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

Q4 2007 Earnings Call

February 27, 2008 8:00 pm ET

Executives

Tracy Cui - Director, 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

Chun Ming Zhao - Susquehanna International Group

Analyst for Aaron Kessler - Piper Jaffray

Catherine Leung - Citigroup

Richard Ji - Morgan Stanley

Leah Hao - Goldman Sachs

George Chu - UBS

Wendy Huang - Bear Stearns

Eddie Leung - Merrill Lynch

Echo He - Oppenheimer

Ashish R. Thadhani - Gilford Securities

Operator

Good day, ladies and gentlemen, and welcome to the fourth quarter 2007 Ctrip.com International Limited earnings conference call. (Operator Instructions) I would now like to turn your presentation over to the host for today’s call, Ms. Tracy Cui, Director of Investor Relations. Please proceed.

Tracy Cui

Thank you for attending Ctrip's fourth quarter 2007 earnings call. Joining me on the call today we have Mr. James Liang, Chairman of the Board; Mr. Min Fan, Chief Executive Officer; and Ms. Jie Sun, Chief Financial Officer.

We may during this call discuss our future outlook and performance, which are forward-looking statements made under the Safe Harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. Forward-looking statements involve inherent risks and uncertainties. As such, our results may be materially different from the views expressed today. A number of potential risks and uncertainties are outlined in Ctrip's public filings with the Securities and Exchange Commission. Ctrip does not undertake any obligation to update any forward-looking statements except as required under applicable law.

Min, James, and Jie will provide business updates, industry outlook, and the financial highlights for the fourth quarter of 2007 as well as the outlook for 2008. 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, Tracy. Welcome, everybody and thanks for joining our conference. We are very glad to report a strong 2007 performance by our Ctrip team. Our total revenues grew 54% over 2006, with hotel business growth 42% year over year, air ticketing business growth 72% year over year, and packaged tour business growth 71% year over year. We are very pleased that all our businesses are growing at a rapid and healthy pace.

In the year, we have further strengthened our relationship with hotel suppliers and expanded our network to include about 6,000 hotels in China. Due to our ever growing contributions to the hotels, we were able to establish guaranteed allotment arrangements with more than half of these hotels and the number is growing every day. Our expansion into tier two cities in China contributed to the reacceleration of our hotel business growth in 2007.

In the air ticketing business, we partnered with about 75 airlines as of Q4 2007, including all the major domestic and international airlines. According to the three major airlines’ customer loading data, the air industry growth was around 15% in 2007. We were able to grow at a much faster rate in 2007. That’s a strong demonstration of our customer acquisition and service capability.

On the customer acquisition side, we continued with the strong momentum and the total number of cumulative active customers grew to 4.2 million by the end of 2007 compared to 2.6 million by the end of 2006.

To fully leverage the Olympics in Beijing this year, we undertook the initiative to rebuild our English website in order to prepare for the increased international inbound travel demand. The upgraded website will be released soon and we look forward to the launch of our international inbound business. We expect the short-term impact of this business will be limited to Ctrip. However, it’s an important step towards building our exposure in the global market.

2007 was also a year with several records. Monthly booking volume for both hotel reservations and air ticketing business reached over 1 million at the high season. In the beginning of the year, we were selected by [Forbes] as one of the top 100 companies with great potential in China. While in the latter part of the year, we were selected by Fortune China as one of the best employers of 2007 in China. Just in June of this year, we moved into our new building, new Ctrip building, yet we are already planning to build another Ctrip campus in the city of Nantong in Jiangsu Province in order to accommodate our fast-growing business.

For 2008, our team is committed to working hard and grasping all of the opportunities ahead of us.

Now I will turn to James for an industry outlook.

James Jianzhang Liang

Thanks, Min. We are very encouraged by the achievements in 2007. We remain to be optimistic to continue to the strong growth rate in 2008 for many reasons. Firstly, China is still at its early stage of travel industry development. Secondly, although we are the dominant online travel service provider, we still have a fairly small market share overall and there is great potential to grow. Thirdly, China’s economy is still growing at a very rapid speed and the Olympics will increase the visibility of China to the whole world. We will certainly benefit from the event in the long run.

