Tuniu Corp (TOUR) 2016 Q1 法說會逐字稿

Welcome to the Tuniu Corporation first quarter 2016 earnings conference call. (Operator Instructions). Please note this conference is being recorded.

I would now like to turn the conference over toe Maria Xin. Miss Xin, please go ahead.

Thank you and welcome to our 2016 first-quarter earnings conference call. Joining me on the call today are Donald Yu, Co-founder, Chairman and Chief 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 the financial performance for the first quarter of 2016. 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 this conference call are in Renminbi.

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

Thanks Maria. Good day, everyone. Welcome to our 2016 first-quarter earnings conference cal. We had a solid first quarter performance with net revenues and packaged tour gross bookings growing 62.8% and 62.5% year over year, respectively.

According to third-party reports, Tuniu has maintained the number 1 player in China's online leisure travel sector starting from the second half of 2015. Despite the impacts from slowing demand of Europe, which remained nearly flat year on year, our number of trips continues to grow strongly.

Our total number of trips continues to rapidly grow at 80.2% year over year. During this period, when many travels are choosing closer destinations instead of going abroad, we observed that customers, who are choosing to travel to nearby destinations instead of further destinations, continue to book with Tuniu platform.

The shifting demand has positively impacted our domestic and local tour business, which grew 83% and 112% year -- in terms of gross booking during the first quarter. This reflects our customers' loyalty and preference for Tuniu as a comprehensive provider for all of their online leisure travel services as our returning customers contributed to 43.6% of our gross bookings during the first quarter.

Growth in Maldives was limited due to our already-large market share in the region and the slowing demand. If we take a closer look at our performance in other regions, excluding Europe and Maldives, Tuniu's gross bookings increased 86% year over year.

For our first quarter, we noticed that self-guided tours was the significant driver of growth for Tuniu. Total number of trips from self-guided tours increased by 104% year over year in the first quarter. While Tuniu has historically been the clear leader in organized tours in China during the past few years in terms of market share, we will also put increased focus in self-guided tours.

Self-guided tours in China has the potential of becoming a driver for online leisure travel because many of the younger generation of travelers and more seasoned travelers often prefer to explore destinations using a flexible schedule.

Going forward, as we increase our procurement capabilities for diversified products, expand our offering in hotels and air tickets and strengthen our supply-chain management capabilities, we will have increased capabilities to efficiently provide products to meet travelers' demands for self-guided tours. We believe that our ability to dynamically bundle air ticket and hotel together with localized resources such as destination-based services and tours, is our key competitive advantage in self-guided tours.

One of the key catalysts in improving our capabilities in self-guided tours is category expansion. Tuniu is becoming increasingly diversified through category expansion as our other revenue grew more than 500% year over year during the first quarter. Additional product categories such as air ticketing, hotel booking, financial services and insurance are reaching scale to start making meaningful contribution to our revenue.

Our air ticketing and hotel booking continue to rapidly grow as our focus in leisure-related resources continues to differentiate us from other OTAs. During the first quarter [PMOE] from air ticketing grew more than 30 times year over year while hotels grew more than seven times year over year. As our coverage of more air ticket routes and hotel resources continued to expand for leisure travel, we will be able to maintain our growth momentum in both air ticketing and hotel bookings.

In addition, as our additional product categories expand, operational synergies between our call (technical difficulty) leisure travel business and additional product categories is developing into our long-term competitive advantage. For example, as we diversify our transportation solutions beyond air ticketing, to bus ticketing and car rental and further expand our destination service, we have the ability to package these resources into our self-guided tours.

Tuniu can now fulfill most of our customers' travel demands through the transportation, plus hotel, plus x model. Individually, these products also provide value to our customers as they are able to book travel services for everyday use in addition to leisure travel. This has increased user stickiness to our platform and reinforces our brand as the go-to platform for online leisure travel.

Now I would like to give an update on our distribution channels. Our website and mobile platform continues to grow strongly in terms of traffic. Combining both website and mobile, [PAO] increased more than 90% during the first quarter.

In addition to growing our traffic, we continue to expand our product coverage in more departing cities. These service centers allow us to better attract potential customers and to provide support of our customers on a localized basis.

