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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

Form 6-K

REPORT OF FOREIGN PRIVATE ISSUER
PURSUANT TO RULE 13a-16 OR 15d-16 UNDER
THE SECURITIES EXCHANGE ACT OF 1934

For the month of December 2015


Commission File Number: 001-33853


CTRIP.COM INTERNATIONAL, LTD.
99 Fu Quan Road
Shanghai 200335, People's Republic of China
(Address of principal executive office)

Indicate by check mark whether the registrant files or will file annual reports under cover of Form 20-F or Form 40-F.

Form 20-F           X           Form 40-F                   

        Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(1) :                                      

        Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(7) :                                      

   


SIGNATURES

        Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

    CTRIP.COM INTERNATIONAL, LTD.

 
 
By:
 
/s/ Xiaofan Wang  
 Name: Xiaofan Wang
Title: Chief Financial Officer

Date: December 9, 2015


EXHIBIT INDEX

Exhibit No.   Description
 

99.1

   UNAUDITED CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS—CTRIP.COM INTERNATIONAL LTD
 

99.2

  

MANAGEMENT'S DISCUSSION AND ANALYSIS OF UNAUDITED FINANCIALS RESULTS OF NINE MONTHS ENDED SEPTEMBER 30, 2015 AND 2014—CTRIP.COM INTERNATIONAL LTD
 

99.3

  

AUDITED CONSOLIDATED ANNUAL FINANCIAL STATEMENTS—CTRIP.COM INTERNATIONAL LTD
 

99.4

  

UNAUDITED CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS—QUNAR CAYMAN ISLANDS LIMITED
 

99.5

  

AUDITED CONSOLIDATED ANNUAL FINANCIAL STATEMENTS—QUNAR CAYMAN ISLANDS LIMITED
 

99.6

  

UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION
 

99.7

  

CONSENT OF PRICEWATERHOUSECOOPERS ZHONG TIAN LLP, INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM, FOR THE INCLUSION OF REPORTS IN FORM S-8 OF CTRIP.COM INTERNATIONAL, LTD.

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SIGNATURES
EXHIBIT INDEX

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Exhibit 99.1


CTRIP.COM INTERNATIONAL, LTD.

Unaudited interim condensed consolidated statements of income and comprehensive income for the
nine-month periods ended September 30, 2014 and 2015

 
   Nine-month
period ended
September 30, 2014 		  Nine-month
period ended
September 30, 2015 		  Nine-month
period ended
September 30, 2015 		 
 
   RMB
   RMB
   US$
  

Revenues:

                    

Accommodation reservation

     2,359,527,084     3,429,431,656     539,592,117  

Transportation ticketing

     2,176,375,590     3,209,447,030     504,979,393  

Packaged-tour

     822,005,605     1,318,390,585     207,437,627  

Corporate travel

     265,257,406     337,472,425     53,098,437  

Others

     128,984,581     169,818,402     26,719,492  
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

Total revenues

     5,752,150,266     8,464,560,098     1,331,827,066  
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

Less: business tax and related surcharges

     (318,530,671 )   (441,047,155 )   (69,395,046 )
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

Net revenues

     5,433,619,595     8,023,512,943     1,262,432,020  
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

Cost of revenues

     (1,516,993,510 )   (2,280,203,474 )   (358,770,765 )
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

Gross profit

     3,916,626,085     5,743,309,469     903,661,255  
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

Operating expenses:

                    

Product development

     (1,532,161,154 )   (2,436,251,190 )   (383,323,556 )

Sales and marketing

     (1,507,008,354 )   (2,239,315,933 )   (352,337,456 )

General and administrative

     (627,347,241 )   (781,892,086 )   (123,024,118 )
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

Total operating expenses

     (3,666,516,749 )   (5,457,459,209 )   (858,685,130 )
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

Income from operations

     250,109,336     285,850,260     44,976,125  
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

Interest income

     247,424,398     320,845,061     50,482,261  

Interest expense

     (111,867,645 )   (207,257,452 )   (32,610,210 )

Other income (net)

     98,506,283     2,390,125,681     376,066,096  
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

Income before income tax expense, equity in income of affiliates and non-controlling interests

     484,172,372     2,789,563,550     438,914,272  
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

Income tax expense

     (144,200,240 )   (398,705,739 )   (62,732,982 )

Equity in income/(loss) of affiliates

     48,771,518     (41,210,788 )   (6,484,170 )
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

Net income

     388,743,650     2,349,647,023     369,697,120  

Net loss attributable to non-controlling interests

     78,420,837     82,280,999     12,946,220  
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

Net income attributable to Ctrip's shareholders

     467,164,487     2,431,928,022     382,643,340  
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

Net income

     388,743,650     2,349,647,023     369,697,120  

Other comprehensive income:

                    

Foreign currency translation

     (53,592,067 )   (301,567,389 )   (47,449,083 )

Unrealized securities holding gains , net of tax

     222,706,701     639,659,744     100,645,060  
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

Total comprehensive income

     557,858,284     2,687,739,378     422,893,097  
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

Comprehensive loss attributable to non-controlling interests

     78,420,837     82,280,999     12,946,220  
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

Comprehensive income attributable to Ctrip's shareholders

     636,279,121     2,770,020,377     435,839,317  

Earnings per ordinary share

                    

—Basic

     13.72     68.58     10.79  
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

—Diluted

     11.99     57.11     8.99  
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

Earnings per ADS

                    

—Basic

     1.71     8.58     1.35  
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

—Diluted

     1.50     7.14     1.13  
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

Weighted average ordinary shares outstanding

                    

—Basic shares

     34,038,621     35,460,682     35,460,682  
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

—Diluted shares

     39,718,398     45,126,192     45,126,192  
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

Share-based compensation included in

                    

Operating expense above is as follows:

                    

Product development

     133,986,656     204,717,632     32,210,591  

Sales and marketing

     39,341,990     47,724,489     7,509,045  

General and administrative

     196,707,143     193,668,130     30,472,045  

   

The accompanying notes are an integral part of these consolidated financial statements.

1


CTRIP.COM INTERNATIONAL, LTD.

Unaudited interim condensed consolidated balance sheets as of December 31, 2014 and
September 30, 2015

 
   December 31,
2014 		  September 30,
2015 		  September 30,
2015 		 
 
   RMB
   RMB
   US$
  

ASSETS

                    

Current assets:

                    

Cash and cash equivalents

     5,300,887,799     8,946,005,987     1,407,578,511  

Restricted cash

     836,394,951     1,076,345,583     169,353,890  

Short-term investment

     6,438,854,587     7,231,623,333     1,137,834,875  

Accounts receivable, net

     1,826,765,949     3,179,848,066     500,322,246  

Due from related parties

     10,568,937     283,261,598     44,568,821  

Prepayments and other current assets

     2,469,707,335     4,737,707,408     745,438,260  

Deferred tax assets, current

     193,503,366     295,665,926     46,520,537  
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

Total current assets

     17,076,682,924     25,750,457,901     4,051,617,140  
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

Long-term deposits and prepayments

     306,661,011     1,729,008,924     272,044,956  

Long-term loan receivable

     192,871,939     204,928,015     32,243,693  

Long-term receivables due from related parties

     510,039,284     531,794,572     83,673,386  

Land use rights

     104,568,868     103,024,034     16,209,962  

Property, equipment and software

     5,220,626,461     5,314,659,388     836,216,783  

Investments

     5,318,756,447     11,855,647,100     1,865,385,975  

Goodwill

     1,892,507,708     2,719,036,781     427,817,481  

Intangible assets

     668,202,371     1,042,417,811     164,015,641  
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

Total assets

     31,290,917,013     49,250,974,526     7,749,225,017  
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

LIABILITIES

                    

Current liabilities:

                    

Short-term debt

     3,560,488,641     5,819,378,028     915,630,000  

Accounts payable

     2,304,111,525     4,143,374,543     651,925,002  

Due to related parties

     17,049,103     160,636,765     25,274,839  

Salary and welfare payable

     525,157,105     769,616,802     121,092,706  

Taxes payable

     339,452,319     549,258,055     86,421,118  

Advances from customers

     3,937,477,522     5,360,571,301     843,440,635  

Accrued liability for customer reward program

     430,852,908     575,420,307     90,537,527  

Other payables and accruals

     1,600,113,658     1,495,522,939     235,307,907  
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

Total current liabilities

     12,714,702,781     18,873,778,740     2,969,629,734  
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

Deferred tax liabilities, non-current

     132,506,644     649,661,616     102,218,770  

Long-term Debt

     8,065,980,000     16,842,340,000     2,650,000,000  
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

Total liabilities

     20,913,189,425     36,365,780,356     5,721,848,504  
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

Commitments and contingencies (Note 11)

                    

Shareholders' equity

    
 		    
 		    
 		  

Share capital (US$0.01 par value; 100,000,000 shares authorized, 35,146,982 and 35,381,474 shares issued and outstanding as of December 31, 2014 and September 30, 2015, respectively.)

     3,085,272     3,125,951     491,842  

Additional paid-in capital

     4,828,021,816     5,161,312,298     812,088,913  

Statutory reserves

     134,098,747     134,098,747     21,099,306  

Accumulated other comprehensive income

     443,579,376     781,671,731     122,989,447  

Retained earnings

     5,726,024,997     8,157,953,019     1,283,585,030  

Less: Treasury stock (3,323,262 and 3,742,219 shares as of December 31, 2014 and September 30, 2015, respectively.)

     (1,605,630,913 )   (2,416,273,887 )   (380,180,296 )
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

Total Ctrip's shareholders' equity

     9,529,179,295     11,821,887,859     1,860,074,242  
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

Non-controlling interests

     848,548,293     1,063,306,311     167,302,271  
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

Total shareholders' equity

     10,377,727,588     12,885,194,170     2,027,376,513  
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

Total liabilities and shareholders' equity

     31,290,917,013     49,250,974,526     7,749,225,017  
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

   

The accompanying notes are an integral part of these consolidated financial statements.

2

CTRIP.COM INTERNATIONAL, LTD.

Unaudited interim condensed consolidated statements of shareholder's equity for the nine-month periods ended
September 30, 2014 and 2015

 
   Ordinary shares
(US$0.01 par value) 		   
    
    
    
    
    
    
    
    
  
 
    
    
   Accumulated
other
comprehensive
income/(loss) 		   
    
    
    
    
    
  
 
   Number of
shares
outstanding 		  Par value   Additional
paid-in
capital 		  Statutory
reserves 		  Retained
earnings 		  Treasury
stock—shares 		  Treasury
stock 		  Total Ctrip's
shareholders'
equity 		  Non-controlling
interests 		  Total
shareholders'
equity 		 
 
    
   RMB
   RMB
   RMB
   RMB
   RMB
    
   RMB
   RMB
   RMB
   RMB
  

Balance as of December 31, 2013

     33,828,251     3,033,490     4,088,484,766     118,449,230     372,634,580     5,498,934,733     3,777,087     (1,551,141,268 )   8,530,395,531     199,690,428     8,730,085,959  

Issuance of common stock pursuant to share incentive plan

     773,149     47,659     203,948,557     —     —     —     —     —     203,996,216     —     203,996,216  

Share-based compensation

     —     —     370,035,789     —     —     —     —     —     370,035,789     —     370,035,789  

Repurchasing common stock

     (392,307 )   —     —     —           —     392,307     (446,155,147 )   (446,155,147 )   —     (446,155,147 )

Foreign currency translation adjustments

     —     —     —     —     (53,592,067 )   —     —     —     (53,592,067 )   —     (53,592,067 )

Unrealized securities holding gains

     —     —     —     —     222,706,701     —     —     —     222,706,701     —     222,706,701  

Early Conversion of Convertible Notes

     233,400     —     (3,478,183 )   —     —     —     (233,400 )   114,293,637     110,815,454     —     110,815,454  

Net income/(loss)

     —     —     —     —     —     467,164,487     —     —     467,164,487     (78,420,837 )   388,743,650  

Disposal of a subsidiary

     —     —     —     —     —     —     —     —     —     (280,076 )   (280,076 )

Issuance of convertible preferred shares by a subsidiary

     —     —     —     —     —     —     —     —     —     186,141,343     186,141,343  

Acquisition of a subsidiary

     —     —     —     —     —     —     —     —     —     273,179,200     273,179,200  

Acquisition of additional stake in a subsidiary

     29,864     299     21,222,057     —     —     —     —     —     21,222,356     (44,268,537 )   (23,046,181 )
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

Balance as of September 30, 2014

     34,472,357     3,081,448     4,680,212,986     118,449,230     541,749,214     5,966,099,220     3,935,994     (1,883,002,778 )   9,426,589,320     536,041,521     9,962,630,841  
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

3

CTRIP.COM INTERNATIONAL, LTD.

Unaudited interim condensed consolidated statements of shareholder's equity for the nine-month periods ended
September 30, 2014 and 2015 (Continued)

 
   Ordinary shares
(US$0.01 par value) 		   
    
    
    
    
    
    
    
    
  
 
    
    
   Accumulated
other
comprehensive
income/(loss) 		   
    
    
    
    
    
  
 
   Number of
shares
outstanding 		  Par value   Additional
paid-in
capital 		  Statutory
reserves 		  Retained
earnings 		  Treasury
stock—shares 		  Treasury
stock 		  Total Ctrip's
shareholders'
equity 		  Non-controlling
interests 		  Total
shareholders'
equity 		 
 
    
   RMB
   RMB
   RMB
   RMB
   RMB
    
   RMB
   RMB
   RMB
   RMB
  

Balance as of December 31, 2014

     35,146,982     3,085,272     4,828,021,816     134,098,747     443,579,376     5,726,024,997     3,323,262     (1,605,630,913 )   9,529,179,295     848,548,293     10,377,727,588  

Issuance of common stock pursuant to share incentive plan

     653,449     40,679     160,912,514     —     —     —     —     —     160,953,193     —     160,953,193  

Share-based compensation

     —     —     446,110,251     —     —     —     —     —     446,110,251     —     446,110,251  

Repurchasing common stock

     (474,547 )   —     —     —           —     474,547     (834,688,738 )   (834,688,738 )   —     (834,688,738 )

Foreign currency translation adjustments

     —     —     —     —     (301,567,389 )   —     —     —     (301,567,389 )   —     (301,567,389 )

Unrealized securities holding gains

     —     —     —     —     639,659,744     —     —     —     639,659,744     —     639,659,744  

Purchasing of Purchased Call Option

     —     —     (805,504,000 )   —     —     —     —     —     (805,504,000 )   —     (805,504,000 )

Sale of Issued Warrants

     —     —     523,404,000     —     —     —     —     —     523,404,000     —     523,404,000  

Early Conversion of Convertible Notes

     55,590     —     2,621,976     —     —     —     (55,590 )   24,045,764     26,667,740     —     26,667,740  

Net income / (loss)

     —     —     —     —     —     2,431,928,022     —     —     2,431,928,022     (82,280,999 )   2,349,647,023  

Disposal of a stake of shares of subsidiaries

     —     —     15,824,133     —     —     —     —     —     15,824,133     (757,619,709 )   (741,795,576 )

Issuance of convertible preferred shares by a former subsidiary

     —     —     —     —     —     —     —     —     —     725,512,512     725,512,512  

Acquisition of subsidiaries

     —     —     —     —     —     —     —     —           365,304,723     365,304,723  

Acquisition of additional stake in subsidiaries

     —     —     (10,078,392 )   —     —     —     —     —     (10,078,392 )   (36,158,509 )   (46,236,901 )
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

Balance as of September 30, 2015

     35,381,474     3,125,951     5,161,312,298     134,098,747     781,671,731     8,157,953,019     3,742,219     (2,416,273,887 )   11,821,887,859     1,063,306,311     12,885,194,170  
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

4


CTRIP.COM INTERNATIONAL, LTD.

Unaudited interim condensed consolidated statements of cash flows for the nine-month periods ended
September 30, 2014 and 2015

 
   Nine-month
period ended
September 30, 2014 		  Nine-month
period ended
September 30, 2015 		  Nine-month
period ended
September 30, 2015 		 
 
   RMB
   RMB
   US$
  

Cash flows from operating activities:

                    

Net income

     388,743,650     2,349,647,023     369,697,120  

Adjustments to reconcile net income to cash provided by operating activities:

                    

Share-based compensation

     370,035,789     446,110,251     70,191,682  

Equity in (income)/ loss of affiliates

     (48,771,518 )   41,210,788     6,484,170  

Gain on deconsolidation of a subsidiary

     —     (2,269,860,747 )   (357,143,424 )

Loss from disposal of property, equipment and software

     1,537,063     5,306,803     834,981  

Gain on disposal of cost method investment

     (1,674,498 )   —     —  

Provision for doubtful accounts

     2,474,801     23,902,615     3,760,875  

Depreciation of property, equipment and software

     106,978,919     199,533,379     31,394,892  

Amortization of intangible assets and land use rights

     4,867,950     48,530,449     7,635,856  

Deferred income tax (benefit)/ expense

     (41,163,681 )   113,722,624     17,893,295  

Changes in current assets and liabilities net of assets acquired and liabilities assumed/disposed of in business combinations/dispositions :

                    

Increase in accounts receivable

     (502,426,755 )   (1,375,625,290 )   (216,443,025 )

Increase in due from related parties

     (296,782,839 )   (145,270,048 )   (22,857,016 )

Increase in prepayments and other current assets

     (1,423,860,135 )   (2,315,022,247 )   (364,249,205 )

Increase in long-term deposits

     (26,004,497 )   (1,322,856,593 )   (208,140,316 )

Increase in accounts payable

     517,601,030     1,875,822,447     295,144,825  

(Decrease)/increase in due to related parties

     (1,868,448 )   143,751,985     22,618,161  

Increase in salary and welfare payable

     86,024,284     265,300,394     41,742,777  

Increase in taxes payable

     51,057,415     217,793,300     34,267,937  

Increase in advances from customers

     931,579,688     1,537,291,842     241,879,892  

Increase in accrued liability for customer reward program

     125,867,159     144,567,399     22,746,460  

Increase in other payables and accruals

     421,644,945     221,687,218     34,880,612  
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

Net cash provided by operating activities

     665,860,322     205,543,592     32,340,549  
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

Cash flows from investing activities:

                    

Purchase of property, equipment and software

     (2,957,868,848 )   (493,927,525 )   (77,715,326 )

Cash paid for long-term investments

     (1,901,680,807 )   (2,862,547,662 )   (450,397,707 )

Cash received from disposal of available-for-sale investment

     —     61,980,000     9,752,030  

Cash paid for acquisition, net of cash acquired

     (139,766,133 )   (998,262,527 )   (157,068,180 )

Purchase of intangible assets

     (9,000,000 )   (20,000,000 )   (3,146,831 )

Increase in restricted cash

     (81,415,667 )   (239,564,471 )   (37,693,447 )

Decrease/ (Increase) in short-term investment

     404,423,629     (791,064,727 )   (124,467,356 )

Cash outflows from deconsolidation of subsidiaries, net of cash disposed

     —     (1,441,060,076 )   (226,738,636 )

Cash outflows from disposal of a subsidiary net of cash disposed

     (4,315,324 )   —     —  
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

Net cash used in investing activities

     (4,689,623,150 )   (6,784,446,988 )   (1,067,475,453 )
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

   

The accompanying notes are an integral part of these consolidated financial statements.

5


CTRIP.COM INTERNATIONAL, LTD.

Unaudited interim condensed consolidated statements of cash flows for the nine-month periods ended
September 30, 2014 and 2015 (Continued)

 
   Nine-month
period ended
September 30, 2014 		  Nine-month
period ended
September 30, 2015 		  Nine-month
period ended
September 30, 2015 		 
 
   RMB
   RMB
   US$
  

Cash flows from financing activities:

                    

Proceeds from short-term bank loans

     876,796,780     2,212,384,360     348,100,000  

Proceeds from exercise of share options

     152,960,799     159,701,667     25,127,709  

Repurchase of common stock

     (446,155,147 )   (834,688,738 )   (131,331,226 )

Cash paid to non-controlling investors

     —     (46,236,902 )   (7,274,986 )

Cash received from non-controlling investors in connection with the establishment of subsidiary

     —     725,512,513     114,153,268  

Proceeds from issuance convertible preferred shares by a subsidiary

     164,565,161     —     —  

Proceeds from issuance of senior convertible notes, net of issuance costs

     3,069,000,000     8,258,400,000     1,299,389,515  

Proceeds from sale of warrants

     —     523,404,000     82,353,200  

Purchase of Purchased Call Option

     —     (805,504,000 )   (126,739,254 )

Net cash provided by financing activities

     3,817,167,593     10,192,972,900     1,603,778,226  
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

Effect of foreign exchange rate changes on cash and cash equivalents

     38,206,670     31,048,684     4,885,249  

Net (decrease)/increase in cash and cash equivalents

    
(168,388,565
)		  
3,645,118,188		    
573,528,571		  

Cash and cash equivalents, beginning of year

     7,138,344,814     5,300,887,799     834,049,940  
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

Cash and cash equivalents, end of year

     6,969,956,249     8,946,005,987     1,407,578,511  
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

Supplemental disclosure of cash flow information

                    

Cash paid during the year for income taxes

     187,727,553     173,710,640     27,331,903  

Cash paid for interest, net of amounts capitalized

     20,060,400     111,516,049     17,546,109  

Supplemental schedule of non-cash investing and financing activities

    
 		    
 		    
 		  

Conversion of convertible senior notes

     110,815,452     26,667,740     4,195,944  

Accruals related to purchase of property, equipment and software

     (269,340,342 )   (99,849,185 )   (15,710,426 )

Unpaid cash consideration for business acquisitions (Note 2)

     (47,225,926 )   (107,862,644 )   (16,971,276 )

   

The accompanying notes are an integral part of these consolidated financial statements.

6


CTRIP.COM INTERNATIONAL, LTD.

Notes to the unaudited interim condensed consolidated financial statements

(Amounts expressed in RENMINBI (RMB) unless otherwise stated)

1. ORGANIZATION AND NATURE OF OPERATIONS

        The accompanying unaudited interim condensed consolidated financial statements include the financial statements of Ctrip.com International, Ltd. (the "Company"), its subsidiaries, VIEs and VIEs' subsidiaries. The Company, its subsidiaries, the consolidated VIEs and their subsidiaries are collectively referred to as the "Group".

        The Group is principally engaged in the provision of travel related services including accommodation reservation, transportation ticketing, packaged-tour, corporate travel management services, as well as, to a much lesser extent, Internet-related advertising and other related services.

2. PRINCIPAL ACCOUNTING POLICIES

Basis of presentation

        The accompanying unaudited interim condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America ("US GAAP").

        In the opinion of the Company's management, the accompanying unaudited condensed consolidated financial statements contain all normal recurring adjustments necessary for a fair statement of the Company's interim condensed consolidated financial statements as of and for the nine months ended September 30 2014 and 2015. The year-end condensed balance sheet data as of December 31, 2014 was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America.

        The preparation of financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosures of contingent assets and liabilities at the balance sheet dates and the reported amounts of revenues and expenses during the reporting periods.

        These unaudited condensed consolidated financial statements should be read in conjunction with the Company's audited financial statements included in the Company's Annual Report on Form 20-F for the year ended December 31, 2014, previously filed with the Securities and Exchange Commission ("SEC").

Consolidation

        The unaudited interim condensed consolidated financial statements include the financial statements of the Company, its subsidiaries, VIEs and VIEs' subsidiaries. All significant transactions and balances between the Company, its subsidiaries, VIEs and VIEs' subsidiaries have been eliminated upon consolidation.

        A subsidiary is an entity in which the Company, directly or indirectly, controls more than one half of the voting power; has the power to appoint or remove the majority of the members of the board of directors; to cast a majority of votes at the meeting of the board of directors or to govern the financial and operating policies of the investee under a statute or agreement among the shareholders or equity holders.

7


CTRIP.COM INTERNATIONAL, LTD.

Notes to the unaudited interim condensed consolidated financial statements (Continued)

(Amounts expressed in RENMINBI (RMB) unless otherwise stated)

2. PRINCIPAL ACCOUNTING POLICIES (Continued)

        The Company has adopted the guidance codified in Accounting Standard Codification 810, Consolidations ("ASC 810") on accounting for VIEs and their respective subsidiaries, which requires certain variable interest entities to be consolidated by the primary beneficiary of the entity in which it has a controlling financial interest. A VIE is an entity with one or more of the following characteristics: (a) the total equity investment at risk is not sufficient to permit the entity to finance its activities without additional financial support; (b) as a group, the holders of the equity investment at risk lack the ability to make certain decisions, the obligation to absorb expected losses or the right to receive expected residual returns, or (c) an equity investor has voting rights that are disproportionate to its economic interest and substantially all of the entity's activities are on behalf of the investor. Accordingly, the financial statements of the following VIEs and VIEs' subsidiaries are consolidated into the Company's financial statements since July 1, 2003 or their respective date of establishment/acquisition, whichever is later:

        The following is a summary of the Company's major VIEs and VIEs' subsidiaries:

Name of VIE and VIEs' subsidiaries
  Date of establishment/acquisition

Shanghai Ctrip Commerce Co., Ltd. ("Shanghai Ctrip Commerce")

   Established on July 18, 2000

Beijing Ctrip International Travel Agency Co., Ltd. ("Beijing Ctrip")

  

Acquired on January 15, 2002

Guangzhou Ctrip International Travel Agency Co., Ltd. ("Guangzhou Ctrip")

  

Established on April 28, 2003

Shanghai Ctrip International Travel Agency Co., Ltd. ("Shanghai Ctrip" formerly Shanghai Ctrip Charming International Travel Agency Co., Ltd.)

  

Acquired on September 23, 2003

Shenzhen Ctrip Travel Agency Co., Ltd. ("Shenzhen Ctrip")

  

Established on April 13, 2004

Ctrip Insurance Agency Co., Ltd. ("Ctrip Insurance")

  

Established on July 25, 2011

Shanghai Huacheng Southwest International Travel Agency Co., Ltd. ("Shanghai Huacheng" formerly Shanghai Huacheng Southwest Travel Agency Co., Ltd.)

  

Established on March 13, 2001

Chengdu Ctrip Travel Agency Co., Ltd. ("Chengdu Ctrip")

  

Established on January 8, 2007

Chengdu Ctrip International Travel Agency Co., Ltd. ("Chengdu Ctrip International")

  

Established on November 4, 2008

        For the nine-month periods ended September 30, 2014 and 2015, the Company is considered the primary beneficiary of a VIE or VIEs' subsidiary and consolidated the VIE or VIEs' subsidiary if the Company had variable interests, that will absorb the entity's expected losses, receive the entity's expected residual returns, or both.

8


CTRIP.COM INTERNATIONAL, LTD.

Notes to the unaudited interim condensed consolidated financial statements (Continued)

(Amounts expressed in RENMINBI (RMB) unless otherwise stated)

2. PRINCIPAL ACCOUNTING POLICIES (Continued)

Major variable interest entities and their subsidiaries

        As of September 30, 2015, the Company conducts a part of its operations through a series of agreements with certain VIEs and VIEs' subsidiaries as stated in above. These VIEs and VIEs' subsidiaries are used solely to facilitate the Group's participation in Internet content provision, advertising business, travel agency and air-ticketing services in the People's Republic of China ("PRC") where foreign ownership is restricted.

        Shanghai Ctrip Commerce is a domestic company incorporated in Shanghai, the PRC. Shanghai Ctrip Commerce holds a value-added telecommunications business license and is primarily engaged in the provision of advertising business on the Internet website. Two senior officers of the Company collectively hold 100% of the equity interest in Shanghai Ctrip Commerce. The registered capital of Shanghai Ctrip Commerce was RMB30,000,000 as of September 30, 2015.

        Beijing Ctrip is a domestic company incorporated in Beijing, the PRC. Beijing Ctrip holds an air transport sales agency license, domestic and cross-border travel agency license and is mainly engaged in the provision of air-ticketing services and packaged tour services. A senior officer of the Company and Shanghai Ctrip Commerce collectively hold 100% of the equity interest in Beijing Ctrip. The registered capital of Beijing Ctrip was RMB40,000,000 as of September 30, 2015.

        Guangzhou Ctrip is a domestic company incorporated in Guangzhou, the PRC. Guangzhou Ctrip holds air transport sales agency license, domestic and cross-border travel agency license and is mainly engaged in the provision of air-ticketing services and packaged tour services. Two senior officers of the Company collectively hold 100% of the equity interest in Guangzhou Ctrip. The registered capital of Guangzhou Ctrip was RMB3,000,000 as of September 30, 2015.

        Shanghai Ctrip is a domestic company incorporated in Shanghai, the PRC. Shanghai Ctrip holds domestic and cross-border travel agency licenses, air transport sales agency license and mainly provides domestic and cross-border tour services. In September 2012, the Company purchased of the ownership interests from the unrelated minority shareholder and effected a simultaneous reduction of capital of Shanghai Ctrip. Upon completion of the above transactions, a senior officer of the Company control 100% of the equity interest in Shanghai Ctrip. The registered capital of Shanghai Ctrip was RMB10,000,000 as of September 30, 2015.

