Good day, ladies and gentlemen, and thank you very much for joining today's Ctrip.com International, Ltd. Earnings Conference Call for Q2 2017. [Operator Instructions] And then next, I will turn the call over to Ms. Michelle Qi, IR Director of Ctrip.com. Please proceed.

Thank you, Bart. Good morning, and welcome to Ctrip's second quarter of 2017 earnings conference call. Joining me today on the call, we have Mr. James Liang, Chief Executive Chairman of the Board; Ms. Jane Sun, Chief Executive Officer; and Ms. Cindy Wang, Chief Financial Officer. During this call, we will discuss our future outlook and performance, which are forward-looking statements made under safe harbor provisions of 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, Jane and Cindy will share our strategy and business updates, operating highlights and financial performance for the second quarter as well as outlook for the third quarter of 2017. After the prepared remarks, we will have a Q&A session. With that, I will turn the call over to James for our business update. James, please.

Thank you, Michelle, and thanks to everyone for joining us on the call today. Ctrip group reported a solid growth in the second quarter. Net revenue was up 45% year-over-year in the second quarter. The strong performance was mainly driven by healthy organic growth and the addition of Skyscanner. Non-GAAP operating margin reached 18% for the quarter, improving from 4% a year ago and 15% last quarter. In the following discussion, I would like to share updates on our progress in expanding into lower-tier cities and increasing presence in international markets. Lower tier cities are becoming a key driver of the growth of China's travel industry for the coming decade. Ctrip is well positioned to benefit from both the increasing online penetration as well as consumption of growth trends in lower-tier cities. We have expanded our product offering in these markets and a further streamlined user experience by offering multiproduct reservation and order changing services. We also offer more personalized services through our franchised top line retail stores. To promote such a strong value proposition to consumers in lower tier cities, we have launched a series of effective marketing campaigns. Our dedicated efforts have led to market share gains for all our brands. New customer acquisition and the user engagement have improved significantly across post brands. In the second quarter, user traffic in second tier cities increased about 50% year-over-year. As part of our -- next, I would like to comment on our international business development. As part of globalization, the growth of international service trade has been accelerating around the world. China service trade as a percentage of total international trade has increased approximately 600 basis points in the last two years. Travel is the largest part of service trade and will continue to be critical in driving the…

Thanks, James. I'm very pleased to share updates on Ctrip's main businesses with you. First, on hotels and other accommodations. The total hotel revenue grew by 30% compared with the same period last year, mainly driven by volume growth. This quarter's growth rate reflected some negative impact due to the adoption of the VAT tax. At the end of the second quarter, Ctrip's domestic hotel coverage reached 570,000 hotels, increasing by approximately 25% over a year ago. In addition to traditional hotels, both Ctrip's and Qunar's accommodation booking engines now offer 450,000 vacation rental properties from Tujia, the largest platform of its own kind in China. This segment is -- has significantly strengthened our overall accommodation inventory. In the second quarter, vacation rental bookings grew at a triple digit from the previous year. The Group continues to strengthen its presence in the lower tier cities. Hotel bookings in these markets have achieved accelerated growth across brand. In July, the total number of room nights in the lower tier cities reached approximately 20 million. Second, transportation and ticketing services. Total transportation revenue grew by 49% year-over-year in the second quarter, supported by strong volume growth and inclusion of Skyscanner's financials. The air ticketing business delivered solid performance, led by strong international air ticketing growth. Ctrip has been making meaningful improvements in the price competitiveness in the international markets and enhancing our technology platform to support functions such as search for complex, multi-destination itineraries. Now, approximately 50% of international air tickets booked on Ctrip are for flights originated from airports outside of China. In addition, Ctrip and Skyscanner has been sharing best practices and creating strong synergies, which should further drive our international air ticket growth. We are greatly encouraged by the progress and confidence in the potential of our international air…

