Ctrip.com Q2 2009 Earnings Call Transcript

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

Q2 2009 Earnings Call

August 4, 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

Catherine Leung - Citigroup

Aaron Kessler - Kaufmann

Wendy Wong - RVS

Mike Olson - Piper Jaffray

Richard Ji - Morgan Stanley

Paul Keung - Oppenheimer

James Li - Sterne, Agee & Leach

Marisa Ho - Credit Suisse

Candy Hong - Nomura

Ming Zhao - SIG

Cathy Chen - Goldman Sachs

Damien Horitz - UBS

Eddie Leung - Banc of America

Elinor Leung - CLSA

Chris Zee - BNP Paribas

Dick Wei - J.P. Morgan

Operator

Good day, ladies and gentlemen, and welcome to the second 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, Krista. Thank you, everyone, for attending Ctrip's second quarter 2009 earnings conference 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 second quarter of 2009 as well as outlook for the third 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. We are proud that our team delivered strong results in the second quarter of 2009. In Q2, our net revenues grew 27% year over year and net income grew 33% year over year. We consolidated ezTravel's financial statement during this quarter. Excluding net revenues attributable to ezTravel, our net revenues grew 21% year over year and net income grew 32% year over year.

We are very excited about the opportunity to work with ezTravel more closely going forward. With this strategic partnership, we will be able to leverage both of our resources and provide our customers the best packaged tour service [across the street] in the future.

Our hotel supply network continued to expand at a rapid pace, with approximately 8,900 hotels by the end of June 2009, compared to approximately 7,000 by the same period last year. The number of hotels with a guaranteed allotment rooms further increased and accounted for approximately 70% of the total supply.

By the end of the second quarter of 2009, Ctrip has reached to 7.5 million active customers compared to 5 million by the same period of last year. During Q2, Ctrip has launched a new service called Ctrip Emergency support. This service leverages our expansive network in China and our seamless operation system to provide a nationwide assistance to our customers during emergencies when they travel with Ctrip.

Along with our national disaster relief fund and other quality guarantee programs, we are committed to [inaudible] our customer experience. Ctrip is the first travel agency [who released] its own service standards of packaged tours. It differentiates ourselves from other agencies by disclosing transparent information of accommodations, itineraries, and [inaudible] and [shopping] arrangements. Ctrip is dedicated to best protect customers’ rights and interests.

In Q2, Ctrip initiated a campaign called late checkout, which allows our customers to have more flexibility when they stay with more than 800 Ctrip selective hotels. Our hotel partners and customers have both responded to the campaign positively and this campaign helps our hotel partners promote their services and bring our customers the best values.

In Q2, we launched a new channel called Air Plus Hotel, which enables customers to combine air ticket booking and hotel bookings together to get lower prices. This system enriched product selections for our leisure travelers and provides more efficient cross-sale opportunity for our future revenue growth as well.

Looking forward, our team will keep up and continue to deliver excellent values to our customers, partners, and investors.

Now I will turn to James for an industry outlook.

James Jianzhang Liang

Thanks, Min. We are seeing early signs of recovery in the economy in China, although there is some uncertainties in the near-term, we believe from a long-term perspective the fundamentals are healthy for the growth of the Chinese economy.

Business travel will be supported by increasing domestic consumption and investment and leisure travel will also increase as personal income increases in the long run.

Ctrip is going to benefit from the growth of the overall travel industry. Year 2009 is our 10th anniversary. We are pleased for what we have achieved. However, we believe it is more important for us to focus on the future. We continuously strengthen our leadership and existing businesses and we will grow prudently and strategically into new areas with our partners, customers, and employees.

This is an exciting moment for China travel industry and we are well-positioned to start a new era of Ctrip in the coming 10 years.

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

Jane Jie Sun

Thanks, James. I am very pleased to report the solid results in the second quarter of 2009. Net revenues were RMB476 million, or $70 million, for the second quarter of 2009 up 27% year over year.

During the second quarter of 2009, Ctrip consolidated the financial statements of ezTravel, a Taiwan based on-line travel service provider. Excluding net revenues attributable to ezTravel, Ctrip's net revenues were RMB453 million, or $66 million, up 21% year-on-year.

Hotel reservation revenues amounted to RMB227 million, or $33 million, for the second quarter of 2009, representing a 16% increase year-on-year and a 21% increase quarter-on-quarter. Excluding revenues attributable to ezTravel, Ctrip's hotel reservation revenues were RMB223 million, or $33 million, representing a 14% increase year-on-year, primarily driven by a 26% increase in hotel reservation volume, which was partially offset by a decrease in commission per room. Excluding revenues attributable to ezTravel, Ctrip's hotel reservation revenues increased by 19% quarter-on-quarter, primarily driven by a 24% increase in hotel room reservation volume, which was partially offset by a decrease in commission per room.

Air-ticketing revenues for the second quarter of 2009 were RMB222 million, $33 million, representing a 32% increase year-on-year and a 20% increase quarter-on-quarter. Excluding revenues attributable to ezTravel, Ctrip's air-ticketing revenues were RMB215 million, or $31 million, for the second quarter of 2009, representing a 27% increase year-on-year, primarily driven by a 42% increase in air-ticketing sales volume, which was partially offset by a decrease in commission per ticket. Excluding revenue attributable to ezTravel, Ctrip's air-ticketing revenues grew 17% quarter-on-quarter, primarily driven by increases in air-ticketing sales volume and commission per ticket.