Speaking of the long run, the long-term trend is sometimes more predictable than the short-term phenomena. As long as we remain to be the market leader, increase our service quality, and enhance our product offering, we’re in the best position to leverage the opportunities brought by the growing China economy, the travel industry and the consumer demand.

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 strong results for the fourth quarter and for the full year of 2007. Our net revenues reached a record of RMB356 million, or $49 million, in the fourth quarter of 2007, representing a growth of 58% year-over-year and 10% quarter over quarter.

For the full year of 2007, our net revenues were RMB1.2 billion, or $164 million, representing a 54% increase from 2006.

Revenues from hotel reservations were RMB196 million or $27 million in the fourth quarter of 2007, up 42% year over year and 12% quarter over quarter due to increased volume of hotel bookings.

For the full year of 2007, hotel reservation revenues were RMB677 million, or $93 million, a 52% increase from 2006. The hotel reservation revenues accounted for 53% of the total revenues in 2007, compared to 57% in 2006.

Revenue from air ticketing remains strong at RMB154 million, or $21 million, in the fourth quarter of 2007, up 78% year-over-year and 12% quarter-over-quarter, primarily due to increased air ticketing volume and commission.

For the full year of 2007, air ticketing booking revenues were RMB503 million, or $69 million, a 72% increase from 2006. The air ticketing booking revenues accounted for 39% of the total revenues in 2007, compared to 35% in 2006.

Revenues from packaged tours were RMB22 million, or $3 million, in the fourth quarter of 2007, up 100% from the same period last year and 6% from the previous quarter, primarily due to the increased travel demand in the fourth quarter of 2007.

For the full year of 2007, packaged tour revenues were RMB71 million, or $10 million, a 71% increase from 2006. The packaged tour revenues accounted for 6% of the total revenues in 2007, compared to 5% in 2006.

Gross margin was 81% in the fourth quarter of 2007, compared to 80% for the same period in 2006 and in the previous quarter. For the full year of 2007, gross margin was 80%, remained consistent with 2006.

Product development expenses for the fourth quarter of 2007 increased by 73% to RMB54 million, or $7 million, from the same period in 2006 and increased by 12% compared to the previous quarter, primarily due to the increase of product development personnel resources. Excluding share-based compensation charges, product development expenses accounted for 13% of net revenues, increased slightly from 12% in the same period last year and remained consistent with the previous quarter.

For the full year of 2007, product development expenses were RMB177 million, or $24 million, increased by 67% from 2006. Excluding share-based compensation charges, product development expenses accounted for 13% of the net revenues, increased slightly from 12% in 2006.

Sales and marketing expenses for the fourth quarter of 2007 increased by 49% to RMB72 million, or $10 million, from the same period in 2006 and 14% from the previous quarter, primarily due to the increase of sales and marketing personnel resources. Excluding share-based compensation charges, sales and marketing expenses accounted for 19% of the net revenues, decreased from 21% in the same period last year and remained consistent with the previous quarter.

For the full year of 2007, sales and marketing expenses were RMB243 million, or $33 million, increased by 41% from 2006. Excluding share-based compensation charges, sales and marketing expenses accounted for 19% of the net revenues, decreased from 21% in 2006.

General and administrative expenses for the fourth quarter of 2007 increased by 45% to RMB36 million, or $5 million, from the same period in 2006, primarily due to the increase of personnel resources and 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 7% of the net revenues, decreased from 8% in the same period last year and remained consistent with the previous quarter.

For the full year of 2007, general and administrative expenses were RMB138 million, or $19 million, increased by 48% from 2006, primarily due to the increase of personnel resources and share-based compensation charges. Excluding share-based compensation charges, general and administrative expenses accounted for 7% of the net revenues, decreased slightly from 8% in 2006.

Income from operations for the fourth quarter of 2007 was RMB127 million, or $17 million, increased 69% from the same period in 2006 and 14% from the previous quarter. Excluding share-based compensation charges, income from operations was RMB149 million, or $20 million, increased 68% from the same period in 2006 and 12% from the pervious quarter.