        Shenzhen Ctrip is a domestic company incorporated in Shenzhen, the PRC. Shenzhen Ctrip holds air transport sales agency license and domestic travel agency license and is engaged in the provision of air-ticketing service. Two senior officers of the Company collectively hold 100% of the equity interest in Shenzhen Ctrip. The registered capital of Shenzhen Ctrip was RMB2,500,000 as of September 30, 2015.

        Ctrip Insurance is an insurance agency incorporated in Shanghai, the PRC. Ctrip Insurance was established in July 2011. Ctrip Insurance holds an insurance agency business license. Shanghai Ctrip Commerce and Ctrip Computer Technology (Shanghai) Co., Ltd. ("Ctrip Computer Technology") hold 100% of the equity interest in Ctrip Insurance. The registered capital of Ctrip Insurance was RMB50,000,000 as of September 30, 2015.

        Shanghai Huacheng is a domestic company incorporated in Shanghai, the PRC. Shanghai Huacheng holds a domestic travel agency license and an air transport sales agency license and mainly provides domestic tour services and air-ticketing services. Shanghai Ctrip Commerce holds 100% of the

9


CTRIP.COM INTERNATIONAL, LTD.

Notes to the unaudited interim condensed consolidated financial statements (Continued)

(Amounts expressed in RENMINBI (RMB) unless otherwise stated)

2. PRINCIPAL ACCOUNTING POLICIES (Continued)

equity interest in Shanghai Huacheng. The registered capital of Shanghai Huacheng was RMB100,000,000 as of September 30, 2015.

        Chengdu Ctrip is a domestic company incorporated in Chengdu, the PRC. Chengdu Ctrip holds air transport sales agency license and domestic travel agency license and is engaged in the provision of air-ticketing service. Shanghai Ctrip holds 100% of the equity interest in Chengdu Ctrip. The registered capital of Chengdu Ctrip was RMB20,000,000 as of September 30, 2015.

        Chengdu Ctrip International is a domestic company incorporated in Chengdu, the PRC. Chengdu Ctrip International holds domestic and cross-border travel agency licenses, air transport sales agency license and mainly provides domestic and cross-border tour services. Shanghai Ctrip holds 100% of the equity interest in Chengdu Ctrip International. The registered capital of Chengdu Ctrip International was RMB2,000,000 as of September 30, 2015.

        The capital injected by senior officers or senior officer's family member are funded by the Company and are recorded as long-term business loans to related parties. The Company does not have any ownership interest in these VIEs and VIEs' subsidiaries.

        As of September 30, 2015, the Company has various agreements with its consolidated VIEs and VIEs' subsidiaries, including loan agreements, exclusive technical consulting and services agreements, share pledge agreements, exclusive option agreements and other operating agreements.

        Powers of Attorney:    Each of the shareholders of our affiliated Chinese entities signed an irrevocable power of attorney to appoint Ctrip Computer Technology (Shanghai) Co., Ltd. or another wholly owned subsidiary of ours, as attorney-in-fact to vote, by itself or any other person to be designated at its discretion, on all matters of our affiliated Chinese entities. Each power of attorney will remain effective during the existence of the applicable affiliated Chinese entity. The Power of Attorney shall remain effective as long as the applicable affiliated Chinese entity exists, and the shareholders of our affiliated Chinese entities are not entitled to terminate or amend the terms of the Power of Attorneys without prior written consent from us.

        Amended and Restated Technical Consulting and Services Agreement:    Ctrip Computer Technology, Ctrip Travel Network and Ctrip Travel Information provide our affiliated Chinese entities with technical consulting and related services and staff training and information services. We also maintain their network platforms. In consideration for our services, our affiliated Chinese entities agree to pay us service fees as calculated in such manner as determined by us from time to time based on the nature of service, which may be adjusted periodically. For the nine-month period ended September 30, 2015, our affiliated Chinese entities paid Ctrip Computer Technology and Ctrip Travel Network a quarterly fee based on the number of air tickets sold and the number of packaged-tour products sold in the quarter, at an average rate of RMB7 (US$1.1) per ticket and from RMB82 (US$12.9) to RMB175 (US$27.5) per person per tour. Although the service fees are typically determined based on the number of air tickets sold and packaged tour products sold, given the fact that the nominee shareholders of our affiliated Chinese entities have irrevocably appointed the employees of our subsidiaries to vote on their behalf on all matters they are entitled to vote on, we have the right to determine the level of service fees paid and therefore receive substantially all of the economic benefits of our affiliated Chinese

10


CTRIP.COM INTERNATIONAL, LTD.

Notes to the unaudited interim condensed consolidated financial statements (Continued)

(Amounts expressed in RENMINBI (RMB) unless otherwise stated)

2. PRINCIPAL ACCOUNTING POLICIES (Continued)

entities in the form of service fees. The services fees paid by all of our affiliated Chinese entities as a percentage of their total net income were 104.8% and 48.2% for the nine-month periods September 30, 2014 and 2015. The initial term of these agreements is 10 years and may be renewed automatically in 10-year terms unless we disapprove the extension. We retain the exclusive right to terminate the agreements at any time by delivering a 30-day advance written notice to the applicable affiliate Chinese entity.

        Amended and Restated Share Pledge Agreements:    The shareholders of our affiliated Chinese entities have pledged their respective equity interests in our affiliated Chinese entities as a guarantee for the performance of all the obligations under the other contractual arrangements, including payment by our affiliated Chinese entities of the technical and consulting services fees to us under the amended and restated technical consulting and services agreements, repayment of the business loan under the amended and restated business loan agreements and performance of obligations under the amended and restated exclusive option agreements, each agreement as described herein. In the event any of our affiliated Chinese entity breaches any of its obligations or any shareholder of our affiliated Chinese entities breaches his/her obligations, as the case may be, under these agreements, we are entitled to enforce the equity pledge right and sell or otherwise dispose of the pledged equity interests, and retain the proceeds from such sale or require any of them to transfer his or her equity interest without consideration to the PRC citizen(s) designated by us. These amended and restated share pledge agreements came into effect on the day when the respective pledgors became shareholders of our affiliated Chinese entities, and shall expire two years after the pledgor and the affiliated Chinese entities no longer undertake any obligations under the above-referenced agreements.

        Amended and Restated Business Loan Arrangements:    Under the amended and restated business loan agreements we entered into with the shareholders of our affiliated Chinese entities, we extended long-term business loans to these shareholders of our affiliated Chinese entities with the sole purpose of providing funds necessary for the capitalization or acquisition of our affiliated Chinese entities. These loan amounts were injected into the affiliated Chinese entities as capitals and cannot be accessed for any personal uses. The amended and restated business loan agreements shall remain effective until the parties have fully performed their respective obligations under the agreement, and the shareholders of our affiliated Chinese entities have no right to unilaterally terminate these agreements. In the event that the PRC government lifts its substantial restrictions on foreign ownership of the air-ticketing, travel agency, or value-added telecommunications business in China, as applicable, we will exercise our exclusive option to purchase all of the outstanding equity interests of our affiliated Chinese entities, as described in the following paragraph, and the amended and restated business loan agreements will be cancelled in connection with such purchase. However, it is uncertain when, if at all, the PRC government will lift any or all of these restrictions.

        Amended and Restated Exclusive Option Agreements:    As consideration for our entering into the amended and restated business loan agreements described above, each of the shareholders of our affiliated Chinese entities has granted us an exclusive, irrevocable option to purchase, or designate one or more person(s) at our discretion to purchase, all of their equity interests in our affiliated Chinese entities at any time we desire, subject to compliance with the applicable PRC laws and regulations. We may exercise the option by issuing a written notice to the relevant affiliated Chinese entity. The purchase price shall be equal to the contribution actually made by the shareholder for the relevant

11


CTRIP.COM INTERNATIONAL, LTD.

Notes to the unaudited interim condensed consolidated financial statements (Continued)

(Amounts expressed in RENMINBI (RMB) unless otherwise stated)

2. PRINCIPAL ACCOUNTING POLICIES (Continued)

equity interest. Therefore, if we exercise these options, we may choose to cancel the outstanding loans we extended to the shareholders of our affiliated Chinese entities pursuant to the amended and restated business loan agreements as the loans were used solely for equity contribution purposes. The initial term of these agreements is 10 years and may be renewed automatically in 10-year terms unless we disapprove the extension. We retain the exclusive right to terminate the agreements at any time by delivering a written notice to the applicable affiliate Chinese entity.

        The affiliated Chinese entities and their shareholders agree not to enter into any transaction that would affect the assets, obligations, rights or operations of the affiliated Chinese entities without the Company's prior written consent. They also agree to accept the Company's guidance with respect to day-to-day operations, financial management systems and the appointment and dismissal of key employees.

        In addition, the Company also enters into amended and restated technical consulting and services agreements with its majority or wholly owned subsidiaries of the affiliated Chinese entities, such as Chengdu Ctrip and Chengdu Ctrip International, and these subsidiaries pay the Company service fees based on the level of services provided. The existence of such amended and restated technical consulting and services agreements provides the Company with the enhanced ability to transfer economic benefits of these majority or wholly owned subsidiaries of the affiliated Chinese entities to us in exchange for the services provided, and this is in addition to the Company's existing ability to consolidate and extract the economic benefits of these majority or wholly owned subsidiaries of the affiliated Chinese entities (for instance, the affiliated Chinese entities may cause the economic benefits to be channeled to them in the form of dividends, which then may be further consolidated and absorbed by the Company through the contractual arrangements described above).

        The Company has been advised by Commerce & Finance Law Offices, its PRC legal counsel, that its contractual arrangements with its consolidated VIEs as described in the Company's annual report are valid, binding and enforceable under the current laws and regulations of China. Based on such legal opinion and the management's knowledge and experience, the Company believes that its contractual arrangements with its consolidated VIEs are in compliance with current PRC laws and legally enforceable. However, there may be in the event that the affiliated Chinese entities and their respective shareholders fail to perform their contractual obligations, the Company may have to rely on the PRC legal system to enforce its rights. The PRC legal system is based on written statutes. Prior court decisions may be cited for reference but have limited precedential value. Since 1979, PRC legislation and regulations have significantly enhanced the protections afforded to various forms of foreign investments in China. However, since the PRC legal system is still evolving, the interpretations of many laws, regulations and rules are not always uniform and enforcement of these laws, regulations and rules involve uncertainties, which may limit remedies available to us. In addition, any litigation in China may be protracted and result in substantial costs and diversion of resources and management attention. Due to the uncertainties with respect to the PRC legal system, the PRC government authorities may ultimately take a view contrary to the opinion of its PRC legal counsel with respect to the enforceability of the contractual arrangements.

12


CTRIP.COM INTERNATIONAL, LTD.

Notes to the unaudited interim condensed consolidated financial statements (Continued)

(Amounts expressed in RENMINBI (RMB) unless otherwise stated)

2. PRINCIPAL ACCOUNTING POLICIES (Continued)

        There are, however, substantial uncertainties regarding the interpretation and application of current or future PRC laws and regulations. Accordingly, the Company cannot be assured that the PRC government authorities will not ultimately take a view that is contrary to the Company's belief and the opinion of its PRC legal counsel. On January 19, 2015, the Ministry of Commerce of the PRC, or (the "MOFCOM") released for public comments a proposed PRC law (the "Draft FIE Law") which includes VIEs within the scope of entities that could be considered to be foreign invested enterprises (or "FIEs") and may be subject to restrictions under existing PRC law on foreign investment in certain categories of industries. Specifically, the Draft FIE Law introduces the concept of "actual control" for determining whether an entity is considered to be an FIE. In addition to control through direct or indirect ownership on equity, the Draft FIE Law includes control through contractual arrangements within the definition of "actual control." If the Draft FIE Law is passed by the People's Congress of the PRC and goes into effect in its current form, these provisions regarding control through contractual arrangements could be construed to reach the Company's VIE arrangements, and as a result the Company's VIEs could become explicitly subject to the current restrictions on foreign investment in certain categories of industry. The Draft FIE Law includes provisions that would exempt from the definition of FIEs where the ultimate controlling shareholders are either entities organized under PRC law or individuals who are PRC citizens. The Draft FIE Law is silent as to what type of enforcement action might be taken against existing VIEs that operate in restricted or prohibited industries and are not controlled by entities organized under PRC law or individuals who are PRC citizens. If the contractual arrangements establishing the Company's VIE structure are found to be in violation of any existing law and regulations or future PRC laws and regulations or under the Draft FIE Law if it becomes effective, the relevant PRC government authorities will have broad discretion in dealing with such violation, including, without limitation, levying fines, confiscating our income or the income of our affiliated Chinese entities, revoking our business licenses or the business licenses of our affiliated Chinese entities, requiring us and our affiliated Chinese entities to restructure our ownership structure or operations and requiring us or our affiliated Chinese entities to discontinue any portion or all of our value-added telecommunications, air-ticketing, travel agency or advertising businesses. Any of these actions could cause significant disruption to the Company's business operations, and have a severe adverse impact on the Company's cash flows, financial position and operating performance. If the imposing of these penalties cause the Company to lose its rights to direct the activities of and receive economic benefits from its VIEs, which in turn may restrict the Company's ability to consolidate and reflect in its financial statements the financial position and results of operations of its VIEs.

        Pursuant to the contractual arrangements with the VIEs, the Company has the power to direct activities of the VIEs, and can have assets transferred freely out of the VIEs without any restrictions. Therefore the Company considers that there is no asset of a consolidated VIE that can be used only to settle obligations of the VIE, except for registered capital and PRC statutory reserves of the VIEs amounting to a total of RMB118 million as of September 30, 2015. As all the consolidated VIEs are incorporated as limited liability companies under the PRC Company Law, creditors of the VIEs do not have recourse to the general credit of the Company for any of the liabilities of the consolidated VIEs.

13


CTRIP.COM INTERNATIONAL, LTD.

Notes to the unaudited interim condensed consolidated financial statements (Continued)

(Amounts expressed in RENMINBI (RMB) unless otherwise stated)

2. PRINCIPAL ACCOUNTING POLICIES (Continued)

        Summary financial information of the VIEs, which represents aggregated financial information of the VIEs and their respective subsidiaries included in the accompanying consolidated financial statements, is as follows:

 
   As of
December 31, 2014 		  As of
September 30, 2015 		 
 
   RMB
   RMB
  

Total assets

     13,495,852,174     16,673,014,679  

Less: Inter-company receivables

     (1,424,351,080 )   (2,574,833,491 )

Total assets excluding inter-company

     12,071,501,094     14,098,181,188  

Total liabilities

     12,509,239,945     15,348,023,915  

Less: Inter-company payables

     (6,133,068,354 )   (5,645,069,141 )

Total liabilities excluding inter-company

     6,376,171,591     9,702,954,774  

        As of December 31, 2014 and September 30, 2015, the VIEs' assets mainly consisted of short-term investment (December 31, 2014: RMB3.1 billion, September 30, 2015: RMB2.4 billion), cash and cash equivalent (December 31, 2014: RMB2.6 billion, September 30, 2015: RMB2.2 billion), prepayments and other current assets (December 31, 2014: RMB2.0 billion, September 30, 2015: RMB3.6 billion), investments (non-current) (December 31, 2014: RMB1.6 billion, September 30, 2015: RMB1.6 billion) and accounts receivables (December 31, 2014: RMB1.4 billion, September 30, 2015: RMB2.6 billion). The inter-company receivables of RMB1.4 billion and RM2.6 billion as of December 31, 2014 and September 30, 2015 mainly represented the cash paid by a VIE to one of the Company's WFOEs for treasury cash management purpose.

        As of December 31, 2014 and September 30, 2015, the VIEs' liabilities mainly consisted of advance from customers (December 31, 2014: RMB3.5 billion, September 30, 2015: RMB4.8 billion), accounts payable (December 31, 2014: RMB1.8 billion, September 30, 2015: RMB3.6 billion), other payables and accruals (December 31, 2014: RMB588 million, September 30, 2015: RMB631 million), salary and welfare payable (December 31, 2014: RMB195 million, September 30, 2015: RMB171 million) and taxes payable (December 31, 2014: RMB45 million, September 30, 2015: RMB109 million). The inter-company payables as of December 31, 2014 and September 30, 2015 were RMB6.1 billion and RMB5.6 billion, respectively, which primarily consisted of the payables due to Ctrip.com (Hong Kong) Limited ("Ctrip HK"), one of the Company's wholly-owned subsidiaries, for its payment of overseas air tickets and tour packages on behalf of a VIE and another VIEs' subsidiary and the service fees payable to the WFOEs under the technical consulting and services agreements, which are operational in nature from the VIEs and their subsidiaries' perspectives.

 
   Nine-month
period ended
September 30, 2014 		  Nine-month
period ended
September 30, 2015 		 
 
   RMB
   RMB
  

Net revenues

     3,131,473,717     4,841,152,848  

Cost of revenues

     920,625,006     1,516,879,374  

Net (loss) / income

     (43,734,329 )   714,987,373  

        As aforementioned, the VIEs mainly conduct air-ticketing, travel agency, advertising and value-added telecommunication businesses. Revenues from VIEs accounted for around 60% of the

14


CTRIP.COM INTERNATIONAL, LTD.

Notes to the unaudited interim condensed consolidated financial statements (Continued)

(Amounts expressed in RENMINBI (RMB) unless otherwise stated)

2. PRINCIPAL ACCOUNTING POLICIES (Continued)

Company's total revenues in nine-month period ended September 30, 2015. The air-ticketing and packaged-tour revenues continued to increase, primarily driven by the increase in the air-ticketing volume and leisure travel volume.

        The VIEs' net income before the deduction of the inter-company consulting fee charges were RMB906 million and RMB1.4 billion for the nine-month period ended September 30, 2014 and 2015, respectively.

        The amount of service fees paid by all the VIEs as a percentage of the VIEs' total net income were 104.8% and 48.2% for the nine-month period ended September 30, 2014 and 2015, respectively.

        The WFOEs are the sole and exclusive provider of technical consulting and related services and information services for the VIEs. Pursuant to the Exclusive Technical Consulting and Service Agreements, the VIEs pay service fees to the WFOEs based on the VIEs' actual operating results. The WFOEs are entitled to receive substantially all of the net income and transfer a majority of the economic benefits in the form of service fees from the VIEs and VIEs' subsidiaries to the WFOEs. The WFOEs did not request service fee payments of RMB286 million from Chengdu Ctrip and Chengdu Ctrip International during the years ended December 31 2012, primarily for tax planning purpose. In 2013, Chengdu Ctrip and Chengdu Ctrip International started to pay service fee to WFOEs, and the retained earnings of 2013 and 2014 have been transferred to the WFOEs, respectively. For remaining undistributed retained earnings, tax planning strategies are in place to support their enterprise income tax free treatment.

        Currently there is no contractual arrangement that could require the Company to provide additional financial support to the consolidated VIEs. As the Company is conducting certain business in the PRC mainly through the VIEs, the Company may provide such support on a discretionary basis in the future, which could expose the Company to a loss.

Foreign currencies

        The Group's reporting currency is RMB. The Company's functional currency is US$. The Company's operations are conducted through the subsidiaries and VIEs where the local currency is the functional currency and the financial statements of those subsidiaries are translated from their respective functional currencies into RMB.

        Transactions denominated in currencies other than functional currencies are translated at the exchange rates quoted by the People's Bank of China (the "PBOC"), the Hong Kong Association of Banks (the "HKAB") or major Taiwan banks, prevailing or averaged at the dates of the transaction for PRC and Hong Kong subsidiaries and ezTravel, a Taiwan subsidiary respectively. Gains and losses resulting from foreign currency transactions are included in the consolidated statements of income and comprehensive income. Monetary assets and liabilities denominated in foreign currencies are translated using the applicable exchange rates quoted by the PBOC, HKAB or banks located in Taiwan at the balance sheet dates. All such exchange gains and losses are included in the statements of income.

        Assets and liabilities of the group companies are translated from their respective functional currencies to the reporting currency at the exchange rates at the balance sheet dates, equity accounts are translated at historical exchange rates and revenues and expenses are translated at the average

15


CTRIP.COM INTERNATIONAL, LTD.

Notes to the unaudited interim condensed consolidated financial statements (Continued)

(Amounts expressed in RENMINBI (RMB) unless otherwise stated)

2. PRINCIPAL ACCOUNTING POLICIES (Continued)

exchange rates in effect during the reporting period. The exchange differences for the translation of group companies with non-RMB functional currency into the RMB functional currency are included in foreign currency translation adjustments, which is a separate component of shareholders' equity on the consolidated financial statements.

        Translations of amounts from RMB into US$ are solely for the convenience of the reader and were calculated at the rate of US$1.00 = RMB6.3556 on September 30, 2015, representing the certificated exchange rate published by the Federal Reserve Board. No representation is intended to imply that the RMB amounts could have been, or could be, converted, realized or settled into US$ at that rate on September 30, 2015, or at any other rate.

Cash and cash equivalents

        Cash includes currency on hand and deposits held by financial institutions that can be added to or withdrawn without limitation. Cash equivalents represent short-term, highly liquid investments that are readily convertible to known amounts of cash and with original maturities from the date of purchase of generally three months or less.

Restricted cash

        Restricted cash represents cash that cannot be withdrawn without the permission of third parties. The Group's restricted cash is substantially cash balance on deposit required by its business partners and commercial banks.

Short-term investment

        Short-term investments represent the investments issued by commercial banks or other financial institutions with a variable interest rate indexed to the performance of underlying assets within one year. The Company elected the fair value method at the date of initial recognition and carried these investments subsequently at fair value. Changes in the fair value are reflected in the consolidated statements of income and comprehensive income.

Long term loan receivable

        Long-term loan receivables are recorded at cost and compounded accrued interests as we do not intend to sell the security, or it is more likely than not that the company will not be required to sell the security before full recovery of our cost. The Company evaluates the qualitative criteria to determine whether we expect to recover our cost.

Land use rights

        Land use rights represent the prepayments for usage of the parcels of land where the office buildings are located, are recorded at cost, and are amortized over their respective lease periods (usually over 40 to 50 years).

16


CTRIP.COM INTERNATIONAL, LTD.

Notes to the unaudited interim condensed consolidated financial statements (Continued)

(Amounts expressed in RENMINBI (RMB) unless otherwise stated)

2. PRINCIPAL ACCOUNTING POLICIES (Continued)

Property, equipment and software

        Property, equipment and software are stated at cost less accumulated depreciation and amortization. Depreciation and amortization are computed using the straight-line method over the following estimated useful lives, taking into account any estimated residual value:

Building

   20 - 30 years

Leasehold improvements

   Lesser of the term of the lease or the estimated useful lives of the assets

Website-related equipment

   5 years

Computer equipment

   3 - 5 years

Furniture and fixtures

   3 - 5 years

Software

   3 - 5 years

        Construction in progress is stated at cost. Construction in progress as of December 31, 2014 mainly refers to costs associated with the purchase of building in Shanghai Sky SOHO and construction of information and technology center in Chengdu before the buildings are put into service. All direct costs related to the new buildings are capitalized as construction in progress until it is substantially completed and available for use.

Investments

        The Company investments include cost method investments, equity method investments and available-for-sale investments in certain publicly traded companies and privately-held companies.

        Cost method is used for investments over which the Company does not have the ability to exercise significant influence. Gain or losses are realized when such investments are sold or when dividends are declared or payments are received. In October 2013, the Company contributed cash in return for 5% equity shares in Zhong An Online Property Insurance Co., Ltd. ("Zhong An Online"). In December 2013, the Company acquired approximately 4% equity shares in Keystone Lodging Holdings Limited ("Keystone"), which in 2013 merged with 7 Days Group Holdings Limited ("7 Days"), a leading economy hotel chain based in China. In 2014, dividends of RMB39 million are received from Keystone. Cost method of accounting was applied to both transactions due to lack of ability to exercise significant influence (Note 3).

        The Company applies equity method in accounting for our investments in entities in which the Company has the ability to exercise significant influence but does not own a majority equity interest or otherwise controls. In 2008, the Company acquired equity interest in Homeinns Hotel Group ("Homeinns" formerly Home Inns & Hotels Management Inc.) and on May 21, 2009, the Company started to have the ability to exercise significant influence and meeting requirement to apply equity method of accounting. In 2014, through a series of transactions, the Company culminated 35% share capital of Skyseas Holding International Ltd. ("Skyseas") and provided a loan of US$80 million to Skyseas to finance its purchase of a cruise ship. The Company therefore has the ability to exercise significant influence on Skyseas and applied equity method to account for the investment (Note 3). In May 2015, the Company acquired approximately 38% share capital of eLong, Inc. ("eLong"). The Company therefore has the ability to exercise significant influence on eLong and applied equity method

17


CTRIP.COM INTERNATIONAL, LTD.

Notes to the unaudited interim condensed consolidated financial statements (Continued)

(Amounts expressed in RENMINBI (RMB) unless otherwise stated)

2. PRINCIPAL ACCOUNTING POLICIES (Continued)

to account for the investment (Note 3).Unrealized gains on transactions between the Company and the affiliated entity are eliminated to the extent of the Company's interest in the affiliated entity; unrealized losses are also eliminated unless the transaction provides evidence of an impairment of the asset transferred.

        The Company classifies its investments in debt and equity securities into one of three categories and accounts for these as follows: (i) debt securities that the Company has the positive intent and the ability to hold to maturity are classified as "held to maturity" and reported at amortized cost; (ii) debt and equity securities that are bought and held principally for the purpose of selling them in the near term are classified as "trading securities" with unrealized holding gains and losses included in earnings; (iii) debt and equity securities not classified as held to maturity or as trading securities are classified as "available-for-sale" and reported at fair value through other comprehensive income. The Company has designated its investment in commons shares of China Lodging Group, Limited ("Hanting"), Tuniu Corporation ("Tuniu") and eHi Car Services Limited("eHi") as available-for-sale equity securities, investment in shares with liquidation preference right of Tongcheng Network Technology Share Co., Ltd. ("LY.com") and a travel agency focusing on teenager market as available-for-sale equity securities and its investments in convertible redeemable preferred shares ("Preferred Share") of Easy Go Inc.("Easy Go"), Dining Secretary China Limited ("Dining Secretary") , Happy City Holdings Limited("Happy City"), Tujia.com International Co., Ltd ("Tujia") and a big-data advertisement company as available-for-sale debt securities in accordance with Accounting Standard Codification ("ASC") 320-10, respectively (Note 3). Unrealized gains and losses on available-for-sale securities are excluded from earnings and reported as accumulated other comprehensive income (loss), net of tax. Realized gains or losses are charged to earnings during the period in which the gains or losses are realized.

        The Company monitors its investments for other-than-temporary impairment by considering factors including, but not limited to, current economic and market conditions, the operating performance of the companies including current earnings trends and other company-specific information.

Fair value measurement of financial instruments

        Financial instruments of the Group primarily comprise of cash and cash equivalents, restricted cash, short-term investments, accounts receivable, due from related parties, available-for-sale investments, accounts payable, due to related parties, advances from customers, short-term bank borrowings, other short-term liabilities and long-term debts. As of December 31, 2014 and September 30, 2015, carrying values of these financial instruments except for short-term investments and available-for-sale investments approximated their fair values because of their generally short maturities, and the carrying value of the long-term debts also approximates their fair value, as they bear interest at rates determined based on prevailing interest rates in the market. The Company reports short-term investments and available-for-sale investments at fair value at each balance sheet date and changes in fair value are reflected in the statements of income and comprehensive income.

        The Company does not have any financial liabilities which must be measured at fair value on a recurring basis.

18


CTRIP.COM INTERNATIONAL, LTD.

Notes to the unaudited interim condensed consolidated financial statements (Continued)

(Amounts expressed in RENMINBI (RMB) unless otherwise stated)

2. PRINCIPAL ACCOUNTING POLICIES (Continued)

        We measure our financial assets and liabilities using inputs from the following three levels of the fair value hierarchy. The three levels are as follows:

Business combination

        U.S. GAAP requires that all business combinations not involving entities or businesses under common control be accounted for under the purchase method. From January 1, 2009, the Group adopted ASC 805, "Business combinations". Following this adoption, the cost of an acquisition is measured as the aggregate of the fair values at the date of exchange of the assets given, liabilities incurred, and equity instruments issued. The costs directly attributable to the acquisition are expensed as incurred. Identifiable assets, liabilities and contingent liabilities acquired or assumed are measured separately at their fair value as of the acquisition date, irrespective of the extent of any non-controlling interests. The excess of the (i) the total of cost of acquisition, fair value of the non-controlling interests and acquisition date fair value of any previously held equity interest in the acquiree over (ii) the fair value of the identifiable net assets of the acquiree is recorded as goodwill. If the cost of acquisition is less than the fair value of the net assets of the subsidiary acquired, the difference is recognized directly in the consolidated statements of income and comprehensive income.

