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Ctrip.com International, Ltd. (NASDAQ:CTRP)

Q1 2009 Earnings Call

May 11, 2009 9:00 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

Mike Olson - Piper Jaffray

Richard Ji - Morgan Stanley

Paul Keung - Oppenheimer

Eddie Leung - Merrill Lynch

Ming Zhao - SIG

Cathy Chen - Goldman Sachs

Marisa Ho - Credit Suisse

James Li - Sterne, Agee & Leach

Ashish R. Thadhani - Gilford Securities

Elinor Leung - CLSA

Candy Wong - Nomura

Chris Zee - BNP Paribas

Martin Ji - Clearbridge Advisors

Operator

Good day, ladies and gentlemen, and welcome to the first quarter 2009 Ctrip.com International Limited earnings conference call. (Operator Instructions) I would now like to turn the call over Ms. Jade Wei, Senior Manager of Investor Relations for Ctrip. Please proceed.

Jade Wei

Thank you, Melanie. Thank you for attending Ctrip's first quarter 2009 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. Jane 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 Jane will provide business updates, industry outlook, and the financial highlights for the first quarter of 2009 as well as outlook for the second 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 and thank you to everyone for joining us today on the call. I am very pleased to report our solid results delivered by our team in the first quarter of 2009. While the economic environment was challenging, we exceeded our guidance on both revenues and profit through strong revenue growth and effective cost controls. Our net revenue grew at 18% year over year in Q1. Operating income and net income grew at 23% year over year.

Travel is one of the most important growth engines to drive the economic growth. The Chinese Government made extraordinary efforts to promote the tourism and to boost the economy.

China National Tourism Administration and its regional bureaus launched a national tourism and leisure plan this year to encourage Chinese people to participate more in leisure travels. Ctrip has been working with multiple key regions, including Beijing, [Hangzhou], [inaudible], et cetera, to distribute travel coupons and tickets through our website and sales channels. These activities are very well-received by our customers and the [inaudible] and our website reached historic peaks during these events.

The year of 2009 is Ctrip's 10th year anniversary. We would like to take this opportunity to thank our customers and business partners for their support and trust in Ctrip. With their support, Ctrip has become one of the best known brands in the travel industry.

Our hotel supply network continued to expand at a rapid pace, with approximately 8,300 hotels by the end of March 2009, compared to approximately 6,400 by the same period last year. The number of hotels with an allocated allotment of rooms further increased and accounted for approximately 70% of the total supply.

By the first quarter of 2009, the number of total customers reached to 6.9 million, compared to 4.5 million by the same period of last year. As part of our efforts to bring the best values to our customers, we launched our campaigns of every Wednesday promotions to promote our tour packages at deep discounts with good quality. This has generated a tremendous interest and increasing demands of our overall packaged tour products. We also implemented the Excel Customer Experience program this year [inaudible] at elevating our customer experience to a higher level through more variety of products, [inaudible] customer satisfactions, and more competitive prices.

Starting this year, we have upgraded our hotel reservation website and added more intelligent search functions for [scenic] resorts hotel facilities and users comments. This provides our customers with more user friendly interface and we see an increasing online booking ratio for our hotel business after this new website launched.

In the first quarter of 2009, we have added Taiwan as one of our tour destinations. This is an opportunity for our packaged tour business and we are seeing very strong demands for mainland travelers to go to Taiwan. We are working very closely with easy travel, our business partner in Taiwan, to leverage their expertise to bring the best packages and services to our customers.

On May the 7th, 2009, we have entered a definitive agreement to acquire around 9.5% additional shares of Home Inns and reached 18.25% of its aggregate base shares outstanding.

Overall, we are confident that our leadership has been strengthened during the tough tie. We will continue to focus on our execution and work hard to live up to the expectations of our customers, partners, and investors.

Now I will turn to James for an industry outlook.

James Jianzhang Liang

Thanks, Min. I am proud that our team has once again demonstrated its ability for both strong execution and a financial discipline. Ctrip has built its competitive advantage in the [expansive] network, high service quality, and advanced technology and strong balance sheet. These strengths will enable Ctrip to outperform the market in a tough environment and to excel to the next level when the economy recovers.

In the short term, the global economy remains challenging and we are monitoring the impact of the recent swine flu to the travel industry very closely.