For the full year of 2007, income from operations was RMB404 million, or $55 million, increased 58% from 2006. Excluding share-based compensation charges, income from operations was RMB491 million, or $67 million, increased 59% from 2006.

Operating margin was 36% in the fourth quarter of 2007, compared to 33% in the fourth quarter of 2006 and 34% in the previous quarter. Excluding share-based compensation charges, operating margin was 42% compared to 39% in the fourth quarter of 2006 and 41% in the previous quarter.

For the full year of 2007, operating margin was 34%, compared to 33% in 2006. Excluding share-based compensation charges, operating margin was 41% compared to 40% in 2006.

Net income for the fourth quarter of 2007 was RMB135 million, or $19 million, representing a 102% increase from the same period in 2006, and a 24% increase from the previous quarter. Excluding share-based compensation charges, net income was RMB158 million, or $22 million, representing a 95% increase from the same period in 2006, and a 19% increase from the previous quarter.

For the full year of 2007, net income was RMB398 million, or $55 million, representing a 66% increase from 2006. Excluding share-based compensation charges, net income was RMB485 million, or $67 million, representing a 64% increase from 2006.

Effective tax rate for the fourth quarter of 2007 was 7%, decreased from 14% in the same quarter of 2006 and 15% in the previous quarter, primarily due to the preferential tax rate granted in the fourth quarter of 2007 and an increase in the deferred tax benefit resulting from the application of the tax rate of 25% under the new PRC enterprise income tax law as of December 31, 2007, as required by applicable accounting guidelines.

Effective tax rate for the full year ended December 31, 2007 was 13%, compared to 15% in 2006, primarily due to an increase in the deferred tax benefit resulting from the application of the tax rate of 25% under the new EIT law as of December 31, 2007, as required by applicable accounting guidelines.

The diluted earnings per ADS were RMB1.96, or $0.27, for the fourth quarter of 2007. Excluding share-based compensation charges, the diluted earnings per ADS were RMB2.28, or $0.31.

For the full year of 2007, the diluted earnings per ADS were RMB5.84, or $0.80. Excluding share-based compensation charges, the diluted earnings per ADS were RMB7.11, or $0.97, compared to RMB4.44, or $0.57, in 2006.

As of December 31, 2007, the cash balance was RMB1.1 billion, or $147 million, compared to RMB851 million as of December 31, 2006.

For the full year of 2008, we expect to continue the year-on-year revenue growth at a rate of approximately 35%.

In order to support our future business expansion, the company acquired the land use right to a piece of land in the city of Nantong in January 2008. Nantong is a city in Jiangsu Province and is approximately 110 kilometers north of Shanghai. The company plans to build its second call center on this piece of land.

The new EIT law became effective on January 1, 2008. The tax rate under the new EIT law is generally 25%, except for certain entities that are subject to preferential tax treatments, such as high and new technology enterprises. However, no guideline has been published on requirements to be satisfied in order to enjoy the preferential tax treatments or on the application procedures for such treatments. The company would apply the general tax rate of 25% before the guidelines on the preferential tax treatments are finalized and the application for such treatment is approved. The effective tax rate that will eventually apply to the company for 2008 will depend on many factors, including, but not limited to, whether certain Ctrip's entities can qualify as high and new technology enterprises as such enterprises are defined under the new EIT law.

With that, Operator, please open the lines for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Ming Zhao with SIG. Please proceed.

Chun Ming Zhao - Susquehanna International Group

Thank you. Good morning, everyone. Congratulations on a good quarter. Just two questions; one is can you provide the booking volumes for the hotel booking and the air ticketing for the quarter, as well as the average revenue on both sides?

And the second question is can you comment on the commission rate on both hotel booking and air ticket? Some competitors are seeing the rate going higher. I just wanted to have a bit on yours. Thank you.

Jane Jie Sun

Sure. For this quarter, we will provide a breakdown between the volume and commission rate but going forward into next quarter, we will stop breaking them out due to the increasing competitive sensitivity. So for Q4 2007, the volume for the hotel room nights is 2.745 million, which represents about 41% year-over-year growth. And the commission rate is the same as last year at RMB71 per room.

