Tuniu Corp (TOUR) 2015 Q2 法說會逐字稿

Thank you and welcome to our second-quarter 2015 earnings conference call. Joining me on the call today are Donald Yu, Co-Founder, Chairman and Executive Officer; Alex Yan, Co-Founder, President and Chief Operating Officer; and Conor Yang, Chief Financial Officer. For today's agenda management will discuss business updates, operational highlights and financial performance for the second quarter of 2015.

Before we continue I refer you to our Safe Harbor statement in the earnings press release which applies to this call as we will make forward-looking statements. Also this call includes discussions of certain non-GAAP financial measures. Please refer to our earnings release which contains a reconciliation of non-GAAP measures to the most directly comparable GAAP measures.

Finally, please note that unless otherwise stated all the figures mentioned during the conference call are in RMB.

I would now like to turn the call over to our Co-Founder and Executive Officer Donald Yu.

Thank you, Maria. Good day everyone. Welcome to our second-quarter 2015 earnings conference call.

I am pleased to report that we delivered excellent growth during the second quarter of 2015 with overall GMV and a packaged tours gross bookings increasing by 126% and 115% year over year respectively. Total quarterly number of trips exceeded 1 million for the first time during the second quarter of 2015. Our growth rate continues to be significantly faster than both our industry peers and the overall travel industry.

According to a third-party research report Tuniu's marketshare in the online leisure travel industry was 20% during the second quarter of 2015, up from 14% during the same period last year. This rapid growth is a testament to our clear strategy and our ability to efficiently execute our strategic initiatives.

In the second quarter we continue to see strong triple-digit growth in both domestic and overseas tours. As we continue to rapidly expand our business we are increasingly diversifying our portfolio of travel products.

During the recent incidence of the MERS virus in South Korea we were able to minimize the impact on our business while maintaining positive customer experiences. We are confident that Tuniu's diversified accretion both in terms of regions and travel product type mitigates the risk that the Company may face from future market specific events.

Now I will walk through the key strategic initiatives that are central to the ongoing expansion of our market share. This includes the strengthening of our regional product procurement and the packaging capabilities, enhancing our direct procurement capabilities, increasing our brand recognition and improving our technology.

First, I would like to discuss our regional expansion and localization strategy. The expansion of our region service center network has enabled Tuniu to access a progressively larger customer base and develop a localized presence. The regional centers continue to serve as entry points for new local customers.

During the second quarter of 2015 the regions covered by the 58 new regional centers that we opened in 2014 contributed to 13% of our total GMV. This is up from 3.3% during the second quarter of 2014.

Starting from this year we started to localize our product centers in Beijing, Shanghai and Guangzhou which will serve as regional product procurement and packaging hubs. With more resources on the ground in major cities we will be able to gain better insight into the different needs of regional customers and harness more local travel resources to enrich our portfolio. We expect our regional expansion strategy to continue to be a key driver in increasing and diversifying our product offerings, further cementing one of our core competitive advantages.

Now I would like to shift to our direct procurement products which is an important part of our strategy in increasing the efficiency of our supply chain. Direct procurement products which have shortened supply chain bring many benefits to Tuniu and our customers. It enables us to develop high-quality products at a competitive price and it allows us to better meet the online customers needs which in turn improves our competitiveness versus our peers.

We are making great progress on this front. In the second quarter our direct procurement products increased to 25% of our total gross merchandise value, a significant increase from 20% in the first quarter of 2015.

Aside from our organic growth initiatives we are also actively reviewing M&A opportunities throughout the entire travel supply chain that will facilitate Tuniu's ability to directly provide travel resources to our customers. We are particularly focused on travel companies with a strong network of resources that can complete Tuniu's direct procurement capabilities.

We recently made an investment for the majority interest in Wuzhouxing, leading outbound package tour wholesaler in China. Our investment in Wuzhouxing is an important step in our ongoing consolidation of China's travel industry supply chain.

The acquisition improves our access to resources in the upstream travel supply chain and helps us improve our capabilities in the direct procurement of high-quality products. In the future the two companies plan to closely integrate their operations to unlock synergies for additional growth and profitability.