However, in the long run, China’s economy is strongly propelled by the domestic spending. Business travel is supported by an increased business activities, and leisure travel is boosted by a higher personal income. And we will capitalize on these opportunities ahead of us.

Now let me turn to Jane for an update on the financial performance.

Jane Jie Sun

Thanks, James. I am very pleased to report the solid results for the first quarter of 2009. Despite all of the challenges from the economy, our net revenues were RMB401 million, or $59 million, for the first quarter of 2009, up 18% year-on-year.

Hotel reservation revenues amounted to RMB187 million, or $27 million, for the first quarter of 2009, representing a 9% increase from the same period in 2008, primarily driven by a 17% increase in hotel room reservation volume, which was partially offset by a decrease in commission per room. Hotel reservation revenues represented an 11% decrease from the previous quarter primarily due to decreased hotel booking volume during the Chinese New Year holidays.

Air-ticketing revenues for the first quarter of 2009 were RMB184 million, or $27 million, representing a 16% increase from the same period in 2008 primarily driven by a 40% increase in air-ticketing sales volume, which was partially offset by a decrease in commission per ticket. Air-ticketing revenue increased 11% from the previous quarter primarily due to increased air-ticketing volume.

Packaged-tour revenues for the first quarter of 2009 were RMB38 million, or $6 million, up 41% from the same period in 2008 and 25% from the previous quarter, primarily due to the increased leisure travel volume in the first quarter of 2009.

Gross margin was 78% in the first quarter of 2009, decreased from 80% in the same period last year and increased from 77% in the previous quarter.

Product development expenses for the first quarter of 2009 increased by 18% to RMB63 million, or $9 million, from the same period in 2008 primarily due to the increased product development personnel resources. Product development expenses remained relatively consistent with the previous quarter. Excluding share-based compensation charges, product development expenses accounted for 14% of net revenues, increasing from 13% in the same period of last year and remaining consistent with the fourth quarter of 2008.

Sales and marketing expenses for the first quarter of 2009 increased by 7% to RMB71 million, or $10 million, from the same period in 2008 primarily due to the increased sales and marketing activities and personnel resources. Sales and marketing expenses decreased 13% from the previous quarter, primarily due to the decrease in advertisement and other sales and marketing activities. Excluding share-based compensation charges, sales and marketing expenses accounted for 17% of net revenues, which was a decrease from 18% in the same period last year and 19% in the previous quarter.

General and administrative expenses for the first quarter of 2009 decreased by 3% to RMB41 million, or $6 million, from the same period in 2008 primarily due to the decrease of share-based compensation charges. General and administrative expenses remained relatively consistent with the previous quarter. Excluding share-based compensation charges, general and administrative expenses accounted for 6% of net revenues, which was a decrease from 7% in the previous period last year and was relatively consistent with the previous quarter.

Income from operations for the first quarter of 2009 was RMB135 million, or $20 million, which represented a 23% increase from the same period in 2008 and a 16% increase from the previous quarter. Excluding share-based compensation charges, income from operations was RMB162 million, or $24 million, representing a 13% increase from the same period in 2008 and a 9% increase from the previous quarter.

Operating margin was 34% in the first quarter of 2009, compared to 32% in the first quarter of 2008 and 30% in the previous quarter. Excluding share-based compensation charges, operating margin was 40% in the first quarter of 2009 compared to 42% in the first quarter of 2008 and 38% in the previous quarter.

Net income for the first quarter of 2009 was RMB121 million, or $18 million, representing a 23% increase from the same period in 2008, and remaining consistent with the previous quarter. Excluding share-based compensation charges, net income was RMB148 million, or $22 million, representing a 12% increase from the same period in 2008 and a 4% decrease from the previous quarter.

The effective tax rate for the first quarter of 2009 decreased to 18%, as compared to 28% in the same period of 2008 due to the application of the High and New Technology Enterprise preferential tax treatment to certain of PRC subsidiaries. The effective tax rate for the first quarter of 2009 increased from 2% in the previous quarter, primarily due to the full year benefit upon initial application of the High and New Technology status in the fourth quarter of 2008.

Diluted earnings per ADS were RMB1.79, or $0.26, for the first quarter of 2009. Excluding share-based compensation charges, diluted earnings per ADS were RMB2.18, or $0.32.

As of March 31, 2009, the balance of cash and short-term investment was RMB1.4 billion, or $202 million.

For the second quarter of 2009, Ctrip expects to continue the year-on-year net revenue growth of approximately 10% to 15%.