        The determination and allocation of fair values to the identifiable assets acquired and liabilities assumed is based on various assumptions and valuation methodologies requiring considerable management judgment. The most significant variables in these valuations are discount rates, terminal values, the number of years on which to base the cash flow projections, as well as the assumptions and estimates used to determine the cash inflows and outflows. Management determines discount rates to be used based on the risk inherent in the related activity's current business model and industry comparisons. Terminal values are based on the expected life of products and forecasted life cycle and forecasted cash flows over that period. Although we believe that the assumptions applied in the determination are reasonable based on information available at the date of acquisition, actual results may differ from the forecasted amounts and the difference could be material.

19


CTRIP.COM INTERNATIONAL, LTD.

Notes to the unaudited interim condensed consolidated financial statements (Continued)

(Amounts expressed in RENMINBI (RMB) unless otherwise stated)

2. PRINCIPAL ACCOUNTING POLICIES (Continued)

Acquisitions

        The Company completed several transactions to acquire controlling shares of certain travel agencies to enrich its products and to expand business. The Company makes estimates and judgments in determining the fair value of the acquired assets and liabilities, based in part on independent appraisal reports as well as its experience with purchasing similar assets and liabilities in similar industries. The amount excess of the purchase price over the fair value of the identifiable assets and liabilities acquired is recorded as goodwill.

        In August, 2013, the Company completed the transaction to acquire controlling shares of a B2B hotel reservation company. The purchase consideration is approximately RMB47 million (US$8 million). The financial results of the acquired entity have been included in the Company's consolidated financial statements since the acquisition date. In February, 2014, Ctrip acquired the remaining share capital of this B2B hotel reservation company at a consideration of approximately RMB44 million (US$7 million). The purchase of the remaining non-controlling interests initiated by the Company was treated as an equity transaction. The difference between the book value of the remaining non-controlling interests and the cash consideration was recorded as additional paid in capital. Upon completion of this share purchase, Ctrip holds 100% of the share capital of the B2B hotel reservation company.

        In January, 2014, the Company completed the transaction to acquire a 51% controlling interest of an online trip package service provider. The purchase consideration is RMB139 million (US$23 million). The results of the acquired entity's operations have been included in the consolidated financial statements of the Company since the acquisition date. On the acquisition date, the preliminary allocation of the purchase price of the assets acquired and liabilities assumed based on their fair values was as follows. The non-controlling interest represents the fair value of the 49% equity interest not held by the Company:

 
   RMB  

Net assets

     13,176,760  

Identifiable intangible assets—trademark and domain

     61,564,134  

Deferred tax liabilities

     (9,234,620 )

Non-controlling interests

     (134,009,200 )

Goodwill

     207,981,890  
​ ​ ​ ​ ​

Total purchase consideration

     139,478,964  
​ ​ ​ ​ ​
​ ​ ​ ​ ​
​ ​ ​ ​ ​

        In January, 2015, the Company completed an investment transaction in Travelfusion by purchasing a majority stake in the company. Travelfusion is a UK-based leading online Low Cost Carrier (LCC) travel content aggregator and innovator of Direct Connect global distribution solutions.

20


CTRIP.COM INTERNATIONAL, LTD.

Notes to the unaudited interim condensed consolidated financial statements (Continued)

(Amounts expressed in RENMINBI (RMB) unless otherwise stated)

2. PRINCIPAL ACCOUNTING POLICIES (Continued)

        The purchase consideration is RMB721 million (GBP75.6 million). The results of the acquired entity's operations have been included in the consolidated financial statements of the Company since the acquisition date. On the acquisition date, the preliminary allocation of the purchase price of the assets acquired and liabilities assumed based on their fair values was as follows. The non-controlling interest represents the fair value of the 30% equity interest not held by the Company:

 
   RMB  

Net assets

     36,936,493  

Identifiable intangible assets—trademark and domain

     344,256,108  

Deferred tax liabilities

     (72,293,783 )

Non-controlling interests

     (275,995,802 )

Goodwill

     687,633,024  
​ ​ ​ ​ ​

Total purchase consideration

     720,536,040  
​ ​ ​ ​ ​
​ ​ ​ ​ ​
​ ​ ​ ​ ​

        From time to time, the Company selectively acquired or invested in businesses that complement our existing business, and will continue to do so in the future. Other than disclosed above, none of such acquisitions or investments is material to our businesses or financial results.

Goodwill and other intangible assets

        Goodwill represents the excess of the purchase price over the fair value of the identifiable assets and liabilities acquired as a result of the Company's acquisitions of interests in its subsidiaries and consolidated VIEs.

        Goodwill is not amortized but is reviewed at least annually at the fourth quarter of each year for impairment or earlier, if an indication of impairment exists. Recoverability of goodwill is evaluated using a two-step process. In the first step, the fair value of a reporting unit is compared to its carrying value. If the fair value of a reporting unit exceeds the carrying value of the net assets assigned to a reporting unit, goodwill is considered not impaired and no further testing is required. If the carrying value of the net assets assigned to a reporting unit exceeds the fair value of a reporting unit, the second step of the impairment test is performed in order to determine the implied fair value of a reporting unit's goodwill. Determining the implied fair value of goodwill requires valuation of a reporting unit's tangible and intangible assets and liabilities in a manner similar to the allocation of purchase price in a business combination. If the carrying value of a reporting unit's goodwill exceeds its implied fair value, goodwill is deemed impaired and is written down to the extent of the difference. The Company estimates total fair value of the reporting unit using discounted cash flow analysis, and makes assumptions regarding future revenue, gross margins, working capital levels, investments in new products, capital spending, tax, cash flows, and the terminal value of the reporting unit.

        As of December 31, 2014, the step one analysis performed indicated that the fair value of the Company's reporting units was substantially greater than the respective carrying value. There was no impairment of goodwill during the years ended December 31, 2012, 2013 and 2014. Each quarter the Company reviews the events and circumstances to determine if goodwill impairment may be indicated.

21


CTRIP.COM INTERNATIONAL, LTD.

Notes to the unaudited interim condensed consolidated financial statements (Continued)

(Amounts expressed in RENMINBI (RMB) unless otherwise stated)

2. PRINCIPAL ACCOUNTING POLICIES (Continued)

        Separately identifiable intangible assets that have determinable lives continue to be amortized and consist primarily of non-compete agreements, customer list, supplier relationship, technology patent and a cross-border travel agency license as of December 31, 2013 and 2014. The Company amortizes intangible assets on a straight-line basis over their estimated useful lives, which is three to ten years. The estimated life of amortized intangibles is reassessed if circumstances occur that indicate the life has changed. Other intangible assets that have indefinite useful life primarily include trademark and domain names as of December 31, 2013 and 2014. The Company evaluates indefinite-lived intangible assets each reporting period to determine whether events and circumstances continue to support an indefinite useful life. If an intangible asset that is not being amortized is subsequently determined to have a finite useful life, the asset is tested for impairment. The Company estimates total fair value of the reporting unit using discounted cash flow analysis, and makes assumptions regarding future revenue, gross margins, working capital levels, investments in new products, capital spending, tax, cash flows, and the terminal value of the reporting unit.

        The Company reviews intangible assets with indefinite lives annually at the fourth quarter of each year for impairment.

        No impairment triggering events were identified on other intangible assets during the nine-month periods ended September 30, 2015. No impairment on the other intangible assets was recorded for the nine-month periods ended September 30, 2014 and September 30, 2015.

Impairment of long-lived assets

        Long-lived assets (including intangible with definite lives) are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Reviews are performed to determine whether the carrying value of asset group is impaired, based on comparison to undiscounted expected future cash flows. If this comparison indicates that there is impairment, the Group recognizes impairment of long-lived assets to the extent the carrying amount of such assets exceeds the fair value.

        No impairment of long-lived assets was recognized for the nine-month periods ended September 30, 2014 and 2015.

Accrued liability for customer reward program

        The Group's customers participate in a reward program, which provides travel awards and other gifts to members based on accumulated membership points that vary depending on the services rendered and fees paid. The estimated incremental costs to provide free travel and other gifts are recognized as sales and marketing expense in the statements of income and comprehensive income and accrued for as a current liability as members accumulate points. As members redeem awards or their entitlements expire, the accrued liability is reduced correspondingly. As of December 31, 2014, and September 30, 2015, the Group's accrued liability for its customer reward program amounted to RMB431 million and RMB575 million, respectively, based on the estimated liabilities under the customer reward program. Our expenses for the customer rewards program were approximately RMB274 million and RMB328 million for the nine-month periods ended September 30, 2014 and 2015.

22


CTRIP.COM INTERNATIONAL, LTD.

Notes to the unaudited interim condensed consolidated financial statements (Continued)

(Amounts expressed in RENMINBI (RMB) unless otherwise stated)

2. PRINCIPAL ACCOUNTING POLICIES (Continued)

Deferred revenue

        In 2011, the Group launched a coupon program, through which the Group provides coupons for customers who book selected hotels online through website. Customers who use the coupons receive credits in their virtual cash accounts upon check-out from the hotels and reviews for hotels submitted. Customers may redeem the amount of credits in their virtual cash account in cash, voucher, or mobile phone credit. In accordance with ASC 605-50 "Revenue Recognition: Customer Payments and Incentives", the Group accounts for the estimated cost of future usage of coupons as contra-revenue or sales and marketing expenses in the consolidated statements.

Revenue recognition

        The Group conducts its principal businesses in Great China Area primarily through Ctrip Computer Technology (Shanghai) Co., Ltd. ("Ctrip Computer Technology"), Ctrip Travel Information Technology (Shanghai) Co., Ltd. ("Ctrip Travel Information"), Ctrip Travel Network Technology (Shanghai) Co., Ltd. ("Ctrip Travel Network"), Ctrip Information Technology (Nantong) Co., Ltd. ("Ctrip Information Technology"), ezTravel and Wing On Travel. Some of the operations of Ctrip Computer Technology and Ctrip Travel Network are conducted through a series of services and other agreements with the VIEs and VIE subsidiaries.

        Ctrip Computer Technology, Ctrip Travel Information, Ctrip Travel Network, Ctrip Information Technology and the VIEs are subject to business tax and related surcharges on the provision of taxable services in the PRC, which include hotel reservation and ticketing services provided to customers. In the statements of income and comprehensive income, business tax and related surcharges are deducted from revenues to arrive at net revenues.

        The Group presents revenues on a net basis generally. Revenues are recognized at gross amounts received from customers in cases where the Group undertakes the majority of the business risks and acts as principal related to the services provided. The amount of revenues recognized at gross basis was immaterial during the nine-month periods ended September 30, 2014 and 2015, respectively.

        In November 2011, the Ministry of Finance released Circular Caishui [2011] No. 111 mandating Shanghai to carry out a pilot program of tax reform. Effective January 1, 2012, selected entities within modern service industries will switch from a business tax payer to a value-added tax ("VAT") payer. In May 2013, the Ministry of Finance released Circular Caishui [2013] No. 37 to extend the tax reform nationwide. Effective August 1, 2013, entities within transportation service and selected modern service industries will switch from a business tax payer to a VAT payer.

Accommodation reservation services

        The Group receives commissions from travel suppliers for hotel room reservations through the Group's transaction and service platform. Commissions from hotel reservation services rendered are recognized after hotel customers have completed their stay at the applicable hotel and upon confirmation of pending payment of the commissions by the hotel. Contracts with certain travel suppliers contain incentive commissions typically subject to achieving specific performance targets and such incentive commissions are recognized when it is reasonably assured that the Group is entitled to such incentive commissions. The Group generally receives incentive commissions from monthly

23


CTRIP.COM INTERNATIONAL, LTD.

Notes to the unaudited interim condensed consolidated financial statements (Continued)

(Amounts expressed in RENMINBI (RMB) unless otherwise stated)

2. PRINCIPAL ACCOUNTING POLICIES (Continued)

arrangements with hotels based on the number of hotel room reservations where customers have completed their stay. The Group presents revenues from such transactions on a net basis in the statements of income and comprehensive income as the Group, generally, does not assume inventory risks and has no obligations for cancelled hotel reservations.

Transportation ticketing services

        Transportation ticketing services revenues mainly represent revenues from reservations of air tickets, railway tickets and other related services. The Group receives commissions from travel suppliers for ticketing services through the Group's transaction and service platform under various services agreements. Commissions from ticketing services rendered are recognized after tickets are issued. The Group presents revenues from such transactions on a net basis in the statements of income as the Group, generally, does not assume inventory risks and has no obligations for cancelled airline ticket reservations. Loss due to obligations for cancelled airline ticket reservations is minimal in the past.

Packaged-tour

        The Group receives referral fees from travel product providers for packaged-tour products and services through the Group's transaction and service platform. Referral fees are recognized as commissions on a net basis after the packaged-tour service are rendered and collections are reasonably assured.

        Shanghai Ctrip, Beijing Ctrip, Guangzhou Ctrip, Shenzhen Ctrip and Wing On Travel conduct domestic and cross-border travel tour services. Revenues, mainly referral fees, are recognized as commissions on a net basis after the services are rendered.

Corporate travel

        Corporate travel management revenues primarily include commissions from air ticket booking, hotel reservation and packaged-tour services rendered to corporate clients. The Group contracts with corporate clients based on service fee model. Travel reservations are made via on-line and off-line services for air tickets, hotel and package-tour. Revenue is recognized on a net basis after the services are rendered, e.g. air tickets are issued, hotel stays or packaged-tour are completed, and collections are reasonably assured.

Other businesses

        Other businesses comprise primarily of online advertising services, the sale of Property Management System ("PMS"), and related maintenance service.

        Shanghai Ctrip Commerce receives advertising revenues, which principally represent the sale of banners or sponsorship on the website from customers. Advertising revenues are recognized ratably over the fixed term of the agreement as services are provided.

        Software Hotel Information conducts sale of PMS and related maintenance service. The sale of PMS is recognized upon customer acceptance. Maintenance service is recognized ratably over the term of the maintenance contract on a straight-line basis.

24


CTRIP.COM INTERNATIONAL, LTD.

Notes to the unaudited interim condensed consolidated financial statements (Continued)

(Amounts expressed in RENMINBI (RMB) unless otherwise stated)

2. PRINCIPAL ACCOUNTING POLICIES (Continued)

Cost of revenues

        Cost of revenues consists primarily of payroll compensation of customer service center personnel, credit card service fee, telecommunication expenses, direct cost of principal travel tour services, depreciation, rentals and related expenses incurred by the Group's transaction and service platform which are directly attributable to the rendering of the Group's travel related services and other businesses.

Product development

        Product development expenses include expenses incurred by the Group to develop the Group's travel supplier networks as well as to maintain, monitor and manage the Group's transaction and service platform. The Group recognizes website, software and mobile applications development costs in accordance with ASC 350-50 "Website development costs" and ASC 350-40 "Software—internal use software" respectively. The Group expenses all costs that are incurred in connection with the planning and implementation phases of development and costs that are associated with repair or maintenance of the existing websites and mobile applications or the development of software or mobile applications for internal use and websites content.

Sales and marketing

        Sales and marketing expenses consist primarily of costs of payroll and related compensation for the Company's sales and marketing personnel, advertising expenses, and other related marketing and promotion expenses. Advertising expenses, amounting to approximately RMB775 million and RMB1.3 billion for the nine-month periods ended September 30, 2014 and 2015 respectively, are charged to the statements of income as incurred.

Share-based compensation

        Under ASC 718, the Company applied the Black-Scholes valuation model in determining the fair value of options granted. Risk-free interest rates are based on US Treasury yield for the terms consistent with the expected life of award at the time of grant. Expected life is based on historical exercise patterns, for options granted before 2008 which the Company has historical data of and believes are representative of future behavior. For options granted since 2008, the Company used simplified method to estimate its expected life. Expected dividend yield is determined in view of the Company's historical dividend payout rate and future business plan. The Company estimates expected volatility at the date of grant based on historical volatilities. The Company recognizes compensation expense on all share-based awards on a straight-line basis over the requisite service period. Forfeiture rate is estimated based on historical forfeiture patterns and adjusted to reflect future change in circumstances and facts, if any. If actual forfeitures differ from those estimates, we may need to revise those estimates used in subsequent periods.

        ASC 718 requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from initial estimates. Share-based compensation expense was recorded net of estimated forfeitures such that expense was recorded only for those share-based awards that are expected to vest.

25


CTRIP.COM INTERNATIONAL, LTD.

Notes to the unaudited interim condensed consolidated financial statements (Continued)

(Amounts expressed in RENMINBI (RMB) unless otherwise stated)

2. PRINCIPAL ACCOUNTING POLICIES (Continued)

        According to ASC 718, a change in any of the terms or conditions of stock options shall be accounted for as a modification of the plan. Therefore, the Company calculates incremental compensation cost of a modification as the excess of the fair value of the modified option over the fair value of the original option immediately before its terms are modified, measured based on the share price and other pertinent factors at the modification date. For vested options, the Company would recognize incremental compensation cost in the period the modification occurs and for unvested options, the Company would recognize, over the remaining requisite service period, the sum of the incremental compensation cost and the remaining unrecognized compensation cost for the original award on the modification date.

        According to ASC 718, the Company classifies options or similar instruments as liabilities if the entity can be required under any circumstances to settle the option or similar instrument by transferring cash or other assets and such cash settlement is probable. The percentage of the fair value that is accrued as compensation cost at the end of each period shall equal the percentage of the requisite service that has been rendered at that date. Changes in fair value of the liability classified award that occur during the requisite service period shall be recognized as compensation cost over that period. Changes in fair value that occur after the end of the requisite service period are compensation cost of the period in which the changes occur. Any difference between the amount for which a liability award is settled and its fair value at the settlement date as estimated is an adjustment of compensation cost in the period of settlement.

        On November 5, 2004, the Company's board of directors adopted a 2005 Employee's Stock Option Plan ("2005 Option Plan"). The 2005 Option Plan was approved by the shareholders of the Company in October 2005. The Company has reserved 3,000,000 ordinary shares for future issuances of options under the 2005 Option Plan. The terms of the 2005 Option Plan are substantially similar to the Company's 2003 Option Plan. As of December 31, 2014 and September 30, 2015, 386,310 and 188,420 options were outstanding under the 2005 Option Plan respectively.

        On October 17, 2007, the Company adopted a 2007 Share Incentive Plan ("2007 Incentive Plan"), which was approved by the shareholders of the Company on June 15, 2007. Under the 2007 Incentive Plan, the maximum aggregate number of shares, which may be issued pursuant to all share-based awards (including Incentive Share Options and Restricted Share Units ("RSU")), is one million ordinary shares as of the first business day of 2007, plus an annual increase of one million shares to be added on the first business day of each calendar year beginning in 2008 to 2016. Under the 2007 Incentive Plan, the directors may, at their discretion, grant any employees, officers, directors and consultants of the Company and/or its subsidiaries such share-based awards. Shares options granted under 2007 Incentive Plan are vested over a period of 4 years. The Company granted 803,189 and 625,006 new shares options to employees with 4 year requisite service period for the nine-month period ended September 30, 2014 and 2015, respectively. RSUs granted under 2007 Incentive Plan have a restricted period for 4 years. As of December 31, 2014 and September 30, 2015, 4,585,868 and 4,917,329 options and 1,058,608 and 919,864 RSUs were outstanding under the 2007 Incentive Plan. The Company calculated the estimated fair value of share options on the date of grant using the Black-

26


CTRIP.COM INTERNATIONAL, LTD.

Notes to the unaudited interim condensed consolidated financial statements (Continued)

(Amounts expressed in RENMINBI (RMB) unless otherwise stated)

2. PRINCIPAL ACCOUNTING POLICIES (Continued)

Scholes pricing model with the same assumptions included in the Company's 2014 20-F, there has been no material change in those assumptions for the nine-month period ended September 30, 2015.

        In January 2012, the compensation committee passed a resolution to replace all options that previously granted under the 2007 incentive plan but with exercise price above $120.00 per ordinary share, with maximum of 518,017 restricted share units (RSU) of the Company based on the conversion ratio at 4:1 ("the Replacement"). The total options modified approximate 1.9 million and the Company incurred no incremental cost for such modification.

        As of September 30, 2015, there was US$153 million of total unrecognized compensation cost, net of estimated forfeitures, related to unvested share options which are expected to be recognized over a weighted average period of 2.7 year. Total unrecognized compensation cost may be adjusted for future changes in estimated forfeitures. Total cash received from the exercise of share options amounted to RMB152,960,799 and RMB159,701,667 for the nine-month period ended September 30, 2014 and 2015, respectively.

        The Company granted 557,008 and 229,603 RSUs to employees with 4 year requisite service period for the nine-month period ended September 30, 2014 and 2015, respectively. In additional, pursuant to the Replacement mentioned above, another 475,343 RSUs replaced the 1,901,372 options initially granted under the 2007 incentive plan.

        Total share-based compensation cost for the RSUs amounted to US$22 million and US$35 million for the nine-month period ended September 30, 2014 and 2015, respectively. As of September 30, 2015, there was US$147 million unrecognized compensation cost, net of estimated forfeitures, related to unvested restricted shares. Total unrecognized compensation cost may be adjusted for future changes in estimated forfeitures.

Operating leases

        Leases where substantially all the rewards and risks of ownership of assets remain with the leasing company are accounted for as operating leases. Payments made under operating leases net of any incentives received by the Group from the leasing company are charged to the statements of income on a straight-line basis over the lease periods.

Taxation

        Deferred income taxes are provided using the balance sheet liability method. Under this method, deferred income taxes are recognized for the tax consequences of significant temporary differences by applying enacted statutory rates applicable to future years to differences between the financial statement carrying amounts and the tax bases of existing assets and liabilities. The tax base of an asset or liability is the amount attributed to that asset or liability for tax purposes. The effect on deferred taxes of a change in tax rates is recognized in income in the period enacted. A valuation allowance is

27


CTRIP.COM INTERNATIONAL, LTD.

Notes to the unaudited interim condensed consolidated financial statements (Continued)

(Amounts expressed in RENMINBI (RMB) unless otherwise stated)

2. PRINCIPAL ACCOUNTING POLICIES (Continued)

provided to reduce the amount of deferred tax assets if it is considered unlikely that some portion of, or all of, the deferred tax assets will not be realized.

        Effective January 1, 2007, the Company adopted ASC 740, "Income Taxes". It clarifies the accounting for uncertainty in income taxes recognized in the Company's consolidated financial statements and prescribes a more likely than not threshold for financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. It also provides guidance on derecognition of income tax assets and liabilities, classification of current and deferred income tax assets and liabilities, accounting for interest and penalties associated with tax positions, accounting for income taxes in interim periods, and income tax disclosures.

        As of both December 31, 2014 and September 30, 2015, the Company did not record any liability for uncertain tax positions. The Company's policy is to recognize, if any, tax related interest as interest expenses and penalties as general and administrative expenses. For the nine-month period ended September 30, 2014 and 2015, the Company did not have any interest and penalties associated with tax positions.

Other income (net)

        Other income consists of financial subsidies, investment income and foreign exchange gains/(losses), and re-measurement gains. Financial subsidies from local PRC government authority were recorded as other income in the consolidated statements of income. There are no defined rules and regulations to govern the criteria necessary for companies to enjoy such benefits and the amount of financial subsidy are determined at the discretion of the relevant government authority. Financial subsidies are recognized as other income when received. Components of other income for the nine-month period ended September 30, 2014 and 2015 were as follows:

 
   Nine-month
period ended
September 30, 2014 		  Nine-month
period ended
September 30, 2015 		 
 
   RMB
   RMB
  

Gain on deconsolidation of a subsidiary

     —     2,269,860,747  

Financial subsidies

     96,454,198     128,633,538  

Reimbursement from the depository

     —     11,582,882  

Foreign exchange (losses)/ gains

     (10,814,803 )   3,994,310  

Dividends from a cost method investment

     39,036,138     —  

Gain on disposal of cost method investment

     1,674,498     —  

Bank charges

     (35,117,403 )   (50,633,202 )

Others

     7,273,655     26,687,406  
​ ​ ​ ​ ​ ​ ​ ​

Total

     98,506,283     2,390,125,681  
​ ​ ​ ​ ​ ​ ​ ​
​ ​ ​ ​ ​ ​ ​ ​
​ ​ ​ ​ ​ ​ ​ ​

        Gain on deconsolidation of subsidiaries refers to the gain recognized from the deconsolidation of Tujia.com International Co., Ltd. ("Tujia") as a result of the loss of control of Tujia after its recent financing in the third quarter of 2015. In July, 2015, Tujia issued Series D+ redeemable convertible

28


CTRIP.COM INTERNATIONAL, LTD.

Notes to the unaudited interim condensed consolidated financial statements (Continued)

(Amounts expressed in RENMINBI (RMB) unless otherwise stated)

2. PRINCIPAL ACCOUNTING POLICIES (Continued)

preferred shares to a number of new investors. The Company did not participate the Series D+ financing and as a result, its equity interest, and fully converted voting rights was diluted from approximately 50% to 45%. After the Series D+ financing, The Company was entitled to appoint 6 out of 12 board of directors. The Company concluded that the changes in interest resulted in its loss of control in Tujia under ASC 810, thus the financial statement of Tujia shall be deconsolidated. A gain is recognized for the deconsolidation of Tujia as of the deconsolidation date and was recorded in the Other Income. The investment in Tujia was re-measured at its fair value at the date of the deconsolidation.

Dividends

        Dividends are recognized when declared.

        PRC regulations currently permit payment of dividends only out of accumulated profits as determined in accordance with PRC accounting standards and regulations. The Company's PRC subsidiaries can only distribute dividends after they have met the PRC requirements for appropriation to statutory reserves. Additionally, as the Company does not have any direct ownership in the VIEs, the VIEs cannot directly distribute dividends to the Company. The PRC government imposes control over its foreign currency reserves in part through direct regulation of the conversion of RMB into foreign exchange and through restrictions on foreign trade. As substantially all of our revenues are in RMB, any restrictions on currency exchange may limit our ability to use revenue generated in RMB to fund our business activities outside China or to make dividend payments in U.S. dollars. Restricted net assets of the Company's PRC subsidiaries and VIEs not distributable in the form of dividends to the parent as a result of the aforesaid PRC regulations and other restrictions were RMB1.8 billion as of September 30, 2015.

        As a result of the aforementioned PRC regulation and the Company's organizational structure, accumulated profits of the subsidiaries in PRC distributable in the form of dividends to the parent as of December 31, 2014 and September 30, 2015 were RMB5.0 billion and RMB5.9 billion, respectively. The Company's PRC subsidiaries and VIEs are able to enter into royalty and trademark license agreements or certain other contractual arrangements at the sole discretion of the Company, for which the compensatory element of the arrangement is deducted from the accumulated profits.

        Effective January 1, 2008, current CIT Law imposes a 10% withholding income tax for dividends distributed by foreign invested enterprises to their immediate holding companies outside mainland China. A lower withholding tax rate will be applied if there is a tax treaty arrangement between mainland China and the jurisdiction of the foreign holding company. Distributions to holding companies in Hong Kong that satisfy certain requirements specified by PRC tax authorities, for example, will be subject to a 5% withholding tax rate.

Earnings per share

        In accordance with "Computation of Earnings Per Share", basic earnings per share is computed by dividing net income attributable to common shareholders by the weighted average number of common shares outstanding during the year. Diluted earnings per share is calculated by dividing net income attributable to common shareholders as adjusted for the effect of dilutive ordinary equivalent shares, if

29


CTRIP.COM INTERNATIONAL, LTD.

Notes to the unaudited interim condensed consolidated financial statements (Continued)

(Amounts expressed in RENMINBI (RMB) unless otherwise stated)

2. PRINCIPAL ACCOUNTING POLICIES (Continued)

any, by the weighted average number of ordinary and dilutive ordinary equivalent shares outstanding during the year. Dilutive ordinary equivalent shares consist of ordinary shares issuable upon the exercise of outstanding share options (using the treasury stock method).

        If the number of common shares outstanding increases as a result of a stock dividend or stock split or decreases as a result of a reverse stock split, the computations of basic and diluted EPS shall be adjusted retroactively for all periods presented to reflect that change in capital structure. If changes in common stock resulting from stock dividends, stock splits, or reverse stock splits occur after the close of the period but before the financial statements are issued or are available to be issued, the per-share computations for those and any prior-period financial statements presented are be based on the new number of shares.

Treasury stock

        On July 30, 2008 and September 30, 2008 our board of directors and shareholders respectively approved a US$15 million share repurchase plan. On September 29, 2011, our board of directors approved another US$100 million share repurchase plan. On June 13, 2012, our board of directors approved a US$300 million share repurchase plan. And on April 3, 2014, our board of directors approved a US$600 million share repurchase plan. The share-repurchase programs do not require the Company to acquire a specific number of shares and may be suspended or discontinued at any time.