Gross bookings from the regions where we opened the regional service centers in 2014 and 2015 contributed to 19% of our total gross bookings during the first quarter. Through regional service centers, Tuniu will continue to increase its coverage at lower-tier cities where consumption power is growing rapidly.

In late 2015, Tuniu test-launched its proprietary online B2B wholesaling channel to further diversify its distribution capabilities. Since its launch, the business has rapidly grown and made benefits to our overall business. First, by wholesaling, we are able to increase the effective coverage of our products to more customers in lower-tier cities. By increasing our presence in the online leader travel supply chain, we are able to ensure that our products can more efficiently reach customers.

For example, in the case of reaching customers in fifth or sixth-tier cities, instead of pushing for localized presence in those areas, we can now distribute our products to the local travel agencies and provide products and services to them.

Secondly, by increasing our transaction volume with our suppliers, we are better positioned to negotiate favorable pricing for products and [raise] our pricing power.

Lastly, our wholesaling business serves as an additional channel that allows us to mitigate inventory risk as we continue to increase our direct procurement. Overall, our wholesaling distribution channels provide additional growth drivers for both our top line and profitability long term.

Lastly, I want to touch on technology. Through continuous investments in R&D during the past quarters, we were able to launch a notable upgrade in our overall business system. Improvements have been implemented in our new business systems in many key functions. Functions such as inventory management, direct procurement and product pricing have all been upgraded in terms of capacity and efficiency as we are now connecting more resources to more customers. We expect the new system to raise the efficiency of our employees and the overall company.

We are confident that the long-term demand for leisure travel in China remains strong. In the past, for example in 2014, we were met with a slowing demand for leisure travel in China. However, the growing consumption power and the general positive trends for outbound travel were the key catalysts for the increase in demand for leisure travel in 2015.

As the market leader in the online leisure travel in China now, we believe that we are well positioned to capture the opportunities of the online leisure travel industry in the future.

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

Thank you, Donald. Hello, everyone. I will now walk you through our first quarter 2016 financial results in greater detail. Please note that all the monetary amounts are in RMB unless otherwise stated. You can find the US-dollar equivalents of the numbers in your earnings release.

Starting from the first quarter of 2016, package tour gross bookings for the first quarter increased by 62.5% year over year to RMB3.1b, including 67.5% from outbound tours.

For the first quarter, net revenues were RMB2b, representing 62.8% year-over-year growth. Revenues from organized tours, substantially all of which] are recognized on a gross basis, were up 59.4% year over year to RMB1.9b and accounted for 94.3% of our total net revenues for the quarter. The increase was primarily due to the rapid growth in demand for travel to certain international destinations, such as Australia, New Zealand, North America, Japan, South Korea and Southeast Asia, and for domestic tours.

The number of trips for organized tours, excluding local tours, increased by 67.9% year over year to 459,000 and the numbers of trips for local tours increased by 68.5% year over year to over 321,000.

Revenues from self-guided tours, which are recognized on a net basis, were up 54.2% year over year to RMB62.3m. The increase was primarily due to the growth in travel to domestic destinations and self-driving tours. The number of trips for self-guided tours increased by 104.3% year over year to 406,000 in the first quarter of 2016.

Other revenues, which are recognized on a net basis, were up 506.9% year over year to RMB67.9m primarily due to a rise in service fees received from insurance companies, service fees for financial services, commission fees for hotel reservations and air ticketing, and revenues from tour attraction tickets.

Gross margin for the first quarter of 2016 was 4.3% compared to 4.1% in the same period in 2015. The increase in gross margins was primarily due to the increased contribution from other revenues as a result of category expansion.

Operating expenses for the first quarter of 2016 was RMB648.1m, up 120.6% year over year. Excluding share-based compensation and amortization of acquired intangible assets, non-GAAP operating expenses were RMB590.9m, representing a year-over-year increase of 110%.

Research and product development expenses for the first quarter of 2016 were RMB122m, up 180.4% year over year. The increase was primarily due to investments for the implementation of additional product categories such as financial services, accommodation reservations and transportation ticketing and an increase in personnel expenses related to direct procurement, technology and new regional service centers.