And for air ticket, the volume is 3.014 million, which represents about 60% of the year-over-year growth. And on the per ticket commission, this quarter is RMB51 versus RMB47 last year, which represents about an 8% increase. The commission rate for the hotel is stable at around 15% and the commission rate for the air ticket for the quarter is around 5%.

Chun Ming Zhao - Susquehanna International Group

Okay, great. Thank you.

Operator

Your next question comes from the line of Aaron Kessler with Piper Jaffray. Please proceed.

Analyst for Aaron Kessler - Piper Jaffray

Hi, this is Paul for Aaron. Congratulations on a good quarter. A couple of questions. First of all, can you quantify the impact of the snowstorm in Q1? Has that had a meaningful impact on your booking volume in terms of the cancellation rates?

And then also, can you give us some color on why the gross margins were -- they were higher than where we had modeled. Just wondering if there is anything going on there.

And then I was hoping that you could also give us a bit of a timeline for the building out of the second call center.

Jane Jie Sun

Sure. The first question is the weather impact. The impact of the weather can be illustrated in two parts. The first one is the direct impact during the storm and the second part is the indirect impact after the storm. So during the period of the storm, the direct impact from the cancellations of the tickets and the room nights were immaterial to our business and our team worked very hard and they did a very good job to proactively take care of our customers during the difficult time.

However, after the storm, we had our Golden Week holiday for the Chinese New Year and people who originally contemplated to travel during the Golden Week holiday tended to stay home due to the cold weather, so the general market is a little slower. Currently we are monitoring the market development very carefully and to see if the business volume will pick up going forward.

And your question, the second question is on the margin. I think the margin for Q4 increased nicely a little bit by 1% for two reasons. First of all, our team day in and day out has been focusing on improved efficiency of our operations, so we reengineered some of the procedures to make sure efficiency is continuously be improved. And secondly, on certain fixed costs as the percentage of revenue decreased as we have achieved a very good revenue growth, so these are the two main reasons on the margin.

And your third question is on the Nantong building. The Nantong -- our current building, it took us four years from the time when we start to select the site to the time when we can move in, so I think our current building can still support our business growth for the next two to three years, so it’s a good time for us to think about what we need to do in two to three years, so we start our planning process right now and we will start the planning and also building starting from 2008 to 2010.

Analyst for Aaron Kessler - Piper Jaffray

Okay. Thank you very much.

Operator

Your next question comes from the line of Catherine Leung with Citigroup. Please proceed.

Catherine Leung - Citigroup

Good morning and congratulations on another extremely strong quarter. I have three questions. Number one -- you see revenue growth acceleration in both your hotel and air ticketing businesses this quarter. Could you discuss the drivers of the growth? And by that I mean in addition to the robust travel market in China, how much of the growth has been coming from market share gains from the smaller travel agencies?

My second question is again on the call center. I think customer service has been one of Ctrip's competitive advantages and focus. There has been a lot of concern I think in general about rising inflation and in particular wage inflation in China. Could you comment on how your decision to open a second call center in Nantong could help you to deal with some of these wage pressures?

And my last question is on your balance sheet, or the accounts receivable. Could you help us understand again your cash collection system and the movement of accounts receivable? For example, I notice for fourth quarter, it seems that the days receivables was about 250 days, which seems like a pretty high number. So could you help us understand that more please? Thank you.

Jane Jie Sun

Sure. Our CEO will address your first question and I will take the second and third question.

Min Fan

Regarding the acceleration of our hotel booking and air ticketing business, I think this is mainly driven by our increased volume and as you probably know in the year 2007, we had very good penetration in the second-tier cities and according to the industry growth rate, in fact it’s not a very big one during 2007 and we just report that -- for example, for the air ticketing business, the major airline companies, their growth rate during 2007 was around 15%. So you can see for Ctrip, we did our market share in the market during 2007 and thanks from the contribution from both the second tier cities and the first tier cities.