Packaged-tour revenues for the second quarter of 2009 were RMB36 million, or $5 million, representing a 51% increase year-on-year and a 5% decrease quarter-on-quarter. Excluding revenue attributable to ezTravel, Ctrip's packaged-tour revenue for the second quarter of 2009 increased by 13% year-on-year, due to the increase in the leisure travel volume. Excluding revenues attributable to ezTravel, Ctrip's packaged-tour revenues decreased by 28% quarter-on-quarter, primarily due to the impact of H1N1 flu and the seasonality of leisure travel.

Gross margin was 77% in the second quarter of 2009, compared with 79% in the same period in 2008 and 78% in the previous quarter.

Product development expenses for the second quarter of 2009 increased by 34% to RMB76 million, or S$ 11 million, from the same period in 2008, and by 20% from the previous quarter, primarily due to the increase in product development personnel.

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

Sales and marketing expenses for the second quarter of 2009 increased by 21% to RMB83 million, or $12 million, from the same period in 2008 and by 17% from the previous quarter, primarily due to the increase in sales and marketing activities and personnel. Excluding share-based compensation charges, sales and marketing expenses accounted for 17% of the net revenues, which was consistent with that in the same period last year and in the previous quarter.

General and administrative expenses for the second quarter of 2009 increased by 6% to RMB45 million, or $7 million, from the same period in 2008 and 10% from the previous quarter primarily due to the increase in personnel. Excluding share-based compensation charges, general and administrative expenses accounted for 6% of the net revenues, which was consistent with that in the same period last year and in the previous quarter.

Income from operations for the second quarter of 2009 was RMB164 million, or $24 million, representing a 29% increase from the same period in 2008 and a 21% increase from the previous quarter. Excluding share-based compensation charges, income from operations was RMB191 million, or $28 million, representing a 20% increase from the same period in 2008 and an 18% increase from the previous quarter.

Operating margin was 34% in the second quarter of 2009, remaining consistent with the second quarter of 2008 and that of the previous quarter. Excluding share-based compensation charges, operating margin was 40% in the second quarter of 2009 compared to 42% in the second quarter of 2008, and remained consistent with that in the previous quarter.

Net income attributable to Ctrip's shareholders for the second quarter of 2009 was RMB159 million, or $23 million, representing a 33% increase from the same period in 2008, and a 31% increase from the previous quarter.

Net income attributable to Ctrip's shareholders for the current quarter includes equity income of RMB7 million, or $1 million, from the Home Inns' investment, which represents proportional equity pick-up of its results of operations from the third quarter of 2008 through the first quarter of 2009 as required by applicable accounting guidelines.

Excluding share-based compensation charges, net income attributable to Ctrip's shareholders was RMB186 million, or $27 million, representing a 23% increase from the same period in 2008 and a 25% increase from the previous quarter.

The effective tax rate for the second quarter of 2009 decreased to 18%, compared to 26% in the same period of 2008 due to the application of the High and New Technology Enterprise preferential tax treatment to certain of Ctrip's PRC subsidiaries. The effective tax rate for the second quarter of 2009 remained consistent with that in the previous quarter.

Diluted earnings per ADS were RMB2.27, or $0.33, for the second quarter of 2009. Excluding share-based compensation charges, diluted earnings per ADS were RMB2.66, or $0.39.

As of June 30, 2009 the balance of cash and short-term investment was RMB1.2 billion, or $182 million.

For the third quarter of 2009, Ctrip expects to continue the year-on-year net revenue growth of approximately 25%. This forecast reflects Ctrip's current and preliminary view, which is subject to change.

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

Question-and-Answer Session

Operator

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

Catherine Leung - Citigroup

I have two questions. The first one is can you please update us on your margin outlook for the second half of ’09 and whether you plan to increase your cost base in terms of call center product development and marketing spend more materially as the market demand has been coming back?

And the second question is on Home Inns, as you mentioned, you had included your proportionate share of the third quarter ’08 through first quarter ’09 earnings as equity income rather than of their second quarter ’09 earnings. Can you please elaborate more on this accounting? Thank you.

Jane Jie Sun

Sure. Let me address the first question first. First of all, our company controls the costs very tightly. Normally we would not allow expense to grow faster than the revenue so gross margin at the current level is very stabilized. For the second half of the year, we expect the gross margin to be somewhere around 76% to 78%, within that range. Operating margin should also be stabilized at around 38% to 40% excluding share-based compensation charges.

And then on your second question on Home Inns, let me address the accounting treatment in five steps. First of all, before Q2 2009, we used cost accounting method because our shareholding was below 10%. Secondly, starting Q2, we increased our share holding in Home Inns and therefore we have to use the equity method to pick up the income from Home Inns’ results. And thirdly, because Home Inns’ financial statements may not be available before we release our earnings, we elect to use one quarter lag method to pick up their net income as permitted by APBAT.