Next I want to transition to our progress in brand development. The Tuniu brand has always been one of our most valued assets and we remain committed to cementing our reputation as the leading leisure travel brand in China.

Recently Tuniu becomes the official travel sponsor for the popular reality TV show The Voice of China. Throughout each episode viewers across the country can connect through the Tuniu APP and interact with other users on the content of the show.

Following the initial episode our brand awareness as measured through the Baidu Search Index increased significantly as we attract new growth or potential customers to our brand. As we continue to invest in new advertising and marketing campaigns to build our brand we expect to continue gaining operating leverage in the future as our business continues to scale.

Lastly, I want to touch on mobile and technology. In the second quarter of 2015 mobile contributed to 68% of the total orders, up from 55% in the previous quarter. It is clear that the trend towards mobile will continue. We are committed to staying ahead of the trend by making ongoing investments in our mobile technology platform so that our customers have a seamless booking experience on their mobile devices and we continue to improve customer stickiness.

In addition to mobile we continue to invest in our broader technology infrastructure to improve user interface and support higher gross bookings. Due to targeted technology investments our online rail ticketing, air ticketing, hotel bookings, financial services and other complementary travel services have all expanded exponentially and have made notable contributions in improving user stickiness. We are confident that our continued investment in this area will ensure Tuniu to expand its market shares as the number one platform for China's leisure traveler.

Before I hand the call over to Conor I would like to provide a brief update on our partnership with JD.com. On August 18 Tuniu officially launched its product on JD.com's travel channel.

Our products were well received by JD.com's customers during the first week. Given the results we are confident that we will be able to leverage JD.com's user traffic, big data capabilities, financial services and operational support to further penetrate the leisure travel market and reach even more Chinese consumers.

I will now turn the call over to Conor Yang, our CFO, for the financial highlights.

Thank you, Donald. Hello everyone. We were pleased to deliver a strong quarter with net revenues exceeding both our guidance and market expectations as we continue to gain market share within the rapidly growing China leisure travel market.

Since our IPO in May 2014 we have stepped up our investments in the key areas of regional expansion, direct procurement, branding and technology. These key areas of investment have served as the fundamental pillars supporting our accelerated growth.

I will now walk you through our second-quarter 2015 financial results in greater detail. Please note that all monetary amounts are in RMB unless otherwise stated. You can find a US dollar equivalent of the numbers in our earnings release.

Package tour growth booking for the quarter increased by 115.2% year over year to CNY2.1 billion including 66% from outbound tours. Organized tours accounted for 71.5% of the overall gross booking in this quarter.

For second quarter, net revenues were CNY1.5182 billion, representing 111.9% year-over-year growth. Revenues from organized tours substantially all of which are recognized on a gross basis were up 110.5% year over year to CNY1.4665 billion and accounted for 96.6% of our total net revenues for the quarter.

The increase was primarily due to the rapid growth in the demand for travel to certain international destinations such as Europe, North America and Japan and for domestic tours. The number of trips for organized tours excluding local tours increased by 99.1% year over year to over 308,000 and the number of trips of local tours increased by 52.2% year over year to over 476,000.

Revenues from self-guided tours which are recognized on a net basis were up 109.4% year over year to CNY34.6 million and accounted for 2.3% of our total net revenues. The increase was primarily due to the growth in travel to certain islands and domestic destinations.

The number of trips for self-guided tours increased by 176.2% year over year to 226,000 in the second quarter of 2015. Other revenues which are recognized on a net basis were up 261.2% year over year to CNY24.7 million primarily due to an increase in revenues from tourist attraction tickets and service fees received from insurance companies and revenues from other travel-related products.

Gross margin for the second quarter of 2015 was 4.7% compared to 5.9% in the same period in 2014. The decline in gross margin was primarily due to Tuniu's competitive pricing strategy and the higher costs associated with new regional service centers and the newly added tour advisors for the coming peak season.

Operating expenses for the second quarter of 2015 were CNY363.8 million, up 128.6% year over year excluding share-based compensation and amortization of acquired intangible assets. Non-GAAP operating expenses were CNY351.5 million, representing a year-over-year increase of 149.6%.

Research and product development expenses for the second quarter of 2015 was CNY61.5 million, up 186.5% year over year. The increase was primarily due to investments in new product lines and online technology-related initiatives and the rise in technology and product development personnel-related expenses.

