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

Q3 2012 Earnings Call

November 5, 2012 7:00 PM ET

Executives

Michelle Qi – IR Manager

Min Fan – Co-founder and CEO

Jane Sun – COO

James Liang – Co-founder and Chairman

Jenny Wu – CFO

Analysts

Jin-Kyu Yoon – Nomura

Richard Ji – Morgan Stanley

Andy Yeung – Oppenheimer

Fei Fang – Goldman Sachs

Alex Yao – Deutsche Bank

Eddie Leung – Bank of America

Mike Olson – Piper Jaffray

Alicia Yap – Barclays Capital

Wendy Huang – CIMB

Fawne Jiang – Brean Capital

Tian Hou – TH Capital

Elinor Leung – CLSA

Jiong Shao – Macquarie Capital

Mu Zhi Li – Citigroup

Operator

Good day, ladies and gentlemen, and welcome to the Third Quarter 2012 Ctrip.com International Limited Earnings Call. My name is Caris, and I will be your coordinator for today. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. (Operator Instructions) As a reminder, today’s call is being recorded for replay purposes.

And I would now like to hand the call over to your host for today Michelle Qi, IR Manager of Ctrip. Please proceed.

Michelle Qi

Thank you, Caris. Thank you for attending Ctrip’s Third Quarter 2012 Earnings Conference Call. Joining me on the call today we have Mr. James Liang, Chairman of the Board; Mr. Min Fan, President and Chief Executive Officer; Ms. Jane Sun, Chief Operating Officer; and Ms. Jenny Wu, 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, Jane, James and Jenny will share our business updates, operating highlights, industry outlook and financial performance for the third quarter of 2012 as well as outlook for the fourth quarter of 2012. We will also have a Q&A session towards the end of this call.

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

Min Fan

Thanks, Michelle, and thank you to everyone for joining us on the call today. In the third quarter of 2012, Ctrip delivered solid results. Net revenues grew by 20% year-over-year, at the high-end of our guidance. We’re pleased to see a strong volume growth of 40% in our hotel business. We executed strategic to gain market share across business lines in the third quarter, and we are continuing our investment to enrich our product offering in full customer experience and enhance brand awareness for future growth.

To build the leading one-stop travel platform in China, we aim to offer a comprehensive product range that meets the needs of all kinds of travelers. The Ctrip product team is working closely with our partners to develop a wide variety of products that offer the best possible values. Meanwhile, we’re also making our system more open platform in order to work with both supplier and distribution partners. Through these efforts, we have become more comprehensive in terms of product coverage, more competitive in pricing and more efficient in operations.

We’re proud to see the high level of market acceptance from our partners and our customers. We’re excited about huge potential of the surging leisure travel market in China, especially outbound travel. Ctrip has built up a solid foundation to capture this opportunity in the industry.

In August, we announced an agreement with Booking.com, the world’s leading online travel reservation service provider. Under the agreement, Ctrip customers can access Booking’s global hotel networks through our hotel reservations services. Our international hotel coverage is now aligned 200 Southern Hotels, far exceeding any other players in China. We are pleased to see the fast growth in international hotel volume.

International air ticketing growth has accelerated significantly since the launch of our new online international air ticketing platform. We are among the top three online travel agencies in China for our tour packages. We are confident that Ctrip is in the best position to make most of the opportunities ahead.

We further stepped up our sales and marketing efforts, especially online channels, to reach leisure travelers. We have partnered with the leading players in vertical like search engine, social media and online video. We will relentlessly explore different online channels and, more importantly, continue to improve the conversion and effectiveness of our online marketing.

Expanding our service to mobile platforms is our strategic focus and investment priority. We have released a series of travel-related apps, including Ctrip Wireless, Ctrip Hotel, Ctrip Travel, (inaudible), Songguo, the hotel booking app, and Tujia, the trip taking app. We actively collaborate with industry leaders to enhance app functions, like mapping and locating services.

Our core app, Ctrip Wireless, is now available on all major smartphone and tablet operating systems. Its latest IOS version is among the first in China to support Passbook. In the third quarter, Ctrip Wireless reached over 15 million downloads; over 10% of our hotel transactions were conducted through mobile channel. During the recent October holiday, our booking volume is very healthy and very strong. This demonstrates that our team is prepared to handle large volume while providing consistent quality services.

We also appreciate the support we received from our partners during the peak season, which ensured the best inventory and the most cooperation for Ctrip’s customers. The Ctrip team will continue to work tirelessly to provide the best value to both our customers and partners.

Now I will turn to Jane for the operating highlights.

Jane Sun

Thanks, Min. Thanks to everyone. The hotel booking services feature further expanded our hotel network over the past quarter. By the end of the third quarter 2012, our domestic hotel supply network covered over 46,300 hotels compared with 21,900 hotels a year ago, more than doubled.

Internationally, our hotel coverage extended to over 200,000 hotels in more than 170 countries through the corporation with Bookings.com, and we have signed contracts to establish direct connection with hotel groups such as Shangri-La, Hilton, InterContinental, Marriott, Accor, and Jumeirah. We continued executing the best-price strategy in the third quarter; these travelers during the summer season and October holidays make substantial contributions to our hotel volume.

We’re encouraged to see the fast development of our new hotel products for leisure travelers, including Smart Choice Hotels, group buying hotels and wholesale website, Sungguo.com, and our vacation rental partner, Tujia.com. For instance, Sungguo.com has expanded its network to directly cover over 10,000 hotels and other accommodation in less than 12 months, which is a record high development in industry and demonstrated Sungguo’s leadership in this area.

Air ticketing volume maintained at a higher growth rate in the third quarter, thanks to our advanced IT platform, superior service quality, reliability and efficiency. International air ticketing volume grew approximately 50% year-over-year. Our air ticketing team worked hard to offer the richest global ticketing products at the lowest price available to Ctrip customers. Based on the long-term close relationship with domestic and international airlines, we are now able to offer direct sales and professional rates for many major airlines on Ctrip’s website. Tickets from most low-cost carriers in China are now also available on Ctrip’s platform.

Our packaged tour business delivered a solid result in the past quarter. The revenue from Mainland China grew over 50% year-over-year, with outbound travel revenue up 80% year-over-year. Through years of concerted efforts, Ctrip has built up a sophisticated worldwide service network to guarantee the best resources and services for Chinese travelers. It also covers local tour product and services, car rental, and activity tickets.

Ctrip’s Corporate Travel Services once again achieved solid growth. We continued to enhance the IT platform and optimize the operating processes to improve customer experience. While our hotel and air ticketing business are penetrating the leisure travel arena, our corporate travel business is also expanding from the top-tier cities to lower-tier cities and are capturing more opportunities in the corporate travel management market.

