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Edited Transcript of 696.HK earnings conference call or presentation 29-Aug-19 7:00am GMT

Half Year 2019 TravelSky Technology Ltd Earnings Call (Chinese, English)

Beijing Sep 3, 2019 (Thomson StreetEvents) -- Edited Transcript of TravelSky Technology Ltd earnings conference call or presentation Thursday, August 29, 2019 at 7:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Yinhong Xiao

TravelSky Technology Limited - CEO, GM & Executive Director

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Conference Call Participants

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* Eric Zong

Macquarie Research - Senior Associates Analyst

* King Pui So

CLSA Limited, Research Division - Research Analyst

* Wai Kin Lau

Daiwa Securities Co. Ltd., Research Division - Head of Automobiles, Transportation and Industrial, Hong Kong & China

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Presentation

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Operator [1]

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(foreign language) Good afternoon, ladies and gentlemen. Welcome to join the Global Investor and Conference Call of TravelSky Technology Limited for the 2019 Interim Result announcement today.

(foreign language) The attending management today are (foreign language) Mr. Xiao Yinhong, Executive Director and General Manager; (foreign language) Secretary of -- to the Board, Mr. Yu Xiaochun; (foreign language) Vice Director of Finance Department, Mr. [Gang Rong]; (foreign language) Director of (inaudible) Secretary office, Ms. [Lee Chen]; (foreign language) Investor Relation Manager, Ms. [Zeng Yiwei]; (foreign language) Office from Finance Department and (inaudible) Secretary Office.

(foreign language) On our conference call today Mr. Yu Xiaochun, Secretary of the Board, will walk through the 2019 interim result performance and the business status of the company. (Operator Instructions) (foreign language) Now I would like to Mr. Yu Xiaochun to start the presentation, please.

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Yinhong Xiao, TravelSky Technology Limited - CEO, GM & Executive Director [2]

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(foreign language)

[Interpreted] Good afternoon. Thank you for attending and joining our conference call today. We announced our 2019 interim results yesterday. In the first half of the year, our revenue grew 9.2%. So this shows that we achieved stable growth in our revenue. For profit growth, the growth rate is smaller than that of revenue growth. This shows that we are under some cost pressure. Overall speaking, in the first half of the year, we did quite well. And for our operating profit margin, we are at 40%. We have adequate cash in hand, and our overall operating condition was good. Now as usual, I would prefer leaving more time for questions and answers. So now we can start Q&A.

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Questions and Answers

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Operator [1]

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(foreign language) (Operator Instructions) Our first question is Alex So from CLSA. (foreign language)

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King Pui So, CLSA Limited, Research Division - Research Analyst [2]

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(foreign language)

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Unidentified Company Representative, [3]

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(foreign language)

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King Pui So, CLSA Limited, Research Division - Research Analyst [4]

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(foreign language)

[Interpreted] First of all, I would like to ask a question about your revenue. Your revenue for system integration business achieved strong growth. And we can also see quite clearly your revenue for data network service because it is being stated separately. And for data network service, there's a year-on-year decline of 1.5%. So can you explain more about these 2 businesses? And in the second half of the year, what do you think will be the situation regarding these 2 businesses?

The second question is about your expenses. In the first half of the year, there is quite a strong increase, a big increase in your R&D expenses, what are the reasons for that? In which products and services did you invest your R&D expenses? And is this increase in the R&D expenses reflected in the staff cost item or in which items?

Now there is also some introduction in your results announcement about cloud products development, can you elaborate more on that? When are you going to see some contribution from cloud products development to your revenue and profit?

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Unidentified Company Representative, [5]

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(foreign language)

[Interpreted] Let me answer the question. Your first question first regarding revenue. So for system integration revenue, we achieved an increase. This is because this year, we have accelerated our implementation of system integration projects. There are more projects that reached the point of revenue recognition. So that is the reason why there's an increase. For data network service, as you said, we are separately stating the revenue for data network services. This is to facilitate easier analysis by the investors. So in first half 2018 because there was the inclusion and consolidation of another company (inaudible), but then this company was no longer in the accounts in 2019. So that's why on a year-on-year basis, there's a drop in revenue. But if we exclude this item, revenue actually increased 5%.