Thanks, Jane. Thanks, everyone. For the second quarter of 2017, Ctrip reported net revenue of RMB6.4 billion or US$946 million, representing a 45% increase from the same period of 2016. Net revenue for the second quarter of 2017 increased 5% from the previous quarter. Accommodation reservation revenue for the second quarter of 2017 were RMB2.3 billion or US$341 million, representing a 30% increase from the same period of 2016, primarily driven by an increase in accommodation reservation volume. Accommodation reservation revenue from the second quarter of 2017 increased 12% from the previous quarter, primarily due to seasonality. Transportation ticketing revenue for the second quarter of 2017 were RMB3 billion or US$441 million, representing a 49% increase from the same period of last year, primarily driven by an increase in ticketing volume and the consolidation of Skyscanner's financial results since December 31, 2016. Transportation ticketing revenue increased 4% from the previous quarter, primarily due to seasonality. Packaged tour revenue for the second quarter of 2017 were RMB612 million or US$90 million, representing a 29% increase from the same period of 2016, primarily driven by an increase in volume growth of organized tours and self-guided tours. Packaged tour revenue for the second quarter of 2017 decreased 13% from the previous quarter, primarily due to seasonality for Chinese New Year in the first quarter. Corporate travel revenue for the second quarter of 2017 were RMB199 million or US$29 million, representing a 36% increase from the same period of 2016, primarily driven by expansion in travel product coverage. Corporate travel revenue for the second quarter of 2017 increased 38% from the previous quarter, primarily due to seasonality. Gross margin was 82% for the second quarter of 2017 compared to 72% for the same period of 2016 and 80% for the previous quarter. Product development…

[Operator Instructions] Our first question comes from Binnie Wong from Merrill Lynch.

Congrats on the strong quarter with top line and margins coming above expectation. Thanks for taking my question. James highlighted in the opening remarks that on Ctrip's long-term strategy in international market and lower-tier cities expansion. Can you provide us more update on the progress and your long-term vision on this front? And also, I would like to ask management about the potential impact from the cross-selling under the recent new requirements by CAAC is contribution and margin profile and also whether has reflected in our 3Q revenue guidance.

Thanks, Binnie. James will take the first question. Cindy will take the second.

Yes, I think we've made great progress in the international expansion. Our integration with Skyscanner have been executing very well, and it's already bearing some fruit. For example, in the direct booking feature we built for -- with Skyscanner, our direct booking question on the Skyscanner website has been received very well at very high conversion rates and a better customer experience. Also on the hotel front, we've expanded our hotel supply network in Asia, and we are generating higher than -- much higher growth than the average -- the market growth. So I think, overall, our international expansion has been well executed according to our plan. Thank you.

And regarding the new CAAC guideline, in the short term, especially the second half of this year, it will have a negative impact on the revenues for our air ticketing business, and the impact on the following quarter will be reflected in our quarterly guidance, including Q3. However, cross selling products are designed to facilitate one-stop shopping experience and meet customers' travel demand, many customers will still purchase those products even under an opt-in model. And furthermore, in the second quarter, international air ticket, which will be much less impacted by the new CAAC guideline, contributed close to 40% of Ctrip's total air ticket revenue and has already become a key growth driver, thanks to the heavy investment we made in the last few years by building the best international air ticket platform, not only just for the China market but also is now becoming very competitive in the international market. In the long term, as long as Ctrip continues to provide the best-in-class products and services in the air distribution industry, we create value for both our customers and suppliers. Therefore, Ctrip shall be fairly rewarded for the products and services we offered. And service charge has already become an industry practice in rest of the world. Even in China, many Internet companies, for example, the online video companies, have already started to charge membership fees for the programs that customers subscribe to. In summary, although there will be some short-term headwinds that we are facing, Ctrip will continue to invest and provide superior product and service, which creates tremendous value for our customers and suppliers. Therefore, we are very confident to achieve our original 2020 growth target. And given the largest scale Ctrip achieved and continuous improvement in the operational efficiency in terms of earning ability, Ctrip is also very confident to bring our non-GAAP operating margin back to the 20% to 30% level in the next one to two years.

Our next question coming from Alvin Jiang from Deutsche Bank. Please proceed.

Could you provide us more color on your revenue guidance for next quarter based on different business lines? And is there any color on the margin outlook?