Internally, we continuously evaluate our processes and improve operational efficiencies across the board. Our online booking ratio reached 50% in the third quarter. In September 2012, Ctrip completed the offering of US$180 million principle amount of convertible senior notes due 2017. The notes bear an interest rate of 0.5%, and may have dilutive effects on the diluted earnings per ADS.

As offering was completed within a relative short time period, close to the end of the third quarter, its impact on the income statement diluted earnings per share for the third quarter of 2012 was insignificant. The cost of the offering of the note will be amortized through the life of the notes. As of November 5, 2012, Ctrip has purchased approximately 17.2 million ADSs in the aggregate, with a total consideration of US$294 million under the three existing share repurchase program adopted in 2012.

We’re encouraged by the latest progress in every segment of our business. The Ctrip team remains dedicated to executing our strategy and we will work diligently to bring the best value to our customers, our partners and our investors.

Now, I will turn to James for the industry outlook.

James Liang

Thanks, Jane. China’s leisure travel market is still in an early age. The competition in this segment is intense, yet in a premature way. Beyond the short-term pressure from pricing war, we believe Ctrip’s core competencies are product offering, service quality and IT efficiency and our highly-qualified and dedicated team. We are very confident in Ctrip’s position as a leader of this market, and we will continue our success in this new era.

Now, I will turn to Jenny for financial updates.

Jenny Wu

Thanks, James. And thanks, everybody. For the third quarter 2012, Ctrip’s net revenue were RMB1.17 billion, up 20% year-on-year and Q-on-Q. Hotel reservation revenues were RMB457 million, up 11% year-on-year, primarily driven by year-on-year increase of 40% in hotel reservation volume and partially offset by a year-on-year decrease of 21% in commission per room night. The decrease of commission per room night was mainly due to promotional activities.

Hotel reservation revenues increased by 11% Q-on-Q, mainly due to seasonality. Air ticketing revenues were RMB478 million, up 24% year-on-year and 18% Q-on-Q, mainly due to an increase in air ticketing volume. Packaged tour revenues were RMB224 million, up 31% year-on-year, due to an increase of leisure travel volume, and up 67% Q-on-Q largely due to seasonality. Corporate travel revenues were RMB54 million, up 25% year-on-year mainly driven by an increased corporate travel demand from business activities, and up 0% Q-on-Q primarily due to seasonality.

Gross margin was 76% versus 77% a year ago and 75% in the previous quarter. Product development expenses increased 51% year-on-year and 17% Q-on-Q, primarily due to an increase in product development personnel-related expenses. Excluding share-based compensation charges, product development expenses accounted for 18% of net revenues up 4 percentage points year-on-year, and remained flattish Q-on-Q.

Sales and marketing expenses increased 34% year-on-year and 39% Q-on-Q primarily due to an increase in sales and marketing-related activities. Excluding share-based compensation charges, sales and marketing expenses accounted for 25% of net revenues, up 8 percentage points year-on-year and 4 percentage points Q-on-Q. General and administrative expenses was 39% year-on-year primarily due to an increased in administrative personnel, share-based compensation charges and incremental turnover tax due to the new value-added tax reform.

G&A expenses increased 9% Q-on-Q, primarily due to an increase of administrative personnel. Excluding share-based compensation charges, G&A expenses accounted for 8% of net revenues, up 2 percentage points year-on-year and remained flattish Q-on-Q. Income from operations were RMB119 million, trending down 38% year-on-year and going up 13% Q-on-Q. Excluding share-based compensation charges, income from operations went down 24% year-on-year and up 8% Q-on-Q.

Operating margin was 16%, down 15 percentage points year-on-year and 1 percentage point Q-on-Q. Excluding share-based compensation charges, operating margin was 20%, down 15 percentage points year-on-year and 6 points Q-on-Q. The effective tax rate was 24%, increased from 21% a year ago, primarily due to the increase in amount of non-tax detectable share-based compensations as a percentage of our income before income tax percentage as a whole.

The effective tax rate for the third quarter decreased from 45% in the previous quarter, recorded in the second quarter of 2012. We made the provision of 5% PRC withholding tax related to the dividends that our PRC subsidiaries would pay to the direct parent, which is our Hong Kong subsidiary, to fund the share repurchase program announced in June. This was partially offset by the preferential tax treatment of certain consolidated PRC entities.

Net income attributable to Ctrip’s shareholders was RMB194 million, down 14% year-on-year and up 62% Q-on-Q. Excluding share-based compensation charges, net income attributable to Ctrip’s shareholders was RMB302 million, down 27% year-on-year and up 32% Q-on-Q. Diluted earnings per ADS were US$0.22 excluding share-based compensation charges it was US$0.35.

As of third quarter 2012, the balance of cash and cash equivalents, restricted cash and short-term investment was RMB5.4 billion, or US$859 million. As to the share buyback, changes are highlighted.

And, finally, for the business outlook. For the fourth quarter 2012, the company expects to continue the net revenue growth year-on-year at a rate of approximately 15% to 20%. This forecast reflects Ctrip’s current and preliminary view, which is subject to change.

With that, operator, we are opening the line for questions.

Question-and-Answer Session

Operator

(Operator Instructions) And your first question comes from the line of Jin-Kyu Yoon with Nomura. Please proceed.

Jin-Kyu Yoon – Nomura

Hey. Good morning, everyone.

Jane Sun

Hi.

Min Fan

Hi.

Jin-Kyu Yoon – Nomura

Jenny, just on your guidance...hello?

Jenny Wu

Hello.

Jin-Kyu Yoon – Nomura

Great. Just on your guidance, are you providing guidance for margins for the fourth quarter or quarters beyond that? And second of all, you mentioned in your prepared remarks that US$294 million have been used of stock buyback from various tranches in 2008, 2011 and 2012. How much of the proceeds remain from 2008 and 2011 tranches today? And how much of US$300 million recently announced in the US$180 million CB remain today? Thanks.

Jenny Wu

Thanks for the question, Jin. For the guidance, firstly, for the top-line guidance, the total growth will be around 15% to 20%. For the OP margin non-GAAP, for the first quarter we forecast it to be around 20% to 25%. You will see it will be lower than the third quarter because fourth quarter is usually lower season. So normally during the normal business year, the fourth quarter’s margin will be lower than third quarter. And plus, in third quarter – in fourth quarter, we will see this winter came early this year and it kind of affect our business. And also for the year-end we usually will also accrue some bonus. So, 20% to 25% is the range we will try our best to reach.