Jane Jie Sun

Okay, and your second question is regarding the wage inflation. I think fortunately, the targeted employee level for our call center is for high school graduates and also vocational school graduates and the wage inflation for this type of labor force has been manageable. And also, I think the labor demand, labor supply is sufficient at this level so we can manage the wage inflation by increasing our efficiency to offset some of the increase in the wage inflation.

And your second question is on the AR increase. The AR increase is in line with our revenue growth, so if you look at the detail of the air balances, it can be broken into three parts. The first part is the AR from hotel commission and this has accounted for around 30% of the total AR. And we normally confirmed with our hotels for our customer stay before we book the AR and we collect these AR within one to one-and-a-half months.

The second part of the AR are from corporate travel customers and that has accounted for approximately 35% of the total AR as of year-end and we control these AR very tightly and we normally can collect these AR within 30 to 60 days.

And the third part of the AR are mainly from the credit card banks when we issue flight tickets for our customers. That has accounted for around 35% of the total AR, and we normally collect these AR within three to five business days on average from the credit card banks.

So if you take the total AR times 35%, you will get around RMB100 million. That is equivalent to 100,000 tickets, which is worth [two to three] days of our total ticket. So as of today, we have collected 100% of these AR associated with the air ticket that is paid by the credit card. So when a customer calls us and books a ticket -- for example, if the ticket price is RMB2,000 and if he wants to use the credit card to pay us, we normally will increase our AR from the credit card bank by the 1,000 and also increase AP to the airlines for the amount we owe them -- for example, 950, and the difference of the RMB50 is our commission income and normally within three to five days, the credit card bank will pay us the RMB1,000 and we will reduce our AR by the 1,000 and increase cash for the same amount. And when we pay the airlines, we will reduce our cash by 950 and reduced our AP accordingly.

So I hope that helps you to understand our AR flow and cash collection a little better.

Catherine Leung - Citigroup

It does. Thank you.

Operator

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

Richard Ji - Morgan Stanley

I have two questions and let me start with hotel room sales. Can you help us to understand a little better about the growth dynamics in tier one and tier two cities and what are the current revenue breakdowns between the two tiers, two segments? And what are the different growth rates in each of these markets? Thank you.

Jane Jie Sun

Sure. The first tier cities are growing at around 30% to 40% and the second tier cities are growing at around 40% to 50%. And the revenue mix has maintained very consistently at a 50-50 split.

Richard Ji - Morgan Stanley

Okay. Very helpful. And the second question is regarding the outlook of your new business, such as corporate travel, et cetera. When do you expect -- and what are the current status for these businesses and what are -- when do we expect them to be material revenue drivers going forward?

Min Fan

Regarding the corporate travel business, during the year 2007 we had a very healthy and very robust growth. But compared with our other revenue mix, like the hotel booking and air ticketing, the corporate travel revenue, the total volume compared to -- not so big as the other two major product lines, so once our corporate travel revenue exceeds 5% of our total revenue, we will break them out. We hope we will see that in the near future.

Richard Ji - Morgan Stanley

Okay, great. And a follow-up question on that point, and again on a quarter-over-quarter basis, your other business, probably including corporate travel, weakened a little bit. Is that partly due to seasonality or [do you have] other reasons?

Jane Jie Sun

Richard, can you repeat your question again, please?

Richard Ji - Morgan Stanley

For your other business, there was a sequential decline quarter on quarter. Can you help us to understand a little better -- is that due to the seasonality issue or some other reasons?

Jane Jie Sun

I think from what we can see on a quarter-over-quarter basis, hotel revenue increased 12, air ticket increased 12, and packaged tour increased 6, and other revenue also increased 11%, so we do not see a decrease in other revenue.

Min Fan

And for corporate travel, we still grew with a very fast pace.

Jane Jie Sun

Yes, so I think for the other lines, it -- for the other, small other -- okay. So the small other income is mainly -- it’s mainly the advertisement income as well as the flight insurance and that’s not our core business, so -- and relatively, [so it’s more] a percentage.

Min Fan

Yes, and maybe you can see on our website, later last year we in fact deleted a little bit of advertisement buttons and space to let our customers more focused, promotional focused branding of our product lines.

