Ctrip.com Q3 2008 Earnings Call Transcript

Ctrip.com International, Ltd. (CTRP)

Q3 2008 Earnings Call

November 17, 2008 8:00 pm ET

Executives

Jade Wei - Senior Manager, Investor Relations

Min Fan - Co-founder, Chief Executive Officer

James Jianzhang Liang - Co-founder; Chairman of the Board

Jane Jie Sun - Chief Financial Officer

Analysts

Catherine Leung - Citigroup

Mike Olson - Piper Jaffray

Wendy Huang - RBS

Chun Ming Zhao - Susquehanna International Group

Richard Ji - Morgan Stanley

Eddie Leung - Merrill Lynch

Marisa Ho - Credit Suisse

Chris Zee - BNP Paribas

Elinor Leung - CLSA

Sun Chang - Teron Capital

Wang Khandi - Nomura

Presentation

Operator

Good day, ladies and gentlemen, and welcome to the quarter three 2008 Ctrip.com International earnings conference call. (Operator Instructions) I would now like to turn the call over to Ms. Jade Wei, Senior IR Manager of Ctrip.com. Please proceed, Madam.

Jade Wei

Thank you. Thank you for attending Ctrip's third quarter 2008 earnings call. Joining me on the call today we have Mr. James Liang, Chairman of the Board; Mr. Min Fan, Chief Executive Officer; and Ms. Jie Sun, 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.

Min, James, and Jie will provide business updates, industry outlook, and the financial highlights for the third quarter of 2008 as well as outlook for the fourth quarter. We will also have a Q&A session towards the end of this call.

With that, I will turn to Min for a business update.

Min Fan

Thanks, Jade. Hello, everyone. Thanks for joining us today on this call. As we look back, the third quarter of 2008 was a remarkable quarter for China. The Olympics and Paralympics were successfully delivered and this event increased and will continue to increase the visibility of China to the world. This will benefit the travel industry in China and our business in the long-term.

Meanwhile, the past quarter was a very difficult time for all companies who operated in the travel industry in China, from airlines to hotels and from traditional agencies to online travel service providers.

For the air-ticketing business, the volume for the overall airline industry decreased by approximately 5% in Q3, which was the first time of marked decreased since SARS in 2003 for the China travel industry. However, Ctrip was able to grow our peak volume by 37%, taking significant [inaudible] from the health market due to our strong execution and superior customer service. Our market share has been growing rapidly in the past quarters of 2008.

In terms of our revenue, our hotel business grew 6% year over year, the air ticketing business grew 21% year over year, and the packaged tour business grew 37% year over year, which all outpaced the industry growth rate significantly. Our team demonstrated its ability to achieve a healthy growth rate in revenue and maintain a solid and profitable operation in a tough environment.

Our hotel supply network continued to expand at a rapid pace with approximately 7,600 hotels by the end of September 2008, compared to approximately 5,600 by the same period last year. The number of hotels with guaranteed allotment rooms increased accordingly and accounted for more than 60% of the total supply.

By the third quarter of 2008, the number of cumulative active customers reached to 5.6 million compared to 3.7 million by the same period of last year. The fast paced new customer acquisition during the tough times demonstrated the effectiveness of our sales and marketing channels.

Our commitment to customers never wavers, either in a strong or in a soft market. The call center is one of our key competitive advantages, providing the efficient platform to serve our customers.

Last month, our call center was awarded as one of the best call centers of 2008 by China Call Center and CIM Association for the second straight year. This award recognized the quality of our customer service backed with our excellent employees, as well as IT platform and seamless team cooperation.

We have established strategic partnerships with notable leading companies in their fields during the past quarter, [Boco], Alibaba, and PayPal. Working with these partners, we enhanced Ctrip's growing list of channels to reach out to our potential customers.

Although the market is challenging, we proactively and swiftly take actions to extend our leadership further. First, get more customers -- whereas some of the traditional agencies are going out of business during the tough time, it’s a very good opportunity for us to lock in the most strategic and efficient channels to recruit new customers.

Second, vendor relations -- we are working with our vendors more closely than ever to leap through the tough environment in order to achieve our winning situation for the travel related industries and for our business. We will take more long-term vision to make sure that Ctrip is the most effective sales channel and the strategic partner for airlines and hotels.

Third, cost control -- we have put in cost control measures to continuously improve our efficiency.

And then I will let James share with you more about our long-term vision.

James Jianzhang Liang

Thanks, Min. The past two months have been volatile worldwide. Our governments are jointly taking measures to iron the tide, more challenges they expect to come not only for the financial industries but also for the world economy. This is not the first time in our history going through the unexpected events. When the Internet bubble busted and saw [inaudible] China at our early stage, Ctrip survived and emerged ever stronger. Although the one-time events caused difficulties in the travel industry in China this year, our team has demonstrated we have the ability to grow substantially and profitably.