(foreign language)

Interpreted For R&D expenses, they are mainly reflected in 2 items, one, staff costs and the other is technical support. So internally, we have our own R&D people doing the work. Besides, we also need external technical support so that is being done by external technical teams. So R&D expenses are mainly reflected in these 2 items.

(foreign language)

Interpreted Concerning the development of our cloud products, step 1 is a private cloud, which is mainly for our own use and application so it will cover R&D, and it is also aimed at lowering operating costs. But we are an IT platform ourselves. So after this private cloud operation has become mature, we will consider providing this cloud service to the external markets as well, but that is step 2. Step 1 will be our own operation and utilization of the project cloud.

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King Pui So, CLSA Limited, Research Division - Research Analyst [6]

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(foreign language)

[Interpreted] How should we interpret? Or how should we look at your R&D expenses for the future?

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Unidentified Company Representative, [7]

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(foreign language)

[Interpreted] Regarding our R&D expenses because right now, in front of you is an interim record of our half yearly results, and some R&D expenses are actually related to specific individual projects. So that's why there may be a big difference on a year-on-year basis if you compare the 2 half year periods. As mentioned, we will continue to increase investment in R&D and this can also be shown in the financial statements last year. So you can see the trend of an increase in R&D expenses.

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Operator [8]

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Next question (inaudible) Macquarie. (foreign language)

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Unidentified Analyst, [9]

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(foreign language)

[Interpreted] My first question is about staff costs. On a year-on-year basis, staff costs went up 18%, the absolute amount was an increase of CNY 400 million. However, if you look at the number of employees, it came down on a year-on-year basis by 12%. And if you can compare with the previous half year period, it's down 7%. So I would like to know if you look at the absolute amount of CNY 400 million increase in staff costs, how much came from an increase in R&D investment? How much was caused by an increase in salaries and fringe benefits? What will be the trend in the coming period, for example, in the second half of the year and next year? What do you think staff costs will become?

And then the second question is, you did quite well in lowering the expenses in relation to system and data by 11%. So what will be actually the costs going forward for this part?

(foreign language)

Interpreted Let me correct. The increase in staff costs amounted to CNY 110 million.

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Unidentified Company Representative, [10]

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(foreign language)

[Interpreted] Right. First of all, in relation to the increase in staff costs. The amount of increase was CNY 110 million. In fact, if you look at our staff salaries, we have made adjustments in accordance with the market trend and also our peers. So we have made adjustments to the structure. So those salaries or those expenses that are supposed to be incurred in the second half of the year were moved forward to the first half of the year. So that's why there is change in the staff costs.

(foreign language)

Interpreted Besides on a year-on-year basis, there is an increase in the base figure, the denominator, in relation to social security. So in terms of social security payments, this amount increased. So as a result, that has also led to increase in staff costs.

(foreign language)

Interpreted You are right in saying that there is a decline in our technical support and maintenance expenses. Well, this is related to the progress in our R&D work, and it is to tie in with business needs. So that is the reason why there is a variation in different years.

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Unidentified Analyst, [11]

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(foreign language)

[Interpreted] Then for the second half of the year and next year, do you have any estimates of this expense? So do you have an estimate in terms of whether it will go up or decrease and so on?

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Unidentified Company Representative, [12]

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(foreign language)

[Interpreted] So we are going to increase our R&D investment, overall speaking. So as a result, this will be reflected in the staff costs and technical support expenses. The trend is that there will be a steady increase. However, it all depends on the actual R&D expense increment because that will have to also depend on our actual business needs.

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Operator [13]

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The next question is Kelvin Lau, Daiwa. (foreign language)

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Wai Kin Lau, Daiwa Securities Co. Ltd., Research Division - Head of Automobiles, Transportation and Industrial, Hong Kong & China [14]

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(foreign language)

[Interpreted] My first question is about your leasing costs. In the first half of the year, leasing costs was 0. In the future, are we going to see no or 0 leasing costs? Now I know that you have office buildings in other cities, and you have plan to preserve or retain these office buildings. So what is your future plans? After relocating to the new park area, are you going to let out the existing office building? What is your plan?