And for the share buyback, you are right, under the three existing board-approved share buyback plans, the total quota is RMB415 million. And as of November 6, we already purchased back RMB294 million. So we still have aggregate together we still have around RMB120 million roughly left for the buyback. And for that one, we will – we can use our existing cash to execute the buyback. And for the CB, our total offering is RMB118 million and net proceeds is RMB115. On the CB issuing day, JP Morgan helped us to purchase back about US$42 million. So for the CB proceeds, we still have around RMB110 million left.

Jin-Kyu Yoon – Nomura

So, Jenny, just to clarify that, RMB120 remaining is excluding the CB, so including the CB it’s more like RMB230 million, is that correct?

Jenny Wu

Yeah, for the RMB115 million, net proceeds from CB, our top priority, yes, it is for the share buyback. So the total quota left could be up to RMB217 million. You are right.

Jin-Kyu Yoon – Nomura

Okay, perfect. Great. Thanks, Jenny.

Jenny Wu

Thanks.

Operator

(Operator Instructions) And your next question comes from the line of Richard Ji from Morgan Stanley. Please proceed.

Richard Ji – Morgan Stanley

Hi, good morning, James, Min, Jane and Jenny. I have a quick question...

Jane Sun

Hi, good morning.

Min Fan

Hi, good morning.

James Liang

Hi, good morning.

Richard Ji – Morgan Stanley

Good morning. First of all, your hotel bookings volume, indeed, a surprise and upside on price promotion. Can you comment on the sustainability of the volume expansion in hotel booking? And especially we’re curious to find out the booking trend in the recent months, especially around the Golden Week holiday. Thank you.

Jane Sun

Hotel bookings volume has grown very healthy. Our goal is to aggressively gain market share. Whatever it takes, how long it takes, we are very determined to penetrate into the market. So 40% demonstrated our ability to gain market share through the first tier, second tier and undeveloped area. Going forward, we will still maintain a very strong marketing activities and make sure our price is the best in the market and product is the most comprehensive in the market. So hotel volume going forward is forecasted between 30% to 40% for the next quarter.

James Liang

I think the Golden Holiday, I think for Ctrip, we are working very good in terms of Malaysian market. So you can see for this year and even the last year during those big Golden Holidays, Golden Week, Ctrip enjoyed very healthy and very strong volume during this time period. So, we anticipate in the coming years we will maintain this momentum.

Richard Ji – Morgan Stanley

Yeah, very good. My second question is regarding your longer-term strategy as a one-stop travel services shop. And can you comment on the feedback so far you have received from your service partner regarding your open platform and what’s the status there? And also regarding your outbound traffic, can you comment on the total revenue contribution and how should we look at the margin trend of outbound travel service? Thank you.

Min Fan

Yeah, I think Ctrip is very open to work with various partners in the travel industry, and including the traditional agency and also other hotels. Our open platform will bring in more service providers to meet customers’ needs, particularly leisure travelers’ increasing demand for more comprehensive and attractive products offerings. I think, in fact, Ctrip start our business with a very open model and platform. We have the right infrastructure and technology to support the open platform to service the partners with more effective and smooth solution.

More importantly, I think Ctrip has most experienced team in the network and industry knowledge to be innovative and, in the same time, to really command the model and have better executions than our competitors. And we have the big travel traffic and largest base of customers, so I think for the open platform definitely will give us more value to contribute more to our partners. And the more traffic and better service, these are the fundamental values for our partners they will appreciate.

And just for simple example, with Ctrip’s open platform our target customers can find probably old products prices when you book – when you need to plan or book a business or leisure travel as well as travel tips or even the switch apps, so I think this will be – we’ll have seized advantage over other players. And in the market I think no – there’s no other players that do this kind of one-stop solution – travel service solution for customers.

In terms of the international travel market, I think outbound travel is growing very fast in China along, with the increased household income, RMB appreciation and also relaxed visa restrictions. And according to BCG report, outbound travel will be growing at a CAGR of 17% between 2010 and 2020. So for Ctrip, we will provide the most comprehensive product offerings and also high service quality for outbound travel in China.

We have been very actively expanding the international travel products to service the fast track travel demand. And, as we just said, we have corporate with our global leading partners and also we have very good – we have also signed strategic contracts like the Accor, Hilton, International, InterContinental, Jumeirah, Marriott, Shangri-La, and those major hotel groups we established direct connection with those hotel groups.

Definitely we will work more effectively both our international hotel coverage to a great extent. And also this year, we’re launching our new international air ticketing channel. This booking engine by far is the best online international air ticketing booking travel in China, obviously has kind of functionality.

And also for leader travel, we are best positioned in the Greater China region, and we have (inaudible) in Hong Kong, and also recently we’re working very hard in the major destinations in Asia regions. We have a very good strategic growth offering partners in different major top destinations. So, by far, I think Ctrip is the very – right now is in a very good position in this market. And according the recent government statistics, Ctrip is right now among the top three online players in China.

Richard Ji – Morgan Stanley

Very helpful, thank you.

Jenny Wu

Thank you.

Min Fan

Thank you.

Operator

And your next question comes from the line of Andy Yeung with Oppenheimer. Please proceed.

Andy Yeung – Oppenheimer

Hi, thank you for taking my questions. First, let me apologize for the audio quality. We’re still dealing with the impact of Hurricane Sandy here in New York.

My first question is about your outbound travel business. I think you just mentioned there’s some focus on that area. Can you give some color on the percentage of your air ticketing, the hotel booking for the business right now that’s related international travel? And what’s the longer-term goal for that international business?

Jane Sun

Approximately 10% of the volume is outbound, but we forecasted the outbound business will grow faster than the domestic one. Particularly, for Ctrip’s customer, I think most of them are very high end and the income level is increasing and visa restrictions have been lifted. Therefore, I think there will be more volume going abroad. So, in the future, this volume percentage can increase to about to 20% or even beyond 20%.

Andy Yeung – Oppenheimer

Okay, great. And then my next question is about your pricing charges. I think you have launched and/or acquired different online brand names to cater to different market segments. With your recent partnership with Booking.com and (inaudible), what’s your view on offering different pricing strategies such as name-your-price type of offerings?

Jane Sun

Two things. First of all, Ctrip is the largest OTA within China. So, legally, Ctrip’s customer should be entitled to enjoy the best price as OTA customers in the market. So, whatever is available online, Ctrip’s customers should be able to enjoy that. So, our product development team works very hard with all the hotel and airline partners to make sure our customers enjoy the best price in the market. Secondly, we also have talks with Bookings, which are the international players, also to make sure that it’s a mutual beneficial relationship we drive Ctrip’s customers by using these inventories. And, meanwhile, our customer is offered the most comprehensive coverage worldwide.