Our business is not isolated from the rest of the world. The travel industry in China is still growing to grow steadily. The Chinese Government has released the largest economic stimulus plan in the history of China to bolster the economy, a wider range of infrastructure investment will increase and therefore the general economy will benefit with a sustainable growth rate.

Travel as a facilitator for business and an increasingly important [leisure] need for people is going to grow with a healthy rate. We view this tough time as opportunity for Ctrip to gain more market share and extend our leadership in the travel industry.

Now let me turn to Jane for the update of our financial performance.

Jane Jie Sun

Thanks, James. I would like to report our financial results for the third quarter of 2008. in spite of the challenges in the market, our net revenue reached RMB370 million, or $55 million, in the third quarter of 2008, representing a growth rate of 15% year over year. Hotel reservation revenues accounted to RMB186 million, or $27 million, for the third quarter of 2008, representing a 6% increase from the same period in 2007, primarily due to the increased hotel booking volume and a 5% decrease from the previous quarter, primarily due to the decreased hotel booking volume.

Air ticketing revenue for the third quarter of 2008 were RMB166 million, or $25 million, representing a 21% increase from the same period in 2007, primarily due to a 37% increase in air ticketing sales volume, which was offset by a 12% decrease in commission per ticket, due to a decrease in the ticketing price. Air ticketing revenues remained relatively consistent with the previous quarter.

Packaged tour revenue for the third quarter of 2008 were RMB28 million, or $4 million, up 37% from the same period in 2007 and 19% from the previous quarter, primarily due to the increased leisure travel volume.

Gross margin was 77% in the third quarter of 2008, compared to 80% in the same period in 2007 and 79% in the previous quarter.

Product development expenses for the third quarter of 2008 increased by 28% to RMB61 million, or $9 million, from the same period in 2007 and increased by 8% compared to the previous quarter, primarily due to the increased product development personnel resources.

Excluding share-based compensation charges, product development expenses accounted for 14% of the net revenues, which was an increase from 13% in the same period last year and the previous quarter.

Sales and marketing expenses for the third quarter of 2008 increased by 12% to RMB71 million, or $10 million, from the same period in 2007 primarily due to the increased sales and marketing personnel resources and other marketing activities. Sales and marketing expenses increased by 4% from the previous quarter, primarily due to the increased marketing activities.

Excluding share-based compensation expenses, sales and marketing expenses accounted for 18% of the net revenues, decreased from 19% in the same period last year and increased from 17% from the previous quarter.

General and administrative expenses for the third quarter of 2008 increased by 24% to RMB45 million, or $7 million, from the same period in 2007 primarily due to the increased personnel resources and share-based compensation charges. General and administrative expenses increased by 4% from the previous quarter, primarily due to the increase of personnel resources.

Excluding share-based compensation charges, general and administrative expenses accounted for 7% of net revenues, which remained consistent with the same period last year and increased from 6% in the previous quarter.

Income from operations for the third quarter of 2008 was RMB107 million, or $16 million, which represented a 4% decrease from the same period in 2007 and a 16% decrease from the previous quarter. Excluding share-based compensation charges, income from operations was RMB138 million, representing a 3% increase from the same period in 2007 and a 13% decrease from the previous quarter.

Operating margin was 29% in the third quarter of 2008, compared to 34% in the third quarter of 2007 and in the previous quarter. Excluding share-based compensation charges, operating margin was 37% in the third quarter of 2008 compared to 41% in the third quarter of 2007 and 42% in the previous quarter.

Net income for the third quarter of 2008 was RMB104 million, or $15 million, representing a 5% decrease from the same period in 2007, and a 12% decrease from the previous quarter. Excluding share-based compensation charges, net income was RMB136 million, or $20 million, representing a 2% increase from the same period in 2007 and a 10% decrease from the previous quarter.

The effective tax rate for the third quarter of 2008 was 17%, increased from 15% in the same period of 2007 primarily due to the application of a statutory tax rate of 25% under the new PRC Enterprise Income Tax Law, effective on January 1, 2008, to domestic enterprises that are not entitled to enjoy the grandfathering provision of transitional preferential tax rate. The effective tax rate for the third quarter of 2008 decreased from 26% in the previous quarter primarily due to the transitional preferential tax rate of 18% applied to one of the domestic enterprises established in the Pudong New Area.

Diluted earnings per ADS were RMB1.52, or $0.22, for the third quarter of 2008. Excluding share-based compensation charges, diluted earnings per ADS were RMB1.97, or $0.29, for the third quarter of 2008.

As of September 30, 2008, the balance of cash and short-term investment were RMB1.4 billion, or $207 million.

For the fourth quarter of 2008, Ctrip expects a year-on-year net revenue growth to be in the range of 5% to 15%.

With that, Operator, we will open the line for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Catherine Leung with Citigroup.