Sure. For each business line items, accommodation reservation revenues will grow at around 25% to 30% in the Q3, and transportation ticketing revenue will grow 40% to 45%. Packaged tour business will grow about 25% to 30%, and corporate travel business will grow 15% to 25%. And our total net revenue will grow at about 35% to 40%. Regarding the earnings ability, our non-GAAP operating profit, we estimate it we would generate about RMB1.5 billion to RMB1.6 billion non-GAAP operating profit in the next quarter.

Next question coming from Alicia Yap from Citigroup. Please proceed.

Thank you for taking my questions. Also congrats on the solid results. I actually have questions on your lower-tier offline penetration progress. Are these 400 stores that you opened recently, is it under the Ctrip and Qunar branded store or is this a Bestone store? And I think you mentioned about RMB2 million store revenue, can you clarify I might have missed it. Is this revenue coming out from a single store? And then following that related to this is that, as the customer -- consumer walk into the store, are we helping them to make reservation just like the traditional agents or do we have the intention to help them to download the mobile app so that we also aim to grow our app penetration into the lower-tier cities? And as we continue to grow this offline store, what would be the margin profile look like, especially on the gross margin front?

Thanks, Alicia. First of all, the 400 stores we have already established, these are representing Ctrip and Qunar's offline stores. Traditionally, Qunar and the Ctrip brand was only presented on the online platform. But now, we are quite aggressive in penetrating into the lower-tier cities. So, so far the feedback on Qunar brand and the Ctrip brand has been very positive, and the revenue per store also stands out at RMB2 million per store, which is significant considering we only opened the store for a few months. In the overall offline stores, Bestone already has about 5,500 stores. So going forward, by the end of the year, we will aggressively grow that number into 6,500. And these stores are on franchise model. So hopefully, within one year, they will be already in a breakeven stage. So, so far, I think that our movement, not only on the online platform but also penetrating into the lower-tier cities through offline platform, and the feedback is very positive.

And, Alicia, regarding your question about the RMB2 million, it's just the GMVs. And since it's a franchise model, we don't take any inventory risk. So in the accounting, we only recognize the net commissions that we earned for the transaction. So it won't have impact on our gross margin.

Next question coming from Natalie Wu from CICC.

Hi. Good morning, management. Thanks for taking my question. And congratulations on the result quarter. For this quarter, your gross profit margin actually increased quite steadily, which is quite impressive. Just curious, how much is contributed by those AI robots replacement of customer service employees and how much by Skyscanner contribution? And what's the change going forward? And about Skyscanner, can I get an update about the contribution from Skyscanner this quarter? Is it mainly recognized on the transportation revenue? And what do you expect the contribution going forward?

Yes, regarding the gross margin, there's a couple of reasons this year, our gross margin increased quite significantly compared with last year. First reason is our Baby Tiger program, the small business unit. They are contributing much more revenues than last year. And in terms of the gross margin, those business units comparatively have higher margins than our hotel and air ticket business. And the second reason is because of Skyscanner. They don't, because they are not a search model, they don't have the cost associated with each transaction, so they have a very high gross margin. And last and most important reason is, even for the air ticket and hotel business, we continuously improve our operational efficiency. For example, we introduced a lot of new technology, including AI-assisted transport, now to handle more than 40% of our booking inquiries, significantly improved our operational efficiency and, at the same time, improved our user satisfaction rate. And regarding Skyscanner, Skyscanner contribute mid-to high single digits of our total revenue. And we believe Skyscanner will continue to have a very healthy growth momentum. And overall, their growth rate is comparable with Ctrip's total growth percentage.

Great. Just to clarify, do you mean that the gross profit margin improvement channel will be continued in the following quarters?

I think the majority, for example, the Skyscanner impact has already reflected in the last two quarters. So, of course, internally, we will do our best to continue to improve our operational efficiency and slightly improve our gross margin in the next couple of quarters, a few years.

Next, we have Kevin Kopelman from Cowen and Company.

