subsidiary to fund the share repurchase program in 2012. Net income attributable to Ctrip's shareholders for the fourth quarter was up 36% year on year and down30% Q-on-Q. On non-GAAP basis it was up 20% year on year and down 24% Q-on-Q. For the full year, net income attributable to Ctrip's shareholders was up 40% year on year. And on non-GAAP basis was 25% year on year. For the fourth quarter, diluted earnings per ADS were US$0.28 and on non-GAAP basis was US$0.39. For the full year, diluted earnings per ADS were US$1.10 and on non-GAAP basis was US$1.57. As of the end of last year, the balance of cash and cash equivalents, restricted cash and short-term investment was US$1.9 billion. Then for the business outlook. For the first quarter of 2014, the company expects to continue the net revenue growth year-on-year at a rate of approximately 25% to 30%. This forecast reflects Ctrip's current and preliminary view which is subject to change. With that, dear operator, please open the line for questions.

Operator, we are ready for the questions.

[Operator Instructions] And our first question comes from the line of Philip Wan with Morgan Stanley. Please proceed. Philip Wan – Morgan Stanley: Hi, good morning. Thank you for taking my question. My question --

Good morning. Philip Wan – Morgan Stanley: -- about your margin. Good morning. So I wonder if you could comment on how margins will be impacted by the heavy investment this year. And if possible, could you give us some color on the budget you're going to spend for the key investment areas such as the offline TV commercials and new business? And how are you going to measure the return on investment? Thank you.

Sure. I will take the question on the margin and Jane will update you on the plan, our strategy. For the full year, on the margin side we expect in 1Q our non-GAAP OP margin is likely to be around 10%. And for the full year we expect the non-GAAP OP margin will be lower than last year's level. The key reason for the margin decline is that we target the 2014 as another important year of investment for Ctrip. In the past two years we have fundamentally rebuilt Ctrip. We're encouraged by the strong momentum that we have built and also our team strength. The booming leisure travel market and the explosive mobile internet growth in China have unfolded a great market opportunity. Our top priority is to grab this presented industry opportunities and to gain more market share at a faster pace. And to be more specific, this year we will further step up our investment on several key areas, especially on IT and mobile internet. On top of that, we are putting more efforts on, one, our branding campaigns to enhance our brand advantage among leisure travelers. Two, we are adopting more effective approaches to strengthen our overall competitiveness in prices and products, including variety of promotion activities and open platform strategy. Three, we are devoting more resources to several new business, dealing with increasing customer demand such as group buying model, local activity tickets, car rental and cruise business. Four, we are also proactively exploring new business territories by working with external industry peers through strategic investments. And also in a more competitive way for 1Q this year, we would expect non-GAAP OP margin to largely decline by 14% on a year-on-year basis. And the margin erosion may come from three fronts. First one, we'll continue matching competitors on hotel coupon side which may hurt our margin by 2 percentage points. Two, PRD product development expenses as a percentage of total net revenues will hurt our margin by like 7 percentage points, we are hiring more business development personnel and IT talents. Three, sales and marketing will hurt our margin by 5 percentage points due to our branding campaigns and the promotions. And for the full year, and largely due to the same reasons, we expect 2014's full year margin will also be lower than the last year's level. However, given the market dynamics and our business development, the dynamic of our business development, we consider the visibility for the full year is low, so we will continue to guide our investors on a quarterly basis once we move into the quarter and have more visibility. And we believe these efforts we're making will help us to build high entry barriers for the long run. And along with those investment efforts, we are implementing technology and innovative methods to improve our operation efficiency, and we continue to conduct tight cost control. As you guys already know, it has been our deeply-rooted corporate culture, and we will continue strengthening that. Yes.