With that, Operator, we would like to open the line for questions.

Question-and-Answer Session

Operator

(Operator Instructions) And our first question comes from the line of Mike Olson with Piper Jaffray. Go ahead.

Mike Olson - Piper Jaffray

Good morning. Just a couple of quick questions -- can you talk about what you are seeing in hotel and air pricing so far in Q2 and what’s built into your guidance assumptions along those lines for Q2?

Jane Jie Sun

Sure. The Q2 pricing remains very consistent from a quarter over quarter basis. From a year-over-year basis, the price drop is still about 5% to 10% for hotels and 10% to 15% for air ticket.

Mike Olson - Piper Jaffray

And what’s typically the seasonal pattern for hotel and air pricing during Q2? Is pricing usually stronger or weaker in Q2 versus Q1?

Jane Jie Sun

Normally Q1 is the slowest season for the hotel business. As the weather is getting warmer, Q2 is normally better than Q1. This year, there is some uncertainty because the global economic crisis has impacted every country so we are monitoring the pricing very carefully. So far, I think the pricing from a quarter over quarter basis has been very consistent.

Mike Olson - Piper Jaffray

Okay. Thanks very much.

Operator

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

Richard Ji - Morgan Stanley

Good quarter. I have two questions; first, starting with the commission grade trends, and obviously the volume growth for your air ticketing has been pretty strong and I’m just curious about the commission rate as of now -- do you see a good expansion of your commission rate going forward? And also for the commission for air ticket as well as hotel room, do you expect recovery in the second half of this year?

Jane Jie Sun

Thanks, Richard. First of all, for hotel commission rate, it has been very stabilized at around 15% so the drop in commission per room, it was primarily driven by the price. On the air ticket, the price drop is about 10% to 15%. The commission rate is still maintained within 4% to 5% on the overall ticket price with 5% to 6% on the bare ticket. It’s probably trending at the lower end of the range rather than the middle of the range.

And going forward, I think so far the commission rate has been stabilized, based on our current visibility.

Min Fan

-- since the swine flu happened.

Richard Ji - Morgan Stanley

Sure. Thanks. That’s helpful. And my second question is regarding your packaged tour business -- obviously it is more [inaudible] than business travel, as evidenced by a very strong annual sales growth, and I’m just wondering about the discount level you are currently offering to the customer and when do you expect to scale back this cost? And also, what new products have you been developing and what is the plan going forward?

Min Fan

For the past Q1, although the business travel decreased because of the financial crisis and we still see quite strong performance of our leisure products, I think that this one is because of the overall, the country, the government, they provide [pricing] policies to promote domestic travel. And in the meantime, we have also provided some competitive package/products among our customers and I think in the Q2, we can still see the leisure customer will still be increased with our sales efforts.

And in terms of new products, we are working very hard with our partners to try to provide better hotel plus air flight products to our customers. I think in the Q2, the leisure market will be still growing.

Richard Ji - Morgan Stanley

Thanks.

Operator

Our next question comes from the line of Paul Keung with Oppenheimer.

Paul Keung - Oppenheimer

My question is kind of on the outlook for your business. You suggested that the leisure business is improving -- the packaged tours and the business travel are still growing fast in your core business, so I was wondering sort of in your guidance then, is it -- where you expect to see possibly the airline business being a bit slower than we saw in first quarter and where do you expect it to be faster? Just sort of reconcile why the guidance is what it is.

Jane Jie Sun

We gave a very prudent guidance at around 10% to 15%. That implies probably the same price drop on a year-over-year basis, so for hotel, the price drop we assume is still 5% to 10% and volume growth is somewhere around a similar level as this quarter.

For air ticket, the price drop is around 10% to 15% and the volume growth is somewhere around 30% because the base for our air ticketing is growing bigger. And for packaged tour, it’s somewhere around 10% to 20% increase for the second quarter. So if you aggregate everything together, that should give you around 10% to 15% year-over-year growth.

Paul Keung - Oppenheimer

Got it -- and the next question is on the marketing efficiency -- obviously you have seen -- consistently you guys have [inaudible] improved your marketing spend as a percent of revenues and also if you measure on a volume basis, it looks like it genuinely has been improving. Has there been any change in improvement of how much your business comes in repeat, or is there any particular marketing channel that you’ve been very successful at improving the efficiency of?