And fourthly, for the current quarter, we therefore pick up the prior period earnings, which amounts to $7 million from the third quarter of 2008, which is the first time we got Home Inns shares and we picked up all the earnings up until last quarter, which was Q1 2009.

And lastly, going forward, we will continuously and consistently use one quarter lag method to pick up Home Inns’ equity income, so we will pick up the Q2 results in our Q3 financials. I hope that helps.

Catherine Leung - Citigroup

Yeah, that’s very clear. Thank you.

Operator

Your next question comes from Aaron Kessler with Kaufmann.

Aaron Kessler - Kaufmann

I have a couple of questions. First on the pricing, maybe you could just update us on the pricing and the commissions in Q2 for both air and hotels and outlook for Q3. And also just on the guidance for Q3, it looks like it implies a sequential decline from Q2 to Q3. I’m just wondering if that’s conservatism or are you seeing something in the marketplace that makes you a little more cautious on Q3 guidance? Thank you.

Jane Jie Sun

Sure. On the pricing, for the hotel business in Q2, the price drop is somewhere around 10% and on air ticket, the price drop is also approximately a 10% drop on a year-over-year basis. On a quarter-over-quarter basis, it is very stabilized.

On the guidance, I think 25% guidance is a conservative guidance. We still remain prudent and to monitor the progress on H1N1 flu and also we have no control on the general economy but hopefully we see the market be stabilized and the China travel industry being stabilized. But you are right, the 25% guidance is a conservative guidance.

Aaron Kessler - Kaufmann

Great. Thank you, Jane.

Operator

Your next question comes from Wendy Wong with [RVS].

Wendy Wong - RVS

Good morning. Thanks for taking my questions. I have two questions. First is mainly regarding your ezTravel stake -- when did you increase your stake in the ezTravel and what is your current stake in that business? And also actually Taiwan travel was [inaudible] last year -- why did you see a significant pick-up, especially in Q209? And excluding the Taiwan business contribution, what kind of organic growth, year-over-year growth actually you implied in your third quarter ’09 guidance? And I have another question. Thank you.

Jane Jie Sun

Sure. The ezTravel, we increased our stake in Q2 2009. That’s the reason we started to consolidate ezTravel's financials into our financials starting in Q2 2009. I think the travel restriction is being lifted and both governments are working very closely to open up the straight to the people from Mainland to Taiwan and from Taiwan to Mainland China, so we look at it as a good opportunity so that people can travel freely and they get to see many places and there will be a lot of direct flights in between Mainland China and Taiwan, which will be positive for the travel industry. So by aligning ourselves with ezTravel, we hope both teams can service the customers on both sides very well and to increase the comprehensiveness of our product and offer very good products to the customers in both Mainland and Taiwan.

Wendy Wong - RVS

So in Q209, ezTravel contributed $23 million to your revenue. If excluding ez's contribution, what kind of organic growth actually you implied for Q3?

Jane Jie Sun

Sure. I think as we disclosed in our press release, for Q2 excluding ezTravel's contribution, our organic growth was about 21% year over year. In Q3 in our guidance, ezTravel probably among 25%, they represent about 5%.

Wendy Wong - RVS

Okay. My second question is regarding your hotel business and this is another quarter that we see the sequential decline in the hotel room rate and account rate is probably around RMB63 per room night. Should we see this as a [inaudible] that we have some initial signs of the economic recovery and the travel rebound?

Jane Jie Sun

Wendy, the last part of your question was kind of unclear -- do you mind repeating it?

Wendy Wong - RVS

Sure. I’m just trying to get a sense of whether this quarter’s hotel room rate is actually the bottom because this quarter we see another quarter of sequential decline but meanwhile, we have seen a strong pick-up in hotel volume and also the initial signs of the economic recovery.

Min Fan

I think for the hotel side, the room rate, average room rates in the first quarter of this year probably hit the historic low in 10 years and I think in Q2, still we see the hotel room rate, if you compare this year and last year, still you see the decrease. So for the Q3, we hope total economic situation can be stabilized and we hope the hotel room rate can be stabilized but I think still it’s up to the macroeconomic situation and so far we did not see a very strong pick-up.

Wendy Wong - RVS

Okay, thank you.

Operator

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

Mike Olson - Piper Jaffray

This was a strong quarter no matter how you slice it but I just want to be crystal clear -- did the original guidance of 10% to 15% growth that you had for Q2 include or exclude ezTravel revenue?

Jane Jie Sun

Excluding ezTravel revenue.

Mike Olson - Piper Jaffray

Okay, and then secondly, what are you anticipating for hotel and air ticket pricing in Q3 on a year-over-year and sequential basis?

Jane Jie Sun

I think on a sequential basis, hotel price probably stabilizing. As Wendy indicated, the volume is increasing. We haven’t seen a further decrease from Q2 to Q3, so on a sequential basis, hotel is stabilizing.

Air ticketing price, July was a little bit better than June but August -- or it’s too early to tell, so we are monitoring them very carefully.

Mike Olson - Piper Jaffray

Okay, so you would anticipate maybe air ticket up at least sequentially?

Jane Jie Sun

For July, it was a little bit increasing but August, it’s too early to tell yet, so --

Mike Olson - Piper Jaffray

Okay, thanks a lot.