Yes, I think Jenny has given a very comprehensive answer on the margin. Internally we classify our spending into two buckets. The first one is the investment into future business. And for that bucket we are very decisive to make aggressive investments in the future pipeline. The second type is expense -- internal expenses. And for that, Ctrip has demonstrated very strong discipline throughout our history. So every penny that we can save we will definitely to save it for the future investment. So we carefully allocate our resources between existing business versus the future investment. And this year we have made great -- we will make investments aggressively into all the travel business related new initiatives. And as you can see, in the past two years we started to make investments in our two biggest business lines which is hotel and airlines. And the results have shown in this quarter the volume growth was 55% for hotels and close to the 40% volume growth for air tickets. So it takes some lead time for these investments to generate good returns, but we have to be very decisive to make the right decision for future. Philip Wan – Morgan Stanley: Thanks, Jane and Jenny. That's very helpful. My second quick question is about your packaged tour business which this quarter seems to see a slower growth rate as compared to previous quarters. Could you give us some color on this? Thank you.

Sure. Packaged tour business is impacted by many reasons. First of all, there are certain uncontrollable events in Asia such as Thailand, there is some demonstration there, Egypt there is also some uncertainty. A lot of these areas are the top travel destinations for Chinese people. So that's the first reason. Secondly, in terms of our pricing, in order to expand our market share, we become more aggressive in pricing, to make sure we have the best pricing strategy in the market. So that also looks a little bit higher -- lower on the revenue side. But in terms of volume, volume growth is between 30% to 40%. So that's our strategy as well. I think for Q4, Q1, packaged tour will be impacted by this number, but hopefully when we are moving into Q2 and Q3, our investment in the new technology and into our new business will start to generate more on the top line. Philip Wan – Morgan Stanley: Thank you. I'll get back to the queue.

Thanks.

[Operator Instructions] And your next question comes from the line of Dick Wei with Credit Suisse. Please proceed. Dick Wei – Credit Suisse: Hi. Thank you for taking my questions. My question is still on the investment. I wonder, what are some of the key metrics [ph] that you measure the success of your investment? I'm not sure if it's market share or if it's online travel penetration, what kind of measurement you expect to see from the investment. And what stopped you from investing further in 2013? Thank you.

The investment we make, obviously we have very aggressive goals for all the business units. They have to become number one in that specific area. So for example, local tour attraction, we just started a few months ago. The volume growth has been very significant. In Q4 it delivered more than 10 times growth rate. So that's very promising. So the leadership and market share for the new business becomes very important. As they have -- generate more and more volumes, then, I think revenue will come along with it. But there is always a lead time. We need to have people in place to work with our partners. We need to have the IT people in line to do the system. So the lead time in terms of top line versus bottom line will have some lag. But once the momentum is up, the scalability will kick in. Normally we expect this new business will turn to be profitable within one to two years. Dick Wei – Credit Suisse: Okay, great. Maybe as a quick follow-up, in terms of hotel pricing seems that in fourth quarter, it implies that the pricing down [ph] around 18% year over year. I wonder if you can break down the impacts from the actual hotel room rate decline because of lower city expansion versus coupon and versus some of these new hotel initiatives such as group buys. Thank you.

In 4Q, you mean, right? And in 4Q, our volume -- Dick Wei – Credit Suisse: That's right.

Yeah. The volume growth for 4Q is, for the hotel, is 55%, and the revenue growth is 37%. And the commission per room night declined. And among that there are three factors. First one, for the listing price, the ADR, which has declined by roughly 3%, which is due to the -- largely due to the mix change of our portfolio as we are moving -- we have higher contribution from lower-tier cities and the lower-star hotels. And they are lower ADR -- kind of diluted our blended ADR a little bit. And the commission rate, the nominal commission rate that we get from suppliers are still very stable, and the rest, like about 8% revenue this commission per room night decline is largely due to the various kinds of promotion activities, and mainly due to the coupons. And for the coupon, its impact on the online side has been very stable, but we're matching the competitors to give more coupons on the mobile side. So on a year-on-year basis we see additional impact this year. And this will also -- this situation continues in the 1Q. So for the 1Q, we also would see this commission per room night will decline, mainly due to this coupon impact. Dick Wei – Credit Suisse: Great. Thank you very much.

And your next question comes from the line of Alex Yao with JPMorgan. Please proceed. Alex Yao – JPMorgan: Hi. Good morning everyone. Thank you for taking my question. My first question is about your market share gain strategy. Can you talk about how you envision the competitive dynamic in each of your core business evolve in this year? Secondly, do you have market share target for each of your core business by the end of this year? Thank you.