Jane Jie Sun

The repeat customer remains still around 80% of our revenue still from repeat customers, so that has been very consistent. During the tough time, we control our costs very carefully and prudently so every channel we put our money in has to generate maximized return, so we -- every team is tasked to maximize the investment or return for their -- for the sales and marketing dollars and so far we have been very successful.

Operator

Our next question comes from the line of Eddie Leung with Merrill Lynch.

Eddie Leung - Merrill Lynch

Good morning. I have a couple of questions -- the first one is did you guys comment on the competition between airlines? Especially, have we seen a decline in deep discount tickets recently?

Min Fan

In terms of the airlines, and I should say we are a very good supplementary channel for all the airlines in China and we have very good cooperation among all the airlines and so I think that this trend is still very healthy.

Eddie Leung - Merrill Lynch

And how about the deep discount tickets? Have you seen a decline in the number of deep discount tickets after the government implemented some new regulations or policies on discounts?

Min Fan

I think the bare ticket price declined 10% to 15% in Q1 compared to the same period of last year and also the fuel surcharge was removed by the government so -- which is the fuel charge is around RMB100 in Q1 2008, so in total you can see the customer can enjoy the 15% to 20% lower price than last year. So I think the airline price decline is mainly because of the -- from the airline company policies and from the government policy.

So of course we -- go ahead.

Eddie Leung - Merrill Lynch

One other question is could you also share with us your views on the hotel supply going forward into the year? Are we going to see more five star or four star hotels, or more economic change, or two star and three star hotels?

Min Fan

Right now in the hotel market, because of last year’s Olympic Games, you can see there are more five star hotels emerge from the market, and as well as the budget hotel chain growing very fast. So you can see our partner hotels increased a lot from the 6,000 last year at the same time to now more than 8,000, so our total hotel pool is growing very significantly and this gave us a very good position to work with our hotels and to provide more products to our customers. So I think for the hotel markets, it’s a very good sign because our customer will have more choices and also more hotels and we can get more allotment among those hotels and then we can provide better service satisfaction for our customers.

Eddie Leung - Merrill Lynch

So are we going to see the increase in partner hotels to be the same in the upcoming few quarters, meaning that we will see a positive trend on that front?

Min Fan

I think if you see the hotels in Shanghai, around Shanghai, there would be still quite some hotels would be built because of the Expo next year and around the Beijing area, I think the new hotels would be not so many as before because most of the hotels would have been built around the Olympic Games. So I think in the Eastern China area, we still can see quite some new hotels coming in the coming years.

Eddie Leung - Merrill Lynch

Got it. That’s very helpful. Thanks.

Operator

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

Ming Zhao - SIG

Thanks for the call and good morning. I have a question -- first question on the hotel volume. If we look at the hotel volume in first quarter, it was up by 17% versus fourth quarter, 11%. It doesn’t seem that the macro environment is better in the first quarter so why the hotel volume was better in the Q1 than Q4? That’s my first question.

Min Fan

For the hotel volume, I should say with more hotels will cooperate and this will help for us to gain more volume, this is one reason. And the second, as we just said, in the Q1 we do see -- we did see quite significant growth in the leisure market, so I think for this quarter, we did acquire quite some leisure customers, as you see the new customers in Q1 we gained a lot. So I think this also helped to promote our hotel volume.

Ming Zhao - SIG

Okay, that’s good. My second question is on the air ticketing volume -- if we compare your ticket volume growth with the airline carrier’s data, usually you are [outperformed] by a very significant margin. If we compare the airline volume in the fourth quarter versus Q1, the year-over-year growth accelerated in the Q1 but if we look at your air ticketing volume in Q4 versus Q1, you are at the same growth rate. So why didn’t we see better growth in the air ticketing volume in the first quarter?

Min Fan

I think for the tickets volume, because most of our customers are business travelers and in the first quarter, still the business travel still impacted a lot, so in that way, we did not acquire more -- did not get [inaudible] of the airline volume and also because of the economic situation, the long haul travel decreased a lot, so -- also we think the business travel will be impacted a lot. So in the meantime, you can see the leisure travel [inaudible] will be increased, because our total, our major business, our air business volume generates most from our business travelers, so I think this is one of the reasons.

Ming Zhao - SIG

All right, that’s very helpful. Thank you.

Operator

Our next question comes from the line of Cathy Chen with Goldman Sachs.