Sales and marketing expenses for the second quarter of 2015 were CNY231.7 million, up 139.1% year over year. The increase was primarily due to branding campaigns and advertisements for our mobile business expansion.

General and administrative expenses were CNY70.2 million (sic - see Press Release, "72.9 million") in the second quarter of 2015, up 74.1% year over year. The increase was primarily due to an increase in headcount of our administrative personnel as a result of business expansion and an increase in the professional service fees associated with being a public Company.

Net loss attributable to ordinary shareholders was CNY246.1 million in the second quarter of 2015. Non-GAAP net loss attributable to ordinary shareholders which excluded share-based compensation expenses and amortization of acquired intangible assets was CNY233.5 million in the second quarter of 2015. As of June 30, 2015 the Company has cash, cash equivalents, restricted cash and short-term investments of CNY4.4 billion.

Cash flow generated from operations for the second quarter of 2015 was CNY88.2 million. In the second quarter, cash conversion cycle was negative 37 days compared to negative 52 days in the corresponding period last year. Capital expenditure for the second quarter of this year were CNY11.9 million.

Now let me provide top-line guidance for the third quarter of 2015. As Donald mentioned earlier in the call we are confident about the outlook for the third quarter of 2015 and expect a trend of accelerated growth in our top line to continue as our investments in regional expansion, product offering and marketing initiatives start to pay off. Tuniu currently expects to generate revenue in the range of CNY2.6 billion to CNY2.7 billion in the third quarter of 2015 representing a 100% to 105% year-over-year increase.

Please note that this forecast reflects Tuniu's current and preliminary view on the industry and its operations which is subject to change. Thank you for listening. We are now ready for your questions.

Tian Hou, TH Capital.

Good morning, management. Just one question.

Can you give us some kind of a guidance regarding your long-term gross margin? And we noticed that the gross margin is not necessarily improving. I realize the Company is still in expansion phase and I just want to understand what's the outlook for this item?

Thank you, Tian. This quarter gross margin 4.7% even was down from a year ago but has improved from the first quarter of 4.1%. In this environment we are expecting very high growth rate of this leisure travel market and we will continue to expend more market share in this area.

So we do not expect gross margin to improve too much this year from this level will be gradually in the range of in this area. But in the longer term as we continue to expand our direct procurement and also integrate it on the vertical integration as we have done in this quarter that gross margin definitely will improve in the mid to long term.

Okay. Can I ask a second or have to come back again?

Okay, so for the revenue per trip for organize the tour increased 25% year on year in the second quarter. So I wonder what's the reason for the ASP change for this organized tour, so is that because the destination or something else? That's the question.

Actually because we have so many SKUs and by now we have together organized tour and self-guided tour we have over 1 million SKUs by end of second quarter this year. So internally from time to time it depends on seasonality, for example this quarter Europe has become the number one destination among all the places compared to a quarter ago. This is kind of seasonality.

So we had different so ASP is not our KPI because it's a combination of many, many different SKUs as a result and also the long trip versus short trip could grow one way or the other higher than each other, depends on the season. So it fluctuates on the ASP. We overall manage our traffic flow from our mobile and PC and try to convert that into order and convert that into the paying order and these are how we manage the day-to-day business.

Regarding the ASP as actually resulting from so many different products we sell and also in different seasons might fluctuate differently. So it's hard to predict ASP will go higher in next year or lower and sometimes ASP also for example on the self-guided tours that our like a local tour type of self-guided tour has increased a lot. Therefore you see the number of trips of self-guided tour has increased dramatically but it ends up actually lowered down ASP due to the higher growth rate of the local tour of the self-guided tours.

Okay. So last question is regarding the acquisition integration. So previously you acquired two travel agencies, (inaudible) and [Zhejiang Zhongshan] and today you announced the Wuzhouxing acquisition. So first I would like to ask what's the philosophy behind those acquisitions and the second is that the integration parts, can you give us some kind of some of your strategy for the integration?

Right. The two travel agencies we acquired we announced in the first quarter that was really for the purpose of appending the Taiwan travel license operating partner to Taiwan. But this one we just announced the Wuzhouxing, they are one of the larger wholesalers in China, especially in the Middle East and Africa area they are one of the -- they are the largest from China as a wholesaler.