        Treasury stock consists of ADS repurchased by the Group under these three plans. In October 2013, US$45.5 million convertible senior notes issued in 2012 was early converted and 588,219 shares of repurchased treasury stock were delivered to bond holders. In 2014, US$65.5 million convertible senior notes issued in 2012 was converted and 846,131 shares of repurchased treasury stock were delivered to bond holders. In the nine-month period ended September, 30, 2015, US$4.3 million convertible senior notes issued in 2012 was converted and 55,590 shares of repurchased treasury stock were delivered to bond holders. As of September 30, 2015, the Company had 3,742,219 shares treasury stock at total cost of US$380 million. Treasury stock is accounted for under the cost method.

Segment reporting

        The Company operates and manages its business as a single segment. Resources are allocated and performance is assessed by the CEO, whom is determined to be the Chief Operating Decision Maker (CODM). Since the Company operates in one reportable segment, all financial segment and product information required by this statement can be found in the Consolidated Statements.

        The Company primarily generates its revenues from customers in Great China Area, and assets of the Company are also located in Great China Area. Accordingly, no geographical segments are presented.

Recent accounting pronouncements

        In April 2014, the FASB issued ASU 2014-08, "Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity". This update changed the threshold for reporting discontinued operations and added new disclosures for disposals. Under the updated guidance, a discontinued operation is defined as a component or group of components that is disposed of or is

30


CTRIP.COM INTERNATIONAL, LTD.

Notes to the unaudited interim condensed consolidated financial statements (Continued)

(Amounts expressed in RENMINBI (RMB) unless otherwise stated)

2. PRINCIPAL ACCOUNTING POLICIES (Continued)

classified as held for sale and represents a strategic shift that has (or will have) a major effect on an entity's operations and financial results. This ASU is effective prospectively for fiscal years, and interim periods within those years, beginning after December 15, 2014. This ASU is not reasonably expected in the future to have a material impact on the Company's consolidated financial statements, because the Company does not have discontinued operations or disposals of components of an Entity.

        In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606) ("ASU 2014-09"). ASU 2014-09 supersedes the revenue recognition requirements in ASC Topic 605, Revenue Recognition, and most industry-specific guidance. The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The new standard will require the Company to separate performance obligations within a contract, determine total transaction costs, and ultimately allocate the transaction costs across the established performance obligations. In August 2015, the FASB issued ASU No. 2015-14, "Revenue from Contracts with Customers" (Topic 606): Deferral of the Effective Date, which delays the effective date of ASU 2014-09 by one year. As a result, ASU 2014-09 will become effective for the Company beginning in fiscal 2018 under either full or modified retrospective adoption, with early adoption permitted as of the original effective date of ASU 2014-09. The Company is currently assessing the potential effects of these changes on the Company's consolidated financial statements.

        In February 2015, the FASB issued the ASU 2015-02, "Amendments to the Consolidation Analysis". The objective of issuing the amendments in this Update is to change the analysis that a reporting entity must perform to determine whether it should consolidate certain types of legal entities. The amendments in this Update are an improvement to current US GAAP because they simplify the Codification and reduce the number of consolidation models through the elimination of the indefinite deferral of Statement 167 and because they place more emphasis on risk of loss when determining a controlling financial interest. The amendments in this Update are effective for public business entities for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2015. Early adoption is permitted, including adoption in an interim period. If an entity early adopts the amendments in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period. A reporting entity may apply the amendments in this Update using a modified retrospective approach by recording a cumulative-effect adjustment to equity as of the beginning of the fiscal year of adoption. A reporting entity also may apply the amendments retrospectively. The Company is in the process of evaluating the impact of the standard on its consolidated financial statements.

        In April 2015, the FASB issued the ASU 2015-05, "Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40) Customer's Accounting for Fees Paid in a Cloud Computing Arrangement". The Board issued the amendments in this Update as part of its Simplification Initiative. The objective of the Simplification Initiative is to identify, evaluate, and improve areas of generally accepted accounting principles (GAAP) for which cost and complexity can be reduced while maintaining or improving the usefulness of the information provided to users of the financial statements. Existing GAAP does not include explicit guidance about a customer's accounting for fees paid in a cloud computing arrangement. The amendments in this Update provide guidance to

31


CTRIP.COM INTERNATIONAL, LTD.

Notes to the unaudited interim condensed consolidated financial statements (Continued)

(Amounts expressed in RENMINBI (RMB) unless otherwise stated)

2. PRINCIPAL ACCOUNTING POLICIES (Continued)

customers about whether a cloud computing arrangement includes a software license. If a cloud computing arrangement includes a software license, then the customer should account for the software license element of the arrangement consistent with the acquisition of other software licenses. If a cloud computing arrangement does not include a software license, the customer should account for the arrangement as a service contract. The guidance will not change GAAP for a customer's accounting for service contracts. In addition, the guidance in this Update supersedes paragraph 350-40-25-16. Consequently, all software licenses within the scope of Subtopic 350-40 will be accounted for consistent with other licenses of intangible assets. For public business entities, the Board decided that the amendments will be effective for annual periods, including interim periods within those annual periods, beginning after December 15, 2015. For all other entities, the amendments will be effective for annual periods beginning after December 15, 2015, and interim periods in annual periods beginning after December 15, 2016. Early adoption is permitted for all entities. An entity can elect to adopt the amendments either (1) prospectively to all arrangements entered into or materially modified after the effective date or (2) retrospectively. For prospective transition, the only disclosure requirements at transition are the nature of and reason for the change in accounting principle, the transition method, and a qualitative description of the financial statement line items affected by the change. For retrospective transition, the disclosure requirements at transition include the requirements for prospective transition and quantitative information about the effects of the accounting change. The Company is in the process of evaluating the impact of the standard on its consolidated financial statements.

        In April 2015, the FASB issued the ASU No. 2015-03—Simplifying the Presentation of Debt Issuance Costs ("ASU 2015-03"), which changes the presentation of debt issuance costs in financial statements. Under ASU 2015-03, an entity will present such costs in the balance sheet as a direct deduction from the related debt liability rather than as an asset. Amortization of the costs will continue to be reported as interest expense. In August 2015, the FASB issued the ASU No. 2015-15—Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements ("ASU 2015-15"), which incorporates the SEC staff's announcement that clarifies the exclusion of line-of-credit arrangements from the scope of ASU 2015-03. The ASU clarifies that debt issuance costs related to line-of-credit arrangements can be deferred and presented as an asset that is subsequently amortized over the time of the line-of-credit arrangement, regardless of whether there are any outstanding borrowings on the line-of-credit arrangement. ASU 2015-03 is effective retrospectively for interim and annual periods beginning after December 15, 2015. The Company is in the process of evaluating the impact of the standard on its consolidated financial statements.

        In September 2015, the FASB issued the ASU No. 2015-16, Simplifying the Accounting for Measurement-Period Adjustments, which eliminates the requirement for acquirers in a business combination to account for measurement-period adjustments retrospectively. Instead, acquirers must recognize measurement-period adjustments during the period in which they determine the amounts, including the effect on earnings of any amounts that would have been recorded in previous periods if the accounting had been completed at the acquisition date. This update is effective for interim and annual periods beginning after December 15, 2015, with early adoption permitted. The Company is in the process of evaluating the impact of the standard on its consolidated financial statements.

32


CTRIP.COM INTERNATIONAL, LTD.

Notes to the unaudited interim condensed consolidated financial statements (Continued)

(Amounts expressed in RENMINBI (RMB) unless otherwise stated)

2. PRINCIPAL ACCOUNTING POLICIES (Continued)

        In November 2015, the FASB issued the ASU No. 2015-17, Balance Sheet Classification of Deferred Taxes, to simplify the presentation of deferred income taxes. The amendments in this Update require that deferred tax liabilities and assets be classified as noncurrent in a classified statement of financial position. The amendments in this Update apply to all entities that present a classified statement of financial position. The current requirement that deferred tax liabilities and assets of a tax-paying component of an entity be offset and presented as a single amount is not affected by the amendments in this Update. For public business entities, the amendments in this Update are effective for financial statements issued for annual periods beginning after December 15, 2016, and interim periods within those annual periods, with early adoption permitted. The amendments in this Update may be applied either prospectively to all deferred tax liabilities and assets or retrospectively to all periods presented. If an entity applies the guidance prospectively, the entity should disclose in the first interim and first annual period of change, the nature of and reason for the change in accounting principle and a statement that prior periods were not retrospectively adjusted. If an entity applies the guidance retrospectively, the entity should disclose in the first interim and first annual period of change the nature of and reason for the change in accounting principle and quantitative information about the effects of the accounting change on prior periods. The Company is in the process of evaluating the impact of the standard on its consolidated financial statements.

Certain risks and concentration

        Financial instruments that potentially subject the Company to significant concentrations of credit risk consist primarily of cash and cash equivalents, restricted cash, short-term investment, accounts receivable, amounts due from related parties, prepayments and other current assets. As of December 31, 2014 and September 30, 2015, substantially all of the Company's cash and cash equivalents, restricted cash and short-term investment were held in major financial institutions located in the PRC and in Hong Kong, which management considers to be of high credit quality. Accounts receivable are generally unsecured and denominated in RMB, and are derived from revenues earned from operations arising primarily in the PRC.

        No individual customer accounted for more than 10% of net revenues for the nine-month period ended September 30, 2014 and 2015. No individual customer accounted for more than 10% of accounts receivable as of December 31, 2014 and September 30, 2015.

33


CTRIP.COM INTERNATIONAL, LTD.

Notes to the unaudited interim condensed consolidated financial statements (Continued)

(Amounts expressed in RENMINBI (RMB) unless otherwise stated)

3. INVESTMENTS

        The Company's long-term investments consisting of cost method investments, equity method investments and available-for-sale securities as of December 31, 2014 and September 30, 2015 were as follows:

 
   December 31,
2014 		  September 30,
2015 		 
 
   RMB
   RMB
  

Available-for-sale securities

              

Tujia (available-for-sale)

     —     2,784,302,479  

LY.com (available-for-sale)

     1,547,844,523     2,253,163,385  

Hanting (available-for-sale)

     898,828,511     852,386,094  

Easy Go (available-for-sale)

     627,905,501     643,186,701  

eHi (available-for-sale)

     535,024,052     717,027,215  

Tuniu (available-for-sale)

     216,690,294     313,860,446  

A travel agency focusing on teenager market (available-for-sale)

     81,000,000     81,000,000  

A big-data advertisement company (available-for-sale)

     62,046,000     63,556,000  

Happy City (available-for-sale)

     35,422,062     36,328,061  

Dining Secretary (available-for-sale)

     29,046,000     30,556,000  

Equity method investments

    
 		    
 		  

eLong (equity method)

     —     2,610,521,829  

Homeinns (equity method)

     902,964,928     933,734,378  

Skyseas (equity method)

     161,828,826     140,002,007  

Cost method investments

              

Keystone (cost method)

     158,217,350     162,067,851  

A C2C carpooling platform (cost method)

     —     127,112,000  

Zhong An Online (cost method)

     50,000,000     50,000,000  

Others

     11,938,400     56,842,654  
​ ​ ​ ​ ​ ​ ​ ​

Total net book value

     5,318,756,447     11,855,647,100  
​ ​ ​ ​ ​ ​ ​ ​
​ ​ ​ ​ ​ ​ ​ ​
​ ​ ​ ​ ​ ​ ​ ​

        In October 2012, February 2013 and June 2014, the Company and other institutional investors entered into a series of agreements with Tujia.com International Co., Ltd ("Tujia") to issue 70,380,000 shares of Series A redeemable convertible preferred stocks ("Series A preferred shares") with total consideration of US$14.6 million, 33,333,333 shares of Series B redeemable convertible preferred stocks ("Series B preferred shares") with total consideration of US$36.7 million and 30,465,080 shares of Series C redeemable convertible preferred stocks ("Series C preferred shares") with total consideration of US$75 million, respectively.

        The Company has held the majority voting power of Tujia and had consolidated Tujia since it was incorporated.

        In July, 2015, Tujia issued Series D+ redeemable convertible preferred shares to a number of new investors. The Company did not participate the Series D+ financing and as a result, its equity interest,

34


CTRIP.COM INTERNATIONAL, LTD.

Notes to the unaudited interim condensed consolidated financial statements (Continued)

(Amounts expressed in RENMINBI (RMB) unless otherwise stated)

3. INVESTMENTS (Continued)

and fully converted voting rights was diluted from approximately 50% to 45%. After the Series D+ financing, the Company was entitled to appoint 6 out of 12 board of directors. The Company concluded that the changes in interest resulted in its loss of control in Tujia under ASC 810, thus the financial statement of Tujia shall be deconsolidated. A gain is recognized for the deconsolidation of Tujia as of the deconsolidation date and was recorded in the Other Income (Note 2). The investment in Tujia was re-measured at its fair value at the date of the deconsolidation.

        The Company recorded this investment as an available-for-sale debt since the preferred shares held by the Company are redeemable at the option of the Company and are not in substance of common stocks. Subsequent to initial recognition, the available-for-sale debt security is measured at fair value at every period end. Unrealized holding gains and losses for available-for-sale securities are reported in other comprehensive income until realized. For the period from the date of the deconsolidation to September 30, 2015, the Company did not identify and recognize any change of fair value for the investment in Tujia.

        In April, 2014, the Company purchased a minority stake of LY.com, a leading local attraction ticket service provider, with a cash consideration of approximately RMB1.4 billion. According to the purchase and shareholders agreement, the Company has the substantive liquidation preference right which allows the Company to receive a priority in liquidation assets allocation over the other shareholders under the liquidation events. With such liquidation preference, the investment is not considered to be in substance of LY.com's common stock. Therefore, the Company recorded this investment as an available-for-sale equity security and subsequently measured at its fair value.

        On March 31, 2010, the Company purchased newly issued 7,202,482 shares from Hanting in a private placement. On the same day, the Company purchased an aggregate of 11,646,964 shares of Hanting from the then shareholders. In addition, on March 31, 2010, the Company purchased 800,000 ADSs representing 3,200,000 shares of Hanting in its initial public offering ("IPO"). All transactions were made at a purchase price of US$12.25 per ADS, or US$3.0625 per share, which is the then IPO price. The total purchase cost is US$67.5 million (approximately RMB461 million). Upon the closing of the transactions described above, the Company holds an aggregate of 22,049,446 shares of Hanting (including 3,200,000 shares represented by ADSs), representing approximately 9% of Hanting's total outstanding shares as of March 31, 2010. The Company has one out of seven seats in Hanting.

        Given the level of investment, the Company applies ASC-320-25 to account for its investment in Hanting. The Company classified the investment as "available for sale" as the Company does not have the ability to exercise significant influence and measured the fair value at every period end (Note 4). Unrealized holding gains and losses for available-for-sale securities are reported in other comprehensive income until realized.

        The closing price of Hanting as of September 30, 2015 is US$24.33 per ADS. As of September 30, 2015, the Company recorded the investment in Hanting at a fair value of RMB852 million

35


CTRIP.COM INTERNATIONAL, LTD.

Notes to the unaudited interim condensed consolidated financial statements (Continued)

(Amounts expressed in RENMINBI (RMB) unless otherwise stated)

3. INVESTMENTS (Continued)

(approximately US$134 million), with RMB423 million increase in fair value of the investment credited to other comprehensive income.

        In December 2013 and August 2014, the Company completed the transactions to acquire equity stake of Easy Go by subscribing its Series B and Series C convertible preferred shares with a total consideration of US$53 million.

        The Company recorded this investment as an available-for-sale debt since the preferred shares purchased by the Company are redeemable at the option of the Company and are not in substance of common stocks. Subsequent to initial recognition, the available-for-sale debt security is measured at fair value at every period end (Note 4). Unrealized holding gains and losses for available-for-sale securities are reported in other comprehensive income until realized. As of September 30, 2015, the Company recorded the investment in Easy Go at a fair value of RMB643 million (approximately US$101 million), with RMB298 million increase in fair value of the investment credited to other comprehensive income.

        In December 2013 and April 2014, the Company completed the transactions to acquire equity stake of eHi, one of the largest car rental companies in China, by subscribing its Series E and Series E Plus convertible preferred shares with a total consideration of approximately US$107 million. In November 2014, with the consummation of eHi's initial public offering, the convertible preferred shares held by the Company were converted into common share of eHi. In November, 2014, the Company purchased US$10 million additional common shares at its IPO price. In May, 2015, the Company sold US$10 million common shares at the IPO price. Upon the closing of the transactions described above, the Company held an aggregate equity interest of approximately 14% of eHi's total outstanding share and 19.9% of eHi's voting power as of September 30, 2015. The Company has one out of seven seats in eHi.

        The Company continued to record this investment as an available-for-sale debt security since the Company does not have the ability to exercise significant influence. The available-for-sale debt security is measured at fair value at every period end (Note 4). Unrealized holding gains and losses for available-for-sale securities are reported in other comprehensive income until realized.

        The closing price of eHi as of September 30, 2015 is US$11.59 per ADS. As of September 30, 2015, the Company recorded the investment in eHi at a fair value of RMB717 million (approximately US$113 million), with RMB37 million increase in fair value of the investment credited to other comprehensive income.

        In May, 2014, the Company purchased 1,666,667 ADSs representing 5,000,000 shares of Tuniu upon its IPO. The transaction was made at a purchase price of US$9 per ADS, or US$3 per share, which is the then IPO price. The total purchase cost is US$15 million (RMB93 million). In addition, in December, 2014, the Company purchased 3,731,034 newly issued class A ordinary shares of Tuniu at a

36


CTRIP.COM INTERNATIONAL, LTD.

Notes to the unaudited interim condensed consolidated financial statements (Continued)

(Amounts expressed in RENMINBI (RMB) unless otherwise stated)

3. INVESTMENTS (Continued)

purchase price of US$12 per ADS, or US$4 per share. Upon the closing of the transactions described above, the Company held an aggregate equity interest approximately 4.6% of Tuniu's total outstanding shares as of December 31, 2014. The Company has one out of nine seats in Tuniu

        Given the level of investment, the Company applies ASC-320-25 to account for its investment in Tuniu. The Company classified the investment as "available for sale" and measured the fair value at every period end (Note 4). Unrealized holding gains and losses for available-for-sale securities are reported in other comprehensive income until realized.

        The closing price of Tuniu as of September 30, 2015 is US$11.87 per ADS. As of September 30, 2015, the Company recorded the investment in Tuniu at a fair value of RMB314 million (US$49 million), with RMB4 million decrease in fair value of the investment credited to other comprehensive income.

        In August, 2014, the Company completed the transactions to acquire a minority stake of a travel agency focusing on teenager market, with a cash consideration of RMB81 million. According to the purchase and shareholders agreement, the Company has the substantive liquidation preference right which allows the Company to receive a priority in the liquidation assets allocation over the other shareholders under the liquidation events. With such liquidation preference, the investment is not considered to be in substance of the acquired entity's common stock. Therefore, the Company recorded this investment as an available-for-sale equity security and subsequently measured at its fair value. There is no significant change in fair value of the investment from the initial investment day to September 30, 2015.

        In August 2014, the Company completed the transactions to acquire a minority stake of Seris B preferred shares of a big-data advertisement company with a total consideration of US$10 million.

        The Company recorded this investment as an available-for-sale debt since the Company does not have the ability to exercise significant influence and the preferred shares purchased by the Company are redeemable at the option of the Company. Subsequent to initial recognition, the available-for-sale debt security is measured at fair value at every period end (Note 4). Unrealized holding gains and losses for available-for-sale securities are reported in other comprehensive income until realized. There is no significant change in fair value of the investment from the initial investment day to September 30, 2015.

        In June 2013, the Company entered into agreements to acquire a minority stake of the Series A preferred shares in Happy City, a privately owned mobile application software company, with total consideration of US$6 million. Happy City is engaged in development and operation of a mobile application for hotel searching and booking.

37


CTRIP.COM INTERNATIONAL, LTD.

Notes to the unaudited interim condensed consolidated financial statements (Continued)

(Amounts expressed in RENMINBI (RMB) unless otherwise stated)

3. INVESTMENTS (Continued)

        The Company recorded this investment as an available-for-sale debt security since the preferred shares purchased by the Company are redeemable at the option of the Company and are not common stocks in substance. Subsequent to initial recognition, the available-for-sale debt security is measured at fair value at every period end (Note 4). Unrealized holding gains and losses for available-for-sale securities are reported in other comprehensive income until realized. The decrease in fair value of the investment in Happy City of RMB2 million (US$0.3 million) was recorded to other comprehensive income as of September 30, 2015.

        In November 2010, the Company completed the transactions to acquire a minority stake of Dining Secretary's Series B convertible preferred shares with total consideration of US$10 million. Dining Secretary is a provider of free online and offline restaurant reservations for diners.

        The Company recorded this investment as an available-for-sale debt security. Subsequent to initial recognition, the available-for-sale debt security is measured at fair value at every period end (Note 4). Unrealized holding gains and losses for available-for-sale securities are reported in other comprehensive income until realized. As of December 31 2014, the Company recorded an other than temporary investment impairment of RMB33 million in Dining Secretary based on the difference of its fair value and cost with the previously recognized unrealized loss in other comprehensive income with amount of RMB4 million reversed.

        In May 2015, the Company entered into a share purchase agreement with certain selling shareholders, including Expedia, Inc. ("Expedia"), together with several other investors to acquire approximately 37.6% share capital of eLong, Inc. ("eLong"). The total consideration was approximately USD414 million. The Company has one out of eight board seats of eLong. The Company's investment of eLong is common stock in nature and due to the significant influence of eLong that the Company is entitled to, the Company applies the equity method to account for the investment starting June 2015.

        The Company calculated equity in income or losses of investment in eLong on one quarter lag basis, as allowed, as the financial statements of eLong were not available within a sufficient time period.

        The Company purchased ADSs of Homeinns from time to time through the open market and in a private placement transaction. As of December 31, 2014, the Company held an aggregate equity interest of approximately 15.1% of the outstanding shares of Homeinns (or 14,400,765 shares). Given the level of investment and the common directors on Board of both companies, the Company applied equity method of accounting to account for the investment in Homeinns.

        The Company calculated the equity in income or losses of investment in Homeinns on one quarter lag basis, as allowed, as the financial statements of Homeinns were not available within a sufficient time period.

38


CTRIP.COM INTERNATIONAL, LTD.

Notes to the unaudited interim condensed consolidated financial statements (Continued)

(Amounts expressed in RENMINBI (RMB) unless otherwise stated)

3. INVESTMENTS (Continued)

        On October 1, 2011, Homeinns completed a transaction to acquire 100% equity interest in a business, pursuant to which Homeinns issued additional ordinary shares as part of the total consideration. As a result, the Company's equity interest in Homeinns effectively decreased from 17.5% to 15.1%. In accordance with ASC 323-10-40-1, the Company accounts for a share issuance by an investee as if the investor had sold a proportionate share of its investment. The issuance price per share of the newly issued capital by the investee is higher than the Company's average per share carrying amount, thus the Company recognized the non-cash gain of RMB39.3 million for the period ended December 31, 2012 as a result of the equity dilution impact. The Company picks up equity calculation of Homeinns on a quarter lag basis, as the Company is not able to timely obtain all necessary financial information from Homeinns to perform the equity investment reconciliations between the Company and Homeinns.

        The carrying amount and unrealized securities holding profit for investment in Homeinns as of December 31, 2014 and September 30, 2015 were as follows:

 
   December 31,
2014 		  September 30,
2015 		 
 
   RMB
   RMB
  

Investment cost

              

Balance at beginning of year

     554,626,285     568,679,251  

Foreign currency translation

     14,052,966     11,235,008  
​ ​ ​ ​ ​ ​ ​ ​

Total investment cost

     568,679,251     579,914,259  
​ ​ ​ ​ ​ ​ ​ ​

Value booked under equity method

              

Share of cumulative profit

     357,085,613     379,535,689  

Amortization of identifiable intangible assets, net of tax

     (22,799,936 )   (25,715,570 )
​ ​ ​ ​ ​ ​ ​ ​

Total booked value under equity method. 

     334,285,677     353,820,119  
​ ​ ​ ​ ​ ​ ​ ​

Net book value

     902,964,928     933,734,378  
​ ​ ​ ​ ​ ​ ​ ​
​ ​ ​ ​ ​ ​ ​ ​
​ ​ ​ ​ ​ ​ ​ ​

        In 2014, among the share of cumulative profit of Homeinns, the Company recognized gain as a result of the equity dilution impact in Homeinns with amount of RMB 12 million.

        The financial information of Homeinns as of September 30, 2014 and June 30, 2015 is as follows:

 
   September 30,
2014 		  June 30, 2015  
 
   RMB ('000)
   RMB ('000)
  

Current assets

     1,230,755     1,394,546  

Non-current assets

     8,030,078     7,895,931  

Current liabilities

     1,751,016     2,579,453  

Non-current liabilities

     2,546,507     1,556,096  

Retain earnings

     1,568,795     1,638,737  

Non-controlling interest

     15,188     17,409  

Total shareholders' equity

     4,963,310     5,154,928  

39


CTRIP.COM INTERNATIONAL, LTD.

Notes to the unaudited interim condensed consolidated financial statements (Continued)

(Amounts expressed in RENMINBI (RMB) unless otherwise stated)

3. INVESTMENTS (Continued)

        The financial information of Homeinns as of and for the nine-month period ended December 31, 2014 and June 30, 2015 is as follows:

Total revenues

     4,780,743     4,773,053  

Net Revenues

     4,483,401     4,485,989  

Income from operations

     359,185     219,612  

Net income

     198,384     121,282  

Net (loss) / income attributable to Homeinns Group's shareholders

     195,884     119,062  

        The closing price of Homeinns as of September 30, 2015 is US$28.74 per ADS, the aggregate market value of the Company's investment in Homeinns is approximately RMB1.3 billion (US$207 million).

        In September 2014, the Company made a US$ 52.5 million investment in a 70% equity stake of Skyeas, a cruise company, which targets to provide Chinese customers the world-class and tailor-made cruise products. The Company also provided a loan with amount of US$ 160 million to Skyseas at the interest rate of 3% per annum. Concurrently, Skyseas purchased a cruise ship from Royal Caribbean Cruises Ltd. ("RCL") with amount of US$ 220 million. Thus the Company obtained the control over Skyseas and its financial results were consolidated with the Company's consolidated financial statements on its incorporation.

        In November 2014, the Company entered into a share transfer agreement with RCL to transfer 35% share capital of Skyseas to RCL for US$ 26.3 million, representing the Company's original cost for the investment. RCL also provided US$ 80 million loan to Skyseas from the US$ 160 million provided by the Company. After the transaction, the Company and RCL each owns 35% of Skyseas, with the remaining equity interest being owned by Skyseas management and a private equity fund and each provided a loan to Skyseas with amount of US$ 80 million. The Company has two out of five board seats of Skyseas and is entitled to appoint the senior management, including CEO. The Company lost the ability to control Skyseas after the share transfer. Therefore, the Company has applied equity method to account for the investment since December 2014 due to the Company continues to maintain the ability to exercise the significant influence. There was no gain or loss on the loss of control and deconsolidation though the Company deconsolidated cash of US$ 19 million in the transactions.

        In December, 2013, the Company acquired approximately 4% equity shares in Keystone Lodging Holdings Limited ("Keystone"), which in 2013, merged with 7 Days Group Holdings Limited ("7 Days"), a leading economy hotel chain based in China. The total consideration was RMB155 million (US$25.5 million). The Company applied cost method of accounting to account for the investment due to lack of ability to exercise significant influence.

40


CTRIP.COM INTERNATIONAL, LTD.

Notes to the unaudited interim condensed consolidated financial statements (Continued)

(Amounts expressed in RENMINBI (RMB) unless otherwise stated)

3. INVESTMENTS (Continued)

        In October 2013, the Company entered into agreements to contribute a 5% equity stake in Zhong An Online Property Insurance Co., Ltd, China's first online insurance company. The capital contribution is RMB50 million. The Company applied cost method of accounting to account for the investment due to lack of ability to exercise significant influence.

        In May, 2015, the Company acquired 5% equity shares in a C2C carpooling platform. The consideration was USD20 million. The Company applied cost method of accounting to account for the investment due to lack of ability to exercise significant influence.

        Other investments included equity investments in certain privately-held companies.

        As of December 31, 2014 and September 30, 2015, no impairments have been recorded for these investments. As of September 30, 2015, the equity-method investments, on an individual basis or on an aggregated basis by any combination are not significant for the Company.

4. FAIR VALUE MEASUREMENT

        In accordance with ASC 820-10, the Company measures short-term investments and available-for-sale investments at fair value on a recurring basis. Available-for-sale investments classified within Level 1 are valued using quoted market prices that currently available on a securities exchange registered with the Securities and Exchange Commission (SEC). Short-term investments classified within Level 2 are valued using directly or indirectly observable inputs in the market place. The available-for-sale investments classified within Level 3 are valued based on a model utilizing unobservable inputs which require significant management judgment and estimation. The estimated fair value of long-term loans approximated the carrying amount as of December 31, 2014 and September 30, 2015, as the interest rates of the long-term loans are considered as approximate the current rate for comparable loans at the respective balance sheet dates.

