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Edited Transcript of 0780.HK earnings conference call or presentation 19-Aug-19 12:00pm GMT

Half Year 2019 Tongcheng-Elong Holdings Ltd Earnings Call

Aug 26, 2019 (Thomson StreetEvents) -- Edited Transcript of Tongcheng-Elong Holdings Ltd earnings conference call or presentation Monday, August 19, 2019 at 12:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Heping Ma

Tongcheng-Elong Holdings Limited - CEO & Executive Director

* Jiazhu Wu

Tongcheng-Elong Holdings Limited - Chief Strategy Officer

* Joyce Li;Investment Director

* Lei Fan

Tongcheng-Elong Holdings Limited - CFO

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Conference Call Participants

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* Brian Gong

Citigroup Inc, Research Division - Equity Research Associate

* Chun Man Poon

Morgan Stanley, Research Division - Equity Analyst

* D. S. Kim

JP Morgan Chase & Co, Research Division - Head of Asia Gaming, Lodging & Leisure

* Ken Chong

Jefferies LLC, Research Division - Equity Associate

* Sally Chan

CLSA Limited, Research Division - Research Analyst

* Wai Yan Wong

HSBC, Research Division - Head of Internet Research of Asia Pacific & Analyst

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Presentation

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Operator [1]

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Ladies and gentlemen, thank you for standing by and welcome to the Tongcheng-Elong Holdings Limited 2019 Interim Results Conference Call. (Operator Instructions) I must advise you that this conference is being recorded.

And I'd like to hand the conference over to your speaker today, Ms. Joyce Li. Thank you. Please go ahead.

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Joyce Li;Investment Director, [2]

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Thank you, operator. Good morning and good evening everyone. Welcome to Tongcheng-Elong's 2019 Second Quarter and Interim Earnings Conference Call. I'm Joyce Li from Tongcheng-Elong. Joining us today on the conference call are Mr. Heping Ma, Executive Director and CEO; Mr. Jiazhu Hu, our CSO; Mr. Julian Fan, our CFO.

For today's call, our management team will provide a review of the company's second quarter and interim results in 2019. Our CEO, Mr. Ma will kick off with a short overview of this quarter. Our CSO, Mr. Wu, will walk us through the company's strategies and business highlights. And then CFO, Mr. Fan, will address the details of our financial performance accordingly. We will take your questions during the Q&A session as well.

As always, our presentation contains forward-looking statements. Such statements are based on management's current expectations and current market operating conditions and related events that involve known and unknown risks, uncertainties and other factors which may cause the company's actual results, performance or achievements to differ from those in the forward-looking statements.

This presentation also contains some original IFRS financial measures that should be considered in addition to, but not as a substitute for measures of the company's financial performance prepared in accordance with IFRS. For a detailed discussion of non-IFRS measures, please refer to our [related] documents in the IR section of our website.

It is now my pleasure to introduce our CEO, host. Please go ahead.

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Heping Ma, Tongcheng-Elong Holdings Limited - CEO & Executive Director [3]

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Thank you, Joyce. Thank you, everyone, for taking time to attend our earnings conference call today. It is a great pleasure to share with you our performance of the second quarter. In this quarter, we continued the good momentum from the beginning of 2019. For both operating and financial performance, we obtained satisfactory results.

[Operationally], there are (inaudible) the improvements of users' consumption power in low-tier cities, the improvement of organization rate, government's continuous investment in transportation, infrastructure, construction and higher demand for travel products and services from (inaudible) by consumption upgrades. These factors continued to stimulate the OTA industry.

There are also more internal factors in this quarter. (inaudible) continues to expand our user base. We're also paying more attention to quality of products and user experience. In the second quarter of 2019, our revenue was CNY 1.59 billion, which increased by 21%, while compared with CNY 1.31 billion over the period -- the same period of 2018.

Our quarterly adjusted net profit reached CNY 345.6 million, increased by 60%, while compared with the same period of last year. And our net profit margin reached 21.7%. In the past quarter, the macro economy experienced a pressure with periodic fluctuations and continued impact of international affairs.

Moreover, OTA industry is vulnerable to and easily influenced by geopolitical and seasonal factors. The second quarter was challenging for the entire industry. In spite of recent challenges, we still maintained very strong business growth in the second quarter.

Our GMV in the second quarter reached CNY 41.3 billion, achieved a strong year-on-year growth of 43%. Our monthly average MAU in the second quarter reached 181.6 million, up 15.4% from 157.4 million over the same period of last year.

