Trip.Com Group Ltd annual report, Q4 FY2015

Business context and reporting period

This is Ctrip.com International, Ltd.’s audited Form 20-F for the fiscal year ended December 31, 2015, filed April 22, 2016. It is an annual report, not a standalone 2015 Q4 filing; the supplied text does not provide clear Q4-only financial results. Ctrip was a China-focused online travel provider offering accommodation reservations, transportation ticketing, packaged tours and corporate travel. The statements are prepared under U.S. GAAP, primarily in RMB.

Financial and operating performance

Net revenue grew 48% year over year. Accommodation revenue rose 44% to RMB4.62bn; transportation ticketing rose 51% to RMB4.45bn; packaged tours rose 58% to RMB1.67bn; corporate travel rose 27% to RMB473m. Ticket volume increased 131%, hotel room nights sold 50%, and packaged-tour volume 50%. Mobile transactions represented about 66% of orders; mobile app cumulative downloads reached 1.7bn.

At December 31, 2015, cash and cash equivalents were RMB19.22bn, restricted cash RMB2.29bn, and short-term investments RMB8.24bn. Current assets totaled RMB40.60bn against current liabilities of RMB33.67bn. Short-term debt was RMB12.71bn and long-term debt RMB18.35bn. Operating cash flow was RMB3.05bn; investing activities used RMB4.43bn and financing activities provided RMB15.23bn. The company reported total assets of RMB118.84bn, including RMB45.69bn goodwill and RMB11.01bn intangible assets.

Material changes versus the prior comparable period

• Operating results rebounded from a 2014 operating loss to 2015 operating income, supported by higher travel volumes and lower operating expenses as a share of net revenue.
• Net income increased sharply, but was materially affected by a RMB2.29bn gain from deconsolidating Tujia; it should not be treated as recurring operating profit.
• In October 2015, Ctrip exchanged shares with Baidu for about 45% of Qunar’s voting interest. After additional Qunar employee-share transactions, Ctrip began consolidating Qunar at December 31, 2015. The acquired business had historically incurred losses; unaudited pro forma results showed net losses of RMB1.89bn for 2014 and RMB5.09bn for 2015.
• Cash and debt both rose substantially, reflecting financing activity and acquisitions. 2015 financing cash inflow included proceeds from convertible-note offerings totaling approximately US$2.35bn.

Outlook, risks and unusual items

No specific numerical revenue or earnings guidance is provided. Management expected travel demand in China to continue growing and stated that cash, operating cash flow and financing sources were expected to cover anticipated needs for at least the next 12 months. These expectations are subject to economic, travel-industry and competitive conditions.

• The Tujia deconsolidation generated the large non-operating gain noted above. Ctrip also recorded an RMB135.8m equity-method loss from affiliates in 2015, including losses related to Qunar and eLong.
• Acquisition-related balances increased markedly, including goodwill and indefinite-lived intangible assets. No goodwill or intangible impairment was recorded in 2015, but future impairment could be significant if acquired businesses underperform.
• Convertible notes and other borrowings create refinancing and repayment exposure. Contractual obligations totaled RMB30.56bn, including RMB4.65bn due in less than one year; note holders also have specified repurchase rights. The company reported compliance with loan covenants.
• Key risks include competition and promotional spending, dependence on hotel and airline suppliers, Qunar’s losses and airline cooperation suspensions announced in early 2016, and the enforceability and regulatory treatment of China VIE contractual structures. The draft PRC Foreign Investment Law could affect those structures.
• Other exposures include RMB892m in airline-ticket guarantees (management did not consider payment probable), rising doubtful-account provisions, currency controls and exchange-rate risk, and limited business-interruption insurance. The May 2015 network shutdown caused temporary service disruption; the company reported no data leakage from that incident.
• Management and the auditor concluded internal control over financial reporting was effective at year-end, but Qunar was excluded from the assessment because of its recent acquisition.

Important facts for investors to verify

• Reconcile reported 2015 earnings with the RMB2.29bn Tujia gain and assess underlying operating profitability.
• Review Qunar’s post-consolidation performance, losses, airline relationships and the accounting and purchase-price allocation for the acquisition.
• Assess debt maturities, put or repurchase rights, collateral, and the effect of further convertible-note issuance or share conversion on dilution.
• Evaluate recoverability of goodwill and acquired intangible assets, and the valuation assumptions behind material private-company investments.
• Review liquidity accessibility, including restricted cash, PRC dividend and currency-transfer limits, and financing requirements for the group’s investment commitments.
• Assess VIE enforceability and regulatory developments, as well as supplier concentration and the impact of any airline or hotel relationship changes.