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Unidentified Company Representative, [15]

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(foreign language)

[Interpreted] So first of all, concerning leasing expenses -- leasing costs in 2019, we adopted IFRS #16 standard. So as a result, there was a change in the accounting arrangements. So leasing costs or leasing expenses, it is no longer presented as an operating leasing expense rather it is now under depreciation and amortization. And there is also some attributable expenses as well.

(foreign language)

Interpreted So the leasing will be such that the market is still there, it's just a change in the accounting standard.

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Wai Kin Lau, Daiwa Securities Co. Ltd., Research Division - Head of Automobiles, Transportation and Industrial, Hong Kong & China [16]

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(foreign language)

[Interpreted] And what is your plan about the vacated office buildings?

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Unidentified Company Representative, [17]

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(foreign language)

[Interpreted] Right now, our intention is that we will rent out the vacated office buildings, and this work is now underway.

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Wai Kin Lau, Daiwa Securities Co. Ltd., Research Division - Head of Automobiles, Transportation and Industrial, Hong Kong & China [18]

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(foreign language)

[Interpreted] Is it because you adopted IFRS 16, #16 standard. So as a result, depreciation increased quite a lot. And in the second half of the year, it will become stable at around CNY 400 million. Is that the case?

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Unidentified Company Representative, [19]

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(foreign language)

[Interpreted] Based on the current situation, your judgment is quite right.

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Operator [20]

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The next question is (inaudible) (foreign language)

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Unidentified Analyst, [21]

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(foreign language)

[Interpreted] My first question is about your systems growth rate. If you compare this first half and the first half of 2018, the growth rate slows down. In first half 2018, growth rate was 10%. In this first half, around 7%. So what will be the trend going forward? And if you look at the volume in relation to foreign airlines it is quite stable in terms of the processing volume. So I would like to know what is your plan? And what will be the progress in relation to business with foreign airlines and the external markets?

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Unidentified Company Representative, [22]

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(foreign language)

[Interpreted] Your first question is about the passenger volume. It has come down because this year, there was a downward pressure in the economy, and there is also volatility in oil price and also the U.S.-China trade war. So last year, in the first half, passenger volume increased 11.4%. In the first half this year, it only went up 7.8%. At the beginning of the year, the civil aviation authority estimated a growth in passenger volume of 11% for the whole year 2019. We think now that this 11% growth will be quite difficult to achieve.

(foreign language)

Interpreted However -- well, even though there is pressure in the short run, as you yourself stated just now, there are several positive factors. For example, in China, if you look at the first half this year, if you look at the Chinese airlines' international flight and also the foreign airlines, the passenger volumes did increase. So we believe that for outbound travel, there will still be growth.

(foreign language)

Interpreted For the mid-to-long run, we are still optimistic about the growth in passenger volume, this is because of the continuous development of the Chinese economy and also the increase in people's disposable income.

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Unidentified Analyst, [23]

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(foreign language)

[Interpreted] For this first half of the year, concerning system integration, you have disclosed the number of projects under construction. So there are actually 90 projects under construction. So when can these projects be completed? And when will revenue be recognized for these projects? So if we have the information then we can better understand and analyze the system integration revenue.

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Unidentified Company Representative, [24]

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(foreign language)

[Interpreted] For these 90 projects under construction, they generated income in the first half of the year. As regards to when can they be completed, this depends on the scale of the projects, the commencement date of the projects as well as the actual details of the projects. At the end of the year, we will disclose and we will provide some new data, and you can see the change and pattern from these new data.