Richard Ji - Morgan Stanley

Great. Very helpful. That helps.

Operator

Your next question comes from the line of Leah Hao with Goldman Sachs. Please proceed.

Leah Hao - Goldman Sachs

Good morning, everyone. Very strong quarter. I just have two questions; the first one, I was just wondering, based off of your very strong margin profile, can you also give us a little bit of color in terms of your expectations for the full year margin on the gross margin side and the operating margin side?

Jane Jie Sun

Sure. On the gross margin side, I think it will be mainly driven by the revenue mix so on one hand, as the air ticket revenue grows faster, that is relatively has a lower margin than the hotel margin. However, our team will work very hard again to improve the efficiency and hopefully we will slow down the decrease in the gross margin. So that’s mainly driven by the revenue mix. And whatever change in the gross margin should flow down to our operating margin.

Leah Hao - Goldman Sachs

That’s great. Very helpful, thank you. And next is just a very small detail question; in terms of hotel reservation, given your obviously huge volume and very strong performance for these hotels, does the percentage of rooms allocated as the guaranteed allotment to Ctrip increase as a percentage of total rooms for the hotel over time?

Jane Jie Sun

Yes, it’s more than 50%.

Leah Hao - Goldman Sachs

I’m sorry, I was wondering just for the hotels that’s in your network, the percentage of room for each hotel that’s on an average basis that guaranteed a room allotment to you guys, does that percentage increase as well?

Jane Jie Sun

Yes, increased slightly from last quarter.

Leah Hao - Goldman Sachs

Thank you.

Operator

Your next question comes from the line of George Chu with UBS. Please proceed.

George Chu - UBS

Good morning. Thank you for taking my questions. The first question is regarding the airline industry. My observation is we have seen some increase in airline tickets and I think that has resulted in higher commission per ticket for Ctrip. I’m just curious from your perspective, do you think this trend will continue for 2008 and do you see any risk of airlines cutting down on the commission rate in the near term? Thank you.

Jane Jie Sun

Sure. In terms of the air ticket price, we monitor it very carefully and so far it has been very stabilized between 900 to 1,000. And in terms of our commission rate, the normalized range is between 4.5% to 5%. Q4 is a little bit higher than last quarter, just because at year-end, due to the high volume, some of the airlines will give some extra incentive. But from what we can see, I think the range is very stabilized.

George Chu - UBS

Okay. A follow-up question is on the operating expenses, if my numbers here are correct, they have been fairly stable in the past few quarters at about 45.78 or around that area. For 2008, should we expect a similar range of operating expenses for the whole year?

Jane Jie Sun

I think we will never allow our operating expenses to outpace our revenue growth so it should always be in line or below our revenue growth but on the other hand, I think the market is growing very fast so it’s also important for us to maintain certain investment for our future branding, so yeah, your assumption is correct that as a percentage of total revenue, it probably will remain very consistent.

George Chu - UBS

That’s great. Thank you. Great numbers.

Operator

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

Wendy Huang - Bear Stearns

Congratulations on the great quarter and thanks for taking my questions. First, recently your competitors launched a 24-hour, seven days services for the domestic and international air booking services, so could you comment how will you react to that competitive change and how will you improve your customer service in the air ticketing segment?

Min Fan

I think our air ticketing service quality is quite good among the industry and our service hours are between 6:00 a.m. to 11:00 p.m. And as we have evaluated the possibility of the 24-hour service and we concluded that according to the current situation, right now our current service hours should be sufficient to deal with customer needs. So definitely we will still try to improve our service quality more and more and for these service hours, we will still see whether -- if there is any need, we need to extend our service hours, we will do it. But I think right now, the service capability and service hours are already sufficient to our customer needs.

Wendy Huang - Bear Stearns

And maybe a follow-up on that -- could you give us some update, headcount of your current call center staff and how that breaks down into the air ticketing, hotel booking, and packaged tours?

Min Fan

We have a total for air ticketing calling, more than 1,000 staff.

Wendy Huang - Bear Stearns

How many for hotel booking?