Catherine Leung - Citigroup

Good morning. I have two questions, please -- the first one is can you help us understand what measures Ctrip is taking to offset the slowdown? I know that you mentioned three measures already in your script. Specifically for the cost control, which are the main areas that we can expect to see some efficiencies?

And my second question is on the commission rates -- since the removal of the 3% fixed commission rates on October 1st, can you help us understand how Ctrip's commission rate has trended? Have you started negotiating with individual airlines and what is the medium term outlook for the commission rates? Thank you.

Jane Jie Sun

Sure, thanks.

Min Fan

Regarding right now the tough period, I think with Ctrip we will take several measures to enhance our revenue and as I just said, since this is a difficult time, every company will encounter the same problems, so maybe if you -- if Ctrip can deliver better service and better quality, then probably we can grab more customers in the market, so I think still we will keep our service quality and efficient sales and marketing channel to grasp more customers from different channels, so this is still our major method during this tough period. And also in terms of cost control, we will have a certain recruitment freezing measures during this tough period in the short-term, so I am sure with these measures, we will try to enlarge our revenue and also decrease our costs.

Jane Jie Sun

And Catherine, I will take your second question, which is the impact of the 3% removal of the commission rate -- so far, our commission rate has been maintained at a very consistent level as previous period. We will work with our airline partners very closely to make sure that we stay as efficient as possible to support their sales.

The government is eliminating the 3% mandatory commission rate and to let the market to decide the commission rate, and that is good news for Ctrip because we believe based on our strong execution, we [inaudible] the most efficient and effective sales channel and by doing that, I think our value proposal for the airlines remains strong. So so far, I think the rate based on our visibility has been maintained.

Catherine Leung - Citigroup

Thank you. Sorry, if I may, for the first question can I have a short follow-up? On the recruitment freezing, which areas, for example, in product development, sales and marketing, or kind of the back office functions, will you target to reduce or control the headcounts?

Min Fan

Normally during the normal period, in fact we will recruit a little bit more stuff to prepare for the increased transaction, so that means even right now, since the business is not so good as before, maybe the volume increase not so high as before, so in the time being, during the time being, right now we have already have enough starting here, so right now we will probably operate all the department recruitment, unless it’s very key, it’s a must for our service. So I think it’s across the line freezing, yes.

Catherine Leung - Citigroup

Thank you.

Operator

Your next question comes from the line of Mike Olson with Piper Jaffray.

Mike Olson - Piper Jaffray

Good morning. Two quick questions -- the first one is given the tough environment, obviously you’ve issued guidance for Q4 revenue outlook that’s cautious -- is there any reason to expect an up-tick in the first half of ’09 from what you are guiding for in Q4?

Jane Jie Sun

Sure. For Q4, based on the customer loading data just published by the major airlines, we are very glad to see that the volume is picking up compared to Q3 and as long as there is volume, we will penetrate into the market and gain as much market share as possible, so that’s a positive sign.

The reason we give a very conservative guidance for Q4 is that the ticket price still remains at a very low level, which offsets the volume increase and the ticket price we do not have too much control on, so that’s the reason for us to give a prudent and conservative guidance for Q4.

Now, going forward in 2009, we will monitor the market very carefully and hopefully based on airline yield management, the price hopefully will increase to a healthy level and we are working on the 2009 forecast, so by the time we release our Q4 number, we should have better visibility and give you solid guidance at that time.

Mike Olson - Piper Jaffray

Okay, and then my second quick question is Jane, can you just give us an update on the application for preferential tax treatment and what you expect the tax rate will look like in ’09?

Jane Jie Sun

Sure. Let me try to walk you through the tax in four steps. First of all, under the new tax law, which took effect on January 1st of 2008, companies should apply a 25% tax rate unless they are qualified for high and new technology enterprise status. Secondly, we have already submitted the high and new technology enterprise application materials for all of our major entities and the government authorities will announce the result upon completion of their review.

Thirdly in Q3, the tax bureau of Pudong Province have formalized a widely adopted practice to provide for a five-year transitional reduced tax rate for companies that are incorporated in Pudong, therefore we applied 18% for one entity that was incorporated in Pudong for fiscal year 2008. The transitional tax provision provides a phase-in rate from 18% to 20%, 22%, 24%, and 25% for the next five years, starting from 2008. So that’s the Pudong entity.

Now, going forward in 2008, the worst scenario is that if none of the entities within our group is entitled for the high and new technology preferential tax treatment, then our tax rate is about 24% to 25%, including the stock-based compensation, or approximately 20% excluding stock-based compensation charges.

The best scenario is that if the entities we applied for are entitled for high and new technology preferential tax treatment, then our tax rate will be in the range of 19% to 20%, including share-based compensation charges, or 15% to 16% excluding share-based compensation charges.

Does that help?

Mike Olson - Piper Jaffray

Thank you very much.