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Operator [25]

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Our next question is (inaudible) Morgan Stanley. (foreign language)

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Unidentified Analyst, [26]

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(foreign language)

[Interpreted] First question is concerning the foreign airlines. There is quite an increase -- quite a bigger increase in relation to the volume of passengers, and you said that this is because of an increase in outbound travel. If you look at the international flights of the Chinese airlines, the volume had also gone up. For the foreign airlines, they actually achieved a single-digit growth rate. So I would like to know more in greater detail. Is it really -- mainly because the increase in outbound travel? Or did the company do anything to boost the growth? My second question is about your clearance and settlement services. In the first half, there is an increase of 3.5%. But then in the second half of last year, growth rates slowed down because of updating of the contract. So what's about the second half of this year? Will the growth rate recover from last year comparing with the second half of last year?

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Unidentified Company Representative, [27]

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(foreign language)

[Interpreted] So let me answer your first question regarding the growth of foreign airlines. In the first half of this year, the growth was 9.6%; in the first half of last year, the growth was 1.6%. So as a result, last year, the base figure, the denominator was smaller. And in the first half 2019, this year, foreign airlines have made adjustment to their transport capacity. They have increased the number of long-haul routes and international routes. So as a result, passenger volume went up. As regards sales promotion, well, we have been doing sales promotion work. We have improved our products and services, and we have invested more in the channels -- in the sales and promotion channel with foreign airlines. So I think the growth for foreign airlines is actually a combination -- is caused by a combination of factors.

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Unidentified Analyst, [28]

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(foreign language)

[Interpreted] Regarding our clearance and settlement service income, well, that is the work done by our wholly-owned subsidiary. In the first half of this year, its revenue increased. This is, in fact, related to the processing volume with airlines. And -- so there is an increase in the processing volumes or revenue went up. For the whole year, we think that revenue will still be up.

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Operator [29]

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Next question (inaudible) (foreign language)

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Unidentified Analyst, [30]

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(foreign language)

[Interpreted] I want to ask about Umetrip. So how much is the loss per year? In the future, what is your plan? Are you going to do restructuring of the organization?

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Unidentified Company Representative, [31]

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(foreign language)

[Interpreted] In relation to Umetrip, we are still making investments in terms of staff costs and also technology, technical development expenses. It has not much income really so it is still at a loss. As regards to the progress and status of the restructuring, this has been on for 3 to 4 years already. I know that some potential shareholders have already signed the agreement on the shareholding restructuring, but then some other potential shareholders are in the final deliberation stage. As regards to when the whole thing can be finalized, we don't really know because we are in a very passive position so I cannot really give you a specific timeframe.

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Unidentified Analyst, [32]

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(foreign language)

[Interpreted] I want to ask a question about the stock option incentive scheme, which was actually started in 2011. Well, I know that many of your employees are working on, for example, cloud technology, cloud system, big data and so on. And in these areas, there is intense competition in relation to talent as well as the salaries. So do you have any other plan on staff incentives?

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Unidentified Company Representative, [33]

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(foreign language)

[Interpreted] In relation to the old stock option incentive plan, it was terminated because the regulator has changed some of the rules. So as a result, the original scheme can no longer be applied. As regards offering staff incentives, there are many different tools and channels to do that. If you look at our salary, well, we are being regulated so our salary is in fact on the lower side in the market. Whether or not we have some other stock option or incentive schemes, right now, we do not have any definite plans yet, but we will go according to (inaudible) policies and take advantage of the room in the policies to think of any particular way to incentivize the staff.

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Unidentified Analyst, [34]

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(foreign language)

[Interpreted] I want to know about your future development direction. Last year, there was some point -- there were some points mentioned in relation to some fee items with airlines. Besides, do you have any plan to make more investment in airports? Right now, your business is already very stable. So I want to know whether there are anything new to boost your company's growth.

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Unidentified Company Representative, [35]

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[Interpreted] Mr. Xiao is engaged in another meeting, so I will answer this question on his behalf. So all along, we have been focusing in the Greater China region and markets. We will continue to focus on the aviation and traveling sector of this market. So from history till now -- from the earliest historical point till now, our business model has been very stable. And for the Greater China region, it is actually the fastest-growing region in the world in terms of aviation and traveling. So there are some positive trends, for example, upgrading of consumption and increase in passenger volume, increase in outbound travel and so on. So these are some positive factors that we will capitalize on to expand our revenue source.