And our MPU grew very [rapidly] in this quarter to 27.7 million, which increased by 53.9% compared with the same period last year. This means our paying ratio also achieved excellent growth from 11.4% in the same period last year to 15.3% in the second quarter of this year. These achievements were underpinned by several reasons. One, we have precise marketing position by leveraging our long-term partnership with Tencent. Two, we (inaudible) 2 product and the services enhancement. Three, we have a well-established membership system.

We understand that users need to better accumulate their buys at the platform. That kind of product will be attractive to them and build loyalty programs upon all their demands. The portion of high level

(technical difficulty)

our platform continued to rise. Users have accumulated trust in our platform and increased their purchase on the platform.

Looking at the whole industry, the online penetration rate of first- and second-tier cities has reached comparatively high level and it's difficult to acquire traffic through mobile payments has been increased. However, OTAs penetration rate in low-tier cities is still far behind growth in the first- and second-tier cities compared with developed countries and first-tier and second-tier cities in China. We are now in the (inaudible) of the market in the third tier and lower-tier cities domestically.

With recent cost reductions and traffic and the mini programs convenience and the select packaging as well as our own diversified and extensive products. We continue to expand our advantages in the [incremental] low-tier cities' markets.

In the second quarter, with the philosophy of customer-first, we launched many innovative products to enrich customers' choices by leveraging their long-term mutual relationship with our suppliers. This is exactly why we acquired the attraction ticketing business in the second quarter. We can provide our users with tickets to about 9,000 attractions in China on our platform. The introduction of attraction ticketing business enriches our suppliers (inaudible) improve our quality control our products and services, enhance a one-stop shop by providing users with more choices of products and services and have more opportunities for cross-selling in different business segments.

In air ticketing business, we are strengthening the business cooperation with suppliers, such as Air China. After the (inaudible) domestic prepaid hotel orders on our platform. We can choose room rate deduction by using their select (inaudible) miles. The maximum deduction rate can be up to 100%. Besides, we saw and are actively involved in the opportunities for mid- and low-end procurement in the companies in China. In addition to the main product line, our railway products and service innovation is also quite fruitful.

To sum up, we enhanced the value of our company through expansion in low-tier cities. Research and development of diversified product for one-stop shop strategy, continuously the exploration of user needs and improvement of membership program, et cetera.

We tried to embrace every growth opportunity in the industry, while also proactively overcome the challenges in the travel industry and user macro environment. Here, I would like to express my sincere gratitude to our users and suppliers for their recognition, to our employees for their hard work and dedication and to our shareholders for their continued support.

Now I will turn the call over to Jiazhu, who will explain in more detail about our implementation, the opportunities and the innovations alongside and our next steps in the following services.

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Jiazhu Wu, Tongcheng-Elong Holdings Limited - Chief Strategy Officer [4]

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Thank you, Ma. Good evening, and good morning to everybody. This quarter, we successfully continued to implement the strategy into every aspect of the company's business. We emphasized on the conversion and engagement of the users on cross-selling between transportation, accommodation and other business segments on development of incremental low-tier city market product -- and product diversification and innovation. I think you have already seen on the quarter's results.

In the second quarter, through the comprehensive population coverage of Weixin and the continued penetration in various channels, we have achieved remarkable results in the expansion into low-tier cities. The growth rate of low-tier cities has exceeded that of [upper] tier cities in every business segment. From perspective of registered users and at the end of the second quarter, 85.5% of the accumulated registered users came from non-first-tier cities. The percentage of Weixin's new paying users from low-tier cities remained at 61.5%, up 5.7% from 55.8% in the same period last year.

In the second quarter, our air ticket volume in the second and low-tier cities almost doubled the growth rate in first-tier cities. Our hotel rooms, room nights in low-tier cities increased by more than 3x when compared with the growth rate in high-tier cities. We can foresee that along with the diversification of our marketing strategies and Weixin and other channels in low-tier cities' market and with the help of maturity and promotion of 5G technology, low-tier cities are gradually releasing the advantages and remain one of our major categories in the future.

Transportation business, especially ground transportation, has always been the company's most frequent traffic business. With strong traffic and low user acquisition costs, our ground transportation and air ticket business have been taking a lead position. Innovative business and value-added service products generated and incubated in different transportation scenarios are our advantages.

In addition, we use a variety of marketing tactics to achieve higher cross-selling rates between transportation and accommodation business. Since the merger of Tongcheng and Elong, the cross-selling rate has been steadily improving. It also contributed a lot to the revenue growth of the accommodation business in this quarter.

In addition, different business segments within the transportation business and the newly added attraction ticketing business could also cross-sell to realize mutual traffic sharing within the company and improve our one-stop shop service throughout the journey.