Yes. We don't have specific market share target. We still mostly compare to ourselves historically. Obviously we will grow much faster than overall market and overall market sales for China travel market. So we'll continue to grow very rapidly and we will grow significantly faster than the overall market. On each different businesses, obviously different competitors, and I think this year still is going to be a very competitive market situation for -- I think for almost every business that we're in. So I would expect continued very aggressive pricing and sales marketing efforts by our competitors. And all of these efforts will probably expand the overall market faster -- when I say the overall market, it's the overall online travel and mobile travel market. So that may not be a bad thing for everybody in the long run. I think when the market further consolidates a little bit and maybe in year or two we will see that our competitors or rivals will be more profit-driven, I think, you know, then we and the most strongest competitors will reap the fruit of our efforts today. Alex Yao – JPMorgan: Got it. Second question is about your first quarter guidance. Can you give us a breakdown of how you think about each of the business will perform in first quarter this year? Thank you.

Okay, sure. For 1Q, our total net revenue will grow about 25% to 30% year on year. And for the hotel side, volume growth will be around 40% to 50%. And ADR will tumble by zero to 5%. And the commission rate will be largely flat. And coupon impact will be around 5% to 10%. And so total revenue for hotel will be about 25% to 30%. And for the air ticketing business, the volume growth will be about 25% to 30%. ADR will -- may increase by zero to 5%. And the commission rate is still flat. And coupon plus other promotional activity impacts the growth by zero to 5%. So total revenue growth for air ticketing business will be around 25% to 30%. And for the packaged tours business, the growth -- revenue growth will be around 10% to 20%. And for the corporate business, the total revenue growth will be about 25% to 30%. Alex Yao – JPMorgan: Thank you very much. That's very helpful.

Thank you.

And your next question comes from the line of Jiong Shao with Macquarie. Please proceed. Jiong Shao – Macquarie: Good morning. My first question is on the coupons, particularly for the hotel coupons. Could you please give us an update for the coupon competition both on the PC and mobile side? And what are you seeing kind of new? Do you think this time, as you compete on the mobile side, revenue sort rush to the bottom much quicker than you did for the PC side sort of a year, a year-and-a-half ago? That's my first question.

For coupon strategy, we have always been very consistent, which is to make sure on the coupon we match up to our competitors. We'll not allow any price disadvantages as a result of the coupon. So whatever our competitor has in the market, we'll match to it. And in terms of allocation between PC versus mobile, obviously we tilt towards mobile as it gives the strongest stickiness for customer loyalty. So really it's a dynamic play, but as of now, it looks like very stabilized. Jiong Shao – Macquarie: Okay, great. My second question is on your Q1 revenue guidance. I think in 2013, for the first two quarters, you guided revenue growth of 15% to 20% and you did 27%, 28%. And in Q3, Q4, you guided I think 20% to 25% and you did 31% for both quarters. Now you're now guiding Q1 at 25%, 30%, which is great. I'm just wondering, is that just because you guys are seeing acceleration of your revenue growth continuing or are you now -- feel like you have enough sort of track record and data points in recent quarters to provide a guidance maybe closer to what you can ultimately achieve? Thank you.

Yeah. As you can see, in our total business there's always uncontrollable events, sometimes natural disasters, sometimes political uncertainty. So when we give our guidance, we always work very hard to make sure we give a very prudent guidance to take into consideration of all the visibilities we can have. So right now I think 25% to 30% is the number we feel comfortable and prudent to give our investors. Jiong Shao – Macquarie: Okay, great. Thank you.

And our next question comes from the line of Vivian Hao with Deutsche Bank. Please proceed. Vivian Hao – Deutsche Bank: Hi. Thank you for taking my question. My question is about, what is the management's view and also our strategy towards the increasing competition from the group buy players in the market? It looks like most of them are moving more aggressively into the hotel booking and other travel segments. Thank you.

Yeah. Group buy is a new investment we're making. We also aggressive are hiring people around the country to make sure we have coverage for all the second-tier and third-tier cities. So that's one of the investments we're making, which right now impacts our margin. But in the future I think it's good for our expansion of our hotel coverage. Vivian Hao – Deutsche Bank: Okay. Thank you.