(foreign language)

Interpreted So you also asked about our participation in the construction of the Daxing Airport. This is the first time that we are doing this kind of work. It is a brand new model for us. We are assessing this model right now. In the future, are we going to extend this approach to other airports? We are still doing assessment. So I have to say that I will not rule out this option. But at the same time, I cannot say that we will definitely go forward with it.

(foreign language)

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Unidentified Analyst, [36]

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[Interpreted] So I have two questions relating to your financial data. Last year, we heard that there would be a big CapEx. However, if you look at your fixed asset growth, it was just a small amount. So I want to know whether you have made those investments. And what is your future CapEx plan? Now concerning the associated connected companies, there is some increase in the receivables from associated companies. Now apart from Southern Airlines, what other associated or connected companies are there?

(foreign language)

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Unidentified Company Representative, [37]

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[Interpreted] Every year, we do disclose our CapEx plan and also we tell investors the actual implementation of the CapEx plan. In the first half of this year, CapEx was CNY 370 million. In fact, if you look at the assets, you may see that this CapEx amount is not fully reflected in the assets. In fact, in our assets, there will be both increase and decrease because there is depreciation, which will reduce the asset number. So that's why the asset represents actually the net effect after all the increases and decreases. And well, last year, the CapEx side was CNY 2-odd billion, but then now this year, it is a lot smaller.

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Unidentified Analyst, [38]

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[Interpreted] Is it true that some items in your CapEx plan has not been implemented?

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Unidentified Company Representative, [39]

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[Interpreted] Yes.

(foreign language)

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Unidentified Analyst, [40]

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[Interpreted] What is your future CapEx target?

(foreign language)

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Unidentified Company Representative, [41]

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[Interpreted] Our CapEx plan is CNY 2.3 billion. However, it all depends on the actual implementation of our business plans. So the final figure may be different. For Southern Airlines, it is still our associated company. So it is reflected in the receivables from connected or associated parties.

(foreign language)

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Unidentified Analyst, [42]

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[Interpreted] Concerning the fees and charges -- the packaged fees and charges with airlines. Well, apart from that, are there other kinds of fees? In the future, will there be new fee items with airlines?

(foreign language)

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Unidentified Company Representative, [43]

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[Interpreted] Well, concerning the packaged fees with airlines, well, the packaged fee includes 3 items: the marketing and distribution system, the IT system, and also the departure from Hong Kong system services. But because different airlines also have many other different demands, so in accordance with the demand, we will also design other applicable products and services for the airlines. And those income will be reflected under other income.

(foreign language)

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Operator [44]

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(foreign language) [Qin Yen Fei], Capital Investment Management.

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Unidentified Analyst, [45]

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I've just got 2 questions. Firstly, where do you think your strength and weaknesses lie in the international market? And secondly, just following up on the receivables, but I want to ask more about the trade payables to related parties. So these have been increasing steadily. I'm just wondering if you can kindly provide some details of what types of transactions, but more importantly, to whom the parties are.

(foreign language)

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Unidentified Company Representative, [46]

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[Interpreted] Concerning our strength and weaknesses in the international markets, well, if you look at the products and service for aviation, service and distribution, this is a very homogeneous service. So if you look at our strengths, first of all, we have the IT platform of many airlines, so we enjoy economies of scale, and so we also enjoy a price advantage as a result. If you look at the homogeneous service that we are providing together with many other players in the world, we are the lowest in price. So if you look at our pricing for Chinese airlines comparing it with foreign airlines, our pricing for Chinese airlines is a lot lower.

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Operator [47]

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(foreign language) Eric Zong, Macquarie.

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Eric Zong, Macquarie Research - Senior Associates Analyst [48]

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[Interpreted] My first question is about your other expenses. In the first half of this year, it is CNY 100 million. In the second half of 2018, it was slightly above CNY 300 million. Is it because there are a number of one-off expenses that were already finished in last year? So this year and next year, the other expenses, the amount will be more stable and steady?