41


CTRIP.COM INTERNATIONAL, LTD.

Notes to the unaudited interim condensed consolidated financial statements (Continued)

(Amounts expressed in RENMINBI (RMB) unless otherwise stated)

4. FAIR VALUE MEASUREMENT (Continued)

        Assets measured at fair value on a recurring basis are summarized below:

 
   Fair Value Measurement at September 30, 2015 using    
    
  
 
   Quoted Prices
in Active
Market for
Identical Assets
(Level 1) 		  Significant
Other
Observable
Inputs
(Level 2) 		  Unobservable
inputs
(Level 3) 		  Fair Value at September 30, 2015  
 
   RMB
   RMB
   RMB
   RMB
   US$
  

Short-term investments

                                

Financial products

     —     7,096,870,156     —     7,096,870,156     1,116,632,600  

Time deposits

     —     134,753,177     —     134,753,177     21,202,275  

Available-for-sale investments

                                

Tujia

     —     —     2,784,302,479     2,784,302,479     438,086,487  

LY.com

     —     —     2,253,163,385     2,253,163,385     354,516,235  

Hanting

     852,386,094     —     —     852,386,094     134,115,755  

Easy Go

     —     —     643,186,701     643,186,701     101,199,997  

eHi

     717,027,215     —     —     717,027,215     112,818,178  

Tuniu

     313,860,446     —     —     313,860,446     49,383,291  

A travel agency focusing on teenager market

     —     —     81,000,000     81,000,000     12,744,666  

A big-data advertisement company

     —     —     63,556,000     63,556,000     10,000,000  

Happy City

     —     —     36,328,061     36,328,061     5,715,914  

Dining Secretary

     —     —     30,556,000     30,556,000     4,807,729  
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

Total

     1,883,273,755     7,231,623,333     5,892,092,626     15,006,989,714     2,361,223,127  
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

42


CTRIP.COM INTERNATIONAL, LTD.

Notes to the unaudited interim condensed consolidated financial statements (Continued)

(Amounts expressed in RENMINBI (RMB) unless otherwise stated)

4. FAIR VALUE MEASUREMENT (Continued)


 
   Fair Value Measurement at December 31, 2014 using    
    
  
 
   Quoted Prices
in Active
Market for
Identical Assets
(Level 1) 		  Significant
Other
Observable
Inputs
(Level 2) 		  Unobservable
inputs
(Level 3) 		  Fair Value at December 31, 2014  
 
   RMB
   RMB
   RMB
   RMB
   US$
  

Short-term investments

                                

Financial products

     —     5,990,483,880     —     5,990,483,880     965,490,746  

Time deposits

     —     448,370,707     —     448,370,707     72,264,240  

Available-for-sale investments

                                

LY.com

     —     —     1,547,844,523     1,547,844,523     249,467,254  

Hanting

     898,828,511     —     —     898,828,511     144,864,860  

Easy Go

     —     —     627,905,501     627,905,501     101,199,997  

eHi

     535,024,052     —     —     535,024,052     86,230,225  

Tuniu

     216,690,294     —     —     216,690,294     34,924,136  

A travel agency focusing on teenager market

     —     —     81,000,000     81,000,000     13,054,830  

A big-data advertisement company

     —     —     62,046,000     62,046,000     10,000,000  

Happy City

     —     —     35,422,062     35,422,062     5,709,000  

Dining Secretary

     —     —     29,046,000     29,046,000     4,681,365  
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

Total

     1,650,542,857     6,438,854,587     2,383,264,086     10,472,661,530     1,687,886,653  
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

        The roll forward of Level 3 Tujia's investment is as following:

 
   Amount  
 
   RMB
  

Fair value of available-for-sale(Level 3) investment as at December 31, 2014

     —  

Fair value of available-for-sale investment of Tujia

     2,784,302,479  

Fair value of available-for-sale (Level 3) investment as at September 30, 2015

     2,784,302,479  
​ ​ ​ ​ ​

Fair value of available-for-sale investment (Level 3) as at September 30, 2015 (US$)

     438,086,487  
​ ​ ​ ​ ​
​ ​ ​ ​ ​
​ ​ ​ ​ ​

43


CTRIP.COM INTERNATIONAL, LTD.

Notes to the unaudited interim condensed consolidated financial statements (Continued)

(Amounts expressed in RENMINBI (RMB) unless otherwise stated)

4. FAIR VALUE MEASUREMENT (Continued)

        The roll forward of Level 3 LY.com's investment is as following:

 
   Amount  
 
   RMB
  

Fair value of available-for-sale(Level 3) investment as at December 31, 2013

     —  

Investment in common share of LY.com

     1,414,285,714  

Transfer in and/or out of Level 3

     —  

The change in fair value of the investment in LY.com

     —  

Fair value of available-for-sale (Level 3) investment as at September 30, 2014

     1,414,285,714  
​ ​ ​ ​ ​

Fair value of available-for-sale(Level 3) investment as at December 31, 2014

     1,547,844,523  

Investment in common share of LY.com

     —  

Transfer in and/or out of Level 3

     —  

The change in fair value of the investment in LY.com

     705,318,862  

Fair value of available-for-sale (Level 3) investment as at September 30, 2015

     2,253,163,385  
​ ​ ​ ​ ​

Fair value of available-for-sale investment (Level 3) as at September 30, 2015 (US$)

     354,516,235  
​ ​ ​ ​ ​
​ ​ ​ ​ ​
​ ​ ​ ​ ​

        The significant unobservable inputs used in the valuation are as following:

Valuation Technique
  Unobservable Input   Parameter value
Discounted cash flow   Weighted average cost of capital ("WACC")   19%
    Terminal growth rate   3%
    Lack of marketability discount ("LoMD")   28%
Option pricing model   Time to liquidation   3 years
    Risk-free rate   3.43%
    Expected volatility   50.89%
    Probability   Liquidation scenario: 20%
        IPO scenario: 80%
    Dividend yield   Nil

44


CTRIP.COM INTERNATIONAL, LTD.

Notes to the unaudited interim condensed consolidated financial statements (Continued)

(Amounts expressed in RENMINBI (RMB) unless otherwise stated)

4. FAIR VALUE MEASUREMENT (Continued)

        The roll forward of Level 3 Easy Go's investment is as following:

 
   Amount  
 
   RMB
  

Fair value of available-for-sale(Level 3) investment as at December 31, 2013

     143,904,165  

Investment in Series C Preferred Shares of Easy Go

     184,377,000  

Transfer in and/or out of Level 3

     —  

Effect of exchange rate change

     (799,480 )

The change in fair value of the investment in Easy Go

     293,683,897  
​ ​ ​ ​ ​

Fair value of available-for-sale (Level 3) investment as at September 30, 2014

     621,165,582  

Fair value of available-for-sale(Level 3) investment as at December 31, 2014

    
627,905,501		  

Investment in Series C Preferred Shares of Easy Go

     —  

Transfer in and/or out of Level 3

     —  

Effect of exchange rate change

     15,281,200  

The change in fair value of the investment in Easy Go

     —  
​ ​ ​ ​ ​

Fair value of available-for-sale (Level 3) investment as at September 30, 2015

     643,186,701  
​ ​ ​ ​ ​
​ ​ ​ ​ ​
​ ​ ​ ​ ​

Fair value of available-for-sale investment (Level 3) as at September 30, 2015 (US$)

     101,199,997  
​ ​ ​ ​ ​
​ ​ ​ ​ ​
​ ​ ​ ​ ​

        The fair value of the investment in Easy Go is determined by the investment in Series C Preferred Shares of Easy Go which was close to year end.

45


CTRIP.COM INTERNATIONAL, LTD.

Notes to the unaudited interim condensed consolidated financial statements (Continued)

(Amounts expressed in RENMINBI (RMB) unless otherwise stated)

4. FAIR VALUE MEASUREMENT (Continued)

        The roll forward of Level 3 travel agency focusing on teenager market's investment is as following:

 
   Amount  
 
   RMB
  

Fair value of available-for-sale (Level 3) investment as at December 31, 2013

     —  

Investment in equity interest of a travel agency focusing on teenager market

     81,000,000  

Transfer in and/or out of Level 3

     —  

The change in fair value of the investment in a travel agency focusing on teenager market

     —  

Fair value of available-for-sale (Level 3) investment as at September 30, 2014

     81,000,000  
​ ​ ​ ​ ​
​ ​ ​ ​ ​
​ ​ ​ ​ ​

Fair value of available-for-sale (Level 3) investment as at December 31, 2014

     81,000,000  

Investment in equity interest of a travel agency focusing on teenager market

     —  

Transfer in and/or out of Level 3

     —  

The change in fair value of the investment in a travel agency focusing on teenager market

     —  

Fair value of available-for-sale (Level 3) investment as at September 30, 2015

     81,000,000  
​ ​ ​ ​ ​
​ ​ ​ ​ ​
​ ​ ​ ​ ​

Fair value of available-for-sale investment (Level 3) as at September 30, 2015 (US$)

     12,744,666  
​ ​ ​ ​ ​
​ ​ ​ ​ ​
​ ​ ​ ​ ​

        The fair value of the investment in the travel agency focusing on teenager market's is determined by the investment in this travel agency focusing on teenager market's which was close to year end.

46


CTRIP.COM INTERNATIONAL, LTD.

Notes to the unaudited interim condensed consolidated financial statements (Continued)

(Amounts expressed in RENMINBI (RMB) unless otherwise stated)

4. FAIR VALUE MEASUREMENT (Continued)

        The roll forward of Level 3 big-data service company in digital advertising's investment is as following:

 
   Amount  
 
   RMB
  

Fair value of available-for-sale (Level 3) investment as at December 31, 2013

     —  

Investment in Series B Preferred Shares of a big-data advertisement company

     61,425,000  

Transfer in and/or out of Level 3

     —  

Effect of exchange rate change

     (45,000 )

The change in fair value of the investment in a big-data advertisement company

     —  

Fair value of available-for-sale (Level 3) investment as at September 30, 2014

     61,380,000  
​ ​ ​ ​ ​
​ ​ ​ ​ ​
​ ​ ​ ​ ​

Fair value of available-for-sale (Level 3) investment as at December 31, 2014

     62,046,000  

Investment in Series B Preferred Shares of a big-data advertisement company

     —  

Transfer in and/or out of Level 3

     —  

Effect of exchange rate change

     1,510,000  

The change in fair value of the investment in a big-data advertisement company

     —  

Fair value of available-for-sale (Level 3) investment as at September 30, 2015

     63,556,000  
​ ​ ​ ​ ​
​ ​ ​ ​ ​
​ ​ ​ ​ ​

Fair value of available-for-sale investment (Level 3) as at September 30, 2015 (US$)

     10,000,000  
​ ​ ​ ​ ​
​ ​ ​ ​ ​
​ ​ ​ ​ ​

        The fair value of the investment in the big-data service company is determined by the investment in this big-data service company which was close to year end.

47


CTRIP.COM INTERNATIONAL, LTD.

Notes to the unaudited interim condensed consolidated financial statements (Continued)

(Amounts expressed in RENMINBI (RMB) unless otherwise stated)

4. FAIR VALUE MEASUREMENT (Continued)

        The roll forward of Level 3 Happy City's investment is as following:

 
   Amount  
 
   RMB
  

Fair value of available-for-sale(Level 3) investment as at December 31, 2013

     37,358,327  

Investment in Series A Preferred Shares of Happy City

     —  

Transfer in and/or out of Level 3

     —  

Effect of exchange rate change

     112,200  

The change in fair value of the investment in Happy City

     —  
​ ​ ​ ​ ​

Fair value of available-for-sale (Level 3) investment as at September 30, 2014

     37,470,527  
​ ​ ​ ​ ​
​ ​ ​ ​ ​
​ ​ ​ ​ ​

Fair value of available-for-sale (Level 3) investment as at December 31, 2014

     35,422,061  

Investment in Series A Preferred Shares of Happy City

     —  

Transfer in and/or out of Level 3

     —  

Effect of exchange rate change

     906,000  

The change in fair value of the investment in Happy City

     —  
​ ​ ​ ​ ​

Fair value of available-for-sale (Level 3) investment as at September 30, 2015

     36,328,061  
​ ​ ​ ​ ​
​ ​ ​ ​ ​
​ ​ ​ ​ ​

Fair value of available-for-sale investment (Level 3) as at September 30, 2015 (US$)

     5,715,914  
​ ​ ​ ​ ​
​ ​ ​ ​ ​
​ ​ ​ ​ ​

        The significant unobservable inputs used in the valuation are as following:

Valuation Technique
  Unobservable Input   Parameter value

Discounted cash flow

   Weighted average cost of capital ("WACC")   27.67%

  Terminal growth rate   3%

  Lack of marketability discount ("LoMD")   25%

Option pricing model

   Time to liquidation   2.67 years

  Risk-free rate   1.567%

  Expected volatility   45.4%

  Probability   Liquidation scenario: 50%
Redemption scenario: 50%

  Dividend yield   Nil

48


CTRIP.COM INTERNATIONAL, LTD.

Notes to the unaudited interim condensed consolidated financial statements (Continued)

(Amounts expressed in RENMINBI (RMB) unless otherwise stated)

4. FAIR VALUE MEASUREMENT (Continued)

        The roll forward of Level 3 Dining Secretary's investment is as following:

 
   Amount  
 
   RMB
  

Fair value of available-for-sale (Level 3) investment as at December 31, 2013

     56,242,365  

Investment in Series B Preferred Shares of Dining Secretary

     —  

Transfer in and/or out of Level 3

     —  

Effect of exchange rate change

     843,000  

The change in fair value of the investment in Dining Secretary

     —  
​ ​ ​ ​ ​

Fair value of available-for-sale (Level 3) investment as at September 30, 2014

     57,085,365  

Fair value of available-for-sale (Level 3) investment as at December 31, 2014

    
29,046,000		  

Investment in Series B Preferred Shares of Dining Secretary

     —  

Transfer in and/or out of Level 3

     —  

Effect of exchange rate change

     1,510,000  

The change in fair value of the investment in Dining Secretary

     —  
​ ​ ​ ​ ​

Fair value of available-for-sale (Level 3) investment as at September 30, 2015

     30,556,000  
​ ​ ​ ​ ​
​ ​ ​ ​ ​
​ ​ ​ ​ ​

Fair value of available-for-sale investment (Level 3) as at September 30, 2015(US$)

     4,807,729  
​ ​ ​ ​ ​
​ ​ ​ ​ ​
​ ​ ​ ​ ​

        The significant unobservable inputs used in the valuation are as following:

Valuation Technique
  Unobservable Input   Parameter value

Discounted cash flow

   Weighted average cost of capital ("WACC")   27.94%

  Terminal growth rate   3%

  Lack of marketability discount ("LoMD")   25%

Option pricing model

   Time to liquidation   3.01 years

  Risk-free rate   4.13%

  Expected volatility   41.4%

  Probability   Liquidation scenario: 45%
Redemption scenario: 45%
IPO scenario: 10%

  Dividend yield   Nil

        Based on the review of various factors of Dining Secretary, including, but not limited to its current market condition, operating performance and current and expected earnings trend, the Company determined the decline in fair value of Dining Secretary to below its carrying value is other than temporary. Accordingly, an impairment with amount of RMB33 million based on the difference of its fair value and cost was provided in other income with a reversal of the previously recognized unrealized loss of RMB4 million recorded in other comprehensive income in 2014.

49


CTRIP.COM INTERNATIONAL, LTD.

Notes to the unaudited interim condensed consolidated financial statements (Continued)

(Amounts expressed in RENMINBI (RMB) unless otherwise stated)

4. FAIR VALUE MEASUREMENT (Continued)

        The Company determined the fair value of their investment by using an income approach concluding on the overall investee's equity value and allocating this value to the various classes of preferred and common shares by using an option-pricing method. The determination of the fair value was assisted by an independent appraisal, based on estimates, judgments and information of other comparable public companies.

5. SHORT-TERM DEBT

 
   As of
December 31, 2014 		  As of
September 30, 2015 		 
 
   RMB
   RMB
  

Short-term borrowings

     3,132,061,011     5,407,852,928  

2017 Convertible Senior Notes(Note 8)

     428,427,630     411,525,100  
​ ​ ​ ​ ​ ​ ​ ​

Total

     3,560,488,641     5,819,378,028  
​ ​ ​ ​ ​ ​ ​ ​
​ ​ ​ ​ ​ ​ ​ ​
​ ​ ​ ​ ​ ​ ​ ​

        As of September 30, 2015, the Group obtained six borrowings of RMB1.7 billion (US$266.3 million) in aggregate collateralized by a bank deposit of RMB120 million and RMB1.2 billion classified as restricted cash and short-term investment at one of the Company's wholly-owned subsidiaries. The annual interest rate of borrowings is approximately 1.5%. The Company is in compliance with the loan covenant at September 30, 2015.

        As of September 30, 2015, the Group obtained three borrowings of RMB1.3 billion (US$197.9 million) in aggregate collateralized by bank deposits of RMB380 million and RMB2.1 billion classified as restricted cash and short-term investment provided by one of the Company's wholly-owned subsidiaries. The annual interest rate of borrowings is approximately from 1.3% to 2.3%. The Company is in compliance with the loan covenant at September 30, 2015.

        As of September 30, 2015, the Group obtained one borrowings of RMB373.7 million (US$58.8 million) in aggregate collateralized by bank deposits of RMB75 million classified as short-term investment provided by one of the Company's wholly-owned subsidiaries. The annual interest rate of borrowings is approximately from 2.0%. The Company is in compliance with the loan covenant at September 30, 2015.

        As of September 30, 2015, the Group obtained three borrowings of RMB998.5 million (US$157.1 million) in aggregate collateralized by bank deposits of RMB442 million classified as short-term investment provided by one of the Company's wholly-owned subsidiaries. The annual interest rate of borrowings is approximately 1.6%. The Company is in compliance with the loan covenant at September 30, 2015.

        As of September 30, 2015, the Group obtained three borrowings of RMB794.5 million (US$125 million) in aggregate collateralized by bank deposits of RMB57.7 million classified as restricted cash provided by one of the Company's wholly-owned subsidiaries. The annual interest rate of borrowings is approximately from 1.9% to 2.0%. The Company is in compliance with the loan covenant at September 30, 2015.

50


CTRIP.COM INTERNATIONAL, LTD.

Notes to the unaudited interim condensed consolidated financial statements (Continued)

(Amounts expressed in RENMINBI (RMB) unless otherwise stated)

5. SHORT-TERM DEBT (Continued)

        As of September 30, 2015, the Group obtained one borrowings of RMB291.1 million (US$45.8 million) in aggregate collateralized by bank deposits of RMB680 million classified as short-term investment provided by one of the Company's wholly-owned subsidiaries. The annual interest rate of borrowings is approximately 1.1%. The Company is in compliance with the loan covenant at September 30, 2015.

6. RELATED PARTY TRANSACTIONS

        During the nine-month ended September 30, 2014 and 2015, significant related party transactions were as follows:

 
   Nine-month
period end
September 30,
2014 		  Nine-month
period end
September 30,
2015 		 
 
   RMB
   RMB
  

Commissions from Homeinns(a)

     23,627,724     25,835,347  

Commissions from Hanting(a)

     14,922,688     10,156,186  

Commissions from Tujia(a)

     —     3,517,066  

Shareholders' loan and interest to Skyseas(c)

     —     11,347,199  

Entrusted loan and interest to Tujia(b)

     —     73,482,082  

Entrusted loan and interest to a technology company focusing on hotel customer reviews(b)

     694,577     —  

Commissions to Skyseas(d)

     —     151,768,047  

Commissions to LY.com(d)

     —     53,560,593  

Commissions to Tujia(d)

     —     8,447,943  

Purchase of tour package from Ananda Travel Service (Aust.) Pty Limited ("Ananda")(e)

     23,695,089     9,143,324  
(a)
The Company's hotel supplier, Homeinns has two directors in common with the Company. Homeinns closed the acquisition of Motel 168 International Holdings Limited ("Motel 168") on September 30, 2011 and consolidated its financial results thereafter. Commissions from Homeinns presented above include the commissions from Motel 168 starting from October 1, 2011 to December 31, 2014. Another hotel supplier, Hanting, has a director in common with the Company and a director who is a family member of one of our officers. In May 2012, the Company sold 51% equity interest of Starway Hong Kong to Hanting with a total consideration of RMB17.1 million and deconsolidated Starway Hong Kong upon the closing of the deal. On November 30, 2013, Hanting further acquired 49% equity interest of Starway Hong Kong from the Company with a total consideration of RMB16.5 million. The remaining purchase price of RMB12.25 million will be paid in a 3-year installment plan. From then on, the Company does not directly hold any equity interest of Starway Hong Kong. Commissions from Hanting presented above include the commissions from Starway Hong Kong starting from December 1, 2013 to December 31, 2013. Homeinns, Hanting and Tujia have entered into agreements with us, respectively, to provide hotel rooms for our customers. Commissions

51


CTRIP.COM INTERNATIONAL, LTD.

Notes to the unaudited interim condensed consolidated financial statements (Continued)

(Amounts expressed in RENMINBI (RMB) unless otherwise stated)

6. RELATED PARTY TRANSACTIONS (Continued)

    from Homeinns, Hanting and Tujia for the nine-month periods ended September 30, 2014 and 2015 are presented as above.

(b)
In September 2013, the Company entered into agreements with a technology company focusing on hotel customer reviews to provide entrusted loan of RMB13 million. The entrusted loan has a one-year maturity period. In March 2015, the Company entered into agreements with Tujia to provide entrusted loan of RMB72 million. The entrusted loan has a one-year maturity period. The balance of entrusted loan together with the interest to the technology company focusing on hotel customer reviews, eHi and Tujia for the year ended September 30, 2015 is presented as above.

(c)
As of September 30, 2015, the Company provided shareholder's loan of US$80 million to Skyseas. The interest rate is 3% per annum currently and shall be subject to annual review and adjustment with mutual consent. The loan is guaranteed by a vessel mortgage and shall be paid back by installments through 2020. The balance of the loan together with the interest for the year ended September 30, 2015 is presented as above.

(d)
In April, 2014, the Company purchased a minority stake of LY.com. The Company has entered into agreements to provide hotel rooms to LY.com and Tujia. Commissions to LY.com starting from April, 2014 to September 30, 2015, commissions to Tujia from August, 2015 to September 30, 2015 and commissions to Skyseas for the nine-month periods ended September 30, 2015 are presented as above.

(e)
The Company's tour package supplier, Ananda is an associate of Wing On Travel. Tour package purchase from Ananda for the nine-month periods ended September 30, 2014 and 2015 is presented as above.

52


CTRIP.COM INTERNATIONAL, LTD.

Notes to the unaudited interim condensed consolidated financial statements (Continued)

(Amounts expressed in RENMINBI (RMB) unless otherwise stated)

6. RELATED PARTY TRANSACTIONS (Continued)

        As of December 31, 2014 and September 30, 2015, significant balances with related parties were as follows:

 
   December 31,
2014 		  September 30,
2015 		 
 
   RMB
   RMB
  

Due from related parties, current:

              

Due from Tujia

     —     155,134,023  

Due from Skyseas

     —     78,525,741  

Due from HK Skysea Investment

     —     31,675,000  

Due from Hanting

     6,402,931     8,898,351  

Due from Homeinns

     4,166,006     6,028,483  

Due from others

     —     3,000,000  

    10,568,937     283,261,598  
​ ​ ​ ​ ​ ​ ​ ​
​ ​ ​ ​ ​ ​ ​ ​
​ ​ ​ ​ ​ ​ ​ ​

Due from related parties, non-current:

              

Due from Skyseas

     505,955,950     529,752,905  

Due from Hanting

     4,083,334     2,041,667  
​ ​ ​ ​ ​ ​ ​ ​

    510,039,284     531,794,572  
​ ​ ​ ​ ​ ​ ​ ​
​ ​ ​ ​ ​ ​ ​ ​
​ ​ ​ ​ ​ ​ ​ ​

Due to related parties, current:

              

Due to HK Skysea

     —     152,105,737  

Due to LY.com

     10,250,334     5,034,669  

Due to Ananda

     5,798,769     2,496,359  

Due to Hanting

     1,000,000     1,000,000  
​ ​ ​ ​ ​ ​ ​ ​

    17,049,103     160,636,765  
​ ​ ​ ​ ​ ​ ​ ​
​ ​ ​ ​ ​ ​ ​ ​
​ ​ ​ ​ ​ ​ ​ ​

        The amounts due from and due to related parties as of December 31, 2014 and September 30, 2015 primarily resulted from the transactions disclosed above and revenue received and expenses paid on behalf of each other. They are not collateralized and have normal business payment terms.

7. TAXATION

Cayman Islands

        Under the current laws of Cayman Islands, the Company is not subject to tax on income or capital gain. In addition, upon payments of dividends by the Company to its shareholders, no Cayman Islands withholding tax will be imposed.

Hong Kong

        The Company's subsidiaries registered in the Hong Kong are subject to Hong Kong Profits Tax ("CIT") on the taxable income as reported in their respective statutory financial statements adjusted in accordance with relevant Hong Kong tax laws. The applicable tax rate is 16.5% in Hong Kong.

53


CTRIP.COM INTERNATIONAL, LTD.

Notes to the unaudited interim condensed consolidated financial statements (Continued)

(Amounts expressed in RENMINBI (RMB) unless otherwise stated)

7. TAXATION (Continued)

Taiwan

        The Company's consolidated entities registered in the Taiwan are subject to Taiwan Enterprise Income Tax ("CIT") on the taxable income as reported in their respective statutory financial statements adjusted in accordance with relevant Taiwan income tax laws. The applicable tax rate is 17% in Taiwan.

China

        The Company's subsidiaries and VIEs registered in the PRC are subject to PRC Corporate Income Tax ("CIT") on the taxable income as reported in their respective statutory financial statements adjusted in accordance with relevant PRC income tax laws.

        In 2007, the National People's Congress passed new PRC CIT Law and Detailed Implementation Rules of China CIT Law. The CIT laws were effective on January 1, 2008. The CIT laws apply a general enterprise income tax rate of 25% to both foreign-invested enterprises and domestic enterprises. Preferential tax treatments will continue to be granted to enterprises, which conduct business in certain encouraged sectors and to enterprises otherwise classified as a high and new technology enterprise. In December 2008, the Company's subsidiaries, Ctrip Computer Technology, Ctrip Travel Information, Ctrip Travel Network and Software Hotel Information obtained approval for the High New Tech Enterprises status. The applicable tax rate for High New Tech Enterprise is 15%, which was effective retroactively as of January 1, 2008. The High New Tech Enterprises qualification has a three-year effective period which expired on December 31, 2010. These four entities reapplied for the qualification in 2011 and 2014, and obtained approval from government authority. The High New Tech Enterprises qualification will expire on December 31, 2016.

        In 2002, China's State Administration of Taxation passed an implementation for the preferential tax treatment in China's Western Region. Enterprises falling within the Catalog of Encouraged Industries in the Western Region ("Old Catalog") enjoyed a preferential income tax rate of 15% from 2001 to 2010. In 2011, Chengdu Ctrip and Chengdu Ctrip International obtained approval to use the 15% tax rate for 2010 income tax. The qualification has an effective period which expired on December 31, 2010. The Company applied 25% rate for CIT filling in 2011. In 2012, China's State Administration of Taxation extended the period to 2020. In 2012, Chengdu Ctrip and Chengdu Ctrip International obtained approval from local tax authorities to apply the 15% tax rate for 2011 tax filing with an effective period from 2012 to 2015. In 2013, Chengdu Information Technology Co., Ltd. ("Chengdu Information") obtained approval from local tax authorities to apply the 15% tax rate for 2012 tax filing with an effective period from 2013 to 2016. In 2014, a new Catalog of Encouraged Industries in the Western Region ("New Catalog") has been released. Under the "New Catalog", the Company may apply the 15% rate for CIT filing upon agreement by the in-charge tax authorities.

        In 2013, in accordance with CIT Law, the applicable CIT rates are 25%, except for aforementioned four subsidiaries qualified for High New Tech Enterprises, Chengdu Ctrip, Chengdu Ctrip International and Chengdu Information.

        Pursuant to the CIT Law and Circular Caishui [2008]No.1 issued by Ministry of Finance of China on February 22, 2008, the dividends declared out of the profits earned after January 1, 2008 by a foreign invested enterprise("FIE") to its immediate holding company outside mainland China would be subject to withholding taxes. A favorable withholding tax rate will be applied if there is a tax treaty

54


CTRIP.COM INTERNATIONAL, LTD.