What more? Our loyalty program plays an important role in improving user retention and efficiency. The significance of the membership program is not only to increase the recognition from new users and the frequency of previous users, but also enable us the life cycle management for higher up and help us to do further precise marketing in the next step.

Our loyalty program is integrated into the whole booking process, including pre-departure notice, benefit reminder and redemption for cash discount, et cetera. We provide products that cover every aspect of user's pre-departure, on the road and arrival demands, including coupons for our products and services, membership cards of e-commerce platforms and video platforms, value discount coupons for restaurants, et cetera.

Besides, we've developed and introduced the [black royal] membership card to the market, which contains membership benefits value of more than RMB 2,000. Users will be attracted by various privileges and benefits provided by the membership. This shows a significant upside for the frequency and value for those users as we expected.

The monthly orders for black royal users are nearly twice of the company's average. In terms of product diversification and technology innovation, every business segment has various highlights to share in this quarter. Noting that some of our users have limited payment channels, we launched a new function called Payment by Friend in the payment process. If users cannot complete the payment by themselves, they can invite friend to complete the payment process. After the launch of this new function, the payment rate of air ticket, especially expensive tickets increased. In addition, for the value-added service of the air ticket business, we have launched a 24-hour free cancellation and 24-hour free change insurance, which can help users to lock the low price and minimize the expenses, the service charge caused by the change of user's itinerary.

In terms of auxiliary products of train tickets, we have rolled out new value-added service products and services such as seat selection, connected seats, et cetera. In an airport scenario, we jointly launched dining voucher service within the airport.

For accommodation business, our advertisement with accommodation segment can help the hotels dynamically improve their exposure rate on our platform page and bring us service fees. Moreover, leveraging on our enormous traffic and extensive operating experience in mini programs, we have also started to develop the advertising business in Weixin-based mini program to enhance our value proposition to our TSPs and expand our revenue stream.

With the support of Big Data and the underlying technology platform, we further developed intelligent products. We have launched an online seat selection service for international flights together with China Southern Airlines with implementation of NDC technology. For air ticketing value-added service, we pioneered a multi-voyage insurance business, which allows users to purchase our insurance and onetime for more than 2 voyages in a single trip to upgrade the service from insurance for flight to insurance for trip.

In terms of customer service, we also adopt the latest technology, realizing the transformation from service for single order to full accelerated service model. In addition, our intelligent robust service capacity has been comprehensively updated, making online communication more smooth. The new robot can intelligently analyze users' real demand with Big Data, respond to users and serve users quickly, and it provides users with the best solution.

As a technology-driven company, we have ongoing commitment to develop and apply advanced information technology to provide users with customized products and services, improved operational efficiency, reduced costs and expenses and help us to achieve transformation from an online travel agency to an intelligent travel assistant.

That's all I wanted to share with you for now. And I will pass this on to Julian for an update on our latest financial results. Julian, please.

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Lei Fan, Tongcheng-Elong Holdings Limited - CFO [5]

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Okay. Thank you, Jiazhu. Good morning, and good evening, everyone. In the second quarter of 2019, if we look into the year-over-year comparison, there was no impact from Tongcheng-Elong merger. So I will start from the performance update in detail for the second quarter of 2019, then walk through the first half results on a combined basis and discuss our thoughts on the full year at last.

We delivered strong performance for the second quarter of 2019. Our revenue grew to RMB 1,591 million, representing a 21% year-over-year increase from the same period of 2018. The revenue from our own platform achieved 26% year-over-year growth in quarter 2 as the impact from distribution channel reduction has been narrowed down since this quarter. We continue to lead the domestic travel industry growth, since we made nice strides forward on our key strategic priorities to win both user volume growth and user value growth as Jiazhu mentioned.

MAU realized a satisfied growth of 15% year-over-year and there is consensus of balance and more disciplined investment on brand advertisement in quarter 2, while our MPU in the second quarter reached a record high of 27.7 million, representing a 53% year-over-year growth and 15.3% of paying ratio compared with 11.4% for the same period of 2018.

The significant jump of paying ratio was mainly benefited from our front-end user experience and user engagement improvement, aligned with further implementation of one-stop shop strategy.

With new cross-selling opportunities unlocked among accommodation, transportation and attraction visits, our cross-selling rate further increased to over 23% in the second quarter of 2019, with which our monthly order per paying user reached a historical high at 2.3% in the second quarter.

Nowadays, ground transportation works more like a traffic engine for the company. It basically distributed more than [300,000 BAU] landing into accommodation booking process through more than 10 different scenarios.