Thank you.

Your next question comes from the line of Fei Fang with Goldman Sachs. Please proceed. Fei Fang – Goldman Sachs: Hi. Thanks for taking my question. Congratulations on the strong 4Q numbers. First I have a follow-up question on the group buy model. So how would you evaluate the competitive intensity of mobile booking relative to PC and call centers? And we know that on mobile, as consumer behaviors are evolving towards same-day booking, do you think you are exceedingly [ph] competing with other mobile group buy platforms and location-based services such as Dianping and Meituan? Then I have a follow-up question. Thank you.

Sure. Mobile, Ctrip Mobile is one of the strongest apps in the market. So location-based application is our focus. So we make sure it's very easy for consumers to make reservations based on their location. And on top of it, something that Ctrip has that nobody else has is, not only we offer hotel reservation, we also offer related services such as train tickets, air tickets, review sites. So within our APPs, it's very easy for consumers to have all the information related to their travel. So that's more convenient. And secondly, we control all the inventory. So the confirmation process and the response time is much better than all the other players in the market. The other players, they have to outsource it to somebody else to do it. So in terms of room availability, guaranteed allotment, services, based on our QA testing, Ctrip's level is much better than the other players in the market. Fei Fang – Goldman Sachs: That's helpful, Jane. A quick follow question, regarding ticketing revenues, is it possible to break it down into air ticketing, railway ticketing and others? And also where do you book the local attraction ticketing revenues? Thank you.

Sure. Ticketing business is -- train ticketing is also included in the ticketing. It's very immaterial. So right now the majority of the contribution into that line is still airline ticket mainly or related services. And local attractions is in the packaged tour business. But right now it's de minimis. The volume growth is very strong, but in order to actually grow our market share, we aggressively price our ticket and cash rebates, these transactions, to the users. So the contribution onto the revenue side is de minimis. And it's recorded in packaged tour business. Fei Fang – Goldman Sachs: That's very helpful. Thank you, Jane.

Thanks.

And your next question comes from the line of Alicia Yap with Barclays. Please proceed. Alicia Yap – Barclays Capital: Hi. Good morning everyone. Thanks for taking my questions. My first question is regarding the packaged tour. So I think -- I understand that Jane explained a couple of the reasons why it declined. So, wanted to know that -- how much of that is driven mainly by the pricing decline? And I think you also mentioned it's only impacting 4Q and Q1. So is that implying that we should see some of this pricing to rebound or the discount to be lower as we progress towards the rest of the year?

Yeah. I think the aggressive pricing is very much, is in line compared to the other players in the market. So for certain popular travel destinations, in order to ascertain our leadership in this area, our pricing will not allow any price disadvantages into the top travel destinations. So that's one of the reasons why the growth rate is about 10% to 20% instead of 50%. Going forward, as the volume is ascertained, I think our bargaining power in the pricing with our hotel partners, airlines will also be strengthened. With the volume, we can negotiate better price, and in return we'll make better revenues also. So, Q4, Q1 for the packaged tour is -- the growth rate is about 10% to 20% growth rate. But in Q2 and when we're moving towards the high travel season, hopefully our investment in Q4 and Q1 will generate better revenue for packaged tour business. Alicia Yap – Barclays Capital: I see. So to follow up on that quickly, Jane, is that, let's say, as we progress to the 2Q and 3Q high season, that is, competitors also being more aggressive on the pricing, are we also prepared to match it, that will also impact our revenue growth then?

Yeah. On the front end with whatever price they offer to the consumers, we'll make sure our pricing will be competitive. Obviously Ctrip's branding has certain premium, so we can have certain acceptable premium on our pricing. Secondly, based on our large volume, we will be able to get a better price from the partners. So although the selling price is the same, in theory the bigger volume we can generate, the better revenue we'll be able to generate. So that's our strategy -- Alicia Yap – Barclays Capital: I see. I see. That's helpful. And then my second quick follow-up question is on the coupon, on the hotel coupon discounting. So just wanted to get a sense, are you still mainly seeing the main competitors that we used to compete for the last two years? Or is there any more aggressive competition from another competitor on the traffic as we go to the site[ph] that is also making more sales on the direct sales side?