Cathy Chen - Goldman Sachs

Thanks for the call. I have two questions -- on the hotel side, can you talk a little bit more about the REVPAR trends that you saw in the first quarter, as well as the occupancy trends? And then how that is trending so far in the second quarter?

And then the second question is on the airline side -- given the better airline volumes that we are seeing, can you share with us if you think that you can continue to get some of the commission bonuses from the airlines that you received in the past?

Min Fan

Sure. Hotel revenue par for the Q1 is about -- around a 5% to 10% decrease if you compare this quarter versus last year, and from a quarter-over-quarter basis, it’s very stabilized at that level.

For air tickets, I think the volume is growing strongly. So far, the commission rate has been maintained at around 4% to 5% over the total ticket price and 5% to 6% over the bare ticket volume, and it has been very stabilized based on our current visibility.

Cathy Chen - Goldman Sachs

Okay, thanks. If it’s okay, if I can add another follow-up question to a previous question regarding the sales and marketing, it looks like there was a pretty big drop in the first quarter -- how should we think about that trend going forward? Is it still a sustainable level? And then how does that flow through to the operating margin trends that we should see in the second quarter?

Jane Jie Sun

Sales and marketing, we normally maintained it at somewhere between 17% to 20%. That’s a normalized range. For Q1, it’s a very slow season during the year so normally Q1 sales and marketing, we control it very tightly but the normalized range should be somewhere between 17% to 20%.

Cathy Chen - Goldman Sachs

Okay. Thank you.

Operator

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

Marisa Ho - Credit Suisse

I have two quick follow-up questions, please -- the first one is Min just mentioned that during the first quarter, you saw a significant decrease in long haul travel because of the economy. So when we are looking at the airline ASP being down by 10% to 15% on a year-on-year basis, is it more a reflection of the mix shift from the long haul tickets to short haul tickets or is that more a reflection of the like-to-like reduction in the airline prices?

Min Fan

Well, we get our average price, I think it reflects many things. First of all, it reflects the decrease in the long haul flight. Secondly, it also reflects the trend down from, for example, first class travelers to economy class. And thirdly, the airlines also voluntarily cut the price. So it’s a mix of many factors, but definitely the reduction in the long haul travel is one of the factors why the price dropped.

Marisa Ho - Credit Suisse

Great, and you also mentioned you successfully launched some deeply discounted packaged tours and they were received very well by your customers. To what extent has that impacted your margin for the packaged tour business?

Min Fan

I think in fact, for the packaged tour business for the past two quarters, we did very well in the short haul packages and also if you -- just a few questions asked about why we have more hotel room nights and maybe not so obvious an increase in the airline tickets, and we do see a trend that during the weekends, more customers, leisure customers, so normally if they come from Shanghai to nearby cities, then normally they would not take air flights. They will just drive there or they will take trains there. So you can see we can see the weekends room nights will be increased.

And in terms of the margin, in fact, for those short to middle packages, the margin is not lower. It meets our expectation. So it’s no problem for us to develop more short-haul packages.

Marisa Ho - Credit Suisse

Would it be correct to say that your hotel partners probably would be more than happy to work with you? And to that extent, they will be able to give you very good prices, so you are not necessarily absorbing the margin shock yourself?

Min Fan

That’s true, yeah.

Marisa Ho - Credit Suisse

That’s great. Thank you very much.

Operator

Our next question comes from the line of James Li with Sterne, Agee Capital.

James Li - Sterne, Agee & Leach

Thanks for taking my question. Can you guys talk about the world expo 2010? How much traffic do you expect coming to Shanghai next year because of that event? And basically how are you positioned to benefit from this trend? Are you participating in any type of government programs to help you accelerate the business activities? And maybe you can help us understand a little bit how different is that versus the Olympics of 2008 in your view? Thank you.

Min Fan

I think that next year, the World Expo will be a very good opportunity for Ctrip and also for all the travel industry to gain more business. According to the government expectations, or according to their projection, the total visits will be around 70 million people and time will be around 180 days, so nearly half a year. So I should say this will be very positive for the travel business because if you compare Expo with the Olympic Games, because the Olympic Games is just one month and you will get very strong traffic and restrictions and also some kind of restriction. But for the Expo, the government will definitely try to get more and more visitors. So I think we will try our best to service our customers during this big event.