Operator

Your next question comes from Richard Ji with Morgan Stanley.

Richard Ji - Morgan Stanley

I have two questions -- the first question is regarding your hotel segment. Can you provide us with some breakdown between the budget hotel and also your high-end star rated hotels and what is the roughly revenue breakdown over there? And also I’m just curious about whether you have seen increasing revenue contribution from Home Inns and more importantly, as the economy starts to stabilize and also show signs of recovery, have you seen your customers start to trade off to high-end hotels? And I have a follow-up.

Jane Jie Sun

Sure. If you look at our revenue pool, I think our revenue is fairly evenly split between different stars of hotels. Five star, four star, three star hotels and budget hotels. We do not have revenue concentration in one settlement versus another, so it is very evenly spread out.

In terms of the growth rate, I think the second tier cities represent very strong growth compared to first tier cities. First tier cities are very international and as the inbound travelers are decreasing their travel volume, these hotels got hit the most.

But if you move further inland to second and third tier cities, these cities are mainly relying on the domestic spending and therefore their volume is holding very strong, so that’s what I have seen so far.

And Home Inns revenue contribution, it’s very insignificant in terms of our revenue pool, so I haven’t seen too much changes one way or the other.

Richard Ji - Morgan Stanley

Okay, thank you. And the second regarding your packaged tour business, obviously in the past quarter it was somewhat impacted by the epidemics and I’m just curious about the about the current development and have you seen a recovery in the packaged tour business, especially given 3Q is typically a seasonally strong --

Min Fan

We can see that [in this quarter], the [inaudible] is heavily impacted by the H1N1 flu and so normally during the autumn season, it’s a high time for those rich people or for those white collar to go [inaudible] but this time we see the significant decrease. And so far I think according to the general data of the industry, most of the travel agencies they face the decrease of the total travel revenue, even in this normal high season, this summer time.

So we -- in our data, you can see we still get some growth but still I think for this summer, it’s not very strong demand in terms of the [inaudible] travel and also for [inaudible] travel will be also impacted by the macroeconomic situation. So we did not see very strong demand and growth during this quarter and for the coming months, I think after July and August, normally it’s a seasonal, low season.

Richard Ji - Morgan Stanley

Thank you.

Operator

Your next question comes from Paul Keung with Oppenheimer.

Paul Keung - Oppenheimer

Looking at your travel volume growth this quarter, and compare it with the competition, it looks like you’ve managed to maintain a decent growth and to grow [inaudible] on the competition and when we dig further, it looks like a lot of it has to do with your ability to sort of generate new customers at a faster pace than what the market seems, so I’m just curious which -- how you are effectively gaining share and getting the new customers. Is it -- do you think it’s a combination of -- is it better marketing, is it tier two cities, is it the corporate customers? Can you give me some more color in terms of where you are getting those new customers that the others can't seem to obtain?

Min Fan

In the quarter, we still see we are very dedicated to acquire new customers and I think it’s mainly because we have very effective marketing channels and also we have very strong sales coverage nationwide, so that’s why we still maintain high growth in acquiring new customers. I think we are getting new customers from the existing travel agencies, as well as those new customers, they will need leisure travels, leisure products and you can see we gain more and more leisure customers during our growth.

Paul Keung - Oppenheimer

Okay, and my other question has to do with the competitive landscape -- a lot of the small agencies have actually struggled despite the recovery in travel, so I was curious going forward, and I think the [inaudible] expectations have declined significantly. I was curious if you think you will see more ezTravel type acquisitions going forward or do you think it’s pretty easy just to gain share without having to do any acquisitions at all?

Jane Jie Sun

I think we normally look at our strategy from our internal growth perspective. Organic growth is always our focus but we are also very open if a good opportunity comes around.

Paul Keung - Oppenheimer

Okay. Thanks.

Operator

Your next question comes from James Li with Sterne, Agee.

James Li - Sterne, Agee & Leach

Thanks for taking my question. I just want to follow-up on your business activities in the third quarter in general. Is there any way we can get some idea in terms of what is the volume in the month of July for both hotels and air travel? And we also heard that there might be some travel restriction heading to the PRC 60th birthday in October and I just want to get a sense of what that restriction might be from your perspective and how that my impact your business. Thank you.

Jane Jie Sun

Sure. For July, I think based on our visibility, it’s very much in line with our guidance. Hotel business probably will grow about 10% to 15%, which is embedded by volume growth around 20% to 25%, partially offset by the price drop on the year-over-year basis by 10%.

And for air ticket, revenue increase is somewhere around 30% to 35%. That assumes the volume increase is around 25% to 30%.

For packaged tour, that is we assume if we include ezTravel, that’s about around 50% increase, so it’s very much -- the volume is in line with our guidance.

Regarding the travel restrictions, we haven’t heard anything yet but we will monitor it very carefully.

James Li - Sterne, Agee & Leach

All right. Thank you.

Operator

Your next question comes from Marisa Ho with Credit Suisse.

Marisa Ho - Credit Suisse

Congratulations on a great set of results. I have a couple of follow-up questions on the last question. For example, looking at your hotel and also air ticketing volume guidance for the third quarter, I mean, do these actually include ezTravel or exclude ezTravel?