Operator

Your next question comes from the line of Wendy Huang with RBS. Please proceed.

Wendy Huang - RBS

Good morning, everyone. Thanks for taking my questions. First of all, could you comment on the hotel bookings commission rate change in Q3, and especially the Q-on-Q changes? And also based on your initial observation of the Q4, what’s the trend of the occupancy rate in the hotel industry right now and what is the change of the hotel room price and how will that impact the hotel room volume and the commission of Ctrip's business? Thank you.

Jane Jie Sun

Okay. For Q3, the hotel commission rate remained consistent with the previous year and the previous quarter, which is about 15% and the hotel price is still within the range of 450 to 500, towards the lower end of the range, so it’s very consistent.

Going forward, I think we are monitoring the market very carefully. Lots of companies are putting cost control measures for the travel [pattern], so we again are monitoring the occupancy rate very carefully. Compared to the peak time which the occupancy rate average was around 60% to 70%, we do see a slight decrease in the occupancy rate across the board.

Wendy Huang - RBS

And my second question is about your air ticketing commission -- is Q3’s commission declined mainly because of the ticket price decline or mainly because of the commission rate change?

Jane Jie Sun

It’s mainly due to the ticket volume change. Let me walk you through the ticket price and share the best visibility we have so far. The ticket price in China is determined mainly by the airlines with some guidelines from the government. We can give our feedback to the airlines but the final decision is made by the airlines. We will try to do our best to share our visibility with you.

The ticket price is mainly made of two components -- the first one is the raw ticket price and the second one is the fuel surcharge. We take a commission based on the raw ticket price and the raw ticket price decreased significantly in Q3 by approximately 10% to 15% year over year. In Q4, we haven’t seen the price to be rebounded back yet. That again is the reason why we give a conservative guidance for Q4.

The fuel surcharge is linked to the fuel costs and approved by the government. As the fuel costs in China were very high in Q3, the fuel surcharge was also pretty high. So what we have seen so far is the oil price is decreasing worldwide. We hope the fuel costs in China will come down also, which will bring down the fuel surcharge accordingly.

If the airlines wants to maintain the total ticket price steady, the decrease in fuel surcharge will give more room for raw ticket price to increase in the future, so that’s the best visibility we have so far.

Wendy Huang - RBS

That’s very clear. I have a final question, if I may have -- that’s on the gross margin. This quarter the gross margin declined by more than 200 basis points but if we look at the revenue mix, actually the air ticketing didn’t increase too much as a percentage of total revenue, so could you help us understand, did you see any pressure on the gross margin of the hotel booking or whether it’s mainly because of the increasing revenue contribution from the packaged tours this quarter?

Jane Jie Sun

Sure, sure -- our cost is very much linked to the business volume, such as the tickets we booked, the number of the tickets we booked. So if you look at our volume in Q3, for example, the ticket volume increased by 37% but our costs increased by 28%. The decrease in the margin was mainly due to decrease in ticket price, which impacted our total commission for each ticket. For example, if you have 100 people calling in, no matter what the ticket price is, we have to have staff to service these calls, so the labor cost does not correlate to the ticket price but more correlates to the volume. That’s the reason you see the gross margin decrease in Q3.

Now, going forward, as Min said, we will implement more aggressive cost control measures, such as tight headcount control, improved efficiency in all business groups, and run more effective sales and marketing channel in order to improve our margin level.

Wendy Huang - RBS

Okay, thanks. That’s all I had. Thank you.

Operator

Your next question comes from the line of Chun Ming Zhao with SIG.

Chun Ming Zhao - Susquehanna International Group

Thank you. Good morning, everyone. Thanks for taking my questions. I was wondering if you could give us more color on your Q4 guidance. If we compare Q3 and Q4, it seems like air volume is better in Q4 so far, hotel should -- are you forecasting hotel to be worse than in Q3, even without the Olympic event? How should we look at your guidance? That’s my major question.

Jane Jie Sun

Okay. The market from a volume perspective, we are very glad to see the market volume has increased and again, we will be very positive to penetrate into the market and get these volumes for as much as possible, so we are confident that the volume growth will be very healthy for us. However, what we have seen so far, particularly in the air industry, is that the average raw ticket price has not rebounded back to the prior year level. The decrease in the raw price on a year-over-year basis will pull back the revenue growth rate. That’s the main reason why we give a conservative guidance.

For hotel, I think we are forecasting a healthy growth based on the market volume.

Chun Ming Zhao - Susquehanna International Group

Okay, so on the hotel side, did you see some rebound after the Olympics?