Sales and marketing expenses for the first quarter of 2016 were RMB384.4m, up 102.7% year over year. The increase was primarily due to promotion for category expansion branding campaigns and advertisements for our mobile business development, expansion of our VIP customer service center and amortization of acquired intangible assets from previously-announced transaction with JD.com.

General and administrative expenses were RMB143.8m in the first quarter of 2016, up 131.9% year over year. The increase was primarily due to an increase in headcount of our administrative personnel as a result of our business expansion such as regional service center expansion and product category expansion.

Net loss attributable to ordinary shareholders was RMB539.5m in the first quarter of 2016. Non-GAAP net loss attributable to ordinary shareholders which excludes share-based compensation expenses and amortization of acquired intangible assets was RMB482.4m in the first quarter of 2016.

As of March 31, 2016, the Company had cash and cash equivalents, restricted cash and short-term investments of RMB5.7b. In the first quarter, cash-conversion cycle was negative 22 days, compared to negative 28 days in the corresponding period last year. Capital expenditures for the first quarter of this year were RMB21.9m.

Second quarter 2016 outlook, now, let me provide a top-line guidance for the second quarter of 2016. Tuniu currently expectd to generate revenues in the range of RMB2.338b to RMB2.414b of net revenues, which represents 54% to 59% growth year over year. 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 questions. Operator.

(Operator Instructions). Evan Zhou, Credit Suisse.

Hi, good evening Donald, Conor, Maria. Thanks for taking my questions. Two questions from me. The first one is on cash flow. I think we actually completed a round of financing from HNA Group this quarter, so that's roughly $500m of cash. And if I simply look at our balance sheet movements, I think it looks like we have a roughly -- maybe RMB1b of capital out. This quarter, it looks pretty significant compared to previous seasonalities. Just wondering is there any specific items that you want to highlight in this quarter?

And also, maybe more color on the quarterly cash burn rate that we will be having into the following quarter will be very helpful, thank you.

Yes, when we received Hainan's money in the first quarter, in January, but if you recall that in our agreement with Hainan Airlines Tourism Group that we will prepay $100m equivalent of money to them for the future purchase of their airline tickets or any hotel resources or tourism-related resources.

So if you subtract that $100m -- if you subtract that amount of money, actually in cooperation of our $500m-plus loss in the first quarter, you can match the cash flow.

I see. So any outlook on, say, how shall we expect the quarterly cash flow trend down the road?

In terms of the seasonality, net net cash cycle days, the first quarter is always the lowest among -- during the yearly quarter. And first quarter you see our cash conversion days shortened from a year ago. There's a few factors, and more important factors is our pre-payment days actually is not as long as -- sorry, our net advance from customers is not as much as in the past, due to the structure difference.

As we mentioned that our European business has been impacted during this -- for these terrorist events, therefore the GMV contribution from the long-haul trips actually is decreasing as a percentage of our total GMV. And these are typically for our customers going to long-haul places, especially like Europe, they need to apply a visa a long time in advance. Therefore, in typical days that our advance from customers days is 30-something days, 30-plus days. This quarter, that has shortened.

Also, on the other factor is that we have developed our supply chain financing. So as a result, our accounts payable days is also shortened compared to the past.

But I think second quarter the cash conversion cycle, the days will improve from the first quarter. Thank you.

Got it, understood. So just one quick follow up on the financing part. So I think there are other internet companies also disclosing or talking about their cash flow impact from developing finance business. Do we have any ballpark number that we can share, like what's the size of the internet finance? Both the consumer side and the supplier side that we have now? That maybe impacts our cash flow pattern this quarter?

(Spoken in Chinese).

(Spoken in Chinese).

(Spoken in Chinese).

Evan, we -- on the consumer financing right now, still not big. It's only -- outstanding balance is RMB20m-something. Supplier financing, about RMB60m-plus. And as we continue to grow this business segment we will have more numbers to disclose going forward.

All right, cool, great, understood. Thanks, Conor. (Spoken in Chinese).

Alvin Jiang, Deutsche Bank.

Hi management, thank you for taking my questions. I have two questions. First question is on Europe and the Maldives. I guess Yu already mentioned in the first quarter, excluding Europe and the Maldives, other destinations' growth is actually quite good, over 80% year-on-year growth. So I'm not sure how is the recovery progress? And in your second quarter guidance, how you project the revenue growth for these two destinations?

