Business Context and Reporting Period
Company: Ctrip.com International, Ltd. (Trip.com Group Ltd)
Filing Type: Form 20-F (Annual Report)
Reporting Period: Fiscal year ended December 31, 2006
Business Overview: Ctrip is a leading consolidator of hotel accommodations and airline tickets in China. The company operates primarily as an agent, earning commissions on bookings for hotels, air tickets, and packaged tours. Due to PRC restrictions on foreign ownership in air-ticketing, travel agency, and internet content provision, the company conducts a significant portion of its operations through contractual arrangements with affiliated Chinese entities (Variable Interest Entities or VIEs).
Key Financial Metrics (Year Ended Dec 31, 2006)
| Metric | 2006 (RMB '000) | 2006 (US$ '000) | 2005 (RMB '000) |
|---|---|---|---|
| Net Revenues | 779,952 | 99,941 | 524,183 |
| Gross Profit | 626,820 | 80,319 | 435,556 |
| Gross Margin | 80.4% | 80.4% | 83.1% |
| Operating Income | 255,216 | 32,702 | 222,460 |
| Net Income | 240,564 | 30,825 | 224,246 |
| Diluted EPS (US$) | 0.93 | ||
| Cash and Cash Equivalents (End of Period) | 844,393 | 108,199 | 735,062 |
| Total Assets | 1,451,853 | 186,037 | 1,035,901 |
| Total Liabilities | 423,483 | 54,264 | 270,314 |
| Shareholders' Equity | 1,027,697 | 131,687 | 764,716 |
Note: US$ amounts are translated at the rate of RMB 7.8041 to US$1.00.
Material Changes vs. Prior Period
- Revenue Growth: Net revenues increased 49% to RMB 780 million (US$ 100 million) from RMB 524 million in 2005. This was driven by a 31% increase in hotel reservation revenue and an 83% increase in air-ticketing revenue.
- Profitability: Net income increased 7% to RMB 241 million (US$ 31 million). Operating income grew 15% to RMB 255 million.
- Expense Increase: Total operating expenses rose 74% to RMB 372 million. A significant portion of this increase (RMB 55 million) was due to the adoption of SFAS No. 123R, which required the recognition of share-based compensation expense using the fair value method. Without this accounting change, operating expenses would have been significantly lower.
- Cash Flow: Net cash provided by operating activities increased 50% to RMB 348 million. Net cash used in investing activities increased to RMB 207 million, primarily due to the construction of a new information and technology center and an investment in ezTravel Co., Ltd.
- Dividends: The company declared and paid cash dividends totaling RMB 67 million (US$ 8.6 million) in 2006, representing approximately 30% of net income.
Guidance, Outlook, Risks, and Unusual Items
Management Commentary and Outlook
Management expects continued growth driven by the expansion of the Chinese economy and travel industry. The company is investing heavily in infrastructure, including a new technology center in Shanghai expected to be completed in mid-2007. The company anticipates that its current cash and cash equivalents will be sufficient to meet anticipated cash needs for the foreseeable future.
Key Risks and Contingencies
- VIE Structure Risk: The company relies on contractual arrangements with affiliated Chinese entities to conduct air-ticketing, travel agency, and internet content provision businesses due to PRC foreign ownership restrictions. If these arrangements are found to be in violation of PRC laws, the company could face fines, license revocation, or forced restructuring.
- Regulatory Changes: A new PRC Enterprise Income Tax law passed in March 2007 will unify the tax rate at 25% starting in 2008. While a transition period exists, the company faces uncertainty regarding its ability to maintain current preferential tax rates (15% or lower) for its subsidiaries.
- Share-Based Compensation: The adoption of SFAS No. 123R in 2006 significantly reduced reported net income and EPS. Future earnings may continue to be impacted by the fair value recognition of stock options.
- Market and Operational Risks: Risks include economic slowdown in China, disruptions in the travel industry (e.g., epidemics like SARS or Avian Flu), intense competition, and reliance on key executives.
- Off-Balance Sheet Guarantees: The company provides guarantees totaling approximately RMB 302 million to airlines for tickets obtained by its VIEs. Management does not believe payment is probable, but the exposure exists.
Investor Verification Checklist
- VIE Compliance: Verify the continued validity and enforceability of the contractual arrangements with affiliated Chinese entities under evolving PRC regulations.
- Tax Rate Exposure: Assess the impact of the new 25% PRC corporate tax rate effective 2008 on future profitability, specifically regarding the loss of preferential rates for "high-tech" and "software" enterprises.
- Share-Based Compensation Impact: Analyze the non-cash nature of the RMB 55 million share-based compensation expense and its effect on true cash profitability.
- Capital Expenditures: Monitor the completion and cost overruns of the new information and technology center in Shanghai (estimated total investment US$ 30 million).
- Revenue Mix: Track the shift in revenue composition as air-ticketing (36% of revenue) grows faster than hotel reservations (57% of revenue), noting the different margin profiles and regulatory environments for each.