Min Fan

For the hotel side, normally I think the whole travel industry anticipated a very healthy rebound after the Olympic Games. As everybody knows, after the Olympic Games, the financial crisis across the world, so there are certain impacts on business travelers’ behavior and although most of our clients are domestic travelers, but those clients if they are companies or their businesses associate with domestic business, probably they will travel as normal but still will be a little bit less, since every company right now is controlling their costs very tightly. And if our clients, their business is export-oriented or JV, those companies, they are more likely to reduce their travel expense to a certain extent. So that’s why we anticipate in Q4 the hotel rebound will not be so significant as we anticipate before, so -- but still there were certain growth but the growth will be, I should say will be not so high as before, since the -- with the impact of the financial crisis.

Chun Ming Zhao - Susquehanna International Group

Okay, and lastly, can you update us on the international visa issuance by the government? Is that visa restriction restricted or lifted already into the November month?

Min Fan

The visa right now is already lifted and I think still there is some after effects because there’s [also] foreigners, they travel to China, they will plan their schedule way ahead of time. So in Q3 and even in Q4, still there would be probably some impact on the travel patterns, travel behaviors here. And also as we know, probably some international meetings, conference, they either postponed or cancelled because of the visa around the Olympic Games period and then after the Olympic Games, because of the financial crisis, those big meetings, they postponed or cancelled. So I think even the visa lifted, visa control lifted but still the incoming foreigners, still the trend is not so big as the industry anticipated before.

Chun Ming Zhao - Susquehanna International Group

Okay. Thank you very much.

Operator

Your next question comes from the line of Richard Ji with Morgan Stanley.

Richard Ji - Morgan Stanley

Good morning. I have two questions and let me start with the hotel booking business. Can you help us understand a little better about the growth dynamics in tier one cities versus the tier two cities? And should we expect a higher growth potential in the tier two cities going forward, despite the uncertainties in the travel market?

Min Fan

Regarding the hotel revenue mix, in Q3 because of the Olympic Games, we can see the revenue transaction generated from the first-tier cities decreased a little bit because of the first-tier cities, Shanghai, Beijing, there were Olympic Games, so the volume from these two big cities decreased a little bit and even -- especially in Beijing as we compare the data, this Q3 hotel bookings business compared with last year is decreased, so definitely there will be some impact on the first tier city production.

And in the general picture, we can see right now there are more production from more than 50% production generated from the second-tier or third-tier cities. And regarding the growth ratio, I should say still the growth ratio from the second-tier and the third-tiers, the hotel booking growth ratio is higher than the first-tier cities.

Richard Ji - Morgan Stanley

Thanks, Min, and the other area, despite all these uncertainties, one bright spot is your leisure travel business, and so going forward, should we expect this business to be more resilient than your business travel service for the time being? And what is roughly the revenue breakdown between your leisure versus your business traveler? Thanks.

Min Fan

For the leisure and business travelers, right now still I think 80% and 20%, this kind of scenario is still almost not without big changes. Still we have more business travelers generate our production. And -- but we are working very hard to try to enlarge our leisure travelers business and especially by our vacation packages business line, and we can anticipate that there will be more high growth ratio from the leisure traveler side than the ratio from the business traveler side.

Richard Ji - Morgan Stanley

Okay, great. Thanks.

Operator

Your next question comes from the line of Eddie Leung with Merrill Lynch. Please proceed.

Eddie Leung - Merrill Lynch

Good morning. My question is could you guys share with us more insights in the industry trends you have observed so far in the fourth quarter, in October as well as so far in November? In particular, I want to understand more about the rapid strength between the business travelers and the leisure travelers in these two months and how much roughly or qualitatively speaking would be so-called pending demand and how much do you think is actually still we are looking at some organic growth for the industry as a whole? Thanks.

Jane Jie Sun

The industry for Q4 so far I think in terms of the volume growth, it has been better than Q3. Based on Air China’s data and also Southern Air, I think the volume growth has been very healthy. So we are confident that as the volume in the market is growing, we will be able to increase our volume accordingly.

However, I think we -- also there is also some uncertainty in the market, just as many of you have already experienced, that many firms have implemented cost control measures to reduce unnecessary travel, or to reduce the fare from business travel class to economy travel class for the air tickets. So the cost measure across the board, we still need to monitor very carefully to get a full picture of it. But overall in general, I think the pent-up demand for Q4 looks better than Q3. That’s how we feel right now.

Min Fan

Also if you are talking about the leisure travelers, I think the consumer behavior from leisure travelers, they are very heavily you can see linked with the [inaudible] market and the stock market in China, so I think -- so that’s why even the Golden Holiday of this October 1st, the travel industry did not come up with a very, very high rebound after the Olympic Games. But on the other hand, I think if the China economic growth still can be growing at a high digit growth ratio, let’s say 8% or 9% next year, I think that we will give more confidence to those leisure travelers. But it still depends on the macroeconomic growth trends, so we are still waiting -- waiting some time to see the afterwards effect.

Eddie Leung - Merrill Lynch

So is it fair to say that so far the observation seems to point to the fact that it seems like the leisure travelers have -- are less sensitive to the economic headwinds than the business travelers?