Jane Jie Sun

Our guidance going forward will include ezTravel, since we started to consolidate their financials.

Marisa Ho - Credit Suisse

Right, and the -- for the air ticketing ASP, would it be realistic to expect the ASP decline to start to moderate because of the base effects going forward?

Jane Jie Sun

At least in July, the price is stabilizing on a sequential basis. It’s a little bit better but on a year-over-year basis, there is no increase for sure. Probably for July specifically that month, it’s very stabilized on a year-over-year basis. But August, it’s too early to tell. We still have to monitor it very carefully.

Marisa Ho - Credit Suisse

Right. That doesn’t mean that -- I mean, if you are looking for air ticketing revenue to grow by 30% to 35% year-on-year and with volume growing by 25% to 30%, it’s probably building in too much ASP decline?

Jane Jie Sun

Yeah, the ASP decline, we want to be careful because we do not have any control on ASP.

In terms of volume, based on our strong execution, we can grow our volume based on our quality and coverage, so ASP will normally remain very prudent when we give guidance.

Marisa Ho - Credit Suisse

Right, okay. And I also have a couple of other smaller questions -- the first one is when looking at the increase in other income on a sequential basis, is there any particular reason to expect the other income to remain pretty high into the second half of this year or is it just a particular slide up in the second quarter?

Jane Jie Sun

The other income mainly represents the government subsidy and we obviously will do our best to apply for as much as possible but the amount of the subsidy and the timing when we can get the subsidy is very much depending on government authority. So therefore we only book other income on a cash basis.

In Q2, it’s higher than our expectation so we do not expect a significant other incomes for the remainder of the year. Pretty much what we can get we already got in Q2.

Marisa Ho - Credit Suisse

Right. And for the share-based compensation, I remember in the past you were guiding that it would be roughly about 8% of the net revenue -- is this guidance still holding up into the rest of this year and also into 2010?

Jane Jie Sun

Yes, I think so.

Marisa Ho - Credit Suisse

Right. And a final question about the tax -- is it realistic to expect the tax rate to remain at below 20% going into 2010?

Jane Jie Sun

Yes, that’s reasonable to expect.

Marisa Ho - Credit Suisse

Okay, excellent. Thank you very much.

Operator

Your next question comes from Candy Hong with Nomura.

Candy Hong - Nomura

I have two questions -- first about your guidance of 25%, excluding ezTravel's 5% -- can you elaborate more of the 20% organic growth [inaudible] and ASP?

And second about the hotels [inaudible] in second quarter, because third quarter tends to be a high season compared with the first quarter, so just wondering -- look at the other hotels sequentially ASP room rate is increasing but I think you mentioned that the sequentially, you still see the hotel room rate is stabilizing, so I just wondered whether you initiated or helped to launch more promotions at hotels that you help your customer to book. Thanks.

Jane Jie Sun

First of all, the guidance of 25% includes ezTravel's number already and going forward, we will always include their number because now we consolidate the financials of this entity. So 25% year over year growth assumes a revenue growth from hotel between 10% to 15% and air tickets around 30% to 35%, and travel somewhere around 50%, so that’s our assumption.

Secondly on hotel business, I think in terms of volume, Q2 is much stronger than Q1. In terms of the pricing, we still see year-over-year decline by about 10%. However, on a sequential basis, it’s very stabilized.

We worked very hard with the hotels to have creative campaigns to stimulate the demand from the customer so we have very special campaigns at different times and different regions. These help us to increase the volume during the quarter.

Candy Hong - Nomura

Thanks. Can you elaborate more on the ASP for the third quarter hotel and air ticket?

Jane Jie Sun

For the third quarter, we are only one month into the quarter and so far, the hotel price has not rebounded but on a sequential basis, it is stabilizing. On the air ticket price, on the July price was a little better than the June number but August is too early to tell.

Candy Hong - Nomura

So can we assume like 10% year-on-year decline in the third quarter or do you think it’s conservative?

Jane Jie Sun

Ten percent decline year-on-year for hotel is what we are seeing right now. For air ticket, probably a little less than 10% decline but we still have to monitor it because air ticket fluctuates from month to month.

Candy Hong - Nomura

Okay, thanks.

Operator

Your next question comes from Ming Zhao with SIG.

Ming Zhao - SIG

Thank you for taking my questions. Good morning. The first question, Jane, can you tell us your consolidation of ezTravel, did that occur at the beginning of the second quarter? And if you could -- what’s your stake in that company? And the $1.7 million minority interest, is that all for the -- from the ezTravel business?

Jane Jie Sun

We started to consolidate ezTravel in Q2 and the minority investment mainly from ezTravel.

Ming Zhao - SIG

Okay. So we can't calculate the EPS contribution from ezTravel basically?

Jane Jie Sun

The amount contributed by ezTravel was very minimal compared to our overall financials. It’s insignificant.

Ming Zhao - SIG

Okay. All right, and my second question is Jane, can you talk a little bit about the macro picture in China and what is your view on that? And what will be the impact on the business in the second half of this year?