Notes to the unaudited interim condensed consolidated financial statements (Continued)

(Amounts expressed in RENMINBI (RMB) unless otherwise stated)

7. TAXATION (Continued)

arrangement between Mainland China and the jurisdiction of the foreign holding company and other supplementary guidance/requirements stipulated by State Administration of Taxation ("SAT") and tax treaty are met and proper procedures have been gone through. The Company's subsidiaries, Ctrip Computer Technology, Ctrip Travel Information, Ctrip Travel Network, and Ctrip Information Technology are considered FIEs and are directly held by our subsidiaries in Hong Kong. According to double tax arrangement between Mainland and Hong Kong Special Administrative Region, dividends payable by an FIE in mainland China to the company in Hong Kong will be subject to 5% withholding tax, subject to approval of the tax authority. All of these foreign invested enterprises will be subject to the withholding tax for their earnings generated after January 1, 2008. The Company expects to indefinitely reinvest undistributed earnings generated after January 1, 2008 in the onshore PRC entities. As a result, no deferred tax liability was provided on the outside basis difference from undistributed earnings after January 1, 2008.

        On June 13, 2012, the board of the Company has approved dividend distribution of US$300 million from its PRC subsidiaries to fund a new share repurchase program whereby Ctrip may purchase its own American depositary shares ("ADSs"). The dividends paid by the Company's PRC subsidiaries to the Company through its Hong Kong subsidiary is subject to a 5% PRC withholding tax, of which RMB95 million (US$15 million) is accrued as of December 31, 2012.

        The dividend distribution on June 13, 2012 aforesaid was a one-time event out of the Company's normal business course, and withholding tax is recorded only for such transaction accordingly. The Company expects to indefinitely reinvest the remaining undistributed earnings generated after January 1, 2008 in the onshore PRC entities. As a result, no additional deferred tax liability was provided on the outside basis difference for the remaining undistributed earnings of RMB4.6 billion after January 1, 2008.

        The current and deferred portion of income tax expense included in the consolidated statements of income for the nine-month period ended September 30, 2014 and 2015 were as follows:

 
   Nine-month
period ended
September 30,
2014 		  Nine-month
period ended
September 30,
2015 		 
 
   RMB
   RMB
  

Current income tax expense

     185,363,921     284,983,115  

Deferred tax (benefit)/expense

     (41,163,681 )   113,722,624  
​ ​ ​ ​ ​ ​ ​ ​

Income tax expense

     144,200,240     398,705,739  
​ ​ ​ ​ ​ ​ ​ ​
​ ​ ​ ​ ​ ​ ​ ​
​ ​ ​ ​ ​ ​ ​ ​

        Income tax expense was RMB399 million (US$63 million) in the nine-month period ended September 30, 2015, increase from RMB144 million in the same period in 2014. The effective income tax rate in nine-month period ended September 30, 2015 was 14%, as compared to 30% in the same period in 2014, mainly due to an the company recognized a gain from the deconsolidation of Tujia.com International Co., Ltd. ("Tujia") as a result of the loss of control of Tujia after its recent financing in 2015. The gain is primarily recognized for the difference between the fair value and carrying value of

55


CTRIP.COM INTERNATIONAL, LTD.

Notes to the unaudited interim condensed consolidated financial statements (Continued)

(Amounts expressed in RENMINBI (RMB) unless otherwise stated)

7. TAXATION (Continued)

the investment in Tujia as of the deconsolidation date, and the company accrued 10% withholding deferred tax liability accordingly. The tax rate of the withholding tax is lower than common income tax rate.

        As of December 31, 2014 and September 30, 2015, valuation allowance of RMB183 million and RMB44 million was provided for operating loss carry forwards related to certain subsidiary based on then assessment where it is more likely than not that such deferred tax assets will not be realized. If events were to occur in the future that would allow us to realize more of our deferred tax assets than the presently recorded net amount, an adjustment would be made to the deferred tax assets that would increase income for the period when those events occurred.

        As of September 30, 2015, the Group had net operating tax loss carry forwards amounted to RMB337 million which will expire from 2016 to 2019 if not used.

        The provisions for income taxes for the nine-month period ended September 30, 2014 and 2015 differ from the amounts computed by applying the CIT primarily due to preferential tax rate enjoyed by certain of the Company's subsidiaries and VIEs in the PRC.

        The following table sets forth the effect of preferential tax on China operations:

 
   Nine-month
period end
September 30,
2014 		  Nine-month
period end
September 30,
2015 		 
 
   RMB
   RMB
  

Tax holiday effect

     90,423,895     108,300,800  

Basic net income per ADS effect

     0.33     0.38  

Diluted net income per ADS effect

     0.28     0.30  

8. LONG-TERM DEBT

 
   As of
December 31, 2014 		  As of
September 30, 2015 		 
 
   RMB
   RMB
  

2018 Convertible Senior Notes

     4,963,680,000     5,084,480,000  

2020 Convertible Senior Notes

     —     4,448,920,000  

Priceline Convertible Notes I

     3,102,300,000     3,177,800,000  

2025 Convertible Senior Notes

     —     2,542,240,000  

Priceline Convertible Notes II

     —     1,588,900,000  
​ ​ ​ ​ ​ ​ ​ ​

Total

     8,065,980,000     16,842,340,000  
​ ​ ​ ​ ​ ​ ​ ​
​ ​ ​ ​ ​ ​ ​ ​
​ ​ ​ ​ ​ ​ ​ ​

        On September 24, 2012, the Company issued US$180 million in aggregate principle amount of 0.5% Convertible Senior Notes due September 15, 2017 (the "Notes") at par. The Notes may be converted, under certain circumstances, based on an initial conversion rate of 51.7116 American

56


CTRIP.COM INTERNATIONAL, LTD.

Notes to the unaudited interim condensed consolidated financial statements (Continued)

(Amounts expressed in RENMINBI (RMB) unless otherwise stated)

8. LONG-TERM DEBT (Continued)

depository shares ("ADS") per US$1,000 principal amount of the Notes (which represents an initial conversion price of US$19.34 per ADS).

        The net proceeds to the Company from the issuance of the Notes were US$175 million. The Company pays cash interest at an annual rate of 0.5% on the Notes, payable semi-annually in arrears on March 15 and September 15 of each year, beginning March 15, 2013. Debt issuance costs were US$5.4 million and are being amortized to interest expense to the first put date of the Notes (September 15, 2015).

        The Notes are general senior unsecured obligations and rank (1) senior in right of payment to any of the Company's future indebtedness that is expressly subordinated in right of payment to the Notes, (2) equal in right of payment to any of the Company's future indebtedness and other liabilities of the Company that are not so subordinated, (3) junior in right of payment to any of the Company's secured indebtedness to the extent of the value of the assets securing such indebtedness and (4) structurally junior to all future indebtedness incurred by the Company's subsidiaries and their other liabilities (including trade payables).

        Concurrently with the issuance of the Notes, the Company purchased a call option ("Purchased Call Option") and sold warrants ("Sold Warrants"). The separate Purchased Call Option and Sold Warrants are structured to reduce the potential future economic dilution associated with the conversion of the Notes and to increase the initial conversion price to US$26.37 per ADS. Each of these components is discussed separately below:

        Counterparty agreed to sell to the Company up to approximately 9.3 million shares of the Company's ADS, which is the number of ADS initially issuable upon conversion of the Notes in full, at a price of US$19.34 per ADS. The Purchased Call Option will be settled by the counterparty in ADSs and will terminate upon the maturity date of the Notes. Settlement of the Purchased Call Option in ADSs, based on the number of ADSs issued upon conversion of the Notes, on the expiration date would result in the Company receiving shares equivalent to the number of shares issuable by the Company upon conversion of the Notes. Should there be an early termination of the Purchased Call Option, the number of ADSs potentially received by the Company will depend upon 1) the then existing overall market conditions, 2) the Company's stock price, 3) the volatility of the Company's stock, and 4) the amount of time remaining before expiration of the convertible note hedge.

        The Company received US$26.6 million from the same counterparty from the sale of warrants to purchase up to approximately 9.3 million shares of the Company's ADS at an exercise price of US$26.37 per ADS. The warrants had an expected life of 5 years and expire on September 15, 2017. At expiration, the Company may, at its option, elect to settle the warrants on a net share basis. As of September 30, 2015, the warrants had not been exercised and remained outstanding.

57


CTRIP.COM INTERNATIONAL, LTD.

Notes to the unaudited interim condensed consolidated financial statements (Continued)

(Amounts expressed in RENMINBI (RMB) unless otherwise stated)

8. LONG-TERM DEBT (Continued)

        In accordance with ASC 815-10-15, the Company concluded that the offering of the Notes, Purchased Call Option and the Issued Warrants (1) do not entail the same risks as the Notes involve interest, credit and equity risks, whereas the Purchased Call Option and Issued Warrants transaction was intended to reduce the equity dilution risk for the Company and (2) have a valid business purpose and economic need for structuring the transactions separately as the Company wanted to mitigate future dilution upon conversion of the Notes, as such required that the purchased call option is an American style option which is physical settled whereas the warrant is a European style instrument that allows net share settlement or cash settlement at the choice of the Company. Therefore, the offering of the Notes, Purchased Call Option and Issued Warrants transactions should be accounted for as separate transactions.

        The Company has accounted for the Notes in accordance with ASC 470, as a single instrument as a long-term debt. The value of the Notes is measured by the cash received. As of September 30, 2015, RMB412 million (US$65 million) is reclassified as short-term debt to present the Notes may be redeemed within one year (Note 5).

        The key terms of the Notes are as follows:

        Redemption

        Contingent redemption option

        The Notes are not redeemable prior to the maturity date of September 15, 2017, except as described below. The holders of the Notes (the "Holders") have a non-contingent option to require the Company to repurchase for cash all or any portion of their Notes on September 15, 2015. The repurchase price will equal 100% of the principal amount of the Notes to be repurchased plus accrued and unpaid interest, if any, to, but excluding, the repurchase date. If a fundamental change (as defined in the Indenture) occurs prior to the maturity date, the Holders may require the Company to purchase for cash all or any portion of the Notes at a purchase price equal to 100% of the principal amount of the Notes to be purchased plus accrued and unpaid interest, if any, to, but excluding, the fundamental change purchase date. The Holders have the option to require the Company to repurchase the Notes, in whole or in part, in the event of a fundamental change for an amount equal to the 100% of the principal amount and any accrued and unpaid interest in the event of fundamental changes. The Company believes that the likelihood of occurrence of events considered a fundamental change is remote.

        The contingent redemption option is assessed in accordance with ASC 815-15-25-42. The contingent redemption option is considered clearly and closely related to its debt host and does not meet the requirement for bifurcation as the Notes were issued at par and the repurchase feature requires the issuer to settle the option by delivering par plus accrued and unpaid interest, the Notes holder would recover all of their initial investment. Additionally, since the Notes holder can only recover its initial investment upon exercise of its option, there are no interest rate scenarios under which the embedded derivative would at least double the investor's initial rate of return.

58


CTRIP.COM INTERNATIONAL, LTD.

Notes to the unaudited interim condensed consolidated financial statements (Continued)

(Amounts expressed in RENMINBI (RMB) unless otherwise stated)

8. LONG-TERM DEBT (Continued)

        On or after September 15, 2015 (after year 3), the Holders have the right to require the issuer to redeem, at 100% of the loan's principal amount plus accrued and unpaid interest, in which circumstance the Holders would recover substantially all of their initial investment.

        Since the Holders can only recover its initial investment upon exercise of its option, there are no interest rate scenarios under which the embedded derivative would at least double the investor's initial rate of return. Therefore, the embedded repurchase feature (put option) is considered clearly and closely related to the debt host pursuant to ASC 815-15-25-1 and does not meet the requirements for bifurcation.

        The Holders may convert their Notes in integral multiples of US$1,000 principle amount at an initial conversion rate of US$19.34 per ADS, at any time prior to the maturity date of September 15, 2017. Upon conversion of the Notes, the Company will deliver shares of the Company's ADS. The conversion rate is subject to adjustment in certain events, such as distribution of dividends and stock splits. In addition, upon a make-whole fundamental change (as defined in the Indenture), the Company will, under certain circumstances, increase the applicable conversion rate for a holder that elects to convert its Notes in connection with such make-whole fundamental change.

        In accordance with ASC 815-10-15-83, the conversion option meets the definition of a derivative. However, bifurcation of conversion option from the Notes is not required as the scope exception prescribed in ASC 815-10-15-74 is met as the conversion option is considered indexed to the entity's own stock and classified in stockholders' equity.

        The Company offered the public tranche of the 2017 Notes holders to convert their Notes early, through an inducement. The inducement we offered included the original term's ratio for ADS conversion plus a cash incentive of 1.5%-2.0%. As a result of the inducement, for the nine-month period ended September 30, 2014 and 2015, US$18 million and US$4.3 million of the notes was tendered, respectively, or 0.9 million ADS and 0.2 million ADS at the initial conversion rate of 51.7116 ADS per note, respectively. These conversions did not materially impact the current shares outstanding.

        The above early conversion of 2017 Convertible Senior Notes also resulted in an early termination of a call option we entered into during 2012, of which the Company has received US$ 11.6 million from this early termination.

        On October 17, 2013, the Company issued US$800 million in aggregate principle amount of 1.25% Convertible Senior Notes due October 15, 2018 (the "Notes") at par. The Notes may be converted, under certain circumstances, based on an initial conversion rate of 12.7568 American depository shares

59


CTRIP.COM INTERNATIONAL, LTD.

Notes to the unaudited interim condensed consolidated financial statements (Continued)

(Amounts expressed in RENMINBI (RMB) unless otherwise stated)

8. LONG-TERM DEBT (Continued)

("ADS") per US$1,000 principal amount of the Notes (which represents an initial conversion price of US$78.39 per ADS).

        The net proceeds to the Company from the issuance of the Notes were US$780 million. The Company pays cash interest at an annual rate of 1.25% on the Notes, payable semi-annually in arrears on April 15 and October 15 of each year, beginning April 15, 2014. Debt issuance costs were US$19.6 million and are being amortized to interest expense to the maturity date of the Notes (October 15, 2018).

        The Notes are general senior unsecured obligations and rank (1) senior in right of payment to any of the Company's future indebtedness that is expressly subordinated in right of payment to the Notes, (2) equal in right of payment to any of the Company's future indebtedness and other liabilities of the Company that are not so subordinated, (3) junior in right of payment to any of the Company's secured indebtedness to the extent of the value of the assets securing such indebtedness and (4) structurally junior to all future indebtedness incurred by the Company's subsidiaries and their other liabilities (including trade payables).

        Concurrently with the issuance of the Notes, the Company purchased a call option ("Purchased Call Option") and sold warrants ("Sold Warrants"). The separate Purchased Call Option and Sold Warrants are structured to reduce the potential future economic dilution associated with the conversion of the Notes and to increase the initial conversion price to US$96.27 per ADS. Each of these components is discussed separately below:

        Counterparty agreed to sell to the Company up to approximately 10.2 million shares of the Company's ADS, which is the number of ADS initially issuable upon conversion of the Notes in full, at a price of US$78.39 per ADS. The Purchased Call Option will be settled in ADSs and will terminate upon the maturity date of the Notes. Settlement of the Purchased Call Option in ADSs, based on the number of ADSs issued upon conversion of the Notes, on the expiration date would result in the Company receiving shares equivalent to the number of shares issuable by the Company upon conversion of the Notes. Should there be an early termination of the Purchased Call Option, the number of ADSs potentially received by the Company will depend upon 1) the then existing overall market conditions, 2) the Company's stock price, 3) the volatility of the Company's stock, and 4) the amount of time remaining before expiration of the convertible note hedge.

        The Company received US$77.2 million from the same counterparty from the sale of warrants to purchase up to approximately 10.2 million shares of the Company's ADS at an exercise price of US$96.27 per ADS. The warrants had an expected life of 5 years and expire on October 15, 2018. At expiration, the Company may, at its option, elect to settle the warrants on a net share basis. As of September 30, 2015, the warrants had not been exercised and remained outstanding.

60


CTRIP.COM INTERNATIONAL, LTD.

Notes to the unaudited interim condensed consolidated financial statements (Continued)

(Amounts expressed in RENMINBI (RMB) unless otherwise stated)

8. LONG-TERM DEBT (Continued)

        The Company used a portion of the net proceeds of the offering to pay the associated cost of the convertible note hedge transaction, after such cost is partially offset by the proceeds to the Company from the sale of the warrant transaction. The remainder of the net proceeds from this offering is planned to be used for other general corporate purposes, including working capital needs and potential acquisitions of complementary businesses, as well as potential ADS repurchases and note retirement from time to time.

        In accordance with ASC 815-10-15, the Company concluded that the offering of the Notes, Purchased Call Option and the Issued Warrants (1) do not entail the same risks as the Notes involve interest, credit and equity risks, whereas the Purchased Call Option and Issued Warrants transaction was intended to reduce the equity dilution risk for the Company and (2) have a valid business purpose and economic need for structuring the transactions separately as the Company wanted to mitigate future dilution upon conversion of the Notes, as such required that the purchased call option is an American style option which is physical settled whereas the warrant is a European style instrument that allows net share settlement or cash settlement at the choice of the Company. Therefore, the offering of the Notes, Purchased Call Option and Issued Warrants transactions should be accounted for as separate transactions.

        The Company has accounted for the Notes in accordance with ASC 470, as a single instrument as a long-term debt. The value of the Notes is measured by the cash received. As of September 30, 2015, RMB5.1 billion (US$800 million) is accounted as the value of the Notes in long-term debt.

        The key terms of the Notes are as follows:

        Redemption

        Contingent redemption option

        The Notes are not redeemable prior to the maturity date of October 15, 2018, except as described below. The holders of the Notes (the "Holders") have a non-contingent option to require the Company to repurchase for cash all or any portion of their Notes on October 15, 2016. The repurchase price will equal 100% of the principal amount of the Notes to be repurchased plus accrued and unpaid interest, if any, to, but excluding, the repurchase date. If a fundamental change (as defined in the Indenture) occurs prior to the maturity date, the Holders may require the Company to purchase for cash all or any portion of the Notes at a purchase price equal to 100% of the principal amount of the Notes to be purchased plus accrued and unpaid interest, if any, to, but excluding, the fundamental change purchase date. The Holders have the option to require the Company to repurchase the Notes, in whole or in part, in the event of a fundamental change for an amount equal to the 100% of the principal amount and any accrued and unpaid interest in the event of fundamental changes. The Company believes that the likelihood of occurrence of events considered a fundamental change is remote.

        The contingent redemption option is assessed in accordance with ASC 815-15-25-42. The contingent redemption option is considered clearly and closely related to its debt host and does not meet the requirement for bifurcation as the Notes were issued at par and the repurchase feature

61


CTRIP.COM INTERNATIONAL, LTD.

Notes to the unaudited interim condensed consolidated financial statements (Continued)

(Amounts expressed in RENMINBI (RMB) unless otherwise stated)

8. LONG-TERM DEBT (Continued)

requires the issuer to settle the option by delivering par plus accrued and unpaid interest, the Notes holder would recover all of their initial investment. Additionally, since the Notes holder can only recover its initial investment upon exercise of its option, there are no interest rate scenarios under which the embedded derivative would at least double the investor's initial rate of return.

        On or after October 15, 2016 (after year 3), the Holders have the right to require the issuer to redeem, at 100% of the loan's principal amount plus accrued and unpaid interest, in which circumstance the Holders would recover substantially all of their initial investment.

        Since the Holders can only recover its initial investment upon exercise of its option, there are no interest rate scenarios under which the embedded derivative would at least double the investor's initial rate of return. Therefore, the embedded repurchase feature (put option) is considered clearly and closely related to the debt host pursuant to ASC 815-15-25-1 and does not meet the requirements for bifurcation.

        The Holders may convert their Notes in integral multiples of US$1,000 principle amount at an initial conversion rate of US$78.39 per ADS, at any time prior to the maturity date of October 15, 2018. Upon conversion of the Notes, the Company will deliver shares of the Company's ADS. The conversion rate is subject to adjustment in certain events, such as distribution of dividends and stock splits. In addition, upon a make-whole fundamental change (as defined in the Indenture), the Company will, under certain circumstances, increase the applicable conversion rate for a holder that elects to convert its Notes in connection with such make-whole fundamental change.

        In accordance with ASC 815-10-15-83, the conversion option meets the definition of a derivative. However, bifurcation of conversion option from the Notes is not required as the scope exception prescribed in ASC 815-10-15-74 is met as the conversion option is considered indexed to the entity's own stock and classified in stockholders' equity.

        As the conversion options are not bifurcated, the Company has assessed the beneficial conversion feature ("BCF"), as of commitment date as defined in ASC 470-20. There was no BCF attribute to the Notes as the set conversion price for the Notes was greater than the fair value of the ordinary share price at date of issuance.

        The Holders have the option to convert upon a fundamental change, if Holders decide to convert in connection with a fundamental change; the number of shares issuable upon conversion will be increased. The Company will have to assess for the contingent BCF using a measurement date upon issuance of the Notes, upon occurrence of such adjustment. The settlement of the conversion is based on a make-whole provision resulting from a fundamental change, this feature is consistent with ASC 815-40-55-46 (example 19), therefore the Company concludes that this feature is also considered indexed to its own stock.

62


CTRIP.COM INTERNATIONAL, LTD.

Notes to the unaudited interim condensed consolidated financial statements (Continued)

(Amounts expressed in RENMINBI (RMB) unless otherwise stated)

8. LONG-TERM DEBT (Continued)

        The debt issuance costs were recorded as deferred issuance costs and are amortized as interest expense, using the effective interest method, over the term of the Notes pursuant to ASC 835-30-35-2.

        In accordance with ASC 815-10-15-83, the Purchased Call Option meets the definition of a derivative instrument. However, the scope exception in accordance with ASC 815-10-15-74 applies to the Purchased Call Option as it is indexed to its own stock, and the Purchased Call Option meets the requirements of ASC 815 and would be classified in stockholders' equity, therefore, the cost paid for Purchased Call Option was accounted for within stockholders' equity, and subsequent changes in fair value will not be recorded.

        The Company assessed that the Issued Warrants are not liabilities within scope of ASC 480-10-25. The Issued Warrants are legally detachable from the Notes and Purchased Call Option and separately exercisable as such meets the definition of a freestanding derivative instrument pursuant to ASC 815. However, the scope exception in accordance with ASC 815-10-15-74 applies to Warrants and it meets the requirements of ASC 815 that would be classified in stockholders' equity. Therefore, the Warrants were initially accounted for within stockholders' equity, and subsequent changes in fair value will not be recorded.

        On June 24, 2015, the Company issued US$700 million in aggregate principle amount of 1.00% Convertible Senior Notes due June 24, 2020 (the "Notes") at par. The Notes may be converted, under certain circumstances, based on an initial conversion rate of 9.1942 American depository shares ("ADS") per US$1,000 principal amount of the Notes (which represents an initial conversion price of US$108.76 per ADS).

        The net proceeds to the Company from the issuance of the Notes were US$689 million. The Company pays cash interest at an annual rate of 1.00% on the Notes, payable semi-annually in arrears on January 1 and July 1 of each year, beginning January 1, 2016. Debt issuance costs were US$11.3 million and are being amortized to interest expense to the maturity date of the Notes (June 24, 2020).

        The Notes are general senior unsecured obligations and rank (1) senior in right of payment to any of the Company's future indebtedness that is expressly subordinated in right of payment to the Notes, (2) equal in right of payment to any of the Company's future indebtedness and other liabilities of the Company that are not so subordinated, (3) junior in right of payment to any of the Company's secured indebtedness to the extent of the value of the assets securing such indebtedness and (4) structurally junior to all future indebtedness incurred by the Company's subsidiaries and their other liabilities (including trade payables).

63


CTRIP.COM INTERNATIONAL, LTD.

Notes to the unaudited interim condensed consolidated financial statements (Continued)

(Amounts expressed in RENMINBI (RMB) unless otherwise stated)

8. LONG-TERM DEBT (Continued)

        Concurrently with the issuance of the Notes, the Company purchased a call option ("Purchased Call Option") and sold warrants ("Sold Warrants"). The separate Purchased Call Option and Sold Warrants are structured to reduce the potential future economic dilution associated with the conversion of the Notes and to increase the initial conversion price to US$135.02 per ADS. Each of these components is discussed separately below:

        Counterparty agreed to sell to the Company up to approximately 6.4 million shares of the Company's ADS, which is the number of ADS initially issuable upon conversion of the Notes in full, at a price of US$108.76 per ADS. The Purchased Call Option will be settled in ADSs and will terminate upon the maturity date of the Notes. Settlement of the Purchased Call Option in ADSs, based on the number of ADSs issued upon conversion of the Notes, on the expiration date would result in the Company receiving shares equivalent to the number of shares issuable by the Company upon conversion of the Notes. Should there be an early termination of the Purchased Call Option, the number of ADSs potentially received by the Company will depend upon 1) the then existing overall market conditions, 2) the Company's stock price, 3) the volatility of the Company's stock, and 4) the amount of time remaining before expiration of the convertible note hedge.

        The Company received US$84.4 million from the same counterparty from the sale of warrants to purchase up to approximately 6.4 million shares of the Company's ADS at an exercise price of US$135.02 per ADS. The warrants had an expected life of 5 years and expire on June 24, 2020. At expiration, the Company may, at its option, elect to settle the warrants on a net share basis. As of September 30, 2015, the warrants had not been exercised and remained outstanding.

        The Company used a portion of the net proceeds of the offering to pay the associated cost of the convertible note hedge transaction, after such cost is partially offset by the proceeds to the Company from the sale of the warrant transaction. The remainder of the net proceeds from this offering is planned to be used for other general corporate purposes, including working capital needs and potential acquisitions of complementary businesses, as well as potential ADS repurchases and note retirement from time to time.

        In accordance with ASC 815-10-15, the Company concluded that the offering of the Notes, Purchased Call Option and the Issued Warrants (1) do not entail the same risks as the Notes involve interest, credit and equity risks, whereas the Purchased Call Option and Issued Warrants transaction was intended to reduce the equity dilution risk for the Company and (2) have a valid business purpose and economic need for structuring the transactions separately as the Company wanted to mitigate future dilution upon conversion of the Notes, as such required that the purchased call option is an American style option which is physical settled whereas the warrant is a European style instrument that allows net share settlement or cash settlement at the choice of the Company. Therefore, the offering of

64


CTRIP.COM INTERNATIONAL, LTD.

Notes to the unaudited interim condensed consolidated financial statements (Continued)

(Amounts expressed in RENMINBI (RMB) unless otherwise stated)

8. LONG-TERM DEBT (Continued)

the Notes, Purchased Call Option and Issued Warrants transactions should be accounted for as separate transactions.

        The Company has accounted for the Notes in accordance with ASC 470, as a single instrument as a long-term debt. The value of the Notes is measured by the cash received. As of September 30, 2015, RMB4.4 billion (US$700 million) is accounted as the value of the Notes in long-term debt.

        The key terms of the Notes are as follows:

        Redemption

        Contingent redemption option

        The Notes are not redeemable prior to the maturity date of June 24, 2020, except as described below. The holders of the Notes (the "Holders") have a non-contingent option to require the Company to repurchase for cash all or any portion of their Notes on June 24, 2018. The repurchase price will equal 100% of the principal amount of the Notes to be repurchased plus accrued and unpaid interest, if any, to, but excluding, the repurchase date. If a fundamental change (as defined in the Indenture) occurs prior to the maturity date, the Holders may require the Company to purchase for cash all or any portion of the Notes at a purchase price equal to 100% of the principal amount of the Notes to be purchased plus accrued and unpaid interest, if any, to, but excluding, the fundamental change purchase date. The Holders have the option to require the Company to repurchase the Notes, in whole or in part, in the event of a fundamental change for an amount equal to the 100% of the principal amount and any accrued and unpaid interest in the event of fundamental changes. The Company believes that the likelihood of occurrence of events considered a fundamental change is remote.

        The contingent redemption option is assessed in accordance with ASC 815-15-25-42. The contingent redemption option is considered clearly and closely related to its debt host and does not meet the requirement for bifurcation as the Notes were issued at par and the repurchase feature requires the issuer to settle the option by delivering par plus accrued and unpaid interest, the Notes holder would recover all of their initial investment. Additionally, since the Notes holder can only recover its initial investment upon exercise of its option, there are no interest rate scenarios under which the embedded derivative would at least double the investor's initial rate of return.

        On or after June 24, 2018 (after year 3), the Holders have the right to require the issuer to redeem, at 100% of the loan's principal amount plus accrued and unpaid interest, in which circumstance the Holders would recover substantially all of their initial investment.

        Since the Holders can only recover its initial investment upon exercise of its option, there are no interest rate scenarios under which the embedded derivative would at least double the investor's initial rate of return. Therefore, the embedded repurchase feature (put option) is considered clearly and closely related to the debt host pursuant to ASC 815-15-25-1 and does not meet the requirements for bifurcation.