Right now we are working very closely with the government, with the organization -- we will try to get the right to sell the tickets for Expo, and also we are developing the necessary packages for the Expo. And also we are working very hard to upgrade our English website. If you check our English website right now, right now it’s more user friendly and more information for destinations, for all the travel know-how in China. So definitely we are anticipating we can get quite some new customers, not only from the mass market as well -- also we will get some volume from abroad.

James Li - Sterne, Agee & Leach

Now if I could ask a follow-up question, you talked about the inbound versus domestic traffic -- can you care to guesstimate the impact of what Expo inbound versus domestic? And also, last question here, regarding substitution to economy chain -- maybe Jane, you can answer that -- how much are you baking that into guidance in the second quarter? Thank you.

Jane Jie Sun

So the first question is inbound travelers -- inbound is going to be depending on a couple of factors. First of all, I think that how attractive the World Expo is for the foreign visitors -- based on the normalized projection, the foreign visitors and business people should show some interest coming to China but it’s very hard for us to see really how many will be coming. And also, it’s going to depend on the worldwide economy. For this year, I think the inbound travelers definitely decreased quite significantly because particularly for the visitors from U.S. and Europe, the economic crisis has impacted their travel budget. So whether or not the economy will rebound next year will impact the volume from outbound to inbound. But our team will do our best to take advantage of this event to attract as much as possible the inbound volume and hopefully they will become Ctrip users also. So that’s the first thing.

Your second question is the economic chain hotel, how are they going to support the events -- is that right, James?

James Li - Sterne, Agee & Leach

No, no -- I was referring to your second quarter guidance. Clearly we’ve probably seen some substitution into economy chains and therefore that may lower your per room rate based on the commission that you generate. I was wondering if you are baking any of that into your guidance in the second quarter, or how are you doing it?

Jane Jie Sun

Sure. I think the economy chain hotel definitely grows very fast because it provides good value for the travelers. However, in terms of revenue contribution, it’s much less than 10%, so it’s not significantly impact our revenue mix. So yeah, the impact is based in our guidance but the impact is not too too significant.

James Li - Sterne, Agee & Leach

Thank you so much.

Operator

Our next question comes from the line of Ashish Thadhani with Gilford Securities.

Ashish R. Thadhani - Gilford Securities

Yes, good morning -- nice quarter. In the past, you have emphasized that a vast majority of your hotel reservation revenue is derived from bookings at three to five star hotels where the commission per room is the highest and room nights have grown very nicely in recent years.

My question has to do with the Home Inns investment. I think it’s -- cumulative now is about $90 million. That investment in the economy segment, is it at odds with this stated positioning of the past?

Jane Jie Sun

It the past, I think before the economy chain hotel gets too much momentum, I think if we just cover three star hotels and above, we should be able to satisfy our customers’ needs very well. But recently, I think the economy chain hotel has grown very fast and when we listen to our customers’ demand, we can see that the economy hotel provides very good value for the customer. And our product mix should follow the customer demand. If we ignore that part of the demand, the customer service level will be decreased, so that is the reason why we have expanded our product coverage to not only cover three star and above but also cover economy chain hotels and two star hotels when we enter into the third tier cities and second tier cities. That’s a very important and strategic move for us.

Ashish R. Thadhani - Gilford Securities

So in the next several years, where would that split stabilize between three to five star and economy chains, long-term?

Jane Jie Sun

Right now I think the revenue -- the majority of the revenue still are three star and above. Economy chain hotels still is below 10%.

Going forward, we will monitor it very carefully. It’s hard to see where it will be in the -- five years from now but based on the chain, I think both sides will grow very fast and we will work hard to try to capitalize the growth on both sides.

Ashish R. Thadhani - Gilford Securities

Okay. Thank you.

Operator

Our next question comes from the line of Elinor Leung with CLSA.

Elinor Leung - CLSA

Thank you for the call. I have two questions -- the first question is regarding your 2Q [inaudible] -- do you think that -- the guidance is better than expected so do you expect it is still supported by the leisure travel or do you see some improvement from the business activity or business travel that is going to give you a better growth for 2Q?

And the second question is regarding your investment in your Home Inns -- you increased your stake in Home Inns. What is the revenue or earnings contribution from Home Inns right now and how do you feel it will be quite meaningful revenue or earnings from that investment?

Jane Jie Sun

The guidance of 5% to 10% has contemplated a couple of factors -- first of all, it’s the normal seasonality. When the weather is warmer, the normal seasonality is that the Q2 is a little better than Q1. It also has taken into consideration of the current uncertainty in the economy because the worldwide economy still prevents some uncertainty, so that has been taken into consideration also.