Yes, the existing player. I think the coupon is stabilizing. The only -- if we are so determined to make sure that whatever coupon any players in the market will put in place, Ctrip will match it, then I think the competition will be stabilized. Because giving coupon no longer will give anyone any advantage on the pricing. So from what we can see today, it's stabilized. Alicia Yap – Barclays Capital: And what about the mobile discount that you're also offering the coupon on, would that be also stabilizing?

Yeah. Mobile is our key strategy, so we carefully calculate everything. But mobile we're willing to give a little bit more coupon, but still in line with the other players. But mobile, although you give more coupon on the mobile, there is some efficiency we can save from sales and marketing because once the customer use the APP, the likelihood for them to come back is higher, so, stickiness is strengthened. So o the net-net basis, probably it's even. Alicia Yap – Barclays Capital: I see. Great. Thank you, Jane.

Thanks, Alicia.

[Operator Instructions] And our next question comes from the line of Eddie Leung with Merrill Lynch. Please proceed. Eddie Leung – Bank of America-Merrill Lynch: Good morning. I have one question on your first quarter and margin guidance. It seems like most of that decline would come from hiring. So just wondering if you could let us know the number of staff by end of last year and how many we could see in first quarter, or if you can give out like full-year guidance it would be even better. And then just a follow-up on some of the group buy pieces questions. Just wondering if you could tell us about the difference in economics between a room night booked using normal channel versus group buy offering. Thanks.

In terms of the margin impact, we carefully allocate our resources into mainly two buckets. One is the product development, which is IT hiring, IT investments, and the people who are talking with our business partners such as the hotels in the second-tier and third-tier cities. So half of the market impact comes from the product development investment, but we believe that the investment we're making today in the future will be more efficient and have more hotel allotment for consumers to use. And the second part is also the investment into the sales and marketing. As many of you have already seen, we worked with a movie star and put advertisement in the major TV channel online. And the feedback has been very positive. But advertisement and branding efforts takes a long time to see the great tilts [ph]. Based on our survey, the response and effectiveness is encouraging. So we will keep up with our efforts in the promotional activities. But again I think it takes a couple of quarters or year or two to see the full result. So the margin is carefully allocated into these two buckets. And mainly these are the investments in the future product and future branding awareness. The second thing is on the group buy model. Group buy model versus major channel, we want to make sure that when customer gets the price advantage through group buy, there are certain limitations such as they need to prepay, they need to make reservations when they have reserved their hotels. So in terms of convenience and time limits, there is some disadvantages through group buy. However, in terms of pricing, they might be able to get some price advantages if they book it much ahead of the other [ph] business travelers. So that's how we differentiate group buy channel versus the normal channel. Eddie Leung – Bank of America-Merrill Lynch: Thank you.

Thanks, Eddie.

And our next question comes from the line of Tian Hou with T.H. Capital. Please proceed. Tian Hou – T.H. Capital: Good morning everyone. I have a couple of questions. The first question is related to your new business that you're entering, such as car rental, cruise and taxi. And I wonder what is the revenue model. Is that the typical commission model or any other model? That is one. And also, have you generated any revenue from that? And in your guidance in Q1 and going forward, so it, you know, this part of revenue, is it part of the guidance? Have you already even included in your guidance or not? And also for the future, would you think the potential size of the market for each of the new business, and what is your goal in terms of the market share? That's the first question.

Sure. Our guidance has included all the revenue contribution from existing business line as well as the new business line. However, since our hotel, air ticket are so huge, they account for about 80%, 85% of the total revenue, the small new initiatives compared to the major business lines are relatively very small. But it's in our guidance. In the future, these -- each one of them will be able to become a very good business for travelers. If you look at United States or Europe, I think you have very good rental business. You also have very good companies working on attraction ticket. So each of the investment we make hopefully in the future will become significant. Tian Hou – T.H. Capital: Okay. So the second question is that, you have several sites, which is community sites. I wonder how you integrate those community sites in your current business.