And my second question is -- yes, please.

Yes, we have to check our European businesses this quarter to date, as you know that the end of March, there's another terrorist attack event in Belgium and we were not very sure about the impact at that time. But now we review the numbers, actually our European businesses on the flying contract perspective is actually decreasing year over year. So that's also part of the reason our guidance for the second quarter is not really improving.

And Maldives is probably quite similar to first quarter that Maldives right now, we have a -- grow so big of the market share. So we were more focused on improving margins rather than the GMV for Maldives. So the total gross booking for Maldives, we are not expecting to grow on the second quarter year-over-year basis.

Okay, got it. My second question is on the other revenues, this part growing is quite strong, so how is your long-term view in terms of the total percentage of revenue for hotels, airlines and the financial services? And what's the margin level of this business?

Right, the other revenue is growing very strong and this quarter is the first time, if you see the net, our net contribution from other revenue has surpassed self-guided tours. And we are happy to see that development.

Going forward, we will continue to expect that the other revenue portion will increase the percentage of overall contribution to our margin. And we have built this air ticketing and hotel channel but these are -- we're actually more focused on the leisure travel destinations from flying as well as hotel side to build our edge.

And the margin contribution of these two are pretty similar to the industry norm. On the financial side, the other contributor is the yield -- enhancement product we see from customers that we help customers actually purchase our enhancement products. That is also increasing contribution of our overall other revenue.

And we're expecting, as a combination of these factors, definitely it will become a very, very important contributor of our margin. And it might soon cover the non-travel related part of the cost in the future.

Okay, got it, thank you.

Amanda Chen, Morgan Stanley.

Hi, good evening, management. Thank you for taking my questions. I have maybe three questions here. So first one is regarding a follow up on your other revenue business. Can you give us some breakdown of the top one or top two segments contributing to the other revenue? And the specific GMV number if available? Thank you.

Right, the top contributor from other revenue in the first -- number one is insurance fees we received from the insurance companies. As we continue -- now grow our air ticketing and hotel -- sorry, special air ticketing and train ticketing. So the contribution of insurance fees not only from our package tours but also coming out from people buying our air tickets, buying our transportation tickets like train tickets as well.

And the number two contribution from other revenue is the interest income we earn from customers that pay -- buying our enhancement products, and then followed by the hotel booking commission.

So overall, this other revenue contribution also includes tour attraction tickets and others. So the GMV from this sector actually is around RMB900m.

Thank you, Conor. So I think, Donald, in the prepared remarks, you quite highlight that our air ticketing and our hotel booking et cetera actually is increasing very, very fast. So we know that now basically in the air ticketing and the hotel booking area, we only have one dominant player here. And from the supplier standpoint, they actually maybe want more diversified channels. So do you think we are going to increase the investment in the hotel and air ticketing standalone business or it's just a supplementary to our package tour area -- package tour business? Thank you.

(Interpreted). The important reason for the air ticketing and hotel booking high growth rate is also we have seen that as we continue expand our regional center to I guess third-tier, fourth-tier, even fifth-tier cities around China, we saw lots of demand coming from this area for the air ticketing and hotel booking, especially in our core leisure travel destinations that the demand is pretty high.

Going forward, we'll increase the more direct procurement, sign hotels directly on the selective core destinations. I think that our customers are all leisure travel purpose, and to fulfill the -- to meet with the current trend as we see that more and more tourists that they want to pick their combination of hotel and air ticketing for their leisure travel purpose.

Even though we are number one in organized tour, but in terms self-guided tours, we'll increase our focus and resources to invest in this area. Thank you.

Got it. Just a quick follow up. So I think my question is in future, will the focus more on the -- maybe let's put it this way. Will this shift more focus or attention to the standalone air-ticketing and hotel business in the future, or it's just will work -- still it's a very important segment of our package tour business? So how should we look at the standalone air ticketing and hotel business in future?

Definitely that we provide these services to make it flexible also for our departing days for our -- part of that is for our organized tour, as well, but to -- as I said, to cope with the increasing trend of self-guided tours, that our air ticketing channel and hotel channel, we will be focusing on the leisure travel destinations, leisure travel routes, flying routes, other than like comprehensive coverage of China. So that's -- we'll focus on more like leisure travel places to differentiate from our peers.

