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Here’s the entire text of the Q&A from Ctrip’s (ticker: CTRP) Q3 2005 conference call. The prepared remarks are here. We recognize that this transcript may contain inaccuracies - if you find any, please post a comment below and we’ll incorporate your corrections. And please note: this conference call transcript is a Seeking Alpha product, so feel free to link to it but reproduction is not permitted without the explicit permission of Seeking Alpha.

Question-and-Answer Session

Operator

Thank you, ma’am. Ladies and gentlemen, if you wish to ask a question, please key “*” followed by “1” on your touchtone telephone. If your question has been answered, or you wish to withdraw your question, please key “*” followed by “2”. Once again, that is “*” “1” to ask a question. And our first question comes from the line of Jason Brueschke of Citigroup. Please proceed.

Jason Brueschke

Thank you. Good morning James and Yin and welcome Jane. Congratulations everyone, going on a fantastic quarter. I have a few questions to them related to air-ticketing and then few more. In terms of air-ticketing, the first one is, could you maybe describe where we are in the market? I know your revenues are relatively small but growing extremely fast. And given, maybe the later stages of development of the overall travel market in China today versus where the hotel business was when you started; I should we be expecting a very fast ramp that continue to get the markets more mature? And then the second part of the question on air-ticketing is could you maybe describe why the cost of services associated with the air-ticketing is higher than the cost of services associated, I think, with hotel, with the implication but maybe it’s just an athlete term for describing? Thanks.

James Jianzhang Liang

Okay. While we are already pretty dominant in big cities, we, in places like Shanghai and Beijing, we already have 5%, 6% of the market, but overall, for the China market, our air-ticket volume still is less than 3% of the total volume. So, I think, overall, we still have a lot of room for growth, particularly in the second-tier cities. As for the gross margin, because per air-ticket, per transaction, the revenue first of all the revenue we get, the commission revenue we get for a transaction is lower, it’s RMB46 when compared to RMB65 roughly, for the hotels. So, the commission received is lower and the cost of service is a little bit higher, the cost of service per transaction is a little bit higher. I think the cost and the cost ph is roughly same. But, a significant portion of air-ticket still needs to be delivered. So, they’re a just little bit higher than the hotel because of delivery cost. So, overall, the air-ticket gross margin, I think is around 70% when compared to, almost 90% for the hotels.

Jason Brueschke

Thank you. The other two questions are, could you tell us what percentage of your revenues from both hotel and air-ticket are from your key customers? And then finally, could you maybe comment on the cost of customer acquisitions? Is that continuing to remain stable, or for any reason whether it’s a competition, or just the cost of your advertising and sales? Is the cost that these each incremental customer you’re adding; is that going on? Thanks.

James Jianzhang Liang

Okay. On a monthly basis, we define, you know, transactions from our key customers, -- transaction from customers who have booked already with us, at least once before. So, on a particular month, we received, you know, almost 80% for the hotel. And, I think it’s probably 60%, 70% for the air-ticket. Simply because air-ticketing is still growing faster of a smaller base, so, I think, given the same amount of transaction, new customers, we will see a bigger portion in terms of overall percentage and the overall transaction as a percentage. The customer acquisition cost still remains pretty stable, right now its’ at RMB160 to RMB180. I think that’s, you know, we have enabled to maintain that kind of efficiency over the years that has been pretty stable.

Jason Brueschke

Great, thank you very much.

Operator

And our next question comes from the line of Richard Ji of Morgan Stanley. Please proceed.

Richard Ji

Hello, hi, James and I have couple of questions. And first is regarding the growth in your online versus offline business, can you provide us a breakdown and then do you see a pickup in your online business?

James Jianzhang Liang

The online portion of our business is still about 30% versus the 70% offline. The percentage grew slightly, maybe, you know, 1% or 2% over our last year, lower or still around 30%.

Richard Ji

Okay. And, in terms of your penetration into like the second-tier city, do you see a more robust growth in second city in terms of hotel and air-ticket booking, versus, first-tier city and, especially in the first-tier city maybe a little bit separate there?

James Jianzhang Liang

For the hotel business, yes, we have seen higher in the second-tier city and then the first-tier city, because we are already very dominant in the first-tier cities. For the air-ticket, we are actually seeing pretty much across a broad growth over in all the cities we that we serve. And we are, having more and more second-tier cities. I think, probably in the future, we will see actually faster growth in second-tier cities. But so far we’ve seen across broad growth.