Yeah. In our main APPs, also our main website, the travel review site becomes very popular and the growth rate on the UV has increased significantly. So when -- consumers normally start with review sites. And then the beauty of our platform is when the consumers need to book hotel, we have product associated with it. When the consumers need to book a ticket, we also have air ticket to go with it. Or if they want to do a package, we have something there. So it's very natural and seamless connection to come in, review the sites, and then go to make a reservation. After the reservation, when they come back, they can write their -- write about their journal and post pictures right away. So it's a closed cycle on our platform. And the efficiency on our one-stop shopping platform is much higher than some of the players which only offer one product. So from that, that's one of the reasons we believe why Ctrip can utilize its strength of product comprehensiveness and also scalability to become a very profitability company versus if you only have a single product, it's less efficient. Tian Hou – T.H. Capital: The last question is related to international travel. We saw a huge increase in international outbound travel. So I wonder, what's that look like for Ctrip? And with the partnership with Priceline.com is progressing?

Yeah. Ctrip customers are relatively high-end customers in a market. They focus quite a lot on service, reliability. So our team work very hard to make sure when the consumers choose Ctrip, they can travel with peace in mind. So when we select local partners to work with us, we're very careful. And Priceline is a very good partner with us. Our relationship is very good. And we will keep up our momentum going forward. Tian Hou – T.H. Capital: Thank you. That's all my questions.

Thanks.

And your next question comes from the line of Muzhi Li with Citigroup. Please proceed. Muzhi Li – Citigroup: Thanks for taking my questions. I have a question regarding the international travel. How much of the revenue contribute to the -- came from the international travel? And if you can break down to hotel and air travel and packaged tour, that would be great. And also I would like to know about your forecast for the business volume came from international travel. And also, can I also double-check with operating margin decline in the first quarter is going to be 14 percentage points? Thank you very much.

Yeah. International travel is growing very fast. That's about -- contribution to the revenue for hotel and air tickets is around 10%, 10% to 15%. For packaged tour, about more than 50%, five-zero, 50% of the revenue comes from people travel overseas. The percentage of the margin, again that's correct.

And for the 1Q, our non-GAAP OP margin will be around 10%. And last year, same period last year, is about 23% to 24%. Muzhi Li – Citigroup: Thank you. Regarding the operating margin, is that going to be like one quarter or do you think that investment would probably la a couple of quarters to see the effect begin to kick in? Thank you.

Sure. I think as we're moving along into Q2 and Q3, we'll be able to give you better guidance on the operating margin. But to Q1, I think Jenny has already given you very good guidance on Q1. And we'll update you for the Q1, Q2, onwards. But historically, if you look at our numbers, in a travel industry, Q1 normally is the slowest season due to the Chinese New Year, there are not so many business people traveling. So normally Q1 is the slowest. Muzhi Li – Citigroup: Thanks very much.

Sure. Thank you.

And your next question comes from the line of Wendy Huang with Standard Chartered. Please proceed. Wendy Huang – Standard Chartered Bank: Thank you. Can you provide hotel booking volume breakdown between the prepaid and postpaid model?

Prepaid model is still a minority. We just started very recently. The majority of the pay model is still pay at the hotel. Wendy Huang – Standard Chartered Bank: Any number you can provide on that?

Very small -- no breakdown. Wendy Huang – Standard Chartered Bank: Okay. Gross margin declined by 3 percentage points sequentially. So how should we look at the gross margin trend going forward? And also, any of the investments you mentioned earlier were actually booked in the cost of the service line and effective gross margin? Thank you.

Gross margin for Q1 I think Jenny has already given you guidance --

She is asking for 4Q.

4Q, yeah, yeah.

Yeah. For 4Q, first one -- 4Q versus 3Q, the coupon side is largely stable -- is -- the impact on the margin side is roughly -- largely similar, but 4Q versus 3Q is typically lower season. And also we stepped up on the promotions, so the other business like for the air ticketing and also other new business. So it’s kind of erode our top line growth. So I think that's mainly the reason. Wendy Huang – Standard Chartered Bank: Okay. I just want to add one maybe macro question. So now we are actually seeing the pricing war extend from your hotel business, air business to even the packaged tour business. So I just wonder, how sticky are those leisure travelers that you're trying to -- targeting are? And how effective those campaigns you're doing can keep those leisure travelers on your platform in long term. Thank you.