Thirdly, we also have been monitoring the swine flu impact because we do not know how that is going to impact our business, so our guidance is prudent guidance to take into consideration of the possible increase during the Q2 and also possible impact from negative factors, such as swine flu and also the worldwide economy.

Your question secondly on the Home Inns, right now we are at 18%, so we are going to use an equity method to pick up 18% of their net income into our P&L. If you look at their last quarter’s P&L, it is very insignificant. Their net income is less than 1 million, so if you pick up 18%, it’s only about 180,000 to our P&L, so we do not expect it is going to materially impact our income statements.

Elinor Leung - CLSA

Thank you.

Operator

Our next question comes from the line of Candy Wong with Nomura.

Candy Wong - Nomura

Jane, a couple of questions -- first of all, your tax rate -- what do you expect the effective tax rate will be in the second quarter and for the rest of the year? And second about the commission rates for the airline, from the airline companies -- it seems like that this quarter, the growth, the overall airline ticket growth is much better than the fourth quarter last year. But it seems that the commission rate is continued on the low end of the range, so it looks a bit weird. What is the expectation for the commission rate for the rest of the year? Do you still expect in the low end of the range?

And third about your investment in Home Inns -- what would you [inaudible] to maximize synergies with Home Inns for let’s say the next two or three years? Thank you.

Jane Jie Sun

Thanks. First of all, the tax rate -- the tax rate for Q2 is around 15% to 17% excluding share-based compensation and around 18% to 20% if you include the share-based compensation.

Air ticket, the volume growth for the industry for Q1 was strong but the price decreased quite significantly anywhere between 10% to 15%. So that is the reason why per ticket, the rates dropped.

And on the commission rate, so far our commission rate is still maintained at the normalized level, which is 4% to 5% on the overall ticket and 5% to 6% on the bare tickets. That range is stabilized. It’s geared towards the lower end of the range. So far I think that range should be very stabilized based on our current visibility.

For Home Inns investment, I think first of all, for Q1, we only had less than 10% shares, so for Q1 it’s a cost accounting method. For Q2 on, it’s an equity method -- we are going to pick up 18% of their bottom line but since their bottom line is very small, we do not expect it is going to materially impact our P&L either. And in the near future, we do not have any plan to consolidate Home Inns.

Now, in a strategic value, I think mainly we are going to try to increase efficiency through similar cooperation with them, so that I hope addresses your question.

Candy Wong - Nomura

Thank you.

Operator

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

Chris Zee - BNP Paribas

Good morning. Congratulations on this very strong set of results. I have some follow-up questions -- first of all, in the opening remarks, it was mentioned or highlighted, that’s part of the revenue growth [segment] was boosted because of the government led policies giving out the travel coupons. So on this, what do you reckon the leisure versus the business travel mix, both for the hotel as well as for the air ticketing side? This is the first part of my question.

And the second part of my question also relates to that -- is for the 10% to 15% growth guidance for second Q, how much do you reckon would also be coming from leisure? And then I have a follow-up question on the cost side. Thanks.

Min Fan

Regarding your first question, I think in the Q1, we do get quite positive feedback on the customers because Ctrip is working with a different government, different city governments to promote the travel coupon and travel tickets. For example, we work together with the [Hangzhou] Tourism Bureau to distribute those tickets among our customers and more and more later customers will be attracted and they will book Ctrip hotels to stay in [Hangzhou] and nearby cities to enjoy their weekend or enjoy their holidays. And also, it is because in June, there is a China -- there is the Golden Holiday in China and there are more and more leisure customers will be, will book products by Ctrip. So in this Q1, we do see the quite significant [inaudible] in terms of leisure markets.

Chris Zee - BNP Paribas

Okay. And how is the traction on the Taiwan segment so far? Obviously the [inaudible] relations has improved. Are you seeing more traction for bookings to Taiwan?

Min Fan

I think Taiwan, because right now Taiwan, we lifted the travel restriction late last year and the chance is there and the demand is very huge but still I think this part of the business will be a process of a step-by-step process because of the -- you know, the flight capacity and because of the -- you may know, right now the prices are still not so cheap, so of course they already decreased a lot compared with the indirect flight but still the price is at the middle to high end.

So we can see the trends there and we anticipate the volume will be increasing at a very stable rate in the years to come.