65


CTRIP.COM INTERNATIONAL, LTD.

Notes to the unaudited interim condensed consolidated financial statements (Continued)

(Amounts expressed in RENMINBI (RMB) unless otherwise stated)

8. LONG-TERM DEBT (Continued)

        The Holders may convert their Notes in integral multiples of US$1,000 principle amount at an initial conversion rate of US$108.76 per ADS, at any time prior to the maturity date of June 24, 2020. Upon conversion of the Notes, the Company will deliver shares of the Company's ADS. The conversion rate is subject to adjustment in certain events, such as distribution of dividends and stock splits. In addition, upon a make-whole fundamental change (as defined in the Indenture), the Company will, under certain circumstances, increase the applicable conversion rate for a holder that elects to convert its Notes in connection with such make-whole fundamental change.

        In accordance with ASC 815-10-15-83, the conversion option meets the definition of a derivative. However, bifurcation of conversion option from the Notes is not required as the scope exception prescribed in ASC 815-10-15-74 is met as the conversion option is considered indexed to the entity's own stock and classified in stockholders' equity.

        As the conversion options are not bifurcated, the Company has assessed the beneficial conversion feature ("BCF"), as of commitment date as defined in ASC 470-20. There was no BCF attribute to the Notes as the set conversion price for the Notes was greater than the fair value of the ordinary share price at date of issuance.

        The Holders have the option to convert upon a fundamental change, if Holders decide to convert in connection with a fundamental change; the number of shares issuable upon conversion will be increased. The Company will have to assess for the contingent BCF using a measurement date upon issuance of the Notes, upon occurrence of such adjustment. The settlement of the conversion is based on a make-whole provision resulting from a fundamental change, this feature is consistent with ASC 815-40-55-46 (example 19), therefore the Company concludes that this feature is also considered indexed to its own stock.

        The debt issuance costs were recorded as deferred issuance costs and are amortized as interest expense, using the effective interest method, over the term of the Notes pursuant to ASC 835-30-35-2.

        In accordance with ASC 815-10-15-83, the Purchased Call Option meets the definition of a derivative instrument. However, the scope exception in accordance with ASC 815-10-15-74 applies to the Purchased Call Option as it is indexed to its own stock, and the Purchased Call Option meets the requirements of ASC 815 and would be classified in stockholders' equity, therefore, the cost paid for Purchased Call Option was accounted for within stockholders' equity, and subsequent changes in fair value will not be recorded.

66


CTRIP.COM INTERNATIONAL, LTD.

Notes to the unaudited interim condensed consolidated financial statements (Continued)

(Amounts expressed in RENMINBI (RMB) unless otherwise stated)

8. LONG-TERM DEBT (Continued)

        The Company assessed that the Issued Warrants are not liabilities within scope of ASC 480-10-25. The Issued Warrants are legally detachable from the Notes and Purchased Call Option and separately exercisable as such meets the definition of a freestanding derivative instrument pursuant to ASC 815. However, the scope exception in accordance with ASC 815-10-15-74 applies to Warrants and it meets the requirements of ASC 815 that would be classified in stockholders' equity. Therefore, the Warrants were initially accounted for within stockholders' equity, and subsequent changes in fair value will not be recorded.

        On June 24, 2015, the Company issued US$400 million in aggregate principle amount of 1.99% Convertible Senior Notes due June 24, 2025 (the "Notes") at par. The Notes may be converted, under certain circumstances, based on an initial conversion rate of 9.3555 American depository shares ("ADS") per US$1,000 principal amount of the Notes (which represents an initial conversion price of US$106.89 per ADS).

        The net proceeds to the Company from the issuance of the Notes were US$393 million. The Company pays cash interest at an annual rate of 1.99% on the Notes, payable semi-annually in arrears on January 1 and July 1 of each year, beginning January 1, 2016. Debt issuance costs were US$6.8 million and are being amortized to interest expense to the maturity date of the Notes (June 24, 2025).

        The Notes are general senior unsecured obligations and rank (1) senior in right of payment to any of the Company's future indebtedness that is expressly subordinated in right of payment to the Notes, (2) equal in right of payment to any of the Company's future indebtedness and other liabilities of the Company that are not so subordinated, (3) junior in right of payment to any of the Company's secured indebtedness to the extent of the value of the assets securing such indebtedness and (4) structurally junior to all future indebtedness incurred by the Company's subsidiaries and their other liabilities (including trade payables).

        The Company used a portion of the net proceeds of the offering to pay the associated cost of the convertible note hedge transaction, after such cost is partially offset by the proceeds to the Company from the sale of the warrant transaction. The remainder of the net proceeds from this offering is planned to be used for other general corporate purposes, including working capital needs and potential acquisitions of complementary businesses, as well as potential ADS repurchases and note retirement from time to time.

        In accordance with ASC 815-10-15, the Company concluded that the offering of the Notes, Purchased Call Option and the Issued Warrants (1) do not entail the same risks as the Notes involve interest, credit and equity risks, whereas the Purchased Call Option and Issued Warrants transaction was intended to reduce the equity dilution risk for the Company and (2) have a valid business purpose

67


CTRIP.COM INTERNATIONAL, LTD.

Notes to the unaudited interim condensed consolidated financial statements (Continued)

(Amounts expressed in RENMINBI (RMB) unless otherwise stated)

8. LONG-TERM DEBT (Continued)

and economic need for structuring the transactions separately as the Company wanted to mitigate future dilution upon conversion of the Notes, as such required that the purchased call option is an American style option which is physical settled whereas the warrant is a European style instrument that allows net share settlement or cash settlement at the choice of the Company. Therefore, the offering of the Notes, Purchased Call Option and Issued Warrants transactions should be accounted for as separate transactions.

        The Company has accounted for the Notes in accordance with ASC 470, as a single instrument as a long-term debt. The value of the Notes is measured by the cash received. As of September 30, 2015, RMB2.5 billion (US$400 million) is accounted as the value of the Notes in long-term debt.

        The key terms of the Notes are as follows:

        Redemption

        Contingent redemption option

        The Notes are not redeemable prior to the maturity date of June 24, 2025, except as described below. The holders of the Notes (the "Holders") have a non-contingent option to require the Company to repurchase for cash all or any portion of their Notes on June 24, 2020. The repurchase price will equal 100% of the principal amount of the Notes to be repurchased plus accrued and unpaid interest, if any, to, but excluding, the repurchase date. If a fundamental change (as defined in the Indenture) occurs prior to the maturity date, the Holders may require the Company to purchase for cash all or any portion of the Notes at a purchase price equal to 100% of the principal amount of the Notes to be purchased plus accrued and unpaid interest, if any, to, but excluding, the fundamental change purchase date. The Holders have the option to require the Company to repurchase the Notes, in whole or in part, in the event of a fundamental change for an amount equal to the 100% of the principal amount and any accrued and unpaid interest in the event of fundamental changes. The Company believes that the likelihood of occurrence of events considered a fundamental change is remote.

        The contingent redemption option is assessed in accordance with ASC 815-15-25-42. The contingent redemption option is considered clearly and closely related to its debt host and does not meet the requirement for bifurcation as the Notes were issued at par and the repurchase feature requires the issuer to settle the option by delivering par plus accrued and unpaid interest, the Notes holder would recover all of their initial investment. Additionally, since the Notes holder can only recover its initial investment upon exercise of its option, there are no interest rate scenarios under which the embedded derivative would at least double the investor's initial rate of return.

        On or after June 24, 2020 (after year 5), the Holders have the right to require the issuer to redeem, at 100% of the loan's principal amount plus accrued and unpaid interest, in which circumstance the Holders would recover substantially all of their initial investment.

        Since the Holders can only recover its initial investment upon exercise of its option, there are no interest rate scenarios under which the embedded derivative would at least double the investor's initial rate of return. Therefore, the embedded repurchase feature (put option) is considered clearly and

68


CTRIP.COM INTERNATIONAL, LTD.

Notes to the unaudited interim condensed consolidated financial statements (Continued)

(Amounts expressed in RENMINBI (RMB) unless otherwise stated)

8. LONG-TERM DEBT (Continued)

closely related to the debt host pursuant to ASC 815-15-25-1 and does not meet the requirements for bifurcation.

        The Holders may convert their Notes in integral multiples of US$1,000 principle amount at an initial conversion rate of US$108.76 per ADS, at any time prior to the maturity date of June 24, 2025. Upon conversion of the Notes, the Company will deliver shares of the Company's ADS. The conversion rate is subject to adjustment in certain events, such as distribution of dividends and stock splits. In addition, upon a make-whole fundamental change (as defined in the Indenture), the Company will, under certain circumstances, increase the applicable conversion rate for a holder that elects to convert its Notes in connection with such make-whole fundamental change.

        In accordance with ASC 815-10-15-83, the conversion option meets the definition of a derivative. However, bifurcation of conversion option from the Notes is not required as the scope exception prescribed in ASC 815-10-15-74 is met as the conversion option is considered indexed to the entity's own stock and classified in stockholders' equity.

        As the conversion options are not bifurcated, the Company has assessed the beneficial conversion feature ("BCF"), as of commitment date as defined in ASC 470-20. There was no BCF attribute to the Notes as the set conversion price for the Notes was greater than the fair value of the ordinary share price at date of issuance.

        The Holders have the option to convert upon a fundamental change, if Holders decide to convert in connection with a fundamental change; the number of shares issuable upon conversion will be increased. The Company will have to assess for the contingent BCF using a measurement date upon issuance of the Notes, upon occurrence of such adjustment. The settlement of the conversion is based on a make-whole provision resulting from a fundamental change, this feature is consistent with ASC 815-40-55-46 (example 19), therefore the Company concludes that this feature is also considered indexed to its own stock.

        The debt issuance costs were recorded as deferred issuance costs and are amortized as interest expense, using the effective interest method, over the term of the Notes pursuant to ASC 835-30-35-2.

        In accordance with ASC 815-10-15-83, the Purchased Call Option meets the definition of a derivative instrument. However, the scope exception in accordance with ASC 815-10-15-74 applies to the Purchased Call Option as it is indexed to its own stock, and the Purchased Call Option meets the requirements of ASC 815 and would be classified in stockholders' equity, therefore, the cost paid for Purchased Call Option was accounted for within stockholders' equity, and subsequent changes in fair value will not be recorded.

69


CTRIP.COM INTERNATIONAL, LTD.

Notes to the unaudited interim condensed consolidated financial statements (Continued)

(Amounts expressed in RENMINBI (RMB) unless otherwise stated)

8. LONG-TERM DEBT (Continued)

        The Company assessed that the Issued Warrants are not liabilities within scope of ASC 480-10-25. The Issued Warrants are legally detachable from the Notes and Purchased Call Option and separately exercisable as such meets the definition of a freestanding derivative instrument pursuant to ASC 815. However, the scope exception in accordance with ASC 815-10-15-74 applies to Warrants and it meets the requirements of ASC 815 that would be classified in stockholders' equity. Therefore, the Warrants were initially accounted for within stockholders' equity, and subsequent changes in fair value will not be recorded.

        On August 7, 2014, the Company issued Convertible Senior Notes (the "Notes") at an aggregate principal amount of US$500 million to the Priceline Group. The Notes are due on August 7, 2019 and bear interest of 1% annually which will be paid semi-annually beginning on August 7, 2014. The Notes will be convertible into the Company's American Depositary Shares ("ADSs") with an initial conversion price of approximately US$81.36 per ADS.

        On May 26, 2015, the Company issued Convertible Senior Notes (the "Notes") at an aggregate principal amount of US$250 million to the Priceline Group. The Notes are due on May 26, 2020 and bear interest of 1% annually which will be paid semi-annually beginning on May 26, 2015. The Notes will be convertible into the Company's American Depositary Shares ("ADSs") with an initial conversion price of approximately US$104.27 per ADS.

        The Company has accounted for the Notes in accordance with ASC 470, as a single instrument within the consolidated financial statements. The value of the Notes is measured by the cash received. The Company recorded the interest expenses according to its annual interest rate.

        In addition, the Company has granted the Priceline Group permission to acquire the Company's shares in the open market over the next twelve months, so that combined with the shares convertible under the bond, the Priceline Group may hold up to 15% of the Company's outstanding shares. As the potential purchase will be conducted by the market price, there is no accounting implication.

9. NON-CONTROLLING INTERESTS

        As of September 30, 2015, the Company's majority-owned subsidiaries and VIEs which are consolidated in the consolidated financial statements but with non-controlling interests recognized mainly include an offline travel agency, a technology company focusing on hotel customer reviews, an online trip package service provider and ezTravel.

70


CTRIP.COM INTERNATIONAL, LTD.

Notes to the unaudited interim condensed consolidated financial statements (Continued)

(Amounts expressed in RENMINBI (RMB) unless otherwise stated)

9. NON-CONTROLLING INTERESTS (Continued)

        Non-controlling interests include the common shares in the consolidated subsidiaries or VIE subsidiaries and preferred shares issued by the Company's subsidiaries. The balance is summarized as follows:

 
   As of
December 31,
2014 		  As of
September 30,
2015 		 
 
   RMB
   RMB
  

An offline travel agency (Note 2)

     367,705,496     399,070,509  

Travelfusion (Note 2)

     —     284,770,666  

An online trip package service provider (Note 2)

     136,890,011     136,457,183  

A technology company focusing on hotel customer reviews (Note 2)

     125,442,240     122,904,216  

ezTravel

     22,769,589     23,603,314  

Tujia

     130,343,575     —  

Others

     65,397,382     96,500,423  
​ ​ ​ ​ ​ ​ ​ ​

    848,548,293     1,063,306,311  
​ ​ ​ ​ ​ ​ ​ ​
​ ​ ​ ​ ​ ​ ​ ​
​ ​ ​ ​ ​ ​ ​ ​

        In October 2012, February 2013 and June 2014, the Company and other institutional investors entered into a series of agreements with Tujia.com International Co., Ltd ("Tujia") to issue 70,380,000 shares of Series A redeemable convertible preferred stocks ("Series A preferred shares") with total consideration of US$14.6 million, 33,333,333 shares of Series B redeemable convertible preferred stocks ("Series B preferred shares") with total consideration of US$36.7 million and 30,465,080 shares of Series C redeemable convertible preferred stocks ("Series C preferred shares") with total consideration of US$75 million, respectively.

        The Company held majority voting power of Tujia and has consolidated Tujia since it was incorporated.

        In July, 2015, Tujia issued Series D+ redeemable convertible preferred shares to a number of new investors. The Company did not participate the Series D+ financing and as a result, its equity interest, and fully converted voting rights was diluted from approximately 50% to 45%. After the Series D+ financing, the Company was entitled to appoint 6 out of 12 board of directors. According to the Article of Associates of Tujia, the resolution of the board of directors shall be made by a simple majority of the directors and in the case of an equality of votes, the Chairman shall have a second vote. The Chairman of Tujia is Mr. Luo Jun, its founder and CEO, who is not a director appointed by Ctrip. Therefore, the Company concluded its loss of control in Tujia under ASC 810 and the financial statement of Tujia was deconsolidated from August 2015. The investment in Tujia was re-measured at its fair value at the date of the deconsolidation.

        In December, 2014, the Company completed the transaction to acquire the equity stake and held majority voting power of an offline travel agency (Note 2).

        In January, 2015, the Company completed an investment transaction in Travelfusion by purchasing a majority stake in the company (Note 2).

71


CTRIP.COM INTERNATIONAL, LTD.

Notes to the unaudited interim condensed consolidated financial statements (Continued)

(Amounts expressed in RENMINBI (RMB) unless otherwise stated)

9. NON-CONTROLLING INTERESTS (Continued)

        In January, 2014, the Company completed the transaction to acquire controlling shares of an online trip package service provider (Note 2).

        In November, 2014, the Company completed the transaction to acquire controlling shares of a technology company focusing on hotel customer reviews (Note 2).

        The shares of the above mentioned companies held by investors other than Ctrip are recorded as non-controlling interests.

10. EARNINGS PER SHARE

        Basic earnings per share and diluted earnings per share were calculated as follows:

 
   Nine-month
period ended
September 30,
2014 		  Nine-month
period ended
September 30,
2015 		 
 
   RMB
   RMB
  

Numerator:

              

Net income attributable to Ctrip's shareholders

     467,164,487     2,431,928,022  

Eliminate the dilutive effect of interest expense of convertible bond

     9,190,333     145,195,565  
​ ​ ​ ​ ​ ​ ​ ​

Numerator for diluted earnings per share

     476,354,820     2,577,123,587  
​ ​ ​ ​ ​ ​ ​ ​

Denominator:

              

Denominator for basic earnings per ordinary share—weighted average ordinary shares outstanding

     34,038,621     35,460,682  

Dilutive effect of share options

     3,059,411     3,033,214  

Dilutive effect of convertible bond

     1,727,690     6,134,484  

Dilutive effect of convertible bond sold warrants

     892,676     497,812  
​ ​ ​ ​ ​ ​ ​ ​

Denominator for diluted earnings per ordinary share

     39,718,398     45,126,192  
​ ​ ​ ​ ​ ​ ​ ​

Basic earnings per ordinary share

     13.72     68.58  
​ ​ ​ ​ ​ ​ ​ ​
​ ​ ​ ​ ​ ​ ​ ​
​ ​ ​ ​ ​ ​ ​ ​

Diluted earnings per ordinary share

     11.99     57.11  
​ ​ ​ ​ ​ ​ ​ ​
​ ​ ​ ​ ​ ​ ​ ​
​ ​ ​ ​ ​ ​ ​ ​

Basic earnings per ADS

     1.72     8.58  
​ ​ ​ ​ ​ ​ ​ ​
​ ​ ​ ​ ​ ​ ​ ​
​ ​ ​ ​ ​ ​ ​ ​

Diluted earnings per ADS

     1.50     7.14  
​ ​ ​ ​ ​ ​ ​ ​
​ ​ ​ ​ ​ ​ ​ ​
​ ​ ​ ​ ​ ​ ​ ​

        Note *—On November 18, the Company also announced that it will change the ratio of its American depositary shares ("ADSs") to ordinary shares from four (4) ADSs representing one (1) ordinary share to eight (8) ADSs representing one (1) ordinary share, effective December 1, 2015. The earning per share of the Company for the periods presented in this financial statement has been retrospectively adjusted to reflect such effect.

        The 2018 convertible senior notes and the Priceline convertible notes were not included in the computation of diluted EPS in the nine-month period ended September, 30, 2014 because the inclusion of such instrument would be anti-dilutive.

72


CTRIP.COM INTERNATIONAL, LTD.

Notes to the unaudited interim condensed consolidated financial statements (Continued)

(Amounts expressed in RENMINBI (RMB) unless otherwise stated)

10. EARNINGS PER SHARE (Continued)

        For the nine-month period ended September 30, 2014 and 2015, the Company had securities which could potentially dilute basic earnings per share in the future, which were excluded from the computation of diluted earnings per share as their effects would have been anti-dilutive. Such weighted average numbers of ordinary shares outstanding are as following:

 
   Nine-month
period ended
September 30,
2014 		  Nine-month
period ended
September 30,
2015 		 
 
   RMB
   RMB
  

2018 convertible senior notes

     2,551,346     —  

Priceline convertible notes

     303,891     —  

Outstanding weighted average stock options

     72,302     430,029  

Sold Warrants

     1,950,251     2,048,305  
​ ​ ​ ​ ​ ​ ​ ​

    4,877,790     2,478,334  
​ ​ ​ ​ ​ ​ ​ ​
​ ​ ​ ​ ​ ​ ​ ​
​ ​ ​ ​ ​ ​ ​ ​

11. COMMITMENTS AND CONTINGENCIES

Operating lease commitments

        The Company has entered into leasing arrangements relating to office premises that are classified as operating leases as of September 30, 2015. Future minimum lease payments for non-cancelable operating leases are as follows:

 
   Office Premises  
 
   RMB
  

Less than 1 year

     131,410,180  

1 - 2 years

     87,341,490  

2 - 3 years

     34,467,768  

3 - 4 years

     9,942,854  

4 - 5 years

     4,496,042  

Thereafter

     2,621,203  
​ ​ ​ ​ ​

    270,279,537  
​ ​ ​ ​ ​
​ ​ ​ ​ ​
​ ​ ​ ​ ​

        Rental expense amounted to RMB99 million and RMB147 million for the nine-month period ended September 30, 2014 and 2015, respectively. Rental expense is charged to the statements of income and comprehensive income when incurred.

Capital commitments

        As of September 30, 2015, the Company had outstanding capital commitments totaling RMB15 million, which consisted of capital expenditures of property, equipment and software.

73


CTRIP.COM INTERNATIONAL, LTD.

Notes to the unaudited interim condensed consolidated financial statements (Continued)

(Amounts expressed in RENMINBI (RMB) unless otherwise stated)

11. COMMITMENTS AND CONTINGENCIES (Continued)

Guarantee

        In connection with our air ticketing business, the Group is required by the Civil Aviation Administration of China, International Air Transport Association, and local airline companies to pay deposits in order to or to provide other guarantees obtain blank air tickets. As of September 30, 2015, the amount under these guarantee arrangements was approximately RMB885 million.

        Based on historical experience and information currently available, we do not believe that it is probable that we will be required to pay any amount under these guarantee arrangements. Therefore, we have not recorded any liability beyond what is required in connection with these guarantee arrangements.

Contingencies

        The Company is not currently a party to any pending material litigation or other legal proceeding or claims.

        The Company is incorporated in Cayman Islands and is considered as a foreign entity under PRC laws. Due to the restrictions on foreign ownership of the air-ticketing, travel agency, advertising and internet content provision businesses, the Company conducts these businesses partly through various VIEs. These VIEs hold the licenses and approvals that are essential for the Company's business operations. In the opinion of the Company's PRC legal counsel, the current ownership structures and the contractual arrangements with these VIEs and their shareholders as well as the operations of these VIEs are in compliance with all existing PRC laws, rules and regulations. However, there may be changes and other developments in PRC laws and regulations. Accordingly, the Company cannot be assured that PRC government authorities will not take a view in the future contrary to the opinion of the Company's PRC legal counsel. If the current ownership structures of the Company and its contractual arrangements with VIEs were found to be in violation of any existing or future PRC laws or regulations, the Company may be required to restructure its ownership structure and operations in China to comply with changing and new Chinese laws and regulations.

12. SUBSEQUENT EVENTS

        In October, 2015, the Company has completed a share exchange transaction with Baidu, Inc. ("Baidu"), pursuant to which Baidu has exchanged 178,702,519 Class A ordinary shares and 11,450,000 Class B ordinary shares of Qunar Cayman Islands Limited ("Qunar") beneficially owned by Baidu prior to the consummation of the transaction in exchange for 11,488,381 newly-issued ordinary shares of the company. As a result of the transaction, Baidu will own ordinary shares of the Company representing approximately 25% of the Company's aggregate voting interest, and the Company will own ordinary shares of Qunar representing approximately 45% of Qunar's aggregate voting interest.

        In connection with the recent transaction with Baidu, the Company has agreed to issue a total of approximately 5 million ordinary shares to certain special purpose vehicles holding these shares solely for the benefit of Qunar employees. The issuance of such Ctrip shares to Qunar employees shall be conditional upon the surrender or forfeiture by such employees of any Qunar securities held by or granted to them. Such exchange includes issuing 4,205,436 ordinary shares of the Company in exchange for 69,607,223 Class B ordinary shares of Qunar beneficially owned by certain management and

74


CTRIP.COM INTERNATIONAL, LTD.

Notes to the unaudited interim condensed consolidated financial statements (Continued)

(Amounts expressed in RENMINBI (RMB) unless otherwise stated)

12. SUBSEQUENT EVENTS (Continued)

directors prior to such issuance. As a result of the aforementioned transactions, the Company shall be deemed to be a beneficial owner of ordinary shares of Qunar representing approximately 56% voting interest and will account for the transactions as business combination under U.S GAAP.

        On November 18, the Company also announced that it will change the ratio of its American depositary shares ("ADSs") to ordinary shares from four (4) ADSs representing one (1) ordinary share to eight (8) ADSs representing one (1) ordinary share, effective December 1, 2015. The earning per share of the Company for the periods presented in this financial statement has been retrospectively adjusted to reflect such effect.

75



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CTRIP.COM INTERNATIONAL, LTD. Unaudited interim condensed consolidated statements of income and comprehensive income for the nine-month periods ended September 30, 2014 and 2015
CTRIP.COM INTERNATIONAL, LTD. Unaudited interim condensed consolidated balance sheets as of December 31, 2014 and September 30, 2015
CTRIP.COM INTERNATIONAL, LTD. Unaudited interim condensed consolidated statements of cash flows for the nine-month periods ended September 30, 2014 and 2015
CTRIP.COM INTERNATIONAL, LTD. Notes to the unaudited interim condensed consolidated financial statements (Amounts expressed in RENMINBI (RMB) unless otherwise stated)

Exhibit 99.2

 

DISCUSSION OF UNAUDITED FINANCIAL RESULTS OF NINE MONTHS ENDED SEPTEMBER 30, 2015 AND 2014 — Ctrip.com International, Ltd.

 

Revenues

 

Revenue Composition and Sources of Revenue Growth. In the first nine months of 2015, we generated total revenues of RMB8.5 billion (US$1.3 billion).

 

We generate our revenues primarily from the accommodation reservation and transportation ticketing businesses. The table below sets forth the revenues from our principal lines of business for the periods indicated, both in absolute amounts and as percentages of our total revenues.

 

 

 

 

 

 

 

For the year ended December 31,

 

For the nine months ended September 30,

 

(in thousands, except

 

2012

 

2013

 

2014

 

2014

 

2015

 

percentages)

 

RMB

 

%

 

RMB

 

%

 

RMB

 

US$

 

%

 

RMB

 

%

 

RMB

 

US$

 

%

 

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accommodation reservation(1)

 

1,702,501

 

39

 

2,214,171

 

39

 

3,201,427

 

515,976

 

41

 

2,359,527

 

41

 

3,429,432

 

539,592

 

41

 

Transportation Ticketing(2)

 

1,690,286

 

38

 

2,161,784

 

38

 

2,950,072

 

475,465

 

38

 

2,176,376

 

38

 

3,209,447

 

504,979

 

38

 

Packaged-tour

 

689,661

 

16

 

935,685

 

16

 

1,055,369

 

170,095

 

14

 

822,006

 

14

 

1,318,391

 

207,438

 

15

 

Corporate travel

 

199,756

 

4

 

266,989

 

5

 

373,407

 

60,182

 

5

 

265,257

 

5

 

337,472

 

53,098

 

4

 

Others

 

126,988

 

3

 

138,389

 

2

 

192,282

 

30,991

 

2

 

128,984

 

2

 

169,818

 

26,720

 

2

 

Total revenues

 

4,409,192

 

100

 

5,717,018

 

100

 

7,772,557

 

1,252,709

 

100

 

5,752,150

 

100

 

8,464,560

 

1,331,827

 

100

 

 

(1)              Accommodation reservation revenues mainly represent revenues from reservations of hotels, hostels, vacation rentals and other accommodation-related services.

 

(2)              Transportation ticketing services revenues mainly represent revenues from reservations of air tickets, railway tickets and other transportation related services.

 

As we generally do not take ownership of the products and services being sold and act as an agent in substantially all of our transactions, our risk of loss due to obligations for cancelled hotel and airline ticket reservations is minimal. Accordingly, we recognize revenues primarily based on commissions earned rather than transaction value.

 

Since current PRC laws and regulations impose substantial restrictions on foreign ownership of air-ticketing, travel agency, advertising and value-added telecommunications businesses in China, we conduct part of our air-ticketing and packaged-tour businesses in China through our affiliated Chinese entities. Historically, we generated a portion of our revenues from fees charged to these entities.

 

Accommodation reservation. Revenues from our accommodation reservation business have been our primary source of revenues since our inception. Revenues from our accommodation reservation business have increased from RMB2.4 billion in the first nine months of 2014 to RMB3.4 billion (US$539.6 million) in the first nine months of 2015, representing 41% of our total revenues for each period.

 

We primarily generate our accommodation reservation revenues through commissions from hotels. We recognize revenues when we receive confirmation from a hotel that a customer who booked the hotel through us has completed the stay at the applicable hotel and upon confirmation of the commissions amount by the hotel. While we generally agree in advance on fixed commissions with a particular hotel, we also enter into a commission arrangement with many of our hotel suppliers that we refer to as the ‘‘ratchet system.’’ Under the ratchet system, our commission per room night for a given hotel increases for the month if we sell in excess of a pre-agreed number of room nights with such hotel within the month.

 

Transportation ticketing. Transportation ticketing revenues mainly represent revenues from reservations of air tickets, railway tickets and other related services. Revenues from our transportation ticketing business have increased from RMB2.2 billion in the first nine months of 2014 to RMB3.2 billion (US$505 million) in the first nine months of 2015, representing 38% of our total revenues for each period.