Yeah. In the idealistic market, we would like to see the price competition as minimal as possible. However, if we do see in certain area there is aggressive pricing by the other players, we have to be very decisive to make sure on the pricing Ctrip does not have any disadvantages [ph]. Once the customer is with Ctrip, once they have used Ctrip's services, the likelihood for them to come back again is much higher than they come back to the other players. Eighty percent of our revenue are from recurring customers. So our strategy has always been aggressively get the volume, make sure we take good care of the customers, we give loyalty points for them, we take care of them during the trip, the likelihood they will use us again will be much higher. Wendy Huang – Standard Chartered Bank: Thank you.

Thanks.

And your next question comes from the line of Ella Ji with Oppenheimer. Please proceed. Ella Ji – Oppenheimer: Good morning and thank you for taking my questions. First, the question is a follow-up on the margins. So you mentioned the 1Q non-GAAP operating margin around the 10%. Is this really your bottom line? So if your competitor becomes much more aggressive, are you willing to give up more profitability? That's my first --

Sure. I think again Q1 normally is the slowest season. So if you look at our historical performance, Q1 margin is lower than the other quarters. In terms of players in the market, the players will be aggressive if they are -- if they have money. Right now I think Ctrip is the only company in the travel business that is -- have very healthy margin. So whatever it takes, we will make sure our leadership is extend, our market share is extend. But we'll carefully monitor all the competition in the market. But so far I think it's very stabilized. Ella Ji – Oppenheimer: Thanks. And then my second question is regarding your recent investment in the car rental company. I think the car rental companies are typically asset-heavy businesses and have low margins. So I know for the investment the dollar amount is not really significant comparing to your total cash balance, but can management talk about your expected rate of return on your future investments, just any general thoughts or discipline [ph] would be appreciated.

Sure. Car rental business as you say is heavy assets, but I think our goal is for the good players, top players in the market, if we establish a strong tie [ph] with them, it helps our customers. So that's the first criteria. Secondly, also we want to make sure we make investment with good valuation. It has potential growth in the valuation. Because Ctrip has a very strong customer pool, so when we invest in this company, potentially we can bring more volume to this company, which will help them to increase their valuation and increase our value for this investment as well. So our investment is very carefully selected and very carefully evaluated. Normally we look at three sectors. First of all is related to travel. Car rental is definitely related to travel. Secondly, we look at strong teams with strong execution capability. And we believe e-Hi has a very strong execution team. And thirdly, I think we also need to see our investment has a good potential to grow, and we believe they do have a good potential with our help on the customer side. So with these three considerations, we make our investment in the car rental business. Ella Ji – Oppenheimer: Thank you. That's very helpful.

Thanks.

And our final question comes from the line of Jiong Shao with Macquarie. Please proceed. Jiong Shao – Macquarie: Thank you for taking my follow-up question. You guided Q1 product development as a percentage of revenue go up seven points. I just want to make sure I get my number correct. That if I am talking in that number, that shows quarter over quarter the product development would go up 33% and the absolute dollars is like RMB100 million. What are some of the reasons behind such a huge jump? Is there anything one-time in this increase?

When we roll out our annual plan, we have a target, which is to become number one player in each line, including existing business such as hotel, air ticket, packaged tour, corporate travel, as well as the small business. The small business in the market, some of them has a niche player in the market. In order for us to quickly gain market share and become number one in the market, we have to quickly make our team to be equipped to become number one. So in Q1 and Q2, I think we will aggressively hire the business development people as well as the technology people to make sure we have the resources to deploy in these new markets. Jiong Shao – Macquarie: Okay. So the jump in this expense line is primarily just hiring?

P&D, IT investment mainly. Jiong Shao – Macquarie: Okay, great. Thanks for the clarification.

Thank you.

I would now like to turn the call over to Michelle Qi for closing remarks.

Thank you everyone for joining us on the call today. A replay of this call will be available as usual on IR website shortly after the call has been completed. We appreciate your interest in Ctrip and look forward to convening with you again next quarter.

Thank you very much for everyone's support.

Thank you.