Trip.Com Group Ltd annual report, Q4 FY2018

Business context and reporting period

Trip.com Group Ltd.’s supplied filing is the annual report on Form 20-F of Ctrip.com International, Ltd., covering the fiscal year ended December 31, 2018; it was filed March 15, 2019. The company is a China-centered travel-services platform spanning accommodation, transportation ticketing, packaged tours, corporate travel and related services. The report presents audited U.S. GAAP results for fiscal years 2016–2018. It does not provide a clear standalone 2018 Q4 income statement or cash-flow figure, so the annual figures below should not be read as Q4 results.

Key financial metrics

Amounts are RMB unless otherwise noted; USD translations use the filing’s stated exchange rate. Net revenue is presented after sales taxes and surcharges.

At December 31, 2018, restricted cash was RMB4.244bn and short-term investments were RMB36.753bn. Current assets were RMB79.394bn versus current liabilities of RMB68.784bn, an approximate current ratio of 1.15. Total assets were RMB185.830bn, total liabilities RMB97.097bn and total equity RMB88.733bn.

Debt on the balance sheet was RMB60.157bn: RMB36.011bn of short-term debt and current maturities, plus RMB24.146bn of long-term debt. The filing separately describes RMB25.1bn of short-term bank borrowings, RMB8.0bn of long-term borrowings, US$3.8bn (about RMB26.5bn) of convertible notes and RMB608m of securitization debt. These disclosures include different classifications of debt and should be reconciled to the balance-sheet total. Contractual debt principal and interest obligations totaled RMB63.028bn; RMB30.407bn was due in less than one year. Certain 2022 notes had a holder put option in September 2019 and were classified as current at year-end.

Material changes versus the prior comparable period

• Net revenue grew 16%, led by accommodation reservations, up 21% to RMB11.580bn, and packaged tours, up 27% to RMB3.772bn. Transportation ticketing rose 6% to RMB12.947bn; corporate travel rose 30% to RMB981m.
• Operating income fell 11% and attributable net income fell 48%. Gross margin declined from 82.5% to 79.6%, while operating margin declined from 11.0% to 8.4%.
• Cost of revenue rose 35% to RMB6.324bn, faster than revenue, reflecting higher card-processing and customer-service costs and payments to suppliers for services the company controlled. Product development and sales and marketing expenses each increased 16%; advertising expense rose from RMB5.1bn to RMB6.0bn.
• Other expense was RMB1.075bn, compared with other income of RMB879m in 2017. The 2018 result included RMB3.064bn of fair-value losses on equity investments, partly offset by RMB1.181bn of gains on investment disposals, RMB469m of government subsidies and a RMB249m remeasurement gain on an acquisition.
• Operating cash flow was broadly flat. Cash from financing increased, including RMB14.7bn of proceeds from bank borrowings; investing cash outflow remained substantial at RMB14.1bn.

Outlook, management commentary, risks and unusual items

• Management attributed growth chiefly to higher hotel-room-night and ticketing volumes and continued to emphasize domestic and outbound travel expansion. Outbound travel represented about 34% of combined domestic and outbound revenue for accommodation, air-ticketing and packaged tours.
• No quantified earnings or revenue guidance is provided. Management stated that available cash, short-term investments, operating cash flow and financing were expected to meet anticipated needs for the foreseeable future and at least 12 months after filing.
• The company adopted ASC 606 retrospectively for 2016 and 2017. Revenue from hotel reservations is now recognized when a booking becomes non-cancellable; packaged-tour revenue is recognized on departure. The company also adopted new equity-investment accounting, recording fair-value changes in income and reclassifying about RMB6.1bn of accumulated unrealized gains into retained earnings at adoption.
• Adoption of the lease standard in 2019 was expected to add approximately RMB800m–RMB900m each to right-of-use assets and lease liabilities. The filing reports RMB997m of operating lease commitments at year-end.
• Investment-related earnings are volatile: the 2018 fair-value loss materially reduced reported profit, while gains on disposals and subsidies supported results. Share-based compensation was RMB1.707bn. Goodwill was RMB58.026bn and intangible assets RMB13.723bn; no goodwill or intangible impairment was recorded in 2016–2018.
• Key risks include the enforceability and regulatory treatment of the China VIE structure, restrictions on moving funds from China, supplier relationships and competition, travel-market downturns, acquisition integration and investment valuation, significant debt and near-term note put rights, data/privacy and cybersecurity compliance, and limits on PCAOB inspection of the China-based auditor.
• The company reported no pending material litigation and no dividends paid in 2016–2018. Management and the auditor concluded internal control over financial reporting was effective at December 31, 2018; the auditor issued unqualified opinions on the financial statements and internal controls.

Important facts for investors to verify

• Obtain the company’s quarterly earnings release or other source for standalone Q4 2018 revenue, profit, cash flow and segment trends; this annual filing does not provide a clear Q4-only set of figures.
• Reconcile the debt disclosures and confirm the amounts, timing and cash-refinancing consequences of the 2019 convertible-note put rights and other maturities.
• Assess the composition, liquidity, restrictions and collateral encumbrances of cash and short-term investments, including the RMB9.5bn of short-term borrowings reported as collateralized.
• Review the assumptions and sensitivity of equity-investment fair values, goodwill and indefinite-lived intangibles, particularly given the RMB3.064bn investment fair-value loss and large goodwill balance.
• Monitor the legal and regulatory status of VIE arrangements, PRC fund-transfer restrictions, and audit-access developments affecting China-based issuers.