Got it. Thank you, Conor, and I assume the final one is regarding your B2B business. I just want to clarify that this business GMV is booked in the gross booking we reported in the press release, right?

Currently, that's the wholesale business -- we wholesale actually a lot of our air ticketing resources, as well as self-guided tour resources to our buyers. This is a B2B business. So it really depends. If we through B2B sell self-guided tours, then so far, if it's our own product, we'll book growth. If it's like a self-guided tour, then it's net booking.

Okay, so if available, can you tell us what's a rough GMB from the B2B business?

Overall contribution to our net revenue is still kind of low single digits.

Got it. Thank you. Very helpful. Thank you very much.

Thank you.

Natalie Wu, CICC.

Hi. Good evening, management. Thanks for taking my question. I have two questions here. The first is regarding your RMB384m sales and marketing expense. How much of that is related of branding and how much is related with direct use acquisition?

Is there any difference you can observe from the consumption pattern between old and new customers, say, average billing size? And what's the average purchase frequency for an old customer, maybe in a year? So that's the first question.

Yes, in the overall RMB384m, this is sales and marketing expenses. And still, that we have a team of close to 400 VIP sales as in that expenses. Excluding that, and if you compare to one year ago, currently, we have on quarterly basis, RMB31m [position] for Maldives, the deal with JD.com in change of their traffic.

If you're excluding this, too, the actual advertising expenses year-over-year growth rate is about -- is still less than -- slightly above 70% year over year. This is pretty much slightly above our reported revenue growth rate, but considering that we -- these expenses on the advertising are -- also, part of those is for our traffic booking channel and also hotel booking channel and other financial-related products, so to speed up the growth rate of our other revenues.

So in terms of the branding spending, percentage it's not -- overall, it's not higher than last year, about 20%, 30%-something of the overall advertising expenses. So going forward, we will have -- cope with the current macro economy in China. We will gradually decreasing the percentage of branding advertising for the rest of the year.

Hello?

Yes, thank you, and about the consumption pattern, say, the average spending around your --

Yes, talk about the -- in our product category, especially the package tour, it's not as frequent as typical e-commerce players, so what we use for the loyal customers or our existing customers, we use the KPI, as Donald mentioned in his script, as the percentage contribution from old customers. This quarter, it's 43.6% compared to about 30%-something one year ago. So we're happy to see that more and more contribution is coming out from our existing customers.

In terms of the frequency of purchase per year, if you're excluding like air ticketing channel for hotel booking, these are more frequent, or hotel. On the package side, as close to two times a year.

I see. So can you give us a rough feeling about maybe the churn rate of the older customers?

I know this term is quite popular for a typical e-commerce company, very frequently purchased, typically four, six times -- six, seven times a year. In our industry, overall, throughout many years, we really look around as really that contribution of GMV coming out from old customers because some of the customers, they -- let's say our customers in 2014 buying our package, they might not purchase in 2015, but they will purchase again in 2016. Yes, so the churn rate is not really our -- in our KPI, that we're more focused on how the old customers come back to contribute to GMV on a quarterly basis. Thank you.

So in terms of a customer that hasn't purchased for two or three years in your platform, will you still give out the coupons or subsidy to that customer, as if he or she is a new customer?

We actually -- for the last year or so, we have built out a team to maintain or to activate, to really serve better of our existing customers. We divided by five different layers. So for our VIP customers, we have a team dedicated to serve them, to give them more certain incentives or more informative information for them to come back. Yes. But we did not use coupons that much, so if a customer that spends -- purchase a package two, three years ago, and we have data, our customer service people will call them to try to reactivate the purchase behavior.

I see. So my second question is more like a housekeeping question. Can you update us the GMV contribution from the top destinations this quarter? Also, the take rate of the self-guided tours and the package tours? And what's your expectation on the take rates of both the self-guided tours and the package tours alter this year? And maybe in three years to come?

Right. The first quarter -- in the past, Europe has been the largest, but this quarter, because of the terrorist attack, Europe has dropped to about 6% of our overall GMV.

Number one right now is Southeast Asia, especially from Thailand, which altogether is about 17% of our overall GMV, then followed by Japan and Korea and combined. Currently, they're about 11% of the GMV, and then followed by -- right now, we count Australia, New Zealand, Middle East and Africa, all these together. Right now, it's about 10% of our GMV.