Andy Yeung – Oppenheimer

Got it. That’s very helpful, thank you.

Jane Sun

Sure. Thanks.

Operator

Operator

And your next question comes from the line of Fei Fang with Goldman Sachs. Please proceed.

Fei Fang – Goldman Sachs

Hi, Min, Jane, Jenny, Jim. Thank you for taking my question and congratulations on a strong set of results. My question is if you can comment on how the competitive landscape has trended in the past quarter, especially after August? And how should we think about the coupons’ impact on your 4Q margin guidance given this low seasonality? Thank you.

Jane Sun

First of all, I think Ctrip always encouraged healthy competition. I think the healthy eco environment for the travel industry is good for every player in the market and good for the consumers as well. Secondly, if we see irrational competition in the market, Ctrip will also match up dollar for dollar, percentage for percentage to make sure we do everything we can to gain market share. So our marketing campaign, our e-coupon program is very much matching up with any competitors in the market to ensure Ctrip customer enjoys the best price in the market. So whatever it takes, how long it takes, Ctrip is very determined to run a effective campaign to gain market share to make sure we capture all the opportunities in this fast-growing market.

So in Q4, we will keep up with our matching strategy to make sure whatever is in the market Ctrip team will match up to any kind of price competition or e-coupon or sales marketing campaign. We are very determined and we have all the resources behind us to run this active campaign.

Fei Fang – Goldman Sachs

I see. Just a quick follow-up question. Just regarding your 40% hotel volume growth versus a 21% commission decline. So if the commission trend – commission trajectory is the new trend that we should expect from the hotel segment going forward? And for the 3Q commission decline, how much of the decline was due to the coupon program and how much was due to the organic commission trend? Thanks.

Jenny Wu

Hi, Fei. This is Jenny.

Fei Fang – Goldman Sachs

Hi.

Jenny Wu

And the hotel volume growth is 40% in 3Q and the commission per room night has trended down by 21% year-on-year. For that one, it will compose three parts. Firstly for the listing price, that one trended down about 5% year-on-year. And second is the listing commission – the nominal commission rate, so that one is largely flat. And the last one is due to the promotional activities largely due to this e-coupon, it caused a decline about 15% year-on-year. And regarding the trend for 4Q and probably I can here give you some guidance for the 4Q overall.

For the hotel, the volume growth for 4Q will be about 30% to 40%. Clearly, you will see the good momentum carried over from 3Q to 4Q. And for commission per room night, again, firstly for this listing price, we see it will trend down about 5%. Again, it’s largely due to the increasing contribution from lower-tier cities and lower star hotels. And for the nominal commission rate, again, it will be flattish. And lastly for this e-coupon-related promotional activities, the impact will be about 10% to 15% year-on-year decline. So for the hotel, in 4Q total revenue will be about 15% to 20% year-on-year.

Fei Fang – Goldman Sachs

Thank you, Jenny.

Jenny Wu

Thanks, Fei.

Jane Sun

Thanks.

Operator

And your next question comes from the line of (inaudible). Please proceed.

Unidentified Analyst

Good morning. Thank you so much for taking my questions. I have two questions as well. Firstly, you mentioned the 4Q hotel volume is going to be up 30% to 40, revenue is going to be up 15% to 20%. Could you please provide the expectations for the other segments of your business?

Jenny Wu

Sure. For air ticketing business, the total volume will be about 15% to 20% year-on-year increase, and for the commission per room per ticket will trend down about 5 percentage points, 50% of the clients due to the pricing and 50% due to the commission per ticket decline. And so the revenue for air ticketing will grow about 10% to 15% year-on-year. And, therefore, the packaged tour business fourth quarter is lowest season than 3Q, so we expect about 25% to 30% year-on-year growth. And, therefore, the corporate travel, it usually grows in line with air ticketing business, so expect it will grow about 10% to 15% also. And this will combine everything together for the fourth quarter, the total – the top-line growth will be about 15% to 20% year-on-year.

Unidentified Analyst

Okay, great. Thank you. And my second question is on the margins. You talked about the Q4 because of the seasonality, operating margin is going to be 20% to 25%. But I was wondering just structurally how you feel about the sort of margins for 2013 and beyond. Are we at a point towards the end of your marketing campaign or your investment cycle now perhaps margins may be the bottom here for the next couple of years? Any comments will be helpful. Thank you.

Jane Sun

Sure. I think for Q4, margin is forecasted at about 20% to 25%. For 2013, our team is working very hard to finalize the forecast for the next year. So by the time when we announce next quarter, we will be able to give you a very insightful guidance for the next year. So, for us, strategically in a market we want to make sure Ctrip is very aggressively gaining market share, either through sales marketing campaign, through best price strategy, whatever it takes we will make sure Ctrip gain market share from this fast-growing market. But internally, our team historically has been very disciplined. So every dollar we can save, we save it for the sales and marketing campaign. And we will make sure for next year we keep up with this disciplined philosophy and strategy to save every penny for our sales and marketing campaign.

Unidentified Analyst

Thank you very much.

Jane Sun

Sure, thanks.

Operator

And your next question comes from the line of Alex Yao with Deutsche Bank. Please proceed.

Alex Yao – Deutsche Bank

Hi. Good morning, everyone, and thank you very much for taking my question. My first question is on the coupon competition in the quarter. Are there any operating metrics you can share with us, for example, redemption rate across different hotels? Or perhaps what percentage of coupon redemption is booked as unearned revenue and what percentage is operating expense? Any color will be helpful? Thank you.

Jenny Wu

Thanks, Alex. And for that one, we’re not ready to disclose such kind of details yet due to the competition reasons. But you see, as Jane mentioned, we’re very determined to gain market share and we will try our best to stop the irrational competition in the market. For the e-coupon life we will continue to carry on the matching strategy and then we will match dollar-by-dollar and percentage-by-percentage versus our competitors. And what I can provide you is probably the margin breakdown. And you’ll see this – in 3Q, our margin – non-operating margin non-GAAP is 25%, and it trend about 15 percentage points year-on-year. And for that one, we have already communicated with you before, 4 percentage points can relate to the new business development and 2 percentage points due to this labor cost increase. And now we have like 9 percentage points. For that one, we can simply say for this quarter roughly half is due to our sales marketing campaigns and half due to this e-coupon program.

Alex Yao – Deutsche Bank

Got it, that’s helpful. And then in relation to the air ticket business, one of your major competitors recently started to offering coupon on the air ticket as well. Shall we expect that you guys to follow the coupon on air ticket soon?