As a result, our GMV achieved over RMB 41 billion in the second quarter of 2019, with the growth accelerating at 43% year-over-year compared with the same period of last year. Accommodation reservation revenue increased by 26% to RMB 563 million in the second quarter. We continue to see strong momentum in our own platform sales on accommodation segment with a 46% year-over-year increase from the same period of last year.

[Inventory risk taking] room nights accounted for approximately 0.4% of the total room nights booked through our online platforms and its financial impact on accommodation reservation revenue was immaterial. The increase in accommodation revenue was mainly because of the increase in both room nights and revenue per room night. On geographic-wise and hotel star-wise, we continue to lead industry growth in low-tier city high-end hotels, low-tier city low-end hotels and high-tier city low-end hotels with over 50% year-over-year growth rate for all (inaudible).

Transportation ticketing revenue increased by 13% to RMB 937 million in the second quarter, primarily driven by the strong volume growth for all cities, including flight, train and bus. The total number of tickets sold for transportation segment increased by over 50% in the second quarter of 2019.

In terms of blended take rate, flight was quite stable while [Guam flights] dropped year-over-year due to lower [VAS] sales reflected.

Other revenue increased by 128% to RMB 100 million in the second quarter, primarily due to advertisement revenue starting to (inaudible) and attraction ticketing business consolidation.

Adjusted EBITDA increased by 41% year-over-year to RMB 441 million in the second quarter. Adjusted EBITDA margin increased to 27.7% from 23.8% period-over-period. Adjusted net profit increased significantly by 60% year-over-year to RMB 346 million in the second quarter. Adjusted net margin increased to 21.7% from 16.4% in the same period last year.

Now turning to the expenses. Excluding share-based compensation charges, costs accounted for 35% of revenue in the second quarter compared with 28% in the same period of last year. This increase was primarily due to the short-term decrease in blended take rate of ground transportation and purchase business from attraction ticketing that were consolidated in this quarter.

Total non-IFRS OpEx accounted for 49% of revenue in the second quarter compared with 64% in the same period of last year with a 15 point year-over-year improvement contributed by marketing efficiency optimization and operational leverage improvement as the merger synergies have been largely delivered.

By the end of the second quarter, our headcount was approximately 5,500, continue to optimize from previous quarter. Amortization of intangible assets from Tongcheng-Elong acquisition was included in the OpEx I mentioned above, reached to 4.4% of revenue in the second quarter of 2019 and 5.2% in the same period last year. As of June 30, 2019, the balance of cash, cash equivalents, restricted cash and short-term investment was around RMB 6.0 billion.

[Then] let us move to the results summary for the first half of 2019 on a combined basis. In the first half of 2019, GMV and revenue grew to RMB 77.2 billion and RMB 3,374 million, respectively, representing a 33% and 19% year-over-year increase from the same period of 2018. The revenue from our own platform achieved a 30% year-over-year growth, continuously gaining the market share in China.

Adjusted EBITDA increased by 36.8% year-over-year to RMB 1,056 million. Adjusted EBITDA margin increased to 31.3% from 27.3% in the same period of last year. Adjusted net profit for the period increased by 26.3% year-over-year to RMB 794.0 million.

Adjusted net margin increased to 23.5% from 22.2% in the same period of last year. Without a positive impact of utilization of the previous unrecognized tax losses in the first half of last year, adjusted profit for the first half of this year increased by almost 54%.

Last, turning to our financial expectation for the full year. Second half of the year is the peak season for OTA industry. Based on the latest market condition and business progress, we are expecting total reporting revenue growth of 2019 full year from 20% to 25% or revenue of our own platform growth from 25% to 30%.

Looking at the second half of the year, we expect modest growth on the third quarter due to weak take rate of ground transportation, impacted by 12306 weekly ticket sales service in short term, especially in the last season of ground transportation. We think the impact will be alleviated in the end of the third quarter, aligned with the peak season arrival and the new product launch on ground transportation as Jiazhu mentioned above.

Meanwhile, the revenue contribution of our Huixing system, which provides our user with intelligent travel options with product combo of railway and flight has been steadily increasing since the second quarter. In that case, we expect that the growth rate will reaccelerate in the fourth quarter.

For the bottom line, we are very confident to continue the strong profitability at the first half year. Overall, the [progression] on our key strategic initiatives led to our strong performance in the first half, maintaining a leading position for revenue growth and profitability in the industry. We plan to accelerate those strategies moving forward in the second half year and deliver another solid result in the full year and beyond.

Operator, we're ready for questions. Thank you.

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Questions and Answers

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Operator [1]

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(Operator Instructions) First question comes from the line of Alex Poon of Morgan Stanley.