So by acquiring the wholesale travel agencies it shortens our whole supply chain. The theme is really we want to have a more and more direct procurement, more and more integration on the vertical integration side to enhance the margin eventually.

So we will continue to look into those better one wholesale package wholesalers as well as on the other side and eventually those local tour operators if they are good ones. So by acquiring these type of companies that can shorten the supply chain and eventually enhance our margin overall.

And in terms of integration after we acquire we actually have a regular operating meeting in terms of the business plan. In terms of the like IT system, finance system, HR system we all eventually will integrate together and through our help they can also expand their business directly through our aligned channel. Thank you.

Evan Zhou, Credit Suisse.

Hi, good evening. Conor and Donald, Alex, thanks for answering my questions.

First question is regarding the free cash flow. I noticed our advance on customers and prepayment of both increased pretty meaningfully. I was just wondering what is kind of the trend that you see actually net-net our free cash flow kind of improved a little bit.

So do you see that mainly coming from our increasing bargaining power on the AP side or is it more coming from on the user side, that side that we kind of increase more product side from prepaid products? That's my first question.

Overall that's due to our business matter we do have a good cash flow. Even though we have a loss this quarter we still generated CNY88 million on the cash flow from operating activities.

And the CapEx is only CNY11 million, CNY12 million. So pretty good free cash flow.

But by quarter it does fluctuate from time to time. So this will continue in a way that we receive the money we have advance from our customers as well as we pay, for the most part pay out suppliers after the customers come back. Even though we grow, we have a larger and larger scale, we want to treat our supplier fairly.

We don't want to take advantage of paying them later. We believe that a win-win situation will create a better ecosystem in our business.

Thank you. Second question is regarding the foreign exchange rate impact for our business because we have a pretty diversified exposure into various currencies both on the revenue and probably more on the cost side I would probably say.

And we also in this quarter we had like roughly CNY30 million FX gains. So just wondering if you can give us more color on how did the recent currency movement may impact our numbers from different segments? Thank you.

Right. On the FX side we have overall exposure of payables, probably around 8% of our overall payables is not in foreign currencies. And out of that more than half is in US dollars with others spreading around different currencies.

So the reason FX like an RMB depreciation does have, in terms of payable actually it's a small impact. Even though we receive our money in RMB we pay our suppliers later.

So as I said that's maybe 7% to 8% of our overall payments are in foreign currencies and in which several percent differences have impact but not big impact. Going forward we have certain hedging activities for ourselves in terms of the payment.

On the other side this quarter we have CNY20 million something gain on foreign exchange due to in the second quarter RMB did appreciate a little bit and now it's kind of reverse back. Yes there will be a certain impact on our deposit offshore in this front that will have a more disclosure by the time we report third quarter. But in terms of operation that the impact is quite minimal.

Got it. And thanks for the color, Conor.

Henry Guo, Summit Research.

Thank you for taking my questions. So could you give us the breakout for the GMV for different destinations, so in particular Japan, Korea, Hong Kong, Taiwan, Europe and US?

And my second question is what is the percentage of GMV from repeat customers? Thank you.

Right. In terms of GMV as I mentioned earlier from different quarter they will have different seasonality, so for this quarter the number one region actually from Europe this second quarter is about 15% of our total GMV. It has increased from like 8% in the first quarter but if you look at like a year ago, second quarter last year was 13% so this quarter second quarter is 15%.

So the European business is growing very fast. And then followed in the foreign destination and followed by those of vacation islands in aggregate is about 10% of our total GMV and then the third one will be like Japan and Korea. Even Korea, as Donald mentioned Korea has MERS but we are able to divert these customers into other places.

Japan is one of the favorite places among all. So Japan and Korea is about 9% of our total GMV in this quarter and then followed by Maldives which is about 8% of the total GMV and then Southeast Asia is 6% of GMV into this quarter.

And in terms of the repeat customers --

(spoken in Chinese)

This quarter even though we have a very high growth rate on the overall GMV revenues, the old customers' contribution to overall GMV is around 37% to 38% which is quite similar to the first quarter, so it keeps up the pace of the rapid growth growing new customers. So we think we are pleased to see that. So the contribution is about -- they contribute about 37% to 38 of the total GMV from old customers.