Jane Sun

Air ticketing business is a very complicated business. We do not believe by just issuing coupon the customers will be attracted to the services, because there are lots of details behind the scene. So we will be there open minded to make sure technically, service-wise, Ctrip spend far beyond any competition. And we will monitor the situation very closely, but right now we do not have any plan. We will monitor the situation very carefully.

Alex Yao – Deutsche Bank

That’s helpful. Thank you very much.

Jane Sun

Thanks.

Operator

And your next question comes from line of Eddie Leung. Please proceed.

Eddie Leung – Bank of America

Good morning. Thank you for taking my questions. I would like to follow up on your air ticketing business just to get more color. Could you share with us the pricing trend of air tickets you have seen in the third quarter as far as the commission rates trend in the third quarter? Thank you.

Jenny Wu

In the third quarter, the pricing is largely flattish and also this commission rate it tend down about 1 percentage points, but we think it’s still largely flattish. And what we said that in the first half of this year the commission not only the commission rate trends down by the 2 percentage points to 3 percentage points, and for the – always see it’s about like 4 percentage points trend down. And in 3Q it end up only about 1%. So, you’ll see normal – it’s very normal to us. And so far what we say that for the commission rate we still can be about 4% to 5%.

That level can be sustained, I think at least for the next several years. And just the airlines, they will adjust their compensation to us based on the timing and on the demand, so Q-on-Q, month-by-month, there were will some saturation. And even we look at the 4Q, based on our current visibility, the pricing will probably trend down about 2 percentage points to 3 percentage points and for the nominal commission rate, again, about 2 percentage points to 3 percentage points. Our judgment about last year, the similar period of last year, is kind of a high base. And also, the airlines will also adjust that based on the demand. But overall, I think this 4% to 5% is still the kind of range we can achieve in the next several years.

Eddie Leung – Bank of America

Very useful. Thank you.

Operator

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

Mike Olson – Piper Jaffray

Hi. Thanks a lot. Good morning. One quick question. You mentioned you’re doing anything to mask pricing, even with irrational competitors. Smaller competitors certainly won’t be able to last long in that kind of environment. So are you seeing that strategy effectively removes smaller competitors from the market? And then, what about new competitors entering the market? Do you see anything changing as far as new competitors in recent months? Thanks.

.

Jane Sun

Sure. Yeah, Mike, you’re right. With this kind of e-coupon, probably only the companies who have very strong financial bandwidth can afford doing that. (Inaudible) cash on the bottom line, so we are very much equipped and prepared to run any campaign it takes for us to gain market share. The other players, depending on their financial bandwidth, they can either match or they do not match. If they do not match, I think the market share will be lost. So, we monitor the different competitors, if we keep up with this strategy, I think Ctrip’s momentum to gain market share will remain to be very strong.

Mike Olson – Piper Jaffray

Okay. One other quick one actually, as far the revenue growth rate, the implied guidance suggest that at the midpoint the revenue growth would slightly decelerate this quarter. I think you have an easier revenue comp in Q4 than you did in Q3. Can you just talk about any reasons why revenue growth would decelerate in Q4 compared to Q3?

Jenny Wu

Sure. And, Michael, when we give the guidance, we want to be prudent, but also be realistic. And, firstly, our business has a very high correlation with GDP growth. And fourth quarter we did not really see any additional macro catalysts to push the demand. And secondly, for this hospitality industry, it inherently with some certainties, as I also always mention to you, that even weather can affect our business. And clearly this year, winter came earlier than last year, and we need to factor in some impact. And also I think for Ctrip team, we gave them kind of guidance and target and we will push the team and our team, indeed, will try their best to deliver the best. That’s what we usually always do, and we will still carry on that attitude.

Eddie Leung – Bank of America

Thank you.

Jenny Wu

Thanks, Mike.

Operator

And your question comes from the line of Alicia Yap with Barclays Capital. Please proceed.

Alicia Yap – Barclays Capital

Hi, good morning. Thanks for taking my questions. My question is regarding the air travel. Just wanted to understand a little bit more, was the strong performance in the air travel and corporate travel helped by the domestic business travel rebound? Or is it mainly because the international travel picks up during the summer holidays?

Jane Sun

International travel comes to about 10%, so the majority of the volume are still from the domestic ones. In Q3, the volume is very strong, 25% year-over-year, that’s the main driving force for us to enjoy the high growth in Q3. I think normally our volume doubles the industry level at least, and we’ll keep up with the momentum.

Alicia Yap – Barclays Capital

Okay. So can I just get a sense if the business travel rebound a little bit in 3Q or we haven’t seen too much, is it mainly because of the cheaper pricing that has encouraged people to travel more?

Jane Sun

In Q3, I think we see both volumes growing very healthy. Leisure during Q3 is a strong driving force because the kids are off school and parents take them for vacation travel. And also the Q3 is a summer month. Normally, business travelers during that month is also very strong as well, so we see both business and leisure volume growing very healthy.

Alicia Yap – Barclays Capital

I see. And then lastly, on the technical terms on the share buyback, just wanted to make sure on the 17.2 million is aggregate year-to-date and not just during the 3Q, right?

Jane Sun

Right.

Alicia Yap – Barclays Capital

So that means you actually only bought back 6.2 million during the Q3?

Jane Sun

Yeah, I think...

Jenny Wu

I think we gave the guidance – latest guidance every quarter. And last – as of July 26, we purchased back about 202 million. And as of November 5, we buy back about 294 million. And for 3Q specifically, I think we purchased back about 150 million something like that. And, yeah, so we will continue to monitor the stock market change and execute our plans accordingly.

Alicia Yap – Barclays Capital

Sure. And then, can I just one more on the EPS for 2013? During your convertible call I think you mentioned that it will be an accretive EPS for the offering?

Jenny Wu

Sure, it goes like that, firstly, you will see, as of 3Q this year, we will have about 136 million ADS outstanding. And for the CB, we issued about RMB118 million and that’s the proceeds and the conversion price is US$19.37. That implies it will be about additional 3.9 million. So, that’s according to the GAAP accounting rule. For the CB, it will be classified under the traditional converted accounting basis. And this 9.3 million will be added to the share count when we calculate the EPS. So, it will be about like 7% dilution for 4Q.

And if we consider the CB and plus the combined cost spread we purchased, the earning could be accretive because, firstly, for this CB alone it will be about 7% dilution. But for the cost spread it actually consists of two call options; first call option is the stock price again matched away this stock price $19.37. And if the CB holders excise their conversion at that price, we can activate this first call option and then buyback the similar amount of shares, so that dilution is not off, it’s zero.