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Chun Man Poon, Morgan Stanley, Research Division - Equity Analyst [2]

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Congratulations on very good results. My first question is related to the 12306 impact. Can you give us the (foreign language) revenue mix by quarter from Q1 to Q4 in a normal seasonality basis? Just want to see how much revenue is impacted -- potential impact in the third quarter? And what's the -- on the second quarter, can you give us the by segment tick rate, transportation and hotel separately for Q2? And what are you expecting for the same tick rate by segment in Q3?

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Lei Fan, Tongcheng-Elong Holdings Limited - CFO [3]

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For the 12306, the impact on our corporation, I'd like Jiazhu to answer this question, and I will give you some comments on the tick rate.

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Jiazhu Wu, Tongcheng-Elong Holdings Limited - Chief Strategy Officer [4]

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The low tick rate in quarter 2 is due to lower value-added service sales in the ground transportation in the flat season, the seasonality. But ground transportation tickets saw -- enjoy a hyper growth over 50% and higher than air, benefited from users experience optimization and the low-tier city online market penetration for the high-speed train and bus. Though the tick rate for the segment is lower, it contributes to gain market share and cross sell to accommodations as our internal traffic engine. We think that the impact by 12306 waiting list for service is more obvious in the flat season. We did not see this impact in the first quarter because of the spring festival. We expect the attach rate at the end of quarter 3 will pick up again because the arrival of peak season and the launch of new products and services for the ground transportation. Thanks.

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Lei Fan, Tongcheng-Elong Holdings Limited - CFO [5]

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And around -- in terms of the tick rate, actually, our accommodation blended tick rate further increased to above 8.5% in the second quarter of 2019 along with rigorous execution for accommodation, one-stop shop in the short run and the long run. Base net tick rate depends on the market condition, and the revenue from value-added service would further increase as we offered more productive service on the whole hotel service chain and destination service, like attraction ticketing business and the cross selling

(technical difficulty)

business benefiting from the low-tier city online penetration, just like Jiazhu mentioned. Both the ticket volume and the GMV more than doubled the industry growth -- average growth. That would also help our monthly paying user grow more than 50% year-over-year, enlarging our paying user base for future cross-selling [actually]. In terms of the blended tick rate for transportation, the trends will be quite similar as the attach rate change. The flight was quite stable at 3.5 -- above 3.5%, while the transportation was lower than 3% in this quarter in short term and will be recovered since the end of the third quarter. I would also like to put some comment on the attached rate trends. Actually the transportation attach rate slightly dropped, mainly due to the ground transportation like we mentioned above. Air attach rate was quite consistent compared with last year and [passes] every quarter from insurance, VIP launch, coupon including the air and airport pickup service, et cetera. So the blended tick rate for air business is also stable. The ground transportation dropped in the second quarter due to 12306 weak release, the ticket sales service impact [in flat seasons] for our express ticketing service. We didn't see this impact in the first quarter because of spring festival. At the same time, we also beat up the traffic transfer from ground transportation to accommodation to accelerate the cross sell and includes the hotel revenue growth. That also explain why is the revenue growth of our accommodation business exceeded our expectation. Actually, we are expecting the attach rate for ground transportation will recover and reaccelerate by the end of the third quarter. On one hand, the peak season arrival, especially for the quarter 4 this year, because 2020 spring festival happens in the middle to end of January next year, it's come earlier than previous years. So the 12306 opened the ticket sale, the train ticket sale, 30 days ahead of the departure. So that would benefit our quarter 4 sales and monetization. On the other hand, new product and service will be launched for ground transportation like Jiazhu said, seat selections, et cetera. And also the revenue contribution of our Huixing system, which provides our users with intelligent travel options with product combo of railway and flight, has been steadily increasing since this quarter -- since second quarter. Thank you.

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Operator [6]

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Next question is from the line of Brian Gong of Citigroup.

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Brian Gong, Citigroup Inc, Research Division - Equity Research Associate [7]

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Congratulation on the solid results. I just have 2 questions. First away is that 12306 tick rate impact and other reasons like traffic support or accommodation. I want to know, can you elaborate more on which one makes larger contribution to the lower tick rates on transportation? And my second question is about the GP margin. So the GP margin drop is mainly due to the lower tick rates on transportation and the pre-purchase products of attraction business, right? So how should we see the trend in the second half?

