Business context and reporting period
This is Ctrip.com International, Ltd.’s annual Form 20-F for the fiscal year ended December 31, 2014, prepared under U.S. GAAP. It is not a standalone 2014 Q4 report; the filing does not provide a clear Q4-only financial summary. The company operated an online and offline travel-services platform, primarily in China, offering accommodation reservations, transportation ticketing, packaged tours and corporate travel. Figures below are in RMB unless otherwise stated.
Financial performance and liquidity
| Metric | 2014 | 2013 | Change / context |
|---|---|---|---|
| Net revenues | RMB7.347bn | RMB5.387bn | +36% |
| Gross profit / margin | RMB5.246bn / 71% | RMB4.000bn / 74% | Margin declined about 3 percentage points |
| Operating income (loss) / margin | RMB(151)m / (2%) | RMB838m / 16% | Shifted to an operating loss |
| Net income | RMB92m | RMB906m | Down sharply |
| Net income attributable to Ctrip shareholders | RMB243m; basic EPS RMB7.08 per ordinary share (RMB1.77 per ADS) | RMB998m; basic EPS RMB30.34 per ordinary share (RMB7.58 per ADS) | Attributable earnings fell substantially |
| Operating cash flow | RMB1.959bn | RMB2.453bn | Down 20% |
| Investing cash flow | RMB(9.366)bn | RMB(4.086)bn | Higher investment, acquisitions and property spending |
| Financing cash flow | RMB5.422bn | RMB5.316bn | Supported by convertible-note and bank-loan proceeds |
Revenue growth came from accommodation (+45%), ticketing (+36%), packaged tours (+13%) and corporate travel (+40%). Hotel room nights sold increased 62%; total transportation tickets sold increased 90%; packaged-tour volume increased 47%. Accommodation and transportation ticketing contributed approximately 41% and 38% of 2014 revenue, respectively.
Expense growth outpaced revenue: cost of revenues rose 51% to RMB2.101bn; product development expense rose 86% to RMB2.321bn; and sales and marketing expense rose 74% to RMB2.214bn. Management cited increased personnel, payroll, advertising, promotions and investment in new products and markets. Interest expense rose to RMB162m from RMB57m, while interest income increased to RMB305m.
At year-end, cash and cash equivalents were RMB5.301bn, short-term investments RMB6.439bn and restricted cash RMB836m. Current assets were RMB17.077bn against current liabilities of RMB12.715bn. Short-term debt was RMB3.560bn and long-term debt RMB8.066bn. The filing reports outstanding convertible notes of approximately US$1.4bn and a term-loan facility with outstanding principal of US$504.8m as of the report date. The company stated that available cash, operating cash flow and financing proceeds were expected to meet anticipated needs for at least the next 12 months.
Material changes, outlook, risks and unusual items
- Profitability weakened markedly despite strong revenue growth. The effective tax rate rose to 97% from 26%, primarily because valuation allowances were recorded against deferred tax assets relating to losses at certain subsidiaries. The filing reports RMB801m of tax-loss carryforwards expiring from 2015 to 2018.
- Investing cash outflow and the balance sheet expanded with acquisitions, minority investments and property purchases. Property, equipment and software rose to RMB5.221bn; goodwill increased to RMB1.893bn. The Sky SOHO premises purchase was approximately RMB3bn. The company also invested in LY.com and other travel-related businesses. A RMB33m impairment was recorded on the Dining Secretary investment; the company reported no goodwill impairment.
- In August 2014, Ctrip issued Priceline a US$500m convertible note bearing 1% annual interest, due 2019, and agreed to permit additional open-market purchases that could bring Priceline’s combined holding to as much as 10%. The company also received short-term bank-loan proceeds of approximately US$380m during 2014.
- Management provided no specific revenue or earnings guidance. It expected Chinese travel demand to continue growing but cautioned that economic slowdown, travel disruptions and competition could adversely affect results. The company noted seasonality, with summer generally stronger and the first quarter typically affected by Chinese New Year.
- Key risks include the PRC variable-interest-entity (VIE) structure and uncertainty around a draft Foreign Investment Law that could affect VIE arrangements; dependence on travel suppliers and commission terms; competition and promotional spending; foreign-exchange and cash-transfer restrictions; and cyber/privacy risks. The filing disclosed a March 2014 potential exposure involving stored customer credit-card data: 93 customers’ information might have been downloaded by a third-party website; the company said it addressed the issue within two hours and had no known customer losses as of the filing.
- Off-balance-sheet airline-ticket guarantees totaled approximately RMB884m; management said payment was not considered probable and recorded no additional liability. The company reported no pending material litigation. Government subsidies of RMB132m were recognized in 2014, but were discretionary. No dividends were paid.
- Management and the auditor concluded internal control over financial reporting was effective as of December 31, 2014. The audit firm noted that PCAOB inspection access in China was restricted at that time.
Important facts for investors to verify
- Reconcile the sharp difference between consolidated net income (RMB92m) and income attributable to Ctrip shareholders (RMB243m), including the effect of non-controlling interests.
- Assess whether increased product-development and marketing spending can support growth without further margin deterioration.
- Review debt maturities, note conversion and put terms, collateralized short-term borrowings, and liquidity available after restricted balances and PRC cash-transfer limits.
- Monitor the draft Foreign Investment Law and any regulatory developments affecting VIE enforceability and the company’s ability to consolidate VIE results.
- Evaluate acquisition and investment valuations, including Level 3 holdings, goodwill, the Skyseas arrangement and potential further impairment exposure.
- Verify the company’s remediation and ongoing controls following the disclosed customer-data incident, and track credit-risk and receivables growth as corporate travel expands.