Richard Ji

Okay, sounds good. And my last question is regarding your leisure packaging business. How much of that, because you are saying you’re targeting that high-end customer, how much of that business is your pricing book business and how much of that is still with the agency business?

James Jianzhang Liang

Compared to the traditional travel agencies which are actually focusing on the tour group business, our you know almost, -- almost all of our leisure packages are targeted high-end, of course, you know, when we see high-end of this is still high, very, very high-end and just high-end. When compared to the target customers that the, of the traditional travel agencies, our target customers will be very high-end.

Richard Ji

Right, but do you hold it? I guess my question is that of, how much, what a proportion of the business you’re holding eventually in the, in the…

James Jianzhang Liang

I catch it okay. Very few, we actually prepay the money to the suppliers to get inventories. Only during peak seasons where the suppliers that we know and advance will be very tight, and we are very certain that we can sell these inventories we will actually buy these inventory in advance, like, you know, the October 1, holidays. In the non-holiday season, actually we don’t prepay; we just have guaranteed allotment from these subscribers.

Richard Ji

Okay, great. Thank you.

Operator

And our next question comes from the line of Safa Rashtchy of Piper Jaffray. Please proceed.

Safa Rashtchy

Hi, good morning, and congratulations on another good quarter.

James Jianzhang Liang

Thank you.

Safa Rashtchy

Couple of questions; first one, could you talk about the competitive landscapes, have you seen…

James Jianzhang Liang

Can you, little louder.

Safa Rashtchy

Hold on one second. Hi, can you hear me better now.

James Jianzhang Liang

Yeah, much better.

Safa Rashtchy

Okay, good. Can you comment on the competitive landscape, have you seen any market share gains by any of your competitors, has the landscape changed, eLong reported earlier today and they were showing somewhat faster growth rate in hotel bookings, is that just based on the smaller numbers or other types of revenues or do you have any comments on that and I have couple of followups.

James Jianzhang Liang

I think, well, I just looked at eLong’s report I think the hotel growth is mostly due to the acquisitions because they acquired the Fortune Trip, I think they closed the transaction in third quarter. So, like before the acquisition, the Fortune Trip has about 10% of eLong’s volume. So, if you check out that, organically, actually eLong is probably just growing, at our same rate as we did, probably even a little bit slower on a hotel side and we’re still growing faster on the air-ticket side, and then, eLong have grown much faster on the packaged side. So, I think, overall, we are at least maintaining our market share as you may expand a little bit, if you’re just talking about organic growth.

Safa Rashtchy

Okay thank you. And then, a bit different question but related on the proportions of the question, this year you’ve seen in for Chinese companies report higher in some cases, significantly higher expenses usually has competitive in that case becomes more intense, but also as costs go up and salaries go up, fuel cosst have stayed relatively constant in terms of revenue. Should we expect that perhaps in ‘06 we could see some increase in your operating expenses, just as the overall Chinese market becomes more competitive and the costs go up?

James Jianzhang Liang

I think different market, different segment and different competitive, you know had pressure there, and, you know, in our business our, you know, sales competitor eLong has been there and has been doing the same thing, and we haven’t seen any new strong competitions emerging. So, I think we don’t have, right now, we don’t feel any pressure that forces us to increase our sales and marketing spending.

Safa Rashtchy

Okay. One final question if I may, could you comment about how concerned you are of that potential impact of the adverse group is expressed implement ph in China? Are you taking into account that all in your guidance and I feel they’re recurring yields, suppose indiscernible of that Taiwan and to the secret.

James Jianzhang Liang

We continue to carefully observe any development with Avian Flu in China, thus far we have not seen softening of demand as a result of some recent isolated cases and more remote villages in processes. However should human to assume ph the infection become wide spread in cities the travel industry could be significantly impact at the case of SARS. Having said that, we expect that impact of such diseases should it happen to be short-term, I think, the long-term prospect is the fundamentals of our business to remain strong.

Safa Rashtchy

Okay. Thank you very much great quarter.

Operator

And our next question comes from the line of William Bean of Deutsche Bank. Please proceed.