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Lei Fan, Tongcheng-Elong Holdings Limited - CFO [8]

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Yes, Brian. Actually, first, I would like to comment on the GP trends. Actually, when we manage -- when the management team manages our profitability, we treat (inaudible) line and the active (inaudible) line as the full feature but not treat each line separately. We focus more on our net margin rather than the gross margin due to different seasonality, product and mix change and marketing condition as well. For example, in the second quarter, like you asked, the gross margin drop but mainly due to our blended tick rate drop in ground transportation business. But at the same, we became more disciplined on -- we'll become more disciplined on the promotion and the marketing on ground transportation as well. That is why you could also see our sales marketing percentage as of revenue dropped in the same level. And our net margin have no impact of the gross margin dropped. What is more, our MPU and the GMV and conversion rate of ground transportation still achieved a hyper growth due to user experience improvement and the lower-tier city penetration. We expect that the growth margin will be above 70% in the full year due to our first seasonality. The quarter 2 is the most flat season of the year, and alleviation from the ground transportation tick rate drop and high-margin product and mix increase. So that is the gross margins. And the second one is about the tick rate for -- I'm sorry, could you repeat the -- your first question?

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Brian Gong, Citigroup Inc, Research Division - Equity Research Associate [9]

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Yes, sure. So for the lower tick rates on transportation, I mean you just mentioned about 2 reasons. One is 12306 ticket sales impact, right? And another is the traffic (inaudible) to accommodation to post the cross-selling ratio. So I'm wondering, can you elaborate more on which reason has larger impact on the lower tick rates?

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Lei Fan, Tongcheng-Elong Holdings Limited - CFO [10]

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Yes. Actually the blended tick rate job, that is mainly due to the 12306 impact. And for the tick rate drop, there is another reason. It's because our attraction business -- attracting ticketing business, there is -- some of the attracting ticketing business is pre-purchase, so it's also gross revenue recognition base. And also in terms of the accommodation visits growth, our cross selling, it makes a very big, huge growth in the second quarter. Nowadays we still see a clear quarter-to-quarter momentum on cross-selling rate this year, 23% in the second quarter. Like what I mentioned above, ground transportation already became a traffic engine inside the company, putting high-quality traffic to other business. Accommodations, flight and attraction tickets was not only benefit from the cross-sale rate increase, but what is more, from the enlarged base of user from ground transportation. For example, each day, our ground transportation generated more than 3 million exposures to help selling accommodation products in more than 10 kinds of scenario and entries, which converted to more than 200,000 effective blending to accommodation booking process. So we attract a higher accommodation growth and higher accommodation mix in the future in the following quarters.

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Operator [11]

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We have Binnie Wong from HSBC.

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Wai Yan Wong, HSBC, Research Division - Head of Internet Research of Asia Pacific & Analyst [12]

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So in terms of when you look at -- when you hear from the opening remarks and your outlook, as soon as you gave that high-end thing like second half of the year, we do see that blend in monetization rate for transportation. Hopefully from the recovery from the train ticket, we will be recovering. So just want to see what are the major reasons we see there? And also the implication effectively on the (foreign language) on the 12306 now. So because I believe we hear earlier, we think about that effectively because it's technically effectively a free waiting list on the 12306, so some people might still be willing to pay a little bit of fees, by value-added services on Tongcheng-Elong to still use our services. So at the end, the impact might not be that much. So I just wanted to see ultimately how the management see -- expect for that, and then also in terms of our margin expectations through second half of the year? And I do have a follow-up on that, too, on the logistic thing. First question first, if that's okay?

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Lei Fan, Tongcheng-Elong Holdings Limited - CFO [13]

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Actually, the (foreign language) business is the only one ancillary business in our transportation. And actually in the past year, in the last year, it is the most part of our ground transportation. But since this year, first, we have a product to offer in ground transportation like Huixing system. The Huixing system offered a product combo for the flight and the train. And the [interim sales] is very hot on this product. So actually for ground transportation, Huixing system already take more than 10% of total ancillary service sales right now for the total transportation sales. So it [kindly mix] some additional revenue instead of the express ticketing sales. And also for the train express ticketing, I have already explained this. For the second quarter, it's a flat season for this product. And since the end of the third quarter, when we take the -- when we get into the peak season of quarter 4, the express ticketing sales will be recovered. And also for the ground transportation, blended tick rate will fully recovered at that time. We also expected a 3.5% of the blended tick rate for both the air and the ground transportation in the long run. Thank you.

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Wai Yan Wong, HSBC, Research Division - Head of Internet Research of Asia Pacific & Analyst [14]

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So the quick follow-up here is just the reasons why do you think it will recover? Is it just because of seasonality? And speaking of that, because we understand 3Q usually seasonally the strongest quarter for the company. Because -- yet because of the macro headwind and all of the micro uncertainties, because of the trade tensions and various things and depreciation of renminbi, how do you see that has impacted the traffic demand so far?