I had a question on the statistic that you gave on lower-tier city room nights. You noted 20 million nights in July. That's an impressive number. Can you give us any more context around that number in terms of both growth and how large that is within the overall Ctrip business and, also, where you see that going as you noted lower-tier being -- lower-tier cities being a key growth driver going forward?

Yes. So Ctrip has put lots of efforts to aggressively penetrate into the lower-tier cities. First of all, we strengthened our branding power. In the lower-tier cities, we have increased our branding efforts. And so far, it has been very positive in increasing our DAUs. Secondly, on the product coverage, we have developed comprehensive products, not only in the hotel but also in air ticket, bus, train, rental car, et cetera. So with that comprehensive products into these cities, customers can use Ctrip services very conveniently. That also helps us to increase our brand as well as our volume. Thirdly, we want to make sure our pricing is very comprehensive, and our open platform enables us to attract the best price on these cities, and that is very suitable for the price-sensitive customers and young users. And thirdly, as we discussed before, we also were very aggressive opening the offline shops. By the end of this year, our target is to open 6,500 stores. And these stores are also going to be in the center of the cities, which will help us to expand Ctrip and Qunar and our brand and product exposure. With all these efforts, we are confident that Ctrip's brand as a group will be able to attract the customers who start to travel to the other cities and even abroad.

[Operator Instructions] And our next question coming from Wendy Huang from Macquarie.

Your international business actually -- is growing very nicely. Can you provide the retail number for the international ticketing growth, especially given that the market growth was actually only 2% this quarter? So how should we actually expect your market share in the international to grow going forward? And also housekeeping regarding the 600 offline stores, how many people actually will you put in those 600 self-operated store? And also, what's the CapEx for that?

Yes, international expansion is our main focus. In the past and going forward, we will continuously invest in our technology. So multi-destination tickets is our focus and we make it seamless for our customers when they use our services. And also, our 24 hours global service is also very helpful. Whenever our customer travels around the world, Ctrip team is behind them to support them. That gives them lots of confidence and peace of mind when they travel abroad. So going forward, international travel still is our main focus to lead the new wave of the growth. Regarding your question on the lower-tier offline stores, it's a franchise model. So the shops where owners will pay a franchise fee, and we give them guidance as to the quality and we provide the product linkage to them. So they have the access to Ctrip's brand, quality guidance as well as the product coverage. We do not incur labor cost. The labor cost is on the shop owners. So for us, it's a very light model, but it's a win-win model because Ctrip is strong in its technology, branding, service and product coverage, and we make it accessible for the shop owners. And the shop owners -- their strength is the knowledge in a local market. So by combining our strength on both sides, we're able to penetrate in the lower-tier cities very well.

Sorry, Jane, but I thought the franchise model you mentioned were mainly referring to the 6,000 or 5,500 Bestone stores, not really for the 400 -- the Ctrip and Qunar stores. When you say you target to open another 200 more in the pipeline, is it referring to the franchising store as well?

Yes. All three brands are franchise models.

Our next question coming from Justin Patterson from Raymond James.

I wanted to revisit the operating margin guidance, which looks like it's coming in at around 20%. That looks like one of the more modest sequential upticks we've seen on operating margin for some time. So just curious if there's any incremental investment you're making, if there's a change in the competitive environment that's reflecting cross-selling a little bit, just a partial quarter there from that impact. Just what's behind the operating margin guidance?

Yes. Ctrip -- although we are quite strong in the China market, but compared with the total market share, we are still in the very early stage, even for the China domestic market. So the first priority for Ctrip as a group is to continuously gaining market share. For example, in the first half of this year, we put a lot of investment branding campaigns in the second, third tier cities, and also, we have planned to open more markets outside of China. So the strategy, current strategy for Ctrip group is to continuously gaining more market share in China market, in the international markets but, at the same time, maintain a very healthy margin.

Next question coming from Tian Hou from T.H. Capital.

I have a question relate, okay. I have a question related to the Marriott Hotel recently announced they formed a partnership with Alibaba's Fliggy to enable the users use Marriott Hotel much more convenient. So what kind of impact could that be to Ctrip? And also a much bigger picture issue. So Ctrip used to say that travel is a low-frequency business, but I figure, we did some research. I feel like recently, I think that pricing has been changed from a low frequency to relatively higher frequency. So I wonder, what's your data say? What's your corporate analysis? Tell us about it. That's my two questions.