Min Fan

Yes, both -- both they are sensitive.

Eddie Leung - Merrill Lynch

Okay, and one last question is about the conferences in the fourth quarter -- do we see any major conferences say in December or the later parts of November in China?

Min Fan

You mean business conferences?

Eddie Leung - Merrill Lynch

Yes, business conferences.

Min Fan

I think probably some conferences reduced and but still there would be a few big conference or exhibition were still held during this season, like [inaudible]. There will be an international travel even in Shanghai but I think those medium-sized or small-sized international conferences will be cancelled or postponed, but for those very big conferences, because they have set up maybe one year ago or more than six months ago, so it’s still quite some big conference still would be in Shanghai or in Beijing. But the visitors or even the participants will be -- sometime will be decreased.

Eddie Leung - Merrill Lynch

Understood. Thank you very much.

Operator

Your next question comes from the line of Marisa Ho with Credit Suisse.

Marisa Ho - Credit Suisse

Good morning. You were alluding to record market share increases during the third quarter. Would you be able to give us a little bit more color and perhaps also quantify the market shares you now have across the hotel booking and also the air ticketing side?

Jane Jie Sun

Sure. The market share is sometimes, depending on the data you used, it’s very hard to calculate. Based on our calculation, right now we are above 5%.

Marisa Ho - Credit Suisse

-- air ticketing?

Jane Jie Sun

Yes, for air ticketing, for air ticketing. For hotel, probably we are still at around 2% to 3%.

Min Fan

Two to three but I think we are -- although we encountered a very hard time here but still we can see our market share is quite strong and also we can see we still grasp for more clients, more customers from those small players in the market. So I think this is -- we are very confident, even in the difficult time we can still grow, still there are more new customers from the market.

Marisa Ho - Credit Suisse

Great. I know it’s somewhat early to talk about the visibility going into 2009 but would it be realistic to expect it rebound, I mean, compared to what you are looking at in the third quarter and also the fourth quarter of 2008? Or are we likely going to be looking at just about like 10% growth for the full year of 2009?

Jane Jie Sun

I think we are still rolling up our 2009 forecast. When we look at our forecast, there are a couple of things we need to monitor. The first one is the volume, and so far the volume in the market has been increasing and we are very confident that as long as there is volume in the market, we will get as much as possible the market share from these volumes.

The second element we looked at is the price for hotels and price for the air tickets and that we do not have control on. We can give the feedback to our suppliers and they will make the final decision, so that is something we are anxiously waiting for and monitoring. By the time we announced our earnings, hopefully we will have better visibility on that element.

And the last one is the commission rate -- again, that is depending on the market and again we will keep you updated throughout the process to make sure our guidance appropriately reflects the commission rate as well.

Min Fan

I would like to add one point -- if the government, they can carry out their stimulus plan in China later this year and next year very efficiently, I think the travel market, there will be quite healthy growth next year if all those plans can come about efficiently and on time.

Marisa Ho - Credit Suisse

Thank you.

Operator

Your next question comes from the line of Chris Zee with BNP.

Chris Zee - BNP Paribas

I just have several follow-up questions. Most of the questions have been answered already. First of all, for the air ticket commissions per ticket being issued, in the 3Q it dropped by 12%. Do you foresee it to go sideways in the fourth quarter and in the first quarter next year, or do you see more downside? That’s the first question. And the second question, basically pertains to your second upcoming call center -- can you provide us an update, particularly now that you are imposing the hiring freeze? Any [inaudible] or potential delays on that one? Thank you.

Jane Jie Sun

Sure. On the commission, if you look at the commission per ticket for a dollar amount, there are two components that needs to be taken into consideration. The first one is the commission rate -- the second one is the price for each ticket. The commission rate has been maintained at a consistent level as previous quarters. However, the price has decreased by 10% to 15% on the raw ticket price. That is the main reason why the commission on the dollar amount decreased year over year by around 12%.

Now, going forward in Q4, we still see the ticket price on the raw ticket price is still very low. That again was the reason why we gave the guidance we have in the press release.

Now, your second question on the call center, the call center we have currently, the first call center we have currently will sustain our growth for the next one year or two, and then we need a new space to accommodate future growth. We will take a very conservative and prudent way to construct the [inaudible] call center. The building is going to be built in two phases, so there is no P&L hit until the building is ready to be put in service, so no P&L hit until 2010.

Chris Zee - BNP Paribas

So the -- sorry, the second call center, the [inaudible], wouldn’t be ready for operations until 2010?

Jane Jie Sun

Perfect, that’s correct.

Chris Zee - BNP Paribas

Okay. Can you just remind us what is the CapEx going to be involved for that project for this year and next year?

Jane Jie Sun

Sure. It’s around $20 million a year for this year, next year, and the year after.

Chris Zee - BNP Paribas

Thanks very much.

Operator

Your next question comes from the line of Elinor Leung. Please proceed.