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Lei Fan, Tongcheng-Elong Holdings Limited - CFO [15]

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Yes. Actually, the third quarter is the peak season for accommodation and the air transportation but not for ground transportation, especially for express ticketing. The quarter 4, the national holiday and also spring festival is the peak season for ground transportation. In terms of the macro economy, actually, our result figure shows that macro situation doesn't have major impact on -- because our GMV in quarter 2 increased significantly by 43%, and also the tickets sold for our transportation is above 50%. So that is the comments on the macro. And also for the seasonality, seasonality is just one legal reason the management team expect the blended tick rate of ground transportation will be recovered. And the other, like what I mentioned, we have more product with service offered. We have fiscal action. We could charge service fee for those additional service, and also our Huixing system growth rate is faster than other products right now. Thank you.

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Operator [16]

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Next question is from Sally Chan of CLSA.

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Sally Chan, CLSA Limited, Research Division - Research Analyst [17]

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As a follow-up question on the mechanism behind the impact of 12306 on our transportation business because if I look at transportation revenue for 2Q, it grew 13% year-on-year. But when I try to break out the 2Q, transportation GMV seems to be growing much faster, around 40% year-over-year. Just now we mentioned the impact from this. 12306 is primarily on the tick rate and attached rates side. Just want to see if we think there would be any impact to the volume growth. For example, will the rollout of 12306 railway system reduce the amount of train tickets that can go into our ticket expressing pool? Just want to try to get a sense of the mechanism behind our ticket expressing and official railway system. And also another question is do we see any potential risk of 12306 trying to restrict on ticket expressing business? Because I did notice Ctrip and [Shina] both launched 2 channels for train ticket booking expressing now. So they allow users to join the official 12306 queue for free and then users can also opt in to pay a little premium for some benefits like more train segments, et cetera. Just wanted to get a sense of the regulatory risk, if any, around this business.

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Lei Fan, Tongcheng-Elong Holdings Limited - CFO [18]

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Actually for the first question, as you can see for our results, there is no impact on the volume and the GMV that sold on our ground transportation. Our GMV of ground transportation increased by more than 50%, and also the ticket sold on ground transportation also have this hyper growth at the same time. That is mainly because we enhanced our user experience and the user engagement in the ground transportation. Nowadays, ground transportation is really a traffic engine inside our company. And it's distributed this high-quality traffic to other segment like accommodation and air transportation and enhanced the conversion rate on the other segments as well. And in terms of the 12306 impact, we have maintained -- actually we have maintained a very good relationship with 12306. I think the other players in this OTA industry will also maintain a good relationship with 12306 and the National Railway Administration as well. We are all aim at serving the railway passengers with a quality service but in different abstract. We work together with 12306 and National Railway Administration to improve our products and services and enhance the travel experience of all the users. But different -- there's only -- there's some difference, some kind of difference the product that we provide as well. For example, we can provide all kinds of ancillary service and product to service -- to satisfy their customer needs in the entire traveling process. And also we have service 7 days plus 24-hour service for ground transportation, but that is not to be done by 12306.

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Operator [19]

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Our next question is from the line of D. S. Kim of JP Morgan.

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D. S. Kim, JP Morgan Chase & Co, Research Division - Head of Asia Gaming, Lodging & Leisure [20]

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I have 2 quick question. First on, sorry if I have missed earlier, but I think we discussed the ground transportation tick rate in 2Q was below 3% for the short term in 2Q. Can we talk about how it was in first quarter and second quarter of 2018 just to have a sense of how much decline we are talking? And secondly, I have a follow-up on the guidance after this.

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Lei Fan, Tongcheng-Elong Holdings Limited - CFO [21]

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Yes. Actually in the first quarter for both the air and ground transportation, the blended tick rates are above 3.5%. And also for the ground transportation, it's also, I think reached around 4.0% in the first quarter because that is the hottest season, that is the peak season for ground transportation in the first quarter due to spring festival. In the second quarter, as I mentioned, it's slightly below 3.0% of the blended tick rate for ground transportation. But in last year, the quarter 2 last year, it's around 3.5%. So it's year-on-year 0.5% drop for the ground transportation tick rate. In the next quarter and the following, just like what I have said, it should be recovered to around 3.5%. Thank you.

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D. S. Kim, JP Morgan Chase & Co, Research Division - Head of Asia Gaming, Lodging & Leisure [22]

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And I have a follow-up on the guidance. I think we are guiding 20% to 25% growth for the full year, and that means second half growth should be somewhere between 20% to 30% if I'm not mistaken. And can we break down those -- the growth rate per each segment, say, like hotel and transportation ticketing? And can we elaborate a little bit about what do we mean by -- what did we mean by third quarter moderate growth? Is it like 5%, 10% or 15%, 20%? Just to have better understanding.