Min Fan

Well, the macroeconomic, I think recently in China, we do see some sign of the rebound in the real estate business and also in some industries. I think for the travel, it’s picking up in some first tier cities and -- but in the second tier cities, still in fact, second tier cities were not very much impacted by the swine flu. So according to our travel data, the market can be picked up a little bit in Q3. Also you can see the airfare prices rebound a little bit. This is an affect of the anticipation of the overall market little bit rebound.

But still I think for the overall situation, right now we still cannot see very clearly and we are still need to monitor very carefully.

Ming Zhao - SIG

Okay, thank you.

Operator

Your next question comes from Cathy Chen with Goldman Sachs.

Cathy Chen - Goldman Sachs

Thanks for the call. I have a quick follow-up regarding the air pricing side -- can you comment about recent news [flow] that the government may [re-integrate] fuel charges? Can you confirm whether this is true and whether it has been reflected in your third quarter guidance?

Secondly, can you give us an update on the mix between corporate versus leisure during the quarter, and whether there were any special promotions done during the quarter, particularly on the leisure side? Thanks.

Jane Jie Sun

Sure. Regarding your questions on fuel surcharge, actually we do not get a commission on the fuel surcharges, so whether or not the government imposes a fuel surcharge should not impact our business significantly. And also the majority of our travelers are business travelers, so if they need to travel, they will travel. They are not going to delay their trips just because the government has a RMB50 or RMB100 surcharge. So that should have a very small impact on our business.

Regarding the split, leisure versus business, it is somewhere around 70% to 80% are our business travelers and the rest are the leisure travelers. And we continuously believe that as the income level of Chinese consumers increases, the leisure travel will become more and more important in the business competition, so our product is very much going to be designed and tailored for the demand of the leisure traveler and that’s going to represent a new increasing point for our business.

Cathy Chen - Goldman Sachs

Okay. Thank you.

Operator

Your next question comes from Damien [Horitz] with UBS.

Damien Horitz - UBS

Good morning. Thanks for the call, guys. Just a quick comment, a quick question on your guidance -- you said that at July, you said roughly flat year-on-year, pricing with volume at 30. That would imply that your volume growth is slowing down from 40 in the second quarter. Is that reflective of the market or is that something to do with the [inaudible]? I know the [inaudible] last year was very [distortive].

Jane Jie Sun

I think the market data for July is not out yet. Our execution remains to be very strong. We are very quickly gaining market share. I think in terms of absolute increased share ticket number, it’s on a year-over-year basis, it’s growing very strongly. In terms of percentage, because our base is growing bigger, so mathematically it will -- the curve will flat a little bit but our execution and market share [inaudible] pace has not slowed at all.

Damien Horitz - UBS

[inaudible]

Jane Jie Sun

I’m sorry?

Damien Horitz - UBS

You think it’s an assumption of a higher base?

Jane Jie Sun

Yes, high base is the main reason. That’s correct.

Damien Horitz - UBS

Have you seen any signs -- just with -- I know that Q3 last year was quite distorted by the travel restrictions around the Olympics. You haven’t seen a big rebound [of sales] to a theoretically lower number?

Jane Jie Sun

In terms of absolute additions to the ticket, the absolute ticket is larger than the previous years and the previous quarters. But in terms of percentage, again I think the base is getting bigger. That’s the reason.

Damien Horitz - UBS

Okay. Thank you.

Operator

Your next question comes from Eddie Leung with Banc of America.

Eddie Leung - Banc of America

I have a couple of questions -- the first one is how do you guys evaluate the potential impact from a potential consolidation of airlines? In particular, on the commission rate side -- and what are the things that you can do to mitigate the risk?

Min Fan

The recent consolidation or the merger between the airlines I think if a certain level of consolidation is healthy for the overall airline industry, it will be also good for the overall business as well. If you are talking about the Eastern Airlines/Shanghai Airlines, in fact they as we know, this will help both airlines to decrease their costs and increase their efficiencies. And I think with the more healthy competition situation, we would not see any significant impact from this merger at this point. Of course, we will still monitor the progress very closely.

Eddie Leung - Banc of America

So so far, there has not been any sign that that will impact the commission rate structure for distributors, right?

Min Fan

So far, no.

Eddie Leung - Banc of America

Okay, thanks. The second question is on the new products that you mentioned, you guys mentioned that there has been some promotion on the air plus hotel package that will offer lower prices. Do you have to take inventory risk for this product?

Min Fan

No, no. We do this air plus hotel model, it’s quite similar to the -- quite similar as what the U.S. have, the U.S. partners, they are doing. It’s more dynamic packages than before. So this will give more value to our customers and also as you know, this year most of the hotels were, especially those high-end hotels were impacted very heavily by the swine flue and by the financial crisis, so probably some hotels, they are waiting to work closely with Ctrip. So that’s why we can provide more value to our customers and also to promote the hotel business.

Eddie Leung - Banc of America

Thank you very much. That’s very helpful. Thank you, guys.

Operator

Your next question comes from Elinor Leung with CLSA.

Elinor Leung - CLSA

Thank you for the call and I have two questions, the first question regarding ezTravel -- what is your stake in ezTravel now and what do you think is the long-term contribution of ezTravel to your business?