Yes. So for Marriott, the alliance with Alitrip, we have historically developed very solid relationship with all hotel chains, and our partnership has always been very innovative. So our team continuously work with all hotel chains to develop a very strong synergy, including the cooperation on the technology brand, including the branding, co-marketing. So that is the reason why Ctrip in overall market is way ahead of the other players. Secondly, on your question high frequency versus low frequency, yes, Ctrip's platform is, offers not only the low-frequency items such as air tickets and hotel but also offers comprehensive products. So we included our travel journal, very similar to TripAdvisor's model in it. So when people want to go somewhere, they can scan through pictures, read through their travel journals from other travelers. And also, we include bus, train, cars, all these high-frequency products into our platform. And once the customers feels that they can find anything that is associated with travel at our app, then it's a very loyal customer base. So internally, we increased the customer loyalties through offering a comprehensive product to increase stickiness and loyalty from our customers. So increasing the frequency by our customer is one of our focuses when we develop new products.

Next question coming from John Choi from Daiwa.

[indiscernible] get more color. You said there could be a negative impact on the airline revenue in the second half. Can you give us a bit more color on how you guys are trying to fix the situation? And also, secondly on the vacation rental contribution, it seems like in the second quarter, there has been a very strong uptick in this business. Can you give us more metric on how important vacation rental is in the accommodation business?

Yes, I think vacation rental is a very promising way of -- alternative way of traveling, will be increasingly popular in China. But, of course, this is still early stage of the development, and we are still making sure the product is -- meets the customer needs in terms of service, in terms of coverage. But Ctrip's customers are very -- from our initial testing, very willing to experiment with these new products. So the opportunity definitely is very, very interesting for us. It will be increasingly a very viable alternative way of travel for our customers.

Regarding the impact, negative impact on the revenue for the air ticket business, as I said, cross-selling those product, we always provide or we always recommend the most useful product to facilitate our customers' one-stop shopping experience. Therefore, even under an opt-in model, we believe there -- still a lot of customers will purchase those useful product coupons. And secondly, with the more contribution from our international air ticket, naturally, it will mitigate the negative impact from the new guideline. And also, in the long run -- and also, internally, we are testing different product, new product and different new ways to mitigate the potential impact. But in the long run, we believe as long as we provide the best product, most comprehensive international air ticket services in the air distribution industries we created for both our customers and our suppliers, Ctrip sure has a very reasonable premium -- create -- shall charge a reasonable premium on the services that we offer.

Next, we have Juan Lin from 86Research.

So my question is related to cross selling. I'm wondering, do you think that with such low commissions and restriction on cross selling, CAAC will eventually allow OTAs to directly charge service fees from consumers? And also wondering whether there's any potential regulatory risk related to cross selling for business lines other than air ticket booking.

Yes, I -- we believe that Ctrip needs to be very resilient in order to provide a very good services to the customer in a most efficient manner. So the key for Ctrip's team is continuously improve our IT platform and also services to make sure the service and technology compared to the other players stands out as the best service provider in the market. And with that, we have already seen that the international business has increased to approximately 40%. And going forward, that number will continuously to grow, which is very promising in terms of increasing both volume as well as the revenue. Secondly, with our strong investment into the service and technology, more customers will come to use our platform. So that will be very positive in our business going forward as well. Thirdly, there are many new alternatives our team is exploring. And in the market, we have already seen Amazon has a very good Prime membership platform et cetera. So going forward, we believe service has value and service contributed greatly into China's GDP growth, and service needs to be rewarded. So as long as we offer the best technology product and service to our customer, we should be very well rewarded for what we have invested.

Thank you. Next, we have Jed Kelly from Oppenheimer. Please proceed.