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Lei Fan, Tongcheng-Elong Holdings Limited - CFO [23]

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Okay, thanks. Yes, as mentioned, the topline growth target is both 20% to 25% for the full year. And also if you look at the -- our old platform, it's around 26% to 30%, which means, yes, the second quarter will be stronger, have higher growth rate than the first half. For quarterly [leads], just like what I've said, quarter 4 will be stronger than quarter 3. Quarter 3 will have a modest growth, maybe slightly lower than 20%. And quarter 4 will be higher, far more higher than 20%. For business segment, lead accommodation reservation growth rate will be stronger, will be far more stronger than the transportation [cross-selling] rate increase. We expected our cross-selling rate will higher than 25%, 23% for quarter 2, and we expect a 25% for the third quarter because of the -- because of we have a lot of execution to transfer our ground transportation traffic to accommodation side. So that is the top line. And also for the bottom line, yes, we have already achieved nearly RMB 800 million adjusted net profit with a 23.5% net margin for the first half as our marketing efficiency and operational leverage further improved. That is higher, far more higher than ours expectation. We will continue our strong profitability in the second half year in the same level. At the same time, we'll invest in the sales and marketing dollar in summer to boost the paying user conversion and user value growth. Thank you.

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D. S. Kim, JP Morgan Chase & Co, Research Division - Head of Asia Gaming, Lodging & Leisure [24]

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If I may follow up on last question. In terms of the sales and marketing spend, if I'm not mistaken, non-GAAP spending this quarter was 25% of revenue, which is bang in line with the prior quarter, first quarter, but then significantly below first half of last year over 30%. So if we model for the second half and next year, shall we take this as a new run rate, like 25% of the revenue? Or to improve our MPUs and whatnot, we may want to spend a little bit more in the second half? And that's my last question.

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Lei Fan, Tongcheng-Elong Holdings Limited - CFO [25]

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Okay. Yes, the sales margin spending percentage as of revenue dropped mainly due to, one, agency commission dropped from reduction of distribution channel; and two, optimization in Weixin advertisement investment. And also like what I mentioned, we disciplined investment on ground transportation. But at the same time, we will keep investing money on the paying user conversion and user value growth. After the ground transportation tick rate recovered in the -- I think at the end of the first quarter, we will invest in more. We will invest in more the sales and marketing dollar at the ground transportation segment as well. So if you look at the sales and marketing spending percentage as of revenue, it will be a little bit higher than 25% level in the second half.

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Operator [26]

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And due to time constraint, we only have one line to accommodate. And our last question comes from the line of Thomas Chong of Jefferies.

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Ken Chong, Jefferies LLC, Research Division - Equity Associate [27]

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This is Ken Chong asking on behalf of Thomas. I see that you have been penetrating (inaudible) successfully through Tencent. And I see -- I want to ask, is our strategy on getting new users different for Tencent? I see from your results said that you have continued (inaudible) as a company through diversifying target source for users. I'm wondering what would those companies be? And how would (inaudible) be in getting new users?

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Jiazhu Wu, Tongcheng-Elong Holdings Limited - Chief Strategy Officer [28]

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Thank you for the question. (inaudible) we're successfully leveraging the Weixin traffic and the penetrating to the low-tier cities especially the Tier 3 and below cities. If you check the data in quarter 2 of 2019, we have effectively penetrated in low-tier cities, and more than 61% of new paying users are from Tier 3 or below cities in Weixin platform. With that, the total paying user in the first half of 2019 reached 83 million and (inaudible) consecutive 12-month total paying users by the end of June was over 120 million, thanks again to the growing in the low-tier cities. We have achieved the hyper growth in low-tier cities for consecutive 6 quarters across all the product line. In addition, as we mentioned about both the low-tier cities' low-end hotels and the high-end hotel revenue surpassed 50% year-over-year growth. At the same time, the relatively low user acquisition cost and our high operation efficiency allow us to achieve nice profitability and also share more benefits with our users and suppliers.

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Operator [29]

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Thank you. That's the end of our Q&A session. I'd now like to hand the conference back to Joyce Li. Please go ahead.

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Joyce Li;Investment Director, [30]

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Thank you, operator. Now we have to end the call. If you wish to check our press release and our financial information, please see IR section of our company website. Thank you, and see you next quarter.

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Operator [31]

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Thank you. Ladies and gentlemen, that's the end of our conference for today, and thank you for participating. You may now all disconnect.