My next question is about your commission and promotion expenses, which was -- which went up 60%. So just now you mentioned that the business with foreign airlines went up. Part of it is because of the sales promotion initiatives that you had carried out. So is it true that for the increase in commission and promotion expenses, it is a result of the increase in business and promotion work with foreign airlines? And in the future, what will be the trend?

(foreign language)

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Unidentified Company Representative, [49]

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[Interpreted] Concerning the decline in other expenses, this year, we did some work to enhance our operating efficiency, we have been controlling costs, and our cost control work has been effective. So as a result, other expenses decreased.

And then about commission and promotion expenses in the first half of the year, we followed our markets -- marketing and sales policies. And we also have increase in business because of an increase in number of passengers. So the increase in commission and promotion expenses is a normal result of the increase in the related business.

(foreign language)

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Eric Zong, Macquarie Research - Senior Associates Analyst [50]

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[Interpreted] You just said that because of your effective cost control work and measures, other expenses decreased. Now is it true that then the CNY 360 million of other expenses of last year was really very high? So if you are going to continue to carry out cost control work, then in the second half of this year, other expenses should come down quite significantly. Is it the case?

(foreign language)

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Unidentified Company Representative, [51]

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[Interpreted] Last year, because of the impact of IFRS #9, we had made quite a lot of provision concerning foreseeable loss. As a result, other expenses went up quite a lot. This year, we have been doing quite a lot of receivable clearance or recovery of receivable work, so we believe that as a result, other expenses should be able to decrease.

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Operator [52]

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(foreign language)

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Unidentified Analyst, [53]

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[Interpreted] My first question is about the AIT revenue. So growth in AIT revenue is faster than the growth in business volume. So is this because of the increase in your ASP? What is the ASP for Chinese airlines and foreign airlines?

The second question is for the Chinese airlines, you charged a packaged fee, which covers 3 different services -- service areas. Well, in the future, let's say if any Chinese airline chooses to -- not to use a particular service, so do you still impose packaged fee on them? Or will you deduct the amount of fee -- of service that they are no longer using from the total fees?

The third question is about commission and promotion expenses. So part of these expenses are being -- are the amounts paid to the airport and some will be OTA commission. So I would like to know which of these 2 is showing a slower growth that has led to the slow growth in the commission and promotion expenses.

(foreign language)

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Unidentified Company Representative, [54]

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[Interpreted] Regarding our AIT income, there is increase in the ASP. In the first half of the year, there was also foreign exchange impact. So as a result, the revenue from foreign airlines is actually bigger or growing faster than the business volume growth. So as a result, the total AIT revenue growth is also faster than business volume growth.

(foreign language)

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Unidentified Analyst, [55]

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[Interpreted] Your business -- your revenue from foreign airlines is relatively smaller. So for Chinese airlines, if you look at the first half ASP, has it come down or is it rather stable?

(foreign language)

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Unidentified Company Representative, [56]

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[Interpreted] Basically, the trend has not changed. So you asked a question about our packaged fees. Well, this is because several systems are closely connected with one another. And packaged fee, in fact, is the most preferential, the most favorable to the airlines. If some airlines decide to choose some services to use and not to use some services, then definitely we have to go through a redeliberation and negotiation process, and there will be change in the price.

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Unidentified Analyst, [57]

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(foreign language)

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Unidentified Company Representative, [58]

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(foreign language)

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Unidentified Analyst, [59]

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(foreign language)

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Unidentified Company Representative, [60]

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[Interpreted] If you look at our commission and promotion expenses, actually, it has not shown any sign of slowing down. It comprises 3 types of expenses. For example, the fees paid to airports, the OTA commission and also the -- and also another service area. Well, in the first half of this year, all these businesses were very normal, so there isn't really a slowing down in the growth in these expenses.

So the follow-up question was is it because last year, there was an irregular growth in these commission and promotion expenses, and this year, things have normalized? Then the answer is last year, we did quite a lot of overseas promotion, and so there was quite a big increase from that. And it was regarded as a bit excessive in terms of growth in this area. So now the growth in commission and promotion expenses are more in line with our overall business growth.