William Bean

Hi guys, nice quarter. Could you just give us a sense of the operating income growth that you expect for Q4, inline, is it inline with your 40% year-over-year or any change there?

James Jianzhang Liang

Well, because we, in our business, we have a limited view of the limited visibility visibility of our future revenue. So, we always guide, we currently still guide the revenue growth year-on-year 40%.

William Bean

Okay, well, last quarter, you also said that you are looking for bottom line of 40%, does that hold true for this Q4?

James Jianzhang Liang

Well, you mean, bottom line or…

William Bean

Or operating income or net income?

James Jianzhang Liang

I think we only give the top-line guidance officially because the bottom-line is more difficult for us to anticipate due to a number of unpredictable factors. For instance, during the fourth quarter 2004, we received a special tax preferential treatment procedure for travel information. Consequently, we received about RMB 8 million tax refunds for 2004 and also other factors such as discretionary bonus including Q4 as well as financial subsidy we received from time-to-time. So for these reasons, we’ve decided to focus on guiding the top-line.

William Bean

Okay, do you expect another bonus this year?

James Jianzhang Liang

You mean the financial subsidy or…

William Bean

The side of the bonus or is that -- is yet to be decided by the many…

James Jianzhang Liang

The is performance-related, so depending on how well we do, we will issue bonus.

William Bean

Okay. And then I just have a couple of house keeping questions that usually answer, if you don’t mind, how many customers did you have in the quarter?

James Jianzhang Liang

1.5 million cumulative.

William Bean

And that’s up about a 150.

James Jianzhang Liang

That’s about, yeah, 150, more like a 160,000.

William Bean

Okay and how many hotel partnerships do you have now?

James Jianzhang Liang

We’ve added 60 hotels to about 3,300 hotels.

William Bean

Okay. And you are guaranteeing allotments…

James Jianzhang Liang

That’s domestic.

William Bean

Sorry.

James Jianzhang Liang

That’s number of domestic hotels.

William Bean

Okay. And, guaranteeing allotment hotels and percentage bookings?

James Jianzhang Liang

I think they’re roughly the same as Q2.

William Bean

That’s 1,300 or so and 70%.

James Jianzhang Liang

Yeah. 70% and 1,400.

William Bean

Okay and then just e-tickets as a percentage of air-tickets?

James Jianzhang Liang

This quarter, coming down little bit to 11%.

William Bean

Okay I really appreciate you taking my question. Thanks a lot.

Operator

And our next question comes from the line of Jason Avilio of First Albany Capital. Please proceed.

Jason Avilio

Hi guys, thanks for taking my question. Just one followup, I guess on the guidance side, looking at operating expenses last year particularly in product development and G&A, it looks like there is a pretty steep ratchet up in terms of absolute dollar amount and then you saw that level-off in the first quarter. And I think that was relating to bonuses, so I just want to make sure that we all understand that, is that something that we would expect to see again in this Q4?

James Jianzhang Liang

Well, I think the G&A and the product development expense are probably the same as Q3 I think, in Q2, we’ve developed, we added lot of people to actually develop new products. But, I think, we have passed that stage, so I think our product developments will probably remain; will remain pretty stable in the future.

Jason Avilio

Okay, so there is not going to a bonus in the fourth quarter, like there was last fourth quarter, as I look at fourth quarter this year relative to fourth quarter last year, and last year you had a $400,000 increase in R&D and $500,000 increase in G&A which again, I think was a function of bonus payment, so we shouldn’t expect to see that again this Q?

Company Speaker

The bonus, discretionary year-end bonus happens every year and it’s related to individual’s performance. So I think the discretionary bonus will be issued depending on the overall performance of each individual.

Jason Avilio

Okay, and then secondly we’ve heard some press here about, maybe the Bank of China limiting eCommerce transactions to RMB1000. I was wondering if you could comment on that please?

James Jianzhang Liang

The People’s Bank of China published October 30 a guideline on electronic payments, setting certain limits on certain types of electronic payment including amount of a single payment and a cumulative daily payment provided to different clients. When providing electronic payments service to neutral clients, banks are asked to endorse no more than RMB 1000 Yuan for a single transactions no more than RMB 5000 Yuan. Thus far banks, but the banks are comfortable with payment arrangement with us, and have not impacted of our transactions.

Jason Avilio

Great, thank you.