Jane Jie Sun

Wendy, I think the total headcount is around 7,000 people. Half of them are the call center people.

Wendy Huang - Bear Stearns

I see. Secondly, just for modeling purposes, could you help us understand what land [inaudible] in Nantong, how will that impact on your balance sheet and the P&L going forward?

Jane Jie Sun

Sure. The Nantong building, we are still in the very early stage of planning so we do not have the final number in terms of the total capital forecast yet. Based on our current best estimate, the building expense probably will be somewhere around $40 million to $50 million.

Wendy Huang - Bear Stearns

40 to 50?

Jane Jie Sun

Yes, and it will be spent from 2008 to 2011.

Wendy Huang - Bear Stearns

Okay, and thirdly, you mentioned that currently your hotel network covers 6,000 hotels in China. Could you give us, what percentage is from those hotels with the rate below RMB300 per room night?

Min Fan

You mean the room nights we realized among these hotels?

Wendy Huang - Bear Stearns

Sorry, I mean how many hotels are those low-end hotels among the 6,000 hotels you cover -- just trying to understand what’s your --

Min Fan

Yeah, okay. Low-end hotels are under 15% of our total hotel pool.

Wendy Huang - Bear Stearns

How was this percentage compared with the previous quarters?

Min Fan

For the total volume, we increased a little bit. Percentage wise, not a big change.

Wendy Huang - Bear Stearns

Okay. Maybe a final housekeeping question -- you just mentioned that your 1% gross margin improvement is coming from a certain segment strong revenue growth, so could you maybe identify which business segment that contributed to that margin improvement, whether it’s air ticketing or packaged tours? Thank you.

Jane Jie Sun

I think all across the line, every business line has improved their margin by somewhat, so it’s an overall effort.

Wendy Huang - Bear Stearns

Okay. That’s helpful. Thank you.

Operator

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

Eddie Leung - Merrill Lynch

Good morning. Very good execution, as always. A couple of questions -- number one is could you guys tell me a little bit about the progress you guys are making in order to secure the guaranteed room nights during the Olympics time?

Number two is could you also comment on your competitive landscapes. I remember previously you guys normally didn’t really focus on competition but it seems like you mentioned that the competition seems to have stepped up a little bit. Can you help us to understand basically the whole landscape? Thank you.

Min Fan

Regarding the Olympic Games, we think from a long-term perspective, we believe the Olympic Games is very good for China and also good for Ctrip as it will increase our visibility. And in the short-term, I think it’s hard to predict at this point, as there is no historical data to base it on.

Regarding the hotel cooperation during the Olympic Games period, we already have acquired some hotels already guaranteeing some room for our customers to book during the Olympic Games period and also we negotiated with potential partners regarding the Olympic Games ticket distribution.

And I think for the Olympic Games hotel booking, right now it’s not started yet because still we have a few months to go. I think we will monitor it very carefully.

And for the competition and for the competitive landscape, we believe right now Ctrip still remains the dominant market player in the online travel service and on the hotel booking and air ticketing business. There is no indication that the competitive landscape has changed.

Eddie Leung - Merrill Lynch

Okay. Good to hear that. Thank you.

Operator

Your next question comes from the line of Paul Keung with Oppenheimer. Please proceed.

Echo He - Oppenheimer

This is Echo He sitting in for Paul Keung. I just want to explain that we used to be CIBC and lately have become Oppenheimer. The question is -- do you see any trend, any cost increase of your call centers? I know you talked about a labor market wage increase but what about [others]?

Jane Jie Sun

The major components for our call center is labor related, so we have been very conscientiously to make sure we improve our efficiency and by looking at different details, different steps for each processes, and so far we have been very successful in order to make our operation efficiencies to be improved on a continuous basis.

The labor increase due to inflation at the current education level we are targeting after, it is still manageable. We monitor the progress very carefully but so far, we can manage that well.

Echo He - Oppenheimer

Okay, thank you so much. And the second question actually, I wanted to ask about the competitive landscape too and in terms of competitive advantage, what do you think your major -- your competitors?