So for this quarter, Europe is only 6%, and Maldives is about 6%. And in terms of the take rate, right now, it's about 6% for self-guided tours and organized tour, it's about 5% -- roughly 5% for our organized tour. The reason being, [Lois], again, that on our European business, we have certain inventory due to terrorist attacks. It actually lowered down the price and in certain extent, we incur certain inventory loss, so that is the main factor that dragged down our take rate for this quarter.

We do expect them to come back in the later of this year, right? And so we still maintain the longer-term target of like 10% take rate in both self-guided tours and package tours, right?

(Interpreted). Yes, as we saw that going forward for the rest of the year, we have seen the overall competitive environment is more rational compared to last year, so we are expecting the take rate should gradually recover. As we do more and more direct procurement and more integrated into the whole supply chain, we're expecting the longer-term take rate to about 10%.

Great. Thank you.

Thank you.

[Melvita Hang], Goldman Sachs.

Hi, yes. Yes, yes. Hi, I thank you. It's David Jin from Goldman Sachs. Thank you for taking my question.

This is the operator. Mr. Hang, if you could please move the voice [tip] closer to your mouth.

Can you hear me? Hello. Is it better now?

Thank you.

Yes, yes. Better.

Thank you. Sorry for that. It's David Jin from Goldman Sachs. I just have two very quick questions. The first one is regarding your gross margin. Conor, I think you mentioned in the opening remarks that the gross margin year-on-year enhancement is partly due to the current mix moving toward the other revenues. I'm just wondering, if you truly look at the travel business, and we talk about take rates, I [would think] that margin wise, on a year-on-year basis, do we see improvement? And how do we think of the margin profile throughout the year?

Yes, this quarter, as I mentioned, that 4.3% compared to 4.1% a year ago is more like (technical difficulty) contribution from other revenues. In terms of take rate on the core leisure travel product package tours, as we mentioned earlier that this first quarter this year, due to the terror attacks in Europe, we have lowered down the price or incurred certain inventory loss overall. Therefore, we see that organized tours take rate is not as -- is slightly below a year ago. Self-guided tour is very similar.

So going forward, and we do see -- we do expect the overall margin should improve, and we -- as our reported revenue, we are very happy to see the other revenue has been increased very rapidly. And we're expecting will continue to grow at a very high growth rate, and overall that our category expansion will contribute more and more of our overall reported gross margin.

Sure. Thank you very much, Conor. My second question is really a kind of big-picture question regarding the competitive landscape, because if we think of the leisure package tour business in China now, eventually, we and Hainan Group seems to be aligned, and also -- we also have a big competitor, which is [UTru] and also like Ctrip.

So if we think of the two -- I would say big two alliances, how are we going to differentiate ourselves from them? And also, if we think of one package, I know it's different from one to one, but if we compare the costs, how -- what kind of cost advantage do we have or disadvantage, what we have versus them? Thank you very much.

Hello?

(Interpreted). Actually, how we differentiate from our competitors is that first of all we -- throughout the last few years, we have really built out our sales network to many, many cities in China from first-tier, second-tier to even fifth-tier cities throughout China, but we have a very diversified customer base that has contributed our business in all the sectors.

And secondly, that Tuniu is the only one that's 100% focused on leisure travel. As we continue to focus on leisure travel, we have gained a number-one position in the online digital travel business, and now we're expanding to even the flight booking, hotel booking, but it's all more focused on the leisure travel destinations, the leisure travel flight routes, so we will form economies of scale on this leisure traffic sector overall. And also, we'll do more and more direct procurement to fulfill the climbing on the leisure purpose.

And we also have the largest SKU among our peers. And then the other one, the third point is the -- our investment in technology, we have to cope with the trend -- this growing trend of customer wants to have more flexibility. The system we built right now, it allows us to -- our customers to dynamically package their choices. So with this dynamic packaging and enable customers to pick freely, flexibly on the air ticketing, plus hotels, plus destination services, plus many other services as a package.

This system we believe will be important for our future growth as we have seen that demand growing strongly on the self-guided tour side. Thank you.

Thank you very much.