Great. Thanks for taking my question. Excellent quarter. On the competitive front, Alitrip signed a deal with Marriott, topped up some of the room night growth as well, and then Airbnb appears to be putting meaningful resources behind its Chinese expansion. Can you just speak to how the competitive environment is evolving versus 12 months ago and some of the different competitive dynamics between Tier 1 and the lower-tier cities?

Yes. I think because travel industry is so promising, over the past 18 years, many players come into the market, many come, many withdraw and new generation will come. So our team is very well trained to monitor the market and move aggressively into different segments. If you look at our development throughout the past 18 years, we started with hotel business. And then two years later, we added air ticketing business. After two years, we added packaged tour and then corporate travel. And now we have Baby Tiger programs covering more than 30 products. So our team is very well trained to be very sensitive into the market and develop product and technology, which will satisfy our customers' needs. And going forward, we'll keep up with this innovative spirit to make sure wherever our customers are, whatever they need, Ctrip is the first mover into the market to give them the product and the services. In terms of the alternative accommodation, I think James is extremely positive in this segment. Do you want to add?

Yes, I think we are very confident of our product coverage and our service and our cross-selling ability as Ctrip or Qunar. The largest hotel platform will be much more likely to win this race, to make Ctrip a much likelier winner in this race compared to even Airbnb, at least in the domestic market.

So yes. Yes, we will continuously work diligently to be very sensitive and quick to market to develop new products and move into these new verticals in the first place.

Next, we have Ming Xu from UBS.

So I have two questions. Firstly, you mentioned that in July, the room night from lower-tier cities or lower-tier hotels are 20 million. I'm just wondering, firstly is, what's the volume or revenue contribution in the total hotel business? Secondly is, how much of that 20 million is booked through your app, your offline stores and also the Bestone stores, respectively? And secondly, very quickly on the CAAC announcement. So I understand CAAC is a regulator for airlines and airports, but I just want to confirm, does CAAC have direct regulatory power over OTAs? And also, how should we, when we try to understand the impact on this and that, how is it different from the last time the Consumer Rights Association investigation into the cross-selling practice?

Yes, so the first question regarding the lower-tier cities innovation, I think, yes, as we discussed, we put tremendous efforts in our branding into the second-tier and third-tier, fourth-tier cities. We also put tremendous efforts to develop comprehensive products, which will serve our customers well in these areas. And third thing is we make sure we have the lowest price for all products that is available on our platform. That is the reason why the growth in the second-tier, third-tier cities have been very significant. In terms of revenue contribution, as we highlighted in the, our financials, it's close to be a RMB2 billion revenue. So it's a very significant revenue contribution from hotel business view. And the CAAC regulation, I think we always respect government's guidance, rules and regulations, and we will, again, work very closely to make sure we are in compliance with all the guidance, rules and regulations. And Ctrip team also want to make sure that the product we offer to the customers satisfy their need. So a lot of cross-sell product we're offering is very well welcomed by the customers when they are traveling within China or outside of China. So we will work very closely to listen to the customers to make sure our product satisfy their need and also work very closely with all the government agencies to make sure we are in compliance with their guidance and their requirement. But, again, I think as long as we have the best technology and services, we will add value through our platform.

A very quick follow-up, Jane. So I want to understand. So within the hotel business itself, so in terms of revenue and volume contribution from these lower-tier cities, so what's the contribution now?

Yes, so we have -- in China hotel business, we have two brands. One is Ctrip brand, one is the Qunar brand. Ctrip brand is more positioned toward the mid-to high end of the market. So still, first-tier, second-tier cities contribute a significant portion of our total revenues and almost 100% of our profit. But Qunar brand, we have -- this year, we made the investment, increased our marketing budgeting to use the Qunar brand to penetrate into the lower-tier cities, which has been very successful. And the lower-tier cities contribution to the total [Indiscernible] improved significantly.

Thank you, ladies and gentlemen. Miss Qi, back to you.

Thanks for everyone who joined us today. You can find the transcript and webcast of today's call on ir.ctrip.com. We look forward to speaking with you on our third quarter 2017 earnings call. Thank you, and have a good day.

Thank you very much. See you next quarter.

Thank you. Ladies and gentlemen, you may now disconnect.