But either way, only by this call option it can be super expensive. So the normal practice of the CB market is that we will can’t really buy – sell additional call options, and that stock price is about 15% premium versus the CB, that’s in price – stock price about $26.34. And if the stock price reached that level, we can ask JP Morgan, our brokers, to buy back about the similar amount of the shares, which is about 5% of total shares from the market, so that we can – in this way we can buy back this additional 5%, so that way it’s only about 2% dilution from the CB plus the cost spread.

Jane Sun

Yes, so, Alicia, in short, it’s accretive because you’re issuing – you’re buying back stock at approximately $17, $19, but when we really issue and convert the stock it will be about $26. So CB itself will have accretive to EPS. And also if you take into consideration of buying back stocks by using these proceeds, the shrinkage for the shares outstanding up until now is about 12% because we bought back about $300 million and our market share right now is about $2.5 billion, that’s about 12% outstanding shares already being brought back. So in total, the purpose was to issue the CB and buy back stock, it will shrink the total pool therefore the EPS is accretive.

Alicia Yap – Barclays Capital

I see. Okay, great. Thanks for the explanation.

Jane Sun

Great, thanks.

Operator

And your next question comes from the line of Wendy Huang with CIMB. Please proceed.

Wendy Huang – CIMB

Thank you. I have some housekeeping questions. First, I want to get more color on the air ticketing commission rate. So despite of the commission rate decline, Jenny, were you saying that air commission rate in Q3 were still about 4%?

Jenny Wu

Yes.

Wendy Huang – CIMB

And, if so – okay. And, if so, if I’m – correct me, historically there are two components of your air ticketing commission rate, one is a 3% fixed rate, the other is 1 percentage points to 2 percentage points based on the volume rebate. So you mention earlier that airlines will actually adjust commission rate based on market demand, et cetera. So is it a just many coming from the 1% to 2% volume rebate, i.e., the 3% fixed rate from airlines actually didn’t change?

Jenny Wu

Yes, you’re right. It has actually effected the volume-driven rewards, and for this 3% is still largely fixed.

Wendy Huang – CIMB

Okay. My second housekeeping question is on the outbound travel volume you mentioned in the beginning of the Q&A session. So, you were talking that 10% of the volume coming from the outbound, are you saying that outbound contributed 10% of total travel volume at Ctrip or 10% of the total leisure travel volume?

Jane Sun

10% of the total air ticketing volume.

Wendy Huang – CIMB

Okay, great. And, lastly, on the competition front – so you mentioned that you would match up the coupon offered by your competitors. So I wonder how has coupon spending from your competitors trended month over month in October and November so far and also how has the Ctrip’s coupon spending trending in the past one and a half month? Thank you.

Jane Sun

I think that our competitive strategy – I think it’s a question for you to ask our competitor. For us, we just monitor the market very carefully, whatever is available in the market we just match up to it. So, so far in last quarter it was about 15% of the total hotel revenue. And going forward again it’s about 10% to 15%. But we are equipped by our financial strength to run any marketing, if our competitor enlarge their offering, we will match it up, if they reduce we will reduce accordingly. So, currently, it’s forecasted at about 10% to 15%.

Wendy Huang – CIMB

So, are you saying that coupon spending actually are kind of coming down little bit in Q3 so far – sorry Q4 so far?

Jane Sun

Q3 already announced about 15%, in Q4 I think it’s very steady, I think we forecasted about 10% to 15%.

Jenny Wu

And for that one, we also observed that if you check online you will see some of the hotel chains we already dropped off on this e-coupon program like – and we are very positive on that and we feel that’s good a trend. It’s just competitors – we have no control of that and, therefore, as we will continue to match. From our guidance, as you know, that Yang declined in 3Q about this coupon cost about 15% decline and in fourth quarter, we guide about 10% to 15%, decline again. So it (inaudible) and, therefore, as our strategy is we’ll continue to match it.

Wendy Huang – CIMB

Thank you. I will go back to the queue.

Jenny Wu

Thanks.

Operator

And your next question comes from the line of Fawne Jiang with Brean Capital. Please proceed.

Fawne Jiang – Brean Capital

Yes, good morning. Thank you for taking my question. Just one follow-up question on the margin front for 4Q. You guided the margin 20% to 25%. That seems to be a pretty wide range. So I just wanted to get a little bit of color on the margin guidance. Just wondered like what are the key factors that could potentially swing that margin more towards lower-end and versus high-end? Also, I think Jenny just gave the guidance – the margin breakdown for 3Q. So which factor could be – what were those the incremental negative impact on 4Q from R&D, labor, or the coupon level? It seems like overall coupon promotion seems to 4Q from 3Q.

Jenny Wu

Thank you for the question. For that one, for 20% to 25% non-GAAP OP margin is still our present-day forecast, and I see I think for under the current visibility that probably close to the low-end. And it’s still impacted by the effective wage to talk about. Like for this year, overall the GDP – the product development will cost about 4 percentage points margin motion and 2% is from labor, and the rest of the impact will continue from the e-coupon and our sales and marketing campaigns. This kind of the trend will continue trend in 4Q and I think that will still be the major factor to affect our margins.

Fawne Jiang – Brean Capital

Got it. Jane, just a follow up on that one. When you say the margin for 4Q trends toward the low-end of the 20% to 25% as incremental base 24% right there. So you’re basically saying in 4Q overall your promotions or your sales and marketing effort or is it coupon overall should be pretty heated compared with 3Q, right?

Jane Sun

For that one, you know, the spending for each item will vary from quarter-to-quarter. And for fourth quarter – for the other I mentioned, we will also consider, you know, in a normal year, the 4Q margin will be lower than 3Q. And then based on my estimate, it can tend to be a bit lower than about 3 percentage points Q-on-Q. And then so I think if we achieve a 25% non-GAAP operating margin in 3Q, this 22% that’s the normal run rate. And on top of that, where you have like I mentioned this tough marketing spend is still going on and then e-coupon still going on and also we have some year-end bonus accrual in here. So I think this 20% to 25% fall to low end will be the result of all the combined efforts together.

Fawne Jiang – Brean Capital

Got it. It’s very helpful. Just one last one on the sales and marketing campaign. If I remember correctly, you’re pretty much balanced offline versus online sales marketing, but as of now, already seeing the shift of sales and marketing more towards online as we’re going forward. Is that the right assumption?

Jane Sun

We will have James take the question.

James Liang

Yeah, for sales and marketing, we are consistently investing in our different channels. And as you know we have the best brand awareness in the industry and recently we are working very hard on the online marketing channels and the way we do see very good feedback and very good results from those online marketing channels. We cooperate with the search engine and also with portals, social media and including also what we call the long tail websites. So we see very positive also in the coming quarters we will still invest in those channels.

Fawne Jiang – Brean Capital

Got it. Thank you very much.

James Liang

Thank you.