(Operator Instructions). Juan Lin, 86Research.

Hi. Good evening, Conor, Alex and Maria. This is Juan of 86Research. My question is related to self-guided tour. Now, the self-guided tour business, it's growing much faster than organized tour.

I'm wondering, compared to the bigger competitors, what is our competitive advantage in terms of procurement pricing and product offerings. And also, just to clarify, are we expecting self-guided tour to enjoy the same take rate with organized tour? Thank you.

(Interpreted). I think that our largest competitive advantage is really having purely focused on leisure travel, we have built up a large base, especially from our organized tour customer base. So whenever they have needs on the self-guided tour, we are there.

And through our supply chain management, our whole supply chain system that we have been working with many suppliers for a long time and with big volumes, so as we continue to expand our direct procurement system, that many of these suppliers in terms of direct procurement, whether it's on the airline, air ticketing or hotel or local tour operators, they are the same providers for self-guided tours.

So through our client base of purchase [sites] for organized tours and applied to self-guided tours, we have advantage on the procurement side. And an important thing is that on the organized tours, we typically purchased that group tickets from airline companies, as well as on hotels, we have a purchase, like a group rate versus in the regional rates. So these two rates are different.

When airlines switch -- for example, when they sell to individual tickets to OTA at high price, versus they sell a group ticket fare to the travel agencies like us, so -- and we have this system -- for example, with Capital Airlines, which is part of the Hainan Airline Group, we already started using their group ticket airfare to supply our self-guided tours customers, so that they can use that ticket to combine as a package with hotels, make it a package for self-guided tours.

Because it's a package, therefore, we will not expose the group ticket airfare to hurt their channel price, so we have seen that this is a cost advantage for our procurement. And we also have expanded our sales network in third-tier, fourth-tier, fifth-tier cities, so these are large client bases when they need a self-guided tour package, and we're ready to supply them.

Thank you, and for the take rate of self-guided tour and organized tour, over the long term, are we expecting them to enjoy the same take rate, or how should we expect the blended take rate to trend going forward?

In the current state, actually, self-guided package, the take rate this quarter for example is even higher than organized tours. Going forward, as we enlarge our procurement site, as we package more and more direct procurements, as we build up many procurement teams overseas, we are expecting the self-guided tour take rate also to increase.

Thank you, Conor.

Thank you.

Tian Hou, TH Cap.

Hi, Conor, Maria and the management. The question related to your Internet finance, and so I wonder, the Internet finance, the revenue you gained, and where do you -- how do you finance this? With your own balance sheet or with external money? So that's the number-one question. I have a follow up.

Yes, for our Internet finance, for the suppliers, the supply chain managed financing using our own capital. So overall, we have -- for example, we sell a yield enhancement product to our customers. And so that's a source of funding.

On the other side, we purchase assets for the longer-term tenor to arbitrage these interest rates on different tenors so we currently purchase, for example, three months more or less.

And on the other side, the capital we have obtained, we invest in one-year -- between six to 12 months tenor. So these capital actually is now own capital.

As we -- our regional thinking is really our overall cash conversion cycle is very advantageous to conduct this part of the business, so we will use our internal cash. And on the other side, as I mentioned, on that part of the business, the capital is obtained from the customer side.

I see. On your balance sheet, I saw a huge jump in the short-term investment. Can you give us some color on the short-term investment. In what form, what kind of short-term investment these $500m are in?

Yes, these are no different than most corporations when they do the yield-enhancement product for their excess cash. It's like three months to six months kind of an investment for many available products that are [coming] from the commercial banks for the most part. We will not conduct in any risky products, so the main purpose is really capital preservation plus higher yield, if possible.

Okay. Thank you. Thanks so much.

That's for our own cash.

It's your own cash.

Right, right. Okay.

Thank you, Conor.

Thank you.

This concludes our question-and-answer session. I would like to turn the conference back over to Conor Yang, CFO, for any closing remarks.

Once again, thank you for joining us today. Please don't hesitate to contact us if you have any further questions. Thank you for your continued support, and we look forward to speaking with you in the coming months. Bye-bye.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.

Portions of this transcript that are marked (interpreted) were spoken by an interpreter present on the live call. The interpreter was provided by the Company sponsoring this Event.