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Operator [61]

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(foreign language) [Mike Pillar], (inaudible).

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Unidentified Analyst, [62]

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Sorry, we're kind running well past the hour at the moment. Just a very quick question on margins. I mean basically, what you've said so far in terms of R&D and staff costs and also the kind of cost control in the other expenses. I'm just wondering what do you think is a reasonable assumption to make with regards to future EBITDA margin trend? I think you saw just over 40% in first half of this year, and hopefully, that reflects impact of IFRS 16.

And just secondly, if you look at the systems integration business alone, I mean how profitable is that relative to the rest of the business and I mean, other instances -- I mean, obviously, it's project-by-project basis. But I mean, are there instances where you're taking on projects that are either low or in 0 margin? Are they kind of loss leader for the rest of the business? (foreign language)

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Unidentified Company Representative, [63]

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[Interpreted] So concerning our operating profit margin, in the first half of last year, it's 42%; in first half this year it's 40%. So in the past 3 years, we have been quite stable in the operating profit margin. The management has been very stringent in cost control measures. So we believe that we are optimistic in this regard. For system integration business, we face mainly airport customers. There are also other customers in other industries. Our profit margin is different for different types of projects, depending on the task, the actual task and work that we have to do.

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Operator [64]

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[Lifen Li], UBT.

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Unidentified Analyst, [65]

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(foreign language)

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Unidentified Company Representative, [66]

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(foreign language)

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Unidentified Analyst, [67]

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[Interpreted] My question is about R&D expenses. So the management just said that it comprises 2 parts: staff costs and also technical support. For staff costs, it went up in this first half; technical support, it came down. And you also made adjustment to the disbursement of salary, the timing of disbursement according to the practice in the industry. And then you also said that you will be very steady in increasing your R&D investment. So how should we interpret these R&D expenses? Should we consider the, for example, the social security payment and also changes in staff salaries? Then what about AI or other use of technologies? How are you going to interpret and consider these as well?

(foreign language)

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Unidentified Company Representative, [68]

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[Interpreted] For our R&D investment, basically, if you look at the financial statement, the R&D expenses represent the staff costs for our R&D people because they will do the research and development work, and their salaries will mainly be in this item. At the same time, we have contracted out some R&D work. As a result, there is this technical support item. So however, there are other related expenses related to R&D investment. For example, the expenses and investment in relation to properties and equipment, and these will be shown under other items.

(foreign language)

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Unidentified Analyst, [69]

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[Interpreted] So I have a question about your software and hardware sales expenses, which has actually increased 60%. So is this related to your system integration services? However, if you look at the operating income from this, it has decreased rather than increased. So what will be the trend in the future?

(foreign language)

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Unidentified Company Representative, [70]

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[Interpreted] So in relation to our system integration revenue, actually, there is -- we have the system integration revenue being reflected in our financial statements. But as regards to its costs and expenses, there are a number of different items. For example, there is the equipment sales expenses and also other expenses. So this really depends on the actual content and details of different projects. Different projects differ in this regard.

Now if this -- if a certain project involves mainly hardware equipment investment, then there will be the hardware procurement expenses, which will be bigger relatively. However, for another project, if it involves mainly the use of our own software, then there wouldn't be a big equipment procurement expense. On the other hand, the profit margin will be relatively higher. So the profit margin differs in different projects.

(foreign language)

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Unidentified Analyst, [71]

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[Interpreted] Can you give guidance on depreciation and amortization for this year?

(foreign language)

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Unidentified Company Representative, [72]

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[Interpreted] For the second half of the year, I think the trend will be more or less the same as in the first half, so there won't be much change.

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Operator [73]

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(foreign language) [Chen Xi], [HSBC].

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Unidentified Analyst, [74]

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[Interpreted] First question is about system integration. So as such, as now, there is equipment procurement and equipment sale in this segment. So if you look at this business, is it on a 0 profit or normal profit situation? Is there a need to make adjustment to this? And then another question is that in around March, there is the -- since you're already being incorporated in your system for 15 months already, so what will be the future trajectory looking forward?