Okay, thank you.

Amanda Chen, Morgan Stanley.

Hello, good evening management. Thank you for taking my question. I have three questions.

Hello?

There seems to be a technical problem with Ms. Chen's location. We will go to the next question. Wendy Huang, Macquarie.

Thank you. I just have two very simple questions.

First, can you give us an update on the usage of your over CNY700 million cash at hand? And second, so can you elaborate a little bit how are you going to work with JD more in-depth level and also what kind of like improvements that you expect to see after you operate the JD travel channel? Thank you.

Okay. Just a few seconds.

(spoken in Chinese)

Yes we start officially to launch the channel on JD on August 18. Currently the result was pretty satisfactory and we are happy to see that. Even though we started with a smaller number of SKUs we have to start with probably over about 2,000 SKUs only but the result was quite satisfactory.

Going forward we are going to offer more and more products to for special partners of ours in JD's channel going forward. Regarding the usage of the cash we have firstly we believe that in this rapid growing market we do need to invest in many areas to grab the further grab the market share as we continue to invest in our branding, the regional expansion, the procurement as well as the technologies and to some extent is investing in pricing or inventories that these are all will be a good usage of our cash.

These are longer-term investments, we will spend our cash on that and we believe they will eventually come back to contribute our overall business. And we also on the other side get suitable acquisition target, if that's a good Company on the vertical integration we will selectively acquire them.

So besides those investments for the growth, would you consider to buy the Company's own shares given the current market volatility?

No decision has been made yet for this front.

Okay, thank you.

Juan Lin, 86Research.

Hi, good evening, Donald, Conor and Alex. Thank you for taking my questions. My first question is related to the direct procurement, whether you could certify the GMV and the revenue contribution from the direct procurement for this quarter?

And then my second question is related to competitive environment. [Tongjiang] recently raised over CNY6 billion and are you expecting more price or marketing competition from Tongjiang and mainly for the lower your take rate going forward? Thank you.

(spoken in Chinese)

Yes, for the direct procurement product in the second quarter and we have about 25% of GMV generated from our direct procurement we're happy to see that and we will continue to increase the percentage of the direct procurement by the end of this year. Regarding to Tongjiang, Donald will answer about that.

(spoken in Chinese)

Regarding Tongjiang their product is quite different than ours regarding to the segment of the customers. They are selling a lot of very low-end package product as well as they're focusing on the tour attraction tickets. For Tuniu there are certain quality standards that we are definitely sticking to.

If it is below such standard we don't want to offer product. That will cost because that will cause a lot of complaints and damage to our repetition. So we are very selective in terms of product.

We target to, even though we target to mass-market for good quality products that are acceptable by our customers we will continue to invest in long-term area for growth as Donald mentioned during his script in this call. And that will benefit us in the longer term. Thank you.

Thank you. If I may have a follow-up question on the direct procurement, recently the big three airlines are gradually lowering their variable commission rate and with that impact the take rate or margin of your direct procurement products going forward?

Actually that's for our direct procurement product for airline for example the ticket we're securing as for the portion that are used for travel agencies the price typically is lower than the individual tickets. So the recent airline changing of the commission policies has basically no impact to our business.

Thank you, Conor. That's all my questions.

Natalie Wu, CICC.

Hi, this is Cheryl from CICC on behalf of Natalie Wu. Thanks for taking my questions and congratulations for a good quarter.

I have a question regarding the gross margin of self-guided trips. Could you so what is the difference on the gross margin of self-guided trips and the organized trips or is there any trend that you could share with us?

Overall the take rate for our organized tour is slightly higher than self-guided tours. And it has been like that and I think that you would probably remain somewhat higher on the organized tours. But both products that as we continue to increase more percentage from direct procurement and as we continue to increase our larger scale we believe that overall blended take rates should increase in the mid to long term.

Actually, I have another question. It's more like a housekeeping question.

Could you please share with us about your plans for the (inaudible), like how many additional accounts are you going to have in the second half of this year or maybe even next year? Thank you.