Operator

Your next question comes from the line of Tian Hou with TH Capital. Please proceed.

Tian Hou – TH Capital

Yeah, I have two questions. One is regarding your old promotion program. What goes to against revenue, what goes against your marketing dollars?

Jenny Wu

If you are talking about e-coupon, then about two-third will be the counter revenue and one-third will go to sales and marketing expenses.

Tian Hou – TH Capital

So what about the cash rebate?

Jenny Wu

Cash rebate that is – you mean for the e-coupon? I think that’s the cash rebate.

Tian Hou – TH Capital

So there is several, I think on your – you have a several promotion programs.

Jenny Wu

Yeah.

Tian Hou – TH Capital

Okay.

Jenny Wu

You mean for this e-coupon cash – probably you can elaborate the question more?

Tian Hou – TH Capital

So, you have multiple promotion program, like cash rebate and similarly there are several on you website, three at least.

Min Fan

Yes, customer can choose, either they want cash back or they can choose the...

Jenny Wu

Gift.

Min Fan

Gift, yeah, like that, also we have some of the points collected to recharge your mobile, buy SIM card. So, there is a few options for our customer to choose.

Jane Sun

Yes, so from the customer side we want to make sure our marketing campaign provides as many alternatives as possible. So, it’s the most attractive promotional activity in the market. From accounting side, if it is directly related to our product, we should record it as counter revenue. For example, if you can use this cash to buy our hotel, it’s counter revenue, deducted from top line right away. If it is accessories, gifts according to GAAP, you record it as sales and marketing expenses. In total amount two-thirds of these activities is counter revenue, one third is below the line at sales and marketing.

Tian Hou – TH Capital

Okay, I got it. So the other question is related to the competition. So beyond the obvious competitor, eLong, there is a lot of smaller guys and also a lot of smaller guys are actually doing business on Taobao platform and there is some wholesalers actually selling hotels at much cheaper price. So what do you think about that?

Jane Sun

Okay. First of all, we always compete with all the players in the market (inaudible) or you’re on the roadside or you’re in the shopping mall. I think the critical thing for us is really a couple of elements, your product, coverage, your service level, your IP strategy and your total solution for the customers to attract. So regardless they’re in the shopping mall or they’re a platform, I think as far as long as in these key elements we are standing above and beyond the other competitors, things go our way. So this has always been our strategy and going forward that has – that will be our strategy going forward as well.

Secondly, on the wholesale platform, again, as we discussed, as the largest OTA in the market, Ctrip customers should be enjoying the best price in the market because we have the largest volume. Ctrip customer legally should enjoy this price. So whatever is online that is available, our product team will make sure Ctrip’s customers get these prices.

Tian Hou – TH Capital

Okay.

James Liang

I think in short, we will stick very much to bad product offering and the coverage, and to bad pricing in the market and also we will stick to better commitment for high-service quality.

Tian Hou – TH Capital

I see your determination. The last question would be your Q3 volume growth it’s really quite impressive. I just wonder how much of that was the result of the holiday started much early this year than previous years?

Jane Sun

Holiday....

James Liang

I don’t think there is....

Min Fan

Golden Week.

Jenny Wu

Yeah, immaterial because we already compared year-over-year, so the seasonality should be taken out mostly.

Tian Hou – TH Capital

Okay, thanks so much. That’s all my questions.

Jenny Wu

Sure, thanks.

Min Fan

Thank you.

Operator

And your next question comes from the line of Elinor Leung with CLSA. Please proceed.

Elinor Leung – CLSA

Hi, thank you for the call. My question is regarding to your international air ticketing business. Can you compare the margin with the domestic air ticketing business, do you collect a similar commission rate? And also for your open platform, you have (inaudible) agent on the platform, how to recognize the revenues on that platform?

Jane Sun

For air ticketing, margin is similar, but air ticketing price is higher than the domestic ticket. So in absolute dollar amount, air ticketing for international routes we make more money. In terms of open platform, I think it’s under discussion with our customers and with our partners who work with us on the platform. We want to make sure it’s a win-win-win situation, from a customer perspective they get the best price, from our partners’ perspective they gain money and profit from the profit and also Ctrip because we’re putting lot of investment, we also make money. So depending on the situation, we want to make sure the arrangement is a win-win situation.

Elinor Leung – CLSA

So the platform is free right now or are you charging listing fee on the platform?

Jane Sun

We don’t charge listing fee. We charge commission.

Elinor Leung – CLSA

Commission of the transaction?

Jane Sun

Correct.

Elinor Leung – CLSA

And what is the percentage? Can you share with us?

Jane Sun

Right now we are just developing it. Again, as we discussed, depending on the discussion we have with our partners, it varies from one person to another.

Elinor Leung – CLSA

I see. And how about your partnership, Bookings.com, how do you share the profit?

Jane Sun

Again, I think both parties we – depending on the region, depend on the volume, we have certain arrangement. So, we want to make sure a booking has a winning strategy through this cooperation and the Ctrip has a winning strategy on that, too.

Elinor Leung – CLSA

Okay, thank you.

Jane Sun

Sure, thanks.

Operator

And your next question comes from the line of Wendy Huang with CIMB. Please proceed.

Wendy Huang – CIMB

Thank you for taking my follow-up questions. Firstly, how has increased attention between China and Japan affected the outbound travel to Japan? And also how has the recent hurricane in the U.S. affected the outbound travel demands to the U.S.? And what percentage of your leisure travel may be coming from these two countries?

Jane Sun

Yeah, Japan is a very popular travel destination for the Chinese travelers because it’s very close to China, so we hope the situation is evening out. So far there is some impact, but it’s already taken into consideration into our guidance.

Wendy Huang – CIMB

And how about the U.S.?

Min Fan

I think for the U.S., we do see the volume – outbound travel volume to the States is growing very steadily. And especially, as you may know, last year we have the chartered flight from China to Hawaii, and this also boost our outbound travel volume to the States, where we do see there is very healthy and a strong demand in this field.

Wendy Huang – CIMB

So, can you share the percentage of your travel coming from these two countries if possible?

Jane Sun

Right now, it’s very small because outbound only accounts for volume rise approximately 10% and 10% is allocated to many, many foreign countries, so none of the countries accounts for more than 1% in the total volume.

Wendy Huang – CIMB

Okay. And my last question is on your call center. So, how many staff do you have for the call center right now? And also I noticed that some of the players in the travel market they actually cut back their call center very aggressively in the past two quarters, and there so as a result they actually have seen the revenue per head count increased significantly. So, I wonder how will Ctrip maybe change or keep your strategy in the call center?