Elinor Leung - CLSA

Thank you. I just have a follow-up question regarding the hotel rate -- can you give a little picture on how the hotel price is in the market right now? Do you see a downward trend going on which could potentially depress your commission rate?

Jane Jie Sun

For Q3, what we have seen is the hotel price has been maintained at a very consistent level, which was in the range of 450 to 500, towards the lower end but still within a reasonable range.

Elinor Leung - CLSA

How about in Q4? Have you seen any downward trends going forward?

Min Fan

For Q4, I think right now it is still -- those high-end hotels, they will slow down a little bit but a very, very small percentage. And on the other hand, those budget hotels and they maintained their prices across the board, so we don’t see a significant decrease on this room rate right now.

Elinor Leung - CLSA

Thank you.

Operator

Your next question comes from the line of [Sun Chang] with [Teron] Capital.

Sun Chang - Teron Capital

I just want to ask a question about your packaged tours. I just want to know, can you distinguish your packaged tour revenue in Q3? How much percentage of them are attributed to only one long weekend holiday? And can we expect the Q-on-Q growth for the fourth quarter in this sector?

Jane Jie Sun

The one long holiday -- which holiday do you mean? The October holiday is going to be in Q4.

Sun Chang - Teron Capital

I mean before that -- do you see any -- okay, sorry. I just mean post-Olympics, the related packaged tour just right before the October the first.

Jane Jie Sun

Normally in Q3 it’s the summer season, so the students are out of school so normally Q3, kids will go out and have tours with their parents. This Q3 though I think because of the Olympic Games, it’s distorted in some level. Q4 October holiday was in line with our expectations.

Sun Chang - Teron Capital

Okay. Thank you.

Jane Jie Sun

Sure. Thank you.

Sun Chang - Teron Capital

Oh, when can we see your -- the [inaudible] of business traveler to a minimal revenue contribution to the --

Jane Jie Sun

You mean the corporate traveler, right?

Sun Chang - Teron Capital

Yes, corporate traveler.

Jane Jie Sun

Sure. The corporate travel this year is growing at a very fast level, so hopefully by the end of next year when the revenue is exceeding 5%, we will be able to break it out to help you to see exactly how much money they are making. So next year we will probably break it out.

Sun Chang - Teron Capital

You just mentioned your -- there will be more increase from the air ticket volume in the fourth quarter, so comparing to the commission rate. So can we expect the same [inaudible] margin compared to the third quarter for fourth quarter?

Jane Jie Sun

Yes, pretty much. Probably the gross margin will be at a level between 77% to 78% and operating margin before stock compensation will be at around 37% to 39%. We will do our best to control the cost and hopefully we will be offsetting the margin by increasing our efficiency in operating levels.

Sun Chang - Teron Capital

Okay, thanks. That’s all.

Operator

(Operator Instructions) Your next question comes from the line of Marisa Ho with Credit Suisse. Please proceed.

Marisa Ho - Credit Suisse

I just have two quick follow-up questions -- the first one is about the cost control measures that you were talking about. In your current budget, I mean, are you now expecting the cost to rise at a slower rate compared to the revenue line? Or are you actually budgeting the cost to perhaps stay flat or even decline in an absolute dollar basis?

Jane Jie Sun

Because of the market uncertainty, we will take very prudent and careful steps, so currently our target is try to control the costs, so that it stays relatively flat. But obviously there are certain costs that need to go with the revenue. For example, if the volume grows to a certain level, we need people to service them. But for other costs, we will try to reduce them to increase the efficiency. So hopefully we will, as a percentage of total revenue, the cost will grow at a lower level compared to the revenue growth.

Marisa Ho - Credit Suisse

Thank you. And my second question is about the [inaudible] alliance -- do you have an update on how that one is going?

Jane Jie Sun

Sure.

Min Fan

For the [Starway] Alliance, I think right now we do not expect [Starway] Alliance to generate significant profits for Ctrip in the near future, and the objective of the [Starway] Alliance is to establish a mutual and a good brand for those qualitative low-end hotels to provide a good service to travelers and also to provide more choice to price-sensitive travelers and for those low-star hotel travelers. And right now, [Starway] is operating independently and meets our expectations so far.

Marisa Ho - Credit Suisse

My feeling is -- I mean, this could be an initiative you want to push in 2009 because if the overall travel market becomes difficult, your customers may actually want to economize, so they may actually want to trade down to the lower grade hotels.

Min Fan

Yes, [they may be helpful].

Jane Jie Sun

I think [Starway] Alliance from a revenue contribution perspective, it will remain to be insignificant because the other revenue pool is so huge. But it’s a meaningful way to provide value-added services to both of our customers and our suppliers because quality is -- if the quality is guaranteed, that will offer more choices for our customers and for the hotel side, if we add some branding power to promote quality hotels, I think that’s good for our supplies too. So it’s really a value-added service for our customers as well as our vendor. So the business meaning exceeds the financial income as of this moment.