Chris Zee - BNP Paribas

Okay. Just one final question on the cost side -- should we expect in the second Q and going forward the sales and marketing expense, as well as the SG&A, to increase at a slower pace compared to revenue? And what should we think about for the product development expense? Should we think about that expense line to grow in line with the revenue?

Jane Jie Sun

I think we normally control our costs very prudently. For product development, the normalized range is somewhere between 14% to 16%, 17% -- 14%, 15% probably at the current range is stabilized. Sales and marketing, we have already discussed, anywhere between 17% to 20% is the normalized range. G&A, 7% to 8% is the normalized range. We are hoping that we can grow our top line and we can control our costs at least in line with revenue growth, not to let the cost to outpace the revenue growth.

Chris Zee - BNP Paribas

Okay, thanks.

Operator

Our next question comes from the line of Martin Ji with Clearbridge Advisors.

Martin Ji - Clearbridge Advisors

Thank you for taking my question -- my question is on Home Inns investments. I just wonder if you can help us better understand the rationales -- is it sort of an experiment, for lack of a better word, for you guys to try to backward integrate into your suppliers, or do you think longer term, the lower budget hotel segment is better than the higher budget, so that’s why you want to get into Home Inns? What is the rationale for the investment?

Min Fan

I think with some stakes in Home Inns, for Ctrip we can better improve our efficiencies through seamless cooperation with Home Inns and also we -- yeah, we can obtain more allotment and secure more service satisfaction from our customers.

As you may know, in China the budget hotel chains are growing very fast. I think maybe Home Inns can be one of the -- will be one of the largest hotel chains in China. If you guess which hotel chain will exceed 1,000 hotels, I think probably Home Inns in five years or some years will achieve this scale. So for Ctrip, we work closely with Home Inns, I think it will be better improve our customer service level and to increase our efficiencies and to decrease the cost among -- between the -- among the corporations.

Martin Ji - Clearbridge Advisors

So it sounds like it is more of getting into that attractive market segment versus trying to integrate a supplier -- is that right?

Min Fan

Yes.

Martin Ji - Clearbridge Advisors

Okay. Thank you.

Operator

Ladies and gentlemen, our final question comes from the line of Paul Keung with Oppenheimer.

Paul Keung - Oppenheimer

I think this was asked but I’ll think of another one -- one of themes today is obviously leisure travel and weekend travel. I was wondering if you see any difference in behavior in terms of how those customers are booking. In other words, historically if bookings are done online [inaudible] call center, has that percentage changed? Are you finding that more and more of your customers are trying to book online, independently self-booking?

Min Fan

Yeah, we do see the different booking behaviors among business travelers and many leisure travelers and for our leisure travelers, for our leisure customers, they are more tending to book online. For leisure products booking mix, we have more than 60% customers who will book online versus more than 30% business travelers will book online. So in that way, I think we can address our customer in a better position because with our better [inaudible] travel website in China, Ctrip enjoys the very complete travel information so this will help our customer to surf online and also they will tend to book online and we hope with the skill increased, we will try to decrease our costs in the package business line and I think in the years to come, we can see the 3G and those new technologies will be more mature. We will see the online booking ratio of leisure products will still be increased.

Paul Keung - Oppenheimer

Okay, and how fast did your web traffic grow this quarter and how fast did your user views grow in terms of customer views throughout this quarter?

Min Fan

You mean the traffic, the page view traffic?

Paul Keung - Oppenheimer

Yeah, page view traffic and also, were you able to get -- were your customers adding more user views this quarter? In the past you have said they have grown quite quickly, much faster than your [inaudible].

Min Fan

In Q1, our page views year-on-year increased very significantly and even though we cooperate with different tourism bureaus, we reached our page view peak, historic high, among certain days. So we do see with our very comprehensive content and page view volume is increasing very significantly.

Paul Keung - Oppenheimer

Great. Okay, thank you.

Operator

Ladies and gentlemen, that does conclude the time that we have available for questions and answers. Does management have any closing remarks?

Jane Jie Sun

Just thanks for everyone for attending this conference call and we will see you next quarter. Thank you very much. Bye bye.

Operator

Ladies and gentlemen, thank you for your participation in today’s conference. That does conclude the presentation. You may disconnect. Have a wonderful rest of the day.

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Source: Ctrip.com Q1 2009 Earnings Call Transcript
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