The second question is regarding the swine flu -- you talked about it has a big impact on your packaged tour or leisure tour but I didn’t see any impact on your business travel. Is there any particular reason for that? And for the long-term, should we still be concerned about this?

Min Fan

I will respond to your second question, and I think for the swine flu, it definitely will impact the outbound travel and the long haul travel in quite significant ways but for business travel, especially most of our business is domestic travel, domestic business travel, so they are not -- they will not be impacted heavily by swine flu. And as you know, in China the government has very strict control to prevent the swine flu, so we don’t think this situation will be worsened, will be so severe as we encounter only this year.

So we anticipate there will be so far what we can see, foresee there will be no various sever situations for swine flu.

Jane Jie Sun

And your first question on ezTravel, I think the alliance with ezTravel from a strategic perspective is very important for us, because the straight has been closed for the past 60 years and now the government worked very closely to make sure the travel restrictions are very prudently being lifted, so we are positive on that. We believe people in Mainland China have shown, will show lots of interest in traveling to Taiwan and therefore our ezTravel partner will be able to utilize their strength and resources to help our team to provide a great product to the Mainland travelers. And reverse is the same -- Ctrip has very comprehensive products, so we will be able to help ezTravel to provide a good selection of the products.

So from a strategic perspective, the alliance will add lots of value to our customers and partners and our shareholders.

From a financial perspective, because ezTravel relatively is smaller, much smaller than our scale, so the financial impact is immaterial to overall our financial position.

Elinor Leung - CLSA

Thanks.

Operator

Your next question comes from Chris Zee with BNP Paribas.

Chris Zee - BNP Paribas

Good morning. First of all, congratulations on the very strong set of results. I just have several very quick follow-up questions pertaining to ezTravel.

First of all, you have provided the numbers on the revenue contributions from ezTravel but on the operating profit line, is it profit making contribution or is this break-even? Can you give us a bit more color on this front?

Jane Jie Sun

Sure. I think they are profitable. Their margin didn’t have a significant impact on our financials, so we were able to maintain a very consistent gross margin as well as operating margin, even if we consolidate the ezTravel's financials, so not significant impact on our business.

Chris Zee - BNP Paribas

Okay, I see. I just wanted to understand a little bit about the operational side with the ezTravel -- so is it a fair comment to say, for example, from China outbound to Taiwan, it will be -- people would be booking through Ctrip, whereas people coming from Taiwan outbound from Taiwan into China will be using ezTravel? Is that the way to think about this kind of relationship?

Min Fan

As you know, we partnered -- by partnering with ezTravel, we can book outbound to Taiwan packages for our customers and ezTravel will be the local ground operator for Ctrip to provide the best service. And as you may know, ezTravel is the largest online travel service provider in Taiwan and one of the major travel players in Taiwan, so we are very confident that ezTravel can provide very good service to our customers.

And in the meantime, ezTravel, they can also enrich their product offering to their customers in Taiwan and they can use Ctrip's hotels and air flight for their customers, so I think this is a win-win situation for ezTravel and Ctrip.

Chris Zee - BNP Paribas

Okay. Thanks for that. I just have one last follow-up, it’s also with ezTravel -- because you are consolidating ezTravel into your P&L and financial statements, for the commissions generated at ezTravel, on the per room nights booked and also on the per ticket issued, is it similar levels compared to Ctrip? Because in your guidance, you give a blended figure so I just wanted to understand for the commission trends, is it being dragged down a little bit because of the pricing at ezTravel or not much impact?

Jane Jie Sun

Not much of that. Their scale is much smaller and therefore it’s not impacting our average price at all.

Chris Zee - BNP Paribas

Okay, but on a per room booked and per ticket issued, the aggregate number, is it slightly smaller than what Ctrip is generating right now?

Jane Jie Sun

Similar, similar.

Chris Zee - BNP Paribas

Similar? Okay. Thanks for that.

Operator

Your next question comes from Dick Wei with J.P. Morgan.

Dick Wei - J.P. Morgan

Good morning. Thanks for taking my questions. Just two questions -- first, can you provide an update on corporate travel business? And secondly on the investment front, if you can talk about just further [stakes] increase potentially on Home Inns or on ezTravel or on [inaudible], if you can give us some sense, that would be great. Thanks.

Min Fan

For the corporate travel business, still this year especially in Q1, we faced a very big impact on the corporate travel business and for this Q2, there is certainly some pick-up in corporate travel business. And especially during the high time, more and more corporate travel -- more and more corporate they want to decrease their costs. So it also gave Ctrip a good timing to acquire more new customers.

And I think the corporate travel business is still in line with our expectation this year so far and also we are confident that we can still penetrate more into this market.

Jane Jie Sun

In terms of our investment, I think we are always very prudent evaluating different opportunities. For Home Inns, I think the current position is very stabilized and we do not have any plan to further increase the investment in the foreseeable future. And for the other investments, again we will always follow our guideline that be open with opportunities but when we execute it, we always execute it with great prudence.

Dick Wei - J.P. Morgan

Great. Thanks a lot.

Operator

Your next question comes from Aaron Kessler of Kaufmann.