Operator

And our next question comes from the line of Kit Low of Goldman Sachs. Please proceed.

Kit Low

Hi, good morning. A few questions, first of all in terms of the ASP for the air-ticketing business. I observed that there is a 2% decline; can you comment on that briefly just now. Could you just elaborate little bit more on what’s the reason behind it, it has been a while since you have decline in ASP. And then my second question regard to the size of the subsidy, I understand it’s difficult to provide the guidance on what subsidy you will be getting. But this quarter has been unusually large compared to previous quarter, I believe it’s about RMB10 million this quarter versus previous quarter around 3 million. If you could give us some guidance on how to look at that number going forward, I would appreciate it. Thank you.

James Jianzhang Liang

Okay. Well, first of all, the air-tickets commission revenue per transaction decreased slightly. So, from RMB46 to RMB45 this quarter. And as we are getting, as our air-ticketing revenue grow as increasing portion of our overall business, I think that will negative impact, or slightly make an impact on our overall gross margin. For the financial subsidy, we really cannot predict the timing of that. And I’m sure you will receive in cash, it’s really a not very good practice, just to predict it all, and even to book it. So, we only book it when we actually receive it, and it’s difficult to predict the timing, because, it’s having to go through all the government approval process. So, I think in the future we are sure to book probably that I think receipt from government from time-to-time.

Kit Low

Okay. In the previous quarters you, the ranges has been about 1 million to 3 million or so, and it right now it’s about 10 million. Is this the magnitude we should be looking at going in the future or is it going to be more? This is anomaly for this quarter and it’s going to be back to the normal…

James Jianzhang Liang

If I line-out some few theories, not necessarily associated with that quarter, the financial subsidy, may be associated with the whole year to perform as a whole year tax contribution by one of our entities or a few of our entities. So, you cannot match that quarter-to-quarter. So, that definitely, that’s not related to just a one quarter for Ctrip’s performance, that 10 million received account.

Kit Low

Okay, thank you.

Operator

And our next question comes from the line of Chang Qiu of Fortune Technology Research. Please proceed.

Chang Qiu

Yeah, good morning, James. One question for you, one of the companies in China state announcing on increase of salaries for employees since the third quarter. The salary increase, why not other companies increased the salary for their employees to keep them motivated and more stable. I wonder, what’s going with the Ctrip, are you increasing salaries for your employees too?

James Jianzhang Liang

Yeah, we do that every year; well it’s just like any other company, depending on performances, and the promotions we’ll increase anywhere from, 10% to 20%, I might add with last year, which is probably single digit. But, the entry level people, people we hire into our, the most basic call centers staff, their salary just increases there slightly, the entry level salary.

Chang Qiu

Okay. You mentioned also earlier that percentage of e-ticket, decreasing slightly in third quarter. I just wonder is that related with the Bank of China’s Reminbi 1,000 kind of guideline?

James Jianzhang Liang

No. The guideline was just recently issued, I think probably end of Q3, even into Q4. The reason that our percent of e-ticket decreased is primarily due to one or two airlines recently having upgraded their e-ticketing systems. Not upgraded, but is in process of upgrading their e-ticketing system. So, their e-ticketing system has various substantial downtime in a quarter. So, that’s why our e-ticketing percentage was going down.

Chang Qiu

I see, do you have any plan, maybe also accept international credit cards for payment?

James Jianzhang Liang

We are working on that, of course international credit cards, you have international credit card. But overall customers there is a percentage that’s very low and the international credit card we have to pay very high transaction fee compared to the local credit card, that’s why, we are kind of reluctant to accepted international credit card. But, we are working on that, we are probably accustom to transaction cost to the customers

if we were to do that.

Chang Qiu

All right, okay thank you.

Operator

And our next question comes from of the line of Ashish Thadhani of Gilford Securities. Please proceed.

Ashish Thadhani

Hi, yes, good morning. What was the ForEx translation loss on US denominated cash balances arising from RMB appreciation?

James Jianzhang Liang

This quarter it’s immaterial, it’s very small.

Ashish Thadhani

Okay. We have seen that number actually quite large at other companies in that geography. Is there any particular reason that that might be different in your case?