Yes, by end of second quarter total headcount for our Company is like over 4,300 people that a year ago we had about close to 19,000. So that's because among these the biggest increase actually coming off from the regional expansion. So if I compare to like second quarter of last year the regional expansion, so regional service centers increased almost like threefold of the staff.

That is really a majority of the people increase coming from. And of course as well as we continue to expand our various regions we have more suppliers, we have more product procurement team and also we do more direct procurement now.

We have increased quite a number of the product design and the procurement team but these are all like long-term investments. Eventually it will be beneficial to our overall business and we also continue to invest in research R&D side.

If you look at this area these are the major areas of our headcount increase. And summertime is the peak season of the year, so we would expect second half that the number of people will continue to increase. But if we go into like next year I think that the pace will more like in-line or growth rate will be lower than the top-line growth rate.

We will probably start to see that next year. This year we will continue to invest in this area we just mentioned.

Okay, thank you.

Amanda Chen, Morgan Stanley.

Hi, good evening management. Sorry for the technical issue previously. Thank you for taking my question and I have three if I may.

The first one is regarding the investment in Wuzhouxing. Could you please give us more details about the Company such as the GMV or any other operating metrics will be appreciated?

Also will this investment impact our 2015 guidance, the guidance of your top line and also the margin and also the percentage of direct procurement? Thank you.

Well, earlier we mentioned about that the direct procurement and other internal forecasts for this year we did not consider the acquisition in our -- we're talking from our own organic growth. And this Company last year they generated revenue of about CNY600 million for last year and they are the largest wholesaler for packaging tours to Middle East and Africa and other than that they are covering also many other places, the destinations including about 100 countries worldwide.

So we are happy to see them on board and we will continue to work they continue to work closely with us to integrate their product into our system. That's with Wuzhouxing. So these are not really part of our original budgeting for this year regarding the GMV and other operating metrics.

Okay, great. That's very helpful.

And the second question is about your financing services. Could you give us some updates about this new business and how the economic works and what's our long-term KPI for this business?

(Spoken in Chinese)

(technical difficulty) for the finance division, financing business in Tuniu that the first part is facing the customers that we provide payment by installation that many customers they don't have to pay at one time, they can pay us over the course of like 12 months or even longer. But we help customers to apply for visa so they have to provide a lot of personal information such as bank account, there is a bank deposit, a job certificate, their income statement to us.

Therefore we have a very good understanding of our customer overall situation compared to other types of e-commerce. So therefore we think we can minimize our risk to the lowest extent and the other side is to provide financing to our suppliers, so the supply chain financing from time to time our suppliers they will have most of them are kind of mid to small companies that they have financing need due to different seasonality that we'll provide the funding to them and on the other side that we can get a good return out of it.

So these are very mutually beneficial. So most areas of focusing on these two sides but nevertheless it's still in the very beginning stage but we see a very good potential coming out from these areas as long. As we continue to expand our GMV our business the opportunity will definitely increase on the financing side, financing business.

Got you, thank you. And the third one is could you please share the GMV that comes from different tiering cities, how is the trend and how does the extend the trend in 2015? Thank you.

Are you referring to the departing cities, right?

Yes.

Right. We will continue to see more and more GMV coming out from the newly opened regional service center. And for example like the first tier city contribute about 60%-plus of the total GMV and by now it has dropped to about 50% and the newly opened regional service center last year in the same period of time contributed about 3% of the GMV that was last year but now this year it has contributed about 13%.

So it increased quite substantially. We're happy to see that and as we continue to expand into more regional service centers by the end of this year we will see more and more contribution from these areas.

Okay. I'm sorry I have a follow-up question. If I remember correctly I think maybe last quarter GMV from non-Tier 1 city already reached 50%, so this quarter is still 50% and we didn't see a significant improvement in that, right?

It's kind of like the first quarter was like slightly above 50%, like 53%, 52% more or less and then this quarter further up like 2 percentage points to about 50%.

Got it, thank you. Very helpful.

We are now approaching the end of the conference call. I will now turn the call over to Tuniu's CFO Connor Yang for closing remarks.

Once again thank you all for joining us today. Please don't hesitate to contact us if you have further questions.

Thank you for your continued support. And we look forward to speaking with you in the coming months. Bye-bye.