(foreign language)

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Unidentified Company Representative, [75]

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[Interpreted] Starting last year, we are deliberating with [Trancho Airlines] on an all-round cooperation. And this year, you can see more and more cooperation between the 2 of us. In the second half, we believe that the results or the achievement from our cooperation can be gradually reflected.

Well, if you say that the system integration business should be defined as a 0 profit or low-profit business, I don't think this is in line with the reality. Even though different projects give different profit margin under system integration, we believe that the profit level is within reasonable range.

(foreign language)

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Unidentified Analyst, [76]

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[Interpreted] My question actually means the following. Now for system integration, there is a part, which is equipment direct sales. So for this equipment direct sales business, is it giving a very low profit? Or is it giving you a different profit margin in different projects?

(foreign language)

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Unidentified Company Representative, [77]

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[Interpreted] Because in different projects, there may be the involvement of using equipment both from outside or using our own equipment, so as a result, the profit margin will be different because of these arrangements.

(foreign language)

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Unidentified Analyst, [78]

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[Interpreted] I have a follow-up question on your cooperation with [Trancho]. So you have already started to have a cooperation model. Comparing this cooperation and packaged fee arrangement with other Chinese airlines, what is the difference? Is there a difference in terms of the source of passengers? And for the second half, if you look at revenue and profit, profit margin, what will be the development?

(foreign language)

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Unidentified Company Representative, [79]

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[Interpreted] So we have all-round cooperation with [Trancho Airlines]. While they are a low-cost carrier, we have deliberated and established some cooperation methods and approaches. However, we are not in a very good position or convenient position to disclose those details.

(foreign language)

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Unidentified Analyst, [80]

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[Interpreted] In 2012, you had a project in which NDC products were developed -- were bought from Ireland. So I want to know the progress of processing of those products right now. And then if those NDC products are sold to Chinese airlines, then is it on a free-of-charge basis or are you charging a fee?

(foreign language)

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Unidentified Company Representative, [81]

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[Interpreted] First of all, that center is not only working on NDC service, it is a comprehensive retail solution provider. In China, well, the company is actually working on retail in the aviation sector, and they have been developing very fast. Their revenue also increased fast. In overseas business -- in terms of overseas business, they provide NDC solution, and their development has also been quite good.

(foreign language)

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Unidentified Analyst, [82]

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[Interpreted] So the NDC part, what is the sales volume annually? And also what is the annual growth rate? Is it reflected in your system integration segment or your data network segment?

(foreign language)

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Unidentified Company Representative, [83]

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[Interpreted] Well, the [offers] only provides NDC service for foreign airlines, but then the exact details and data are not with me now.

(foreign language)

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Unidentified Analyst, [84]

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[Interpreted] What is the annual sales right now?

(foreign language)

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Unidentified Company Representative, [85]

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[Interpreted] For (inaudible) they include both Chinese, domestic and also overseas. Their income is reflected in other income.

(foreign language)

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Unidentified Analyst, [86]

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[Interpreted] Can you give us an amount in terms of the actual volume? And what is the growth rates, please?

(foreign language)

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Unidentified Company Representative, [87]

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[Interpreted] We haven't disclosed this information in the past, and so we have to discuss whether we can disclose it or not. So let's leave it for next time.

(foreign language)

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Unidentified Analyst, [88]

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[Interpreted] Okay. Looking at the situation right now since June in Hong Kong and also the incident about Cathay Pacific, since you also have some cooperation with Cathay, has there been some impact on your business?

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Unidentified Company Representative, [89]

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[Interpreted] The answer is until now, no impact.

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Operator [90]

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(foreign language)

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Unidentified Company Representative, [91]

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[Interpreted] Thank you very much. This concludes our Q&A session. If you have further questions, please feel free to contact our Investors Relations department, and we will see each other again in January.

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Operator [92]

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(foreign language) This concludes today's conference call. You may disconnect now. Goodbye.

[Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]