James Jianzhang Liang

Well, the reason that the functional currency of China introduced RMB as a revenue in cost denominated RMB, but the functional currency of indiscernible Hong Kong and where we keep most of our US dollar cash as they want to make it in Hong Kong dollar as our functional currency. Because, we’ve receive commissions in Hong Kong and Macau hotels and incur expenses in Hong Kong.

Ashish Thadhani

Okay. So, this should not be a material line item at any time going forward? Is that right then?

James Jianzhang Liang

Yeah.

Ashish Thadhani

Okay and then I didn’t quite catch the domestic hotel network figure, is that 3,300 did you say?

James Jianzhang Liang

Yes.

Ashish Thadhani

And that was compared with what in the last quarter?

James Jianzhang Liang

We’ve just added 60 hotels this quarter.

Ashish Thadhani

Okay. And going forward what kind of pace should one expect?

James Jianzhang Liang

We’ll have to see 500 hotels a year, and most of hotels we’ve added during the first, second quarter, because it’s just a flat season and it’s easier to negotiate with hotel in that period of time.

Ashish Thadhani

Okay, very helpful, thank you and congratulations on a great quarter.

James Jianzhang Liang

Thank you.

Operator

As a reminder, ladies and gentlemen, that is “*” “1” if you wish to ask a question. Our next question comes from the line of Michael Millman of Soleil Securities. Please proceed.

Michael Millman

Thank you. That is Soleil Securities. Just to clarify, I think you said e-ticketing was 11% of the total or did you say that was up 11% and compared to the 30% that audit online sort of, only one-third of those online tickets are then e-ticketed, is that, am I understanding that correctly?

James Jianzhang Liang

Yes, 11% out of 30% online.

Michael Millman

11 percentage point?

James Jianzhang Liang

11% of the order tickets are e-tickets.

Michael Millman

Okay, so about a third of…

James Jianzhang Liang

That’s coming compared to 15% from Q2.

Michael Millman

And can you talk about; we know that you have on the order of 5% of the hotel business. Can you talk about what percentage of the travel marketing is attributable to yours that you spend and do you see that travel marketing expense over that travel marketing total growing very fast, or what rate do you see it growing?

James Jianzhang Liang

You mean our sales marketing expense?

Michael Millman

Well, not yours but just the total China.

James Jianzhang Liang

Travel market in China?

Michael Millman

Yes.

James Jianzhang Liang

Okay. Of course, we don’t have a very accurate number, we only rely on the numbers issued by the government agency. And, really the number is saying a year or three years if you like. We have, the most recently we will have actually the 2003 number. But, we believe the travel market overall is growing 1.5 to 2 times of the GDP, I think, for example, the number of the air-ticketing passengers is probably growing at close to 20%.

Michael Millman

Okay and you are not growing your marketing or maybe, or let me ask, are you growing your marketing or would you expect you to grow your marketing at that rate of faster, going forward and the total market spend? How do you see that?

James Jianzhang Liang

You are saying, are we growing faster than the market?

Michael Millman

In terms of total advertising, marketing.

James Jianzhang Liang

You mean the marketing dollars?

Michael Millman

Your expense compared with the total marketing dollars in China.

James Jianzhang Liang

Okay. You mean travel industry, the total marketing expense spent by the travel companies in China then we don’t, that’s a very difficult number to get, I mean, there’s all the different types of companies, you can call the airline companies, travel companies and hotels and the restaurants, but this is the number that’s very difficult to get. I would assume, unless, if they the overall travel industry maintain the same kind of profitability, their expenditure on marketing is probably grow very much inline with their overall revenue growth. So, if you take that assumption, their revenue, their marketing growth probably will be around to your 15% to 20%. And, our marketing expense is also a stable proportion of all of our revenue. So, our own revenue grew, this year 50%. So, our marketing expense is growing probably in that 40% to 50%, much faster than the overall marketing growth in the travel industry.

Michael Millman

Okay thank you.

Operator

And as a reminder that is “*” “1” to ask a question. And at this time, I am currently showing we have no questions in the queue. I would like to turn the presentation back over to Ms. Yin for closing remarks.

Yin Yin, Senior Director of Finance

No more questions. I want to thank you all for attending, and looking forward to hear from you on the next call. Thank you.

Operator

Ladies and gentlemen, thank you for your participation in today’s conference call. This does conclude the presentation and you may now disconnect.

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