Operator

Your next question comes from the line of Wendy Huang with RBS.

Wendy Huang - RBS

Thanks for taking my follow-up questions. First, could you give me some guidance on the Q4 tax rate [inaudible]? I think you mentioned before that you expect some tax reversal in Q4, so should we expect a big jump in Q4’s tax rate?

Jane Jie Sun

Sure. The worst tax rate we have is the same for the full year because we did a true-up for the Pudong province, so if the other entities do not get the high and new technology status, our full-year tax rate will be the same as the nine months tax rate. If the entities we applied for high and new technology get their status approved, then we will reduce these entities tax rate to a 15% tax rate, excluding share-based compensation costs.

Wendy Huang - RBS

I see. And second, could you help me understand about the gross margin between the high-end hotel booking and lower-end hotel booking? My understanding is that actually the cost is very much fixed and similar for both types of hotels, so with the increasing revenue contribution from the low-end hotels, will you see any pressure over the gross margin?

Jane Jie Sun

Sure. For the gross margin, it’s very difficult to segregate certain levels of the cost to one -- from one to the other, but we will do our best to help our investor to understand the gross margin. Roughly the gross margin for the hotel business is somewhere around 85% to 90%, and for high-end hotels, it is towards the high-end of the range and the economy hotel is towards the lower end of the range.

Wendy Huang - RBS

I see. Thanks.

Operator

Your final question comes from the line of [Wang Khandi] with Nomura.

Wang Khandi - Nomura

Jane, on your balance sheet, can you explain why the -- almost a double increase in the advanced room customers --

Jane Jie Sun

Sure. The October holiday is a big holiday, Golden Week holiday for China, so we book lots of packaged tours for the October holiday and when we book it, the customer will pay us up-front and we will realize our revenue upon return and completion of their tours. So before they come back, the money they give to us is recorded as customer advance.

Wang Khandi - Nomura

Okay, so you mean that the huge increase in the packaged tours in the -- by the end of the third quarter -- I see the increase is very sharp compared with the previous few quarters.

Jane Jie Sun

Yes, if you compare quarter over quarter, that number should increase quite significantly because if you are comparing June number, there is no national holiday in June, only in July, so you will not receive the customer advance for that [inaudible], versus in September, you do receive advanced payment from the customer for the deposit of the packaged tour they are going to use in October.

Wang Khandi - Nomura

Okay, how about --

Jane Jie Sun

But if you look at historical trends, September, in every year, September you should see an increase in customer deposits.

Wang Khandi - Nomura

Okay, so now, is it normalized to a normal level or still a very high level in your --

Jane Jie Sun

Once the holiday is over, once they come back from their packaged tour, that balance should be reduced.

Wang Khandi - Nomura

Okay. Another quick question on your accounts receivable -- those balances increased by over 68% year-on-year versus your revenue growth is only I think 28%, 29%, so is that airline companies late in the payable to you or are there any other issues?

Jane Jie Sun

Sure. It’s similar to what we explained before. If you look at our AR balance, there were three components. The first one is the hotel commission and we normally confirm the hotel commission with the hotels before we book it, and we normally collect the AR between one to one-and-a-half months.

The second part of the AR is corporate travel customers, which is also one-third of our AR, and we control the AR very tightly and collect the AR between 45 days to 60 days. And the rest of the AR are mainly due to the credit, the AR from the credit card banks, because when we issue credit -- tickets, for example, when a customer calls us to book a RMB1,000 ticket, we will increase the AR from the credit card company for RMB1,000 and also increase the AP to the airlines for RMB950, and the difference of RMB50 is our commission. And normally within two to three days, the credit card bank will pay us the RMB1,000 and then we will reduce our AR for RMB1,000 and increase our cash for RMB1,000. So if you look at AR and AP for this quarter, they both increased because we receive the payment from the customer’s credit bank company but we also need to submit the ticket price to the airline company, so the AR and AP both increased.

Wang Khandi - Nomura

Okay. Last question on your fourth quarter, you forecast 5% to 15% top line growth. Given that you are taking some cost control measures plus you may receive some lower effective tax rate in the fourth quarter, so can we expect like flat net margin or operating margin in the fourth quarter year-on-year?

Jane Jie Sun

The gross margin, probably it will be -- it’s reasonable to assume it’s probably at a range of 77% to 78%, and operating margin probably is between 37% to 40%, excluding share-based compensation charges.

Wang Khandi - Nomura

Okay. Thank you.

Operator

Ladies and gentlemen, this concludes the question-and-answer session. I would like to now turn the call back over to Ms. Jane Wei for any closing remarks. Please proceed.

Jade Wei

Thanks, everyone, for participating in our conference call. We would like to conclude the conference call here and hope to talk to you next quarter. Thank you very much.

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