Min Fan

Major competitors I think for the hotel booking side is still eLong will be the major competitor. And for airline ticketing business, I think our major competitors will be located in different cities -- local traditional ticketing companies.

Echo He - Oppenheimer

Okay. Thank you so much. Those are very good results.

Operator

Your next question comes from the line of Ashish Thadhani with Gilford Securities. Please proceed.

Ashish R. Thadhani - Gilford Securities

Yes, good morning. When will you get clarity into the tax rate for 2008? Where do you think this figure might settle? And the business tax -- will that stay in the same roughly 7% range?

Jane Jie Sun

I think all the enterprises in China right now are anxiously waiting for the detailed guidelines on the preferential tax treatment and before that guideline is published, we have to apply the general rate to the provision. I believe all the enterprises are waiting anxiously right now. The ball is really on the tax authority in China, so hopefully they hear the demand from the industry and they will publish the guideline and we can start our application process as quickly as possible. And we will always do our best and work hard to get the best tax treatment as possible.

In terms of business tax rate, it should be very stabilized.

Ashish R. Thadhani - Gilford Securities

Okay, so the effective tax rate, obviously 25% would be the ceiling and you had I think something in the order of about 13% in the year just completed, so something in the high teens when the dust settles? Is that your expectation or -- just trying to get a sense for what it might be when you do get clarification.

Jane Jie Sun

It’s really hard to control the timing of the government tax authority. We monitor it very carefully, so right now we do not know when the final guideline will be published. So for example, if they speed up and publish the guideline during the early part of the year and if we can start our application process early, then we can apply a lower rate as soon as we get the approval. However, if the government does not apply, does not publish this guideline until the later part of the year, then our application process will be delayed. So it’s really depending on when they can publish the guideline and when the approval can be granted.

Ashish R. Thadhani - Gilford Securities

And until such time, 25% will be the rate?

Jane Jie Sun

Yes, until such time, we will prudently apply 25% to our provision.

Ashish R. Thadhani - Gilford Securities

Okay. Thank you very much.

Operator

Your next question is a follow-up question from the line of Ming Zhao with SIG. Please proceed.

Chun Ming Zhao - Susquehanna International Group

Thank you. I have two questions. One is I want to understand from the consumers, how many of them are using the Internet to book travel? The amount you guys always said is 70-30 split between call center and Internet. Do you see any increase on the Internet part after so many years?

Min Fan

I think generally speaking, the 30-70, the big picture did not change a lot but if you look into the consumer behavior, we noticed that more and more consumers, more and more clients will surf on our website more than before and I think this is somewhat related with the consumer behavior. Those clients, they will surf online and finally they would like to call offline to have again more comfortable, if there is some people contact.

So if you are talking about the product line, I think for the airline ticketing business we do see a tendency that the online booking is increased a little bit more than the hotel online booking ratio. And if you are talking about our vacation package booking, in fact the vacation package we do see the booking ratio, online booking ratio already more than 50%, 50%, 60% are booking online. But because this part of the business for vacation package business is relatively small in our revenue mix, so if we have more and more vacation business than we can see this online ratio will be increased a little bit.

Chun Ming Zhao - Susquehanna International Group

Okay, good. The second question is regarding Ctrip as a business using the Internet to market. Can you share some color on how heavy you are using search engines to market your business, if possible and how many key words are you buying? What’s the percentage of your marketing expense is actually from using search engines?

Min Fan

During the year 2007, we did quite some work on the search engine, especially on the -- what we called the SOE or search engine optimization and we do get quite some good results from our optimized searching efforts. And we cooperate with all the major search engines in China and we allocate a certain marketing expenditure on this field.

So in the year, in 2008 still we will try to make more efficient search engine efforts, try to get more and more market share from this field.

Chun Ming Zhao - Susquehanna International Group

Okay. Thank you.

Operator

We are currently showing no more audio questions at this time.

Tracy Cui

Thank you. We will conclude this call. Thanks, everybody.

Operator

Thank you for your participation in today’s conference. This concludes our presentation. You may now disconnect. Have a good day.

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Source: Ctrip.com Q4 2007 Earnings Call Transcript
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