Aaron Kessler - Kaufmann

Just a quick follow-up question -- can you just, if you have it, the volume growth numbers for Q2 for both air and hotel, if you include ezTravel in the numbers? I’m not sure if you have that. If not, can you just remind us what you said on the pricing for air in Q2 -- did you say down 10% year over year and what was that in Q1? Thank you.

Jane Jie Sun

In Q2, the price was dropped about 10% year-on-year. I believe that is similar in Q1 as well, so -- so on a sequential basis, it’s very stabilized but on a year-over-year basis, it still represents around 10% decrease.

Aaron Kessler - Kaufmann

Okay, and do you happen to have the volume numbers if you include ezTravel in Q2?

Jane Jie Sun

The volume number is disclosed in our press release on the percentage growth perspective.

Aaron Kessler - Kaufmann

Right, but that excludes ezTravel -- I’m just wondering if you include it, if you happen to have that.

Jane Jie Sun

We have both including and excluding in the press release.

Aaron Kessler - Kaufmann

Oh, you did? Okay, great. I’ll take a look. Thank you.

Operator

Your next question comes from James Li with Sterne, Agee & Leach.

James Li - Sterne, Agee & Leach

I was wondering if you guys can provide any of the update on the World Expo 2010. For example, did the government provide any guideline on hotel pricing for next year?

And regarding to some of the official ticket agencies, are you currently working with them on hotel bookings in general? And any other programs that you are working with the government to capitalize on this trend?

And also lastly, there’s a lot of construction activity leading up to the event next year. I wonder, is that -- could that be possibly holding back some of the travel activities in the back half of the year? Thanks.

Min Fan

I think the World Expo will be a very good opportunity for China and for Shanghai and we are working very closely with the government organization and we will try to provide more product offerings during the next year’s World Expo. And so far, we will try to be the designated official distributor in terms of the ticketing distribution business.

And as you are talking about the construction during the -- before the Expo, I don’t think this will prevent the business travel to travel to Shanghai or nearby cities. I think this will be very minor impact on the business travel, and as well as the leisure travels.

James Li - Sterne, Agee & Leach

Okay, and I just want to clarify your answer regarding being an official ticket agent for the Government of Shanghai -- I remember some time ago reading about the Shanghai Government designated a number of agencies, i.e. the telephone companies, to be official agencies for selling the World Expo ticket. Are they in the process of still evaluating additional vendors for that kind of service, that’s what you are referring to? Or are there any specific partnership programs you are working with these agencies on the hotel booking side? Thank you.

Min Fan

For the telephone companies, those four big companies, that’s going to be retail distributors and for travel agencies, we are working with the organizing body to apply to get the group distribution companies, so this will be in the process I think in Q3.

And in terms of the hotel bookings, in fact there will be no certain regulation on who can book hotels for Expo and who cannot, so as the largest hotel booking company in China, I am sure we will have very good opportunity and be in a very good position to provide good service to our customers.

Operator

Your next question comes from Wendy Wong.

Wendy Wong - RVS

Just a few housekeeping questions -- first, what is the cost incurred in Q2 for increasing the stake in ezTravel? And second, what revenue contribution from the corporate travel in Q209? I remember in the past you mentioned you will break that out if that part exceeds 5% of total revenue.

And lastly, could you maybe comment on the potential competition from the e-commerce platforms such as [inaudible] and [Alibaba]? Especially recently we read news that three airlines partnered with [Ali-Pay] to issue the tickets. Thank you.

Min Fan

For the last two questions, for [Talbo] and for other third-party companies that work with the airline companies, I think it’s a normal situation in the industry because the airlines, they would try to enlarge their direct sales and they will partner with different intermediary channels. And still as you know, right now in the total air ticketing market, Ctrip, the market share is less than 10%. And also for the airline company, their direct sales is between 10% to 20%, so still there is much room for us to grow so I don’t think the competition landscape has changed so far. There should be no significant change.

Wendy Wong - RVS

I think for some of your clients, they seem quite interested [inaudible] so I wonder what kind of clients overlap potentially that you may have with other Internet platforms like [Talbo] or [Ali-Pay]?

Min Fan

In fact, we also work with Alibaba and with this kind of bidding Internet companies in China, so I think it’s really the mutual channels we can also work -- airline companies and Ctrip can also work together with those intermediary Internet companies. So in fact, if you look, the overall market, there is a lot of room for us to gain market share -- in fact, it’s not really whether we can or the airline company can not to gain the customers in the same market.

Wendy Wong - RVS

Okay.

Jane Jie Sun

Okay, good. And then your other question for corporate travel, it is growing in accordance to our plan. And so far, the revenue contribution is still below 5%, so as we promised, once it reaches 5%, we will break it out as a separate line item.

And in terms of the additional investment in ezTravel for the quarter, compared to our overall financial positions, the additional investment we made in this quarter is insignificant compared to the [inaudible] assets we have.

Wendy Wong - RVS

Thank you.

Jade Wei

Okay, Operator.

Operator

At this time, there are no further questions. I will turn the call back over to Jade Wei.

Jade Wei

Okay. Thank you very much for your participation and we hope to see you next quarter.

Operator

Thank you for your participation. This concludes the call. You may now disconnect. Have a good day.

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