Jane Sun

Okay. In terms of call center, half of our employees are in the call center. Call center from a cost side takes more man power, however, the customers who are using call center normally are very high-end users. So, in terms of net margin, call center and online platform generate a very similar growth margin. So for us, it’s not one-sided equation, we don’t just look at the cost. We also look at how much volume and what kind of loyalty customers have from these platform.

So internally we work very hard to improve the efficiency of the call center by running Six Sigma projects to monitor every business processes in the market. And externally I think our call center still offers the highest service level to our customers. So, Ctrip’s efficiency in the call center is a very important competitive advantage we will have, so we will, again, improve efficiency and also generate more revenues from the high-end customers.

Jenny Wu

Sure. We have about 9,000 people in call centers, and we are very disciplined in cost control and we use – have a lot of head count growth to be – to exceed the top-line growth. And, as Jane mentioned, we are continuously improving our IT infrastructure and to improve our workflow, to make sure we can continue to improve our operational efficiency, so we will still be able to run the business in a very cost efficient way.

Wendy Huang – CIMB

If I recall it correctly, actually the number of staff you had in call center in Q2 was already 9,000, so does that mean you actually haven’t added any staff for the call center materially in Q3? And also are you going to keep the call center staff at the current site or further expand?

Jane Sun

I think there are two elements that we need to take into the consideration. First of all, every year we invest a lot into IT system. These investment should enable us to run a more efficient operations in the call center that help us to reduce the head count. Secondly, our business volume is increasing, so that will require more staff to serve our high-end customers. So if you net these two elements together, hopefully the growth in the call center head count will be below the revenue growth in the top-line, therefore, the margin should be insured.

Jenny Wu

We indeed see some increase in the head count in call center, but it’s much less than – the growth rate itself is much less than the top-line growth. And now it’s over 9,000 and then at last – in second quarter it was about 9,000, I think we only add about like 200 additional people here, but we can (inaudible) the record high volume in 3Q, so hopefully you can see that is a good improvement – demonstration of our operation efficiency improvement and our cost control efforts.

Wendy Huang – CIMB

Thank you very much.

Jenny Wu

Thanks.

Operator

And your next question comes from the line of Jiong Shao. Please proceed.

Jiong Shao – Macquarie Capital

Thank you for taking my follow-up questions. Just a follow up on your open platform. As you go through your planning phase, how do you address the potential sort of, what do you call, channel conflict situation, i.e., can some of your partners selling the same tickets and hotel rooms as yours and they’re priced at below or above your price, how have you thought about that?

Jane Sun

Again, as we discussed, whatever is available in the market that is good for Ctrip’s customer, Ctrip should legally get it. So, again we’ll have a matching principle to get the best price in the market available for OTA customers.

Jiong Shao – Macquarie Capital

Okay, so even if some of these partners are selling for the same room below yours, you’re going to do it also?

Min Fan

I think for – if you check some room rates, some different room rates, probably you will see some lower price with a kind of a pre-paid model, which is quite different from the check-in model. So I think that the price is different and also the payment method also different. So certain – you can certainly differentiate your operation method in this kind of practice.

Jiong Shao – Macquarie Capital

Okay. Do you have a rough timeline for launching the meaningful offerings on open platform?

Min Fan

Yeah, in fact, you can check on our website. There are already some pre-paid, pre-paid room price in our website and also I think we are working prudently in this field. We will try to see the very good feedback from customer as well as with our partners.

Jiong Shao – Macquarie Capital

Okay, thank you very much, very helpful.

Min Fan

Thank you.

Jane Sun

Thank you.

Operator

And your next question comes from the line of Mu Zhi Li with Citigroup. Please proceed.

Mu Zhi Li – Citigroup

Hi, thank you very much for taking my questions. I have a follow-up question regarding the hotels that stopped the coupon program. I don’t understand why this is good for the, for Ctrip and OTA if the hotel comes out to stop it because isn’t that aggressive coupon program take the market share from the hotels and that’s why the hotels stop it, that if they stop then the growth rate will go back to the previous level and so that’s net-net at least not a positive thing? I just don’t understand the math and you can help me see what do I need to understand?

Jane Sun

Sure, sure. I think the coupon program is very unique in China market. If you look at the whole world, there is very few company in the whole world offer coupon. And in order for the industry to grow in a very sustainable level, we always support a very healthy ecosystem. So hotel, OTA customers, all the partners in this ecosystem have to have a winning strategy, then the industry will grow. If somebody started to have a rational competition to dispose the market, we do not think it’s a sustainable strategy.

So that is why for coupon, we didn’t match immediately because we wanted to make sure the ecosystem is protected. However, if somebody still keep up with this strategy, we have to match up to it. But I think we’re already seeing the industry leaders have voiced their concerns. So we support the healthy ecosystem to go back and everyone have their own balanced sales channel for it.

So either way, I think if the e-coupon volume will be higher, but the commission rate will be a little bit lower or if the hotels do not want you to issue coupon, volume might be a little bit lower but commission rates will be higher. So whoever can win, needs to win on service, on product, on the IT system. Price is never going to be a higher barrier of entry competitive strategy because whoever has the most money will win in a price war.

Min Fan

And also (inaudible) something, if there is no e-coupon, where we don’t enjoy the high growth, but if you check when our before competitors promote the e-coupon, Ctrip room net growth year-on-year 30%, 40%. I think it’s mainly, finally still a company’s growth will rely on your service quality, on your product, on your IT structure. Price war will not decide everything.

Mu Zhi Li – Citigroup

I see. Thank you very much. And also I would like to ask about another follow-up question regarding the convertible bond. You mentioned that the convertible bond has received a proceed of RMB180 million and now they have RMB111 million left over. so can I assume that you spent the RMB70 million to buy back the ADS from the bondholder at the private negotiated prices?

Jenny Wu

So, what’s – yeah, I think it’s the RMB180 million that’s the total gross proceeds. And after we pay professional fees and the cost spread, as I explained before, now the proceeds is about RMB115 million. And on the issuing day, we purchased back from CB holders about RMB42 million, and so, we still have about RMB110 million net proceeds from the CB alone. Was that the question?

Mu Zhi Li – Citigroup

Okay. Thank you very much.

Jenny Wu

Thanks.

Operator

At this time, there are no further questions in queue.

Michelle Qi

Thank you, everyone, for joining us on the call today. A replay of the call will be available as usual on the IR website shortly after the call is completed. We appreciate your interest in Ctrip and look forward to convening with you again next quarter.

Jane Sun

Thanks you very much.

Jenny Wu

Thanks.

Operator

And, ladies and gentlemen, that concludes today’s conference. Thank you for your participation. You may now disconnect. Have a wonderful day.

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