 

1


 

We conduct our transportation ticketing business through our consolidated affiliated Chinese entities, as well as a network of independent transportation ticketing service companies. Commissions from ticketing services rendered are recognized after tickets are issued.

 

Packaged-tour. Revenues from our packaged-tour business have increased from RMB822 million in the first nine months of 2014 to RMB1.3 billion (US$207.4 million) in the first nine months of 2015, representing 14% and 15% of our total revenues in the respective periods. We conduct our packaged-tour business mainly through our consolidated affiliated Chinese entities, which bundle the packaged tour products and receive referral fees from different travel suppliers for different components and services of the packaged-tours sold through our transaction and service platform. Referral fees are recognized as revenues after the packaged-tour services are rendered.

 

Corporate travel. Corporate travel revenues primarily include commissions from transportation ticket booking, accommodation reservation and packaged-tour services rendered to corporate clients. Revenues from our corporate travel services have increased from RMB265.3 million in the first nine months of 2014 to RMB337.5 million (US$53.1 million) in the first nine months of 2015, representing 5% and 4% of our total revenues for each period. Commissions from transportation ticketing services rendered are recognized after transportation tickets are issued. Commissions from accommodation reservation services rendered are recognized after hotel customers have completed their stay at the applicable hotel and upon confirmation of commissions amount by the hotel. Commissions from tour package services rendered are recognized after the packaged-tour services are rendered and collections are reasonably assured.

 

Other products and services. Other products and services comprise primarily of online advertising services, the sale of Property Management System (‘‘PMS’’) and related maintenance service. We place our customers’ advertisements on our websites and in our introductory brochures. We conduct the advertising business through Ctrip Commerce, and we recognize revenues when Ctrip Commerce renders advertising services. We conduct PMS sale and maintenance business through Beijing JointWisdom Information Technology Co., Ltd. (formerly China Software Hotel Information System Co., Ltd.). The sale of PMS is recognized upon customer’s acceptance. Maintenance service revenue is recognized ratably over the term of the maintenance contract on a straight-line basis.

 

Cost of revenues

 

Cost of revenues are costs directly attributable to rendering our revenues, which consists primarily of payroll compensation of customer service center personnel, credit card service fee, telecommunication expenses, and other direct expenses incurred in connection with our transaction and service platform.

 

Cost of revenues accounted for 28% of our net revenues for the nine-month period ended September 30, 2014 and the nine-month period ended September 30, 2015. We believe our relatively low ratio of cost of revenues to revenues is primarily due to the high efficiency of our customer service system and reasonable labor costs in China. Our cost efficiency was further enhanced by our mobile and website operations, which require fewer service staff to operate and maintain.

 

Operating expenses

 

Operating expenses consist primarily of product development expenses, sales and marketing expenses, and general and administrative expenses, all of which include share-based compensation expense. In the first nine months of 2014 and 2015, we recorded RMB370 million and RMB446 million (US$70 million) of share-based compensation expense, respectively. Share-based compensation expense is included in the same income statement category as the cash compensation paid to the recipient of the share-based award.

 

Product development expenses primarily include expenses we incur to develop our travel suppliers network and expenses we incur to develop, maintain, monitor and manage our transaction and service platform. Product development expenses accounted for 28% and 30% of our net revenues in the first nine months of 2014 and 2015, respectively. The product development expenses as a percentage of net revenues in the first nine months of 2015 increased compared to that in the same period in 2014 primarily due to an increase in product development personnel related expenses, including the increases in the number of product development personnel and the average payroll. In the first nine months of 2015, we continued to increase expenditure on product development in response

 

2


 

to more intense industry competition in order to capture more business opportunities in new products and services as well as in new markets.

 

Sales and marketing expenses primarily comprise payroll compensation and benefits for our sales and marketing personnel, advertising expenses, and other related marketing and promotion expenses. Our sales and marketing expenses accounted for 28% of our net revenues in the first nine months of both 2014 and 2015.

 

General and administrative expenses consist primarily of payroll compensation, benefits and travel expenses for our administrative staff, professional service fees, as well as administrative office expenses. Our general and administrative expenses accounted for 12% and 10% of our net revenues in the first nine months of 2014 and 2015, respectively. The decrease of general and administrative expenses as a percentage of net revenues in the first nine months of 2015 was primarily due to an increase in our revenues and operating leverage.

 

Results of operations

 

The following table sets forth a summary of our consolidated statements of operations for the periods indicated, both in absolute amounts and as percentages of our net revenues:

 

 

 

For the year ended December 31,

 

For the nine months ended September 30,

 

(in thousands, except share, per

 

2012

 

2013

 

2014

 

2014

 

2015

 

share and per ADS data)

 

RMB

 

%

 

RMB

 

%

 

RMB

 

US$(2)

 

%

 

RMB

 

%

 

RMB

 

US$(2)

 

%

 

Consolidated statement of operation data

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net revenues:

 

4,158,791

 

100

 

5,386,746

 

100

 

7,346,918

 

1,184,108

 

100

 

5,433,620

 

100

 

8,023,513

 

1,262,432

 

100

 

Cost of revenues

 

(1,037,791

)

(25

)

(1,386,767

)

(26

)

(2,100,606

)

(338,556

)

(29

)

(1,516,994

)

(28

)

(2,280,204

)

(358,771

)

(28

)

Gross profit

 

3,121,000

 

75

 

3,999,979

 

74

 

5,246,312

 

845,552

 

71

 

3,916,626

 

72

 

5,743,309

 

903,661

 

72

 

Operating expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Product development(1)

 

(911,905

)

(22

)

(1,245,719

)

(23

)

(2,321,349

)

(374,134

)

(32

)

(1,532,161

)

(28

)

(2,436,251

)

(383,324

)

(30

)

Sales and marketing(1)

 

(984,002

)

(24

)

(1,269,413

)

(24

)

(2,214,210

)

(356,866

)

(30

)

(1,507,008

)

(28

)

(2,239,316

)

(352,337

)

(28

)

General and administrative(1)

 

(570,487

)

(14

)

(646,405

)

(12

)

(861,551

)

(138,856

)

(12

)

(627,348

)

(12

)

(781,892

)

(123,024

)

(10

)

Total operating expenses:

 

(2,466,394

)

(59

)

(3,161,537

)

(59

)

(5,397,110

)

(869,856

)

(73

)

(3,666,517

)

(67

)

(5,457,459

)

(858,685

)

(68

)

Income/(loss) from operations

 

654,606

 

16

 

838,442

 

16

 

(150,798

)

(24,304

)

(2

)

250,109

 

5

 

285,850

 

44,976

 

4

 

Net interest income and other income/(loss)

 

296,088

 

7

 

306,147

 

6

 

286,235

 

46,133

 

4

 

234,063

 

4

 

2,503,714

 

393,938

 

31

 

Income before income tax expense equity in income/(loss) of affiliates and noncontrolling interest

 

950,694

 

23

 

1,144,589

 

21

 

135,437

 

21,829

 

2

 

484,172

 

9

 

2,789,564

 

438,914

 

35

 

Income tax expense

 

(294,526

)

(7

)

(293,740

)

(5

)

(130,821

)

(21,085

)

(2

)

(144,200

)

(3

)

(398,706

)

(62,733

)

(5

)

Equity in income/(loss) of affiliates

 

34,343

 

1

 

55,554

 

1

 

87,006

 

14,023

 

1

 

48,772

 

1

 

(41,211

)

(6,484

)

(1

)

Net income

 

690,511

 

17

 

906,403

 

17

 

91,622

 

14,767

 

1

 

388,744

 

7

 

2,349,647

 

369,697

 

29

 

Less: Net loss attributable to noncontrolling interests

 

23,895

 

1

 

91,917

 

2

 

151,117

 

24,356

 

2

 

78,420

 

1

 

82,281

 

12,946

 

1

 

Net income attributable to Ctrip’s shareholders

 

714,406

 

17

 

998,320

 

19

 

242,739

 

39,123

 

3

 

467,164

 

9

 

2,431,928

 

382,643

 

30

 

 

Earnings per ordinary share data:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income attributable to Ctrip’s shareholders

 

714,406

 

998,320

 

242,739

 

39,123

 

467,164

 

2,431,928

 

382,643

 

Earnings per ordinary share, basic

 

20.87

 

30.34

 

7.08

 

1.14

 

13.72

 

68.58

 

10.79

 

Earnings per ordinary share, diluted

 

19.92

 

26.63

 

6.35

 

1.02

 

11.99

 

57.11

 

8.99

 

Earnings per ADS(3), basic

 

2.61

 

3.79

 

0.89

 

0.14

 

1.71

 

8.58

 

1.35

 

Earnings per ADS(3), diluted

 

2.49

 

3.33

 

0.79

 

0.13

 

1.50

 

7.14

 

1.13

 

 

(1)              Share-based compensation expenses are included in the consolidated statement of operations data as follows:

 

 

 

For the year ended December 31,

 

For the nine months ended September 30,

 

 

 

2012

 

2013

 

2014

 

2014

 

2015

 

(in thousands)

 

RMB

 

%

 

RMB

 

%

 

RMB

 

US$(2)

 

%

 

RMB

 

%

 

RMB

 

US$(2)

 

%

 

Product development:

 

132,583

 

3

 

138,668

 

3

 

184,665

 

29,763

 

3

 

133,987

 

2

 

204,718

 

32,211

 

3

 

Sales and marketing

 

55,892

 

1

 

49,105

 

1

 

54,392

 

8,766

 

1

 

39,342

 

1

 

47,724

 

7,509

 

1

 

General and administrative

 

243,246

 

6

 

250,157

 

5

 

257,587

 

41,516

 

4

 

196,707

 

4

 

193,668

 

30,472

 

2

 

 

(2)              Translation from RMB amounts into U.S. dollars was made at a rate of RMB6.3556 to US$1.00 as of September 30, 2015, and a rate of RMB6.2046 to US$1.00 as of December 31, 2014. See ‘‘Exchange rate information.’’

 

(3)              Effective December 1, 2015, each ADS represents 0.125 of an ordinary share (changed from the previous ratio of each ADS representing 0.25 of an ordinary share), and each ADS holder of record as of the close of business on November 30, 2015 received one (1) additional ADS for every one ADS held on that date. The per ADS information herein has been retroactively adjusted to reflect such adjustment in ADS-to-ordinary share ratio.

 

Results of operations for the nine months ended September 30, 2014 and 2015

 

Revenues. Total revenues were RMB8.5 billion (US$1.3 billion) in the nine months ended September 30, 2015, representing a 47% increase from RMB5.8 billion in the same period in 2014.

 

3


 

Accommodation reservation. Revenues from our accommodation reservation business were RMB3.4 billion (US$540 million) for the nine months ended September 30, 2015, representing a 45% increase from RMB2.4 billion in the same period in 2014, primarily driven by a 54% increase in accommodation reservation volume and partially offset by the decline of effective commission rate.

 

Transportation ticking. Revenues from our transportation ticketing business were RMB3.2 billion (US$505 million) for the nine months ended September 30, 2015, representing a 47% increase over RMB2.2 billion in the same period in 2014, primarily driven by an 125% increase in ticketing volume and partially offset by the decline of effective commission rate and change in ticket mix.

 

Packaged-tour. Revenues from packaged-tours were RMB1.3 billion (US$207 million) in the nine months ended September 30, 2015, representing a 60% increase over RMB822 million in the same period in 2014, primarily driven by an increase in volume growth of organized tours and self-guided tours.

 

Corporate travel. Revenues from corporate travel were RMB337 million (US$53 million) in the nine months ended September 30, 2015, representing a 27% increase over RMB265 million in the same period in 2014. The increase was primarily driven by the increased corporate travel demand from business activities.

 

Other businesses. Revenues from other businesses were RMB170 million (US$27 million) in the nine months ended September 30, 2015, representing a 32% increase over RMB129 million in the same period in 2014. The increase was primarily due to increased revenues from advertising services.

 

Business tax and related surcharges. Our business tax and related surcharges were RMB441 million (USS$69 million) for the nine months ended September 30, 2015, representing a 38% increase from RMB319 million in the nine months ended September 30, 2014, as a result of the increases in revenues in all of our business lines.

 

Cost of revenues. Cost of revenues were RMB2.3 billion (US$359 million) in the nine months ended September 30, 2015, representing a 50% increase from RMB1.5 billion in the nine months ended September 30, 2014, primarily due to increased cost associated with the expansion of our accommodation reservation business and the rapid growth of our packaged-tour and ticketing businesses.

 

Operating expenses. Operating expenses include product development expenses, sales and marketing expenses and general and administrative expenses.

 

Product development. Product development expenses for the nine months ended September 30, 2015 were RMB2.4 billion (US$383 million), representing a 59% increase from RMB1.5 billion in the nine months ended September 30, 2014, primarily due to an increase in product development personnel related expenses, which is in turn due to an increase in the number of product development personnel as we expanded all of our lines of businesses, as well as an increase in the average payroll and share-based compensation to our product development personnel.

 

Sales and marketing. Sales and marketing expenses for the nine months ended September 30, 2015 were RMB2.2 billion (US$352 million), representing a 49% increase from RMB1.5 billion in the nine months ended September 30, 2014, primarily due to an increase in advertising expenses and marketing and promotion expenses, including our continued intensified efforts to promote our mobile app across different channels, such as through promotions on popular Android app stores and pre-installation arrangements with makers of high-end smartphones.

 

General and administrative. General and administrative expenses for the nine months ended September 30, 2015 were RMB782 million (US$123 million), representing a 25% increase from RMB627 million in the nine months ended September 30, 2014, primarily due to an increase in amortization expenses for intangible assets of newly acquired entities.

 

Equity in income/(loss) of affiliates. Equity in loss of affiliates was RMB41 million (US$6.5 million) in the nine months ended September 30, 2015, representing a decrease of 184% compared with RMB49 million income in the same period in 2014, primarily due to decreased equity pick-up of Homeinns’ results of operations and pick-up of

 

4


 

the loss of Skysea Cruise, a joint venture with Royal Carribbean Cruises Ltd. designed to serve the Chinese cruise market.

 

Interest income. Interest income increased by 30% to RMB321 million (US$50 million) in the nine months ended September 30, 2015 from RMB247 million in the same period in 2014, primarily due to the increase of the yield rates of our financial management products.

 

Interest expense. Interest expense increased by 85% to RMB207 million (US$33 million) in the nine months ended September 30, 2015 from RMB112 million in the same period in 2014 primarily due to an increase in short-term loan facilities and the issuance of the 2019 Priceline notes, the 2020 Priceline notes, the 2020 notes and the 2025 notes.

 

Other income. Other expense amounted to RMB2.4 billion (US$376 million) in the nine months ended September 30, 2015, compared with RMB99 million in the same period in 2014, primarily due to the gain recognized from the deconsolidation of Tujia.com International Co., Ltd. (“Tujia”) as a result of the loss of control of Tujia after its recent financing in this quarter. The gain is primarily recognized for the difference between the fair value and carrying value of the investment in Tujia as of the deconsolidation date.

 

Income tax expense. Income tax expense in nine months ended September 30, 2015 was RMB399 million (US$63 million), representing a 176% increase compared from income tax expense of RMB144 million in the same period of 2014, mainly as a result of non-deductible share-based compensation expenses. The effective income tax rate in the nine months ended September 30, 2015 was 14%, as compared to 30% in the same period in 2014.

 

Liquidity and capital resources

 

The following table presents a summary of our consolidated balance sheet data as of December 31, 2012, 2013 and 2014, and September 30, 2015:

 

 

 

For the year ended December 31,

 

As of September 30,

 

 

 

2012

 

2013

 

2014

 

2015

 

(in thousands)

 

RMB

 

RMB

 

RMB

 

US$

 

RMB

 

US$

 

Consolidated balance sheet data

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

3,421,533

 

7,138,345

 

5,300,888

 

854,348

 

8,946,006

 

1,407,579

 

Restricted cash

 

768,229

 

739,544

 

836,395

 

134,802

 

1,076,346

 

169,354

 

Short-term investments

 

1,408,664

 

3,635,091

 

6,438,855

 

1,037,755

 

7,231,623

 

1,137,835

 

Accounts receivable, net

 

983,804

 

1,518,230

 

1,826,766

 

294,422

 

3,179,848

 

500,322

 

Prepayments and other current assets

 

1,060,989

 

1,334,510

 

2,673,780

 

430,935

 

5,316,635

 

836,527

 

Non-current assets

 

4,026,531

 

6,452,753

 

14,214,234

 

2,290,918

 

23,500,517

 

3,697,608

 

Total assets

 

11,669,751

 

20,818,474

 

31,290,917

 

5,043,180

 

49,250,975

 

7,749,225

 

Short-term borrowings

 

453,479

 

774,599

 

3,560,489

 

573,847

 

5,819,378

 

915,630

 

Other current liabilities

 

3,456,655

 

5,593,409

 

9,154,214

 

1,475,391

 

13,054,401

 

2,054,000

 

Other non-current liabilities

 

1,174,727

 

5,720,380

 

8,198,487

 

1,321,356

 

17,492,002

 

2,752,219

 

Total Ctrip’s shareholders’ equity

 

6,489,632

 

8,530,396

 

9,529,179

 

1,535,825

 

11,821,888

 

1,860,074

 

Noncontrolling interests

 

95,248

 

199,690

 

848,548

 

136,761

 

1,063,306

 

167,303

 

Total shareholder’s equity

 

6,584,880

 

8,730,086

 

10,377,727

 

1,672,586

 

12,885,194

 

2,027,377

 

 

As of September 30, 2015, our primary source of liquidity was RMB16.2 billion (US$2.5 billion) of cash and cash equivalents, and short-term investment, cash generated from operating activities, short-term borrowings from third-party lenders, as well as the proceeds we received from our public offerings of ordinary shares and our offerings of convertible senior notes. Our cash and cash equivalents consist of cash on hand and liquid investments which are unrestricted as to withdrawal or use. Except as disclosed in this offering memorandum, we have no outstanding bank loans or financial guarantees or similar commitments to guarantee the payment obligations of third parties. We believe that our cash and cash equivalents, our anticipated cash flow from operations, our credit facilities and proceeds from our financing activities will be sufficient to meet our anticipated cash needs for the next 12 months. We may, however, need additional cash resources in the future if we experience changes in business conditions or other developments. We may also need additional cash resources in the future if we decide to pursue additional opportunities for investments or acquisitions.

 

5


 

The following table sets forth a summary of our cash flows for the periods indicated:

 

 

 

For the year ended December 31,

 

For the nine months ended September 30,

 

 

 

2012

 

2013

 

2014

 

2014

 

2015

 

(in thousands)

 

RMB

 

RMB

 

RMB

 

US$

 

RMB

 

RMB

 

US$

 

Net cash provided by operating activities

 

1,654,368

 

2,452,827

 

1,958,604

 

315,670

 

665,860

 

205,544

 

32,341

 

Net cash (used in)/provided by investing activities

 

(1,239,904

)

(4,086,144

)

(9,366,411

)

(1,509,591

)

(4,689,623

)

(6,784,447

)

(1,067,475

)

Net cash (used in)/provided by financing activities

 

(515,564

)

5,315,975

 

5,422,195

 

873,899

 

3,817,168

 

10,192,973

 

1,603,778

 

Effect of foreign exchange rate changes on cash and cash equivalents

 

19,205

 

34,154

 

148,155

 

23,878

 

38,206

 

31,048

 

4,885

 

Net increase (decrease) in cash and cash equivalents

 

(81,895

)

3,716,812

 

(1,837,457

)

(296,144

)

(168,389

)

3,645,118

 

573,529

 

Cash and cash equivalents at beginning of period

 

3,503,428

 

3,421,533

 

7,138,345

 

1,150,492

 

7,138,345

 

5,300,888

 

834,050

 

Cash and cash equivalents at end of the period

 

3,421,533

 

7,138,345

 

5,300,888

 

854,348

 

6,969,956

 

8,946,006

 

1,407,579

 

 

Operating activities

 

Net cash provided by operating activities amounted to RMB206 million (US$32 million) in the first nine months of 2015, which was primarily attributable to (i) our net income of RMB2.35 billion (US$370 million) in the first nine months of 2015; (ii) an add-back of RMB765 million (US$120 million) in non-cash items, primarily relating to share-based compensation expenses, provision for doubtful accounts and depreciation and amortization expenses; (iii) an increase in accounts payable of RMB1.88 billion (US$295 million), primarily due to the increased volume of accommodation reservation and air ticketing services, as we are generally entitled to certain credit terms from our suppliers; (iv) a decrease in advances from customers of RMB1.54 billion (US$242 million) and (v) an increase in accrued liability for our customer reward program of RMB145 million (US$23 million). These increases were partially offset by (i) a decrease in prepayments and other current assets of RMB2.32 billion (US$364 million); (ii) gain from deconsolidation of Tujia of RMB2.27 billion (US$357 million); (iii) an increase in long-term deposits of RMB1.3 billion (US$160 million); and (iv) an increase in accounts receivable of RMB1.38 billion (US$216 million), primarily due to increased credit card payments from our individual customers for air-ticket booking as well as an increased receivable from our insurance business.

 

Investing activities

 

Net cash used in investing activities amounted to RMB6.8 billion (US$1.1 million) in the first nine months of 2015, which was primarily attributable to an increase in investments and acquisitions, short-term investments in bank deposits with original maturity of more than three months.

 

Financing activities

 

Net cash provided by financing activities amounted to RMB10.2 billion (US$1.6 billion) in the first nine months of 2015, which was primarily attributable to the issuance of the 2020 Priceline notes, the 2020 notes and 2025 notes, and an increase in short-term bank loans.

 

Capital expenditures

 

As of September 30, 2015, our primary capital commitment was RMB15 million (US$2.4 million) in connection with capital expenditures of property, equipment and software.

 

The following sets forth our contractual obligations as of September 30, 2015:

 

 

 

Payments due by period

 

(in RMB thousands)

 

Total

 

Less than
1 year

 

1-3 years

 

3-5 years

 

More than
5 years

 

Convertible senior notes with principal and interest

 

18,163,915

 

209,502

 

826,188

 

17,128,225

 

—

 

Term Loans with principal and interest

 

5,436,909

 

5,436,909

 

—

 

—

 

—

 

Operating lease obligations

 

270,280

 

131,410

 

121,809

 

14,439

 

2,621

 

Purchase obligations

 

115,276

 

114,952

 

324

 

—

 

 

 

 

6


 

Our 2017 notes will mature in September 2017, unless earlier repurchased or converted into our ADSs based on an initial conversion rate of 51.7116 of our ADSs per US$1,000 principal amount of notes; this conversion rate, after giving effect to the change in the ratio of our ADSs to ordinary shares from four (4) ADSs representing one ordinary share to eight (8) ADSs representing one ordinary share on December 1, 2015, is now at 103.4232 of our ADSs per US$1,000 principal amount of notes. The conversion rate is subject to adjustment upon occurrence of certain events. The 2017 notes bear interest at a rate of 0.5% per year, payable semiannually in arrears on March 15 and September 15 of each year, beginning on March 15, 2013.

 

Our 2018 notes will mature in October 2018, unless earlier repurchased or converted into our ADSs based on an initial conversion rate of 12.7568 of our ADSs per US$1,000 principal amount of notes; this conversion rate, after giving effect to the change in the ratio of our ADSs on December 1, 2015, is now at 25.5136 of our ADSs per US$1,000 principal amount of notes. The conversion rate is subject to adjustment upon occurrence of certain events. The 2018 notes bear interest at a rate of 1.25% per year, payable semiannually in arrears on April 15 and October 15 of each year, beginning on April 15, 2014.

 

The 2019 Priceline notes will mature in August 2019, unless earlier repurchased or converted into our ADSs based on an initial conversion rate of 12.2911 of our ADSs per US$1,000 principal amount of notes; this conversion rate, after giving effect to the change in the ratio of our ADSs on December 1, 2015, is now at 24.5822 of our ADSs per US$1,000 principal amount of notes. The conversion rate is subject to adjustment upon occurrence of certain events. The notes have an interest rate of 1.00% per year that accrues semi-annually from August 7, 2014.

 

The 2020 Priceline notes will mature in May 2020, unless earlier repurchased or converted into our ADSs based on an initial conversion rate of 9.5904 of our ADSs per US$1,000 principal amount of notes; this conversion rate, after giving effect to the change in the ratio of our ADSs on December 1, 2015, is now at 19.1808 of our ADSs per US$1,000 principal amount of notes. The conversion rate is subject to adjustment upon occurrence of certain events. The notes have an interest rate of 1.00% per year that accrues semi-annually from May 26, 2015.

 

The 2020 notes will mature in July 2020, unless earlier repurchased or converted into our ADSs based on an initial conversion rate of 9.1942 ADSs per US$1,000 principal amount of notes; this conversion rate, after giving effect to the change in the ratio of our ADSs on December 1, 2015, is now at 18.3884 of our ADSs per US$1,000 principal amount of notes. The conversion rate is subject to adjustment upon occurrence of certain events. The notes have an interest rate of 1.00% per year payable semiannually in arrears on January 1 and July 1 of each year, beginning on January 1, 2016.

 

The 2025 notes will mature in in July 2025, unless earlier repurchased or converted into our ADSs based on an initial conversion rate of 9.3555 ADSs per US$1,000 principal amount of notes; this conversion rate, after giving effect to the change in the ratio of our ADSs on December 1, 2015, is now at 18.7110 of our ADSs per US$1,000 principal amount of notes. The conversion rate is subject to adjustment upon occurrence of certain events. The notes have an interest rate of 1.99% per year payable semiannually in arrears on January 1 and July 1 of each year, beginning on January 1, 2016.

 

As of September 30, 2015, we obtained six borrowings of RMB1.7 billion (US$266.3 million) in aggregate collateralized by a bank deposit of RMB120 million and RMB1.2 billion classified as restricted cash and short-term investment at one of our wholly-owned subsidiaries. The annual interest rate of borrowings is approximately 1.5%. We are in compliance with the relevant loan covenants as of September 30, 2015.

 

As of September 30, 2015, we obtained three borrowings of RMB1.3 billion (US$197.9 million) in aggregate collateralized by bank deposits of RMB380 million and RMB2.1 billion classified as restricted cash and short-term investment provided by one of our wholly-owned subsidiaries. The annual interest rate of borrowings is approximately from 1.3% to 2.3%. We are in compliance with the relevant loan covenants as of September 30, 2015.

 

As of September 30, 2015, we obtained one borrowings of RMB373.7 million (US$58.8 million) in aggregate collateralized by bank deposits of RMB75 million classified as short-term investment provided by one of our wholly-owned subsidiaries. The annual interest rate of borrowings is approximately from 2.0%. We are in compliance with the relevant loan covenants as of September 30, 2015.

 

7


 

As of September 30, 2015, we obtained three borrowings of RMB998.5 million (US$157.1 million) in aggregate collateralized by bank deposits of RMB442 million classified as short-term investment provided by one of our wholly-owned subsidiaries. The annual interest rate of borrowings is approximately 1.6%. We are in compliance with the relevant loan covenants as of September 30, 2015.

 

As of September 30, 2015, we obtained three borrowings of RMB794.5 million (US$125 million) in aggregate collateralized by bank deposits of RMB57.7 million classified as restricted cash provided by one of our wholly-owned subsidiaries. The annual interest rate of borrowings is approximately from 1.9% to 2.0%. We are in compliance with the relevant loan covenants as of September 30, 2015.

 

As of September 30, 2015, we obtained one borrowing of RMB291.1 million (US$45.8 million) in aggregate collateralized by bank deposits of RMB680 million classified as short-term investment provided by one of our wholly-owned subsidiaries. The annual interest rate of borrowings is approximately 1.1%. We are in compliance with the relevant loan covenants as of September 30, 2015.

 

Operating lease obligations for the years 2015, 2016, 2017, 2018, 2019 and 2020 are RMB131.4 million, RMB87.3 million, RMB34.5 million, RMB9.9 million, RMB4.5 million and RMB2.6 million, respectively. Rental expenses amounted to approximately RMB94 million, RMB118 million and RMB144 million (US$23 million) for the years ended December 31, 2012, 2013 and 2014, respectively. Rental expense is charged to the statements of income when incurred.

 

While the table above indicates our contractual obligations as of September 30, 2015, the actual amounts we are eventually required to pay may be different in the event that any agreements are renegotiated, cancelled or terminated.

 

8



Exihibit 99.3

 

CTRIP.COM INTERNATIONAL, LTD.

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

 

 

Page

Report of Independent Registered Public Accounting Firm

2

Consolidated Statements of Income and Comprehensive Income for the years ended December 31, 2012, 2013 and 2014

3

Consolidated Balance Sheets as of December 31, 2013 and 2014

4

Consolidated Statements of Shareholders’ Equity for the years ended December 31, 2012, 2013 and 2014

5

Consolidated Statements of Cash Flows for the years ended December 31, 2012, 2013 and 2014

8

Notes to the Consolidated Financial Statements

10

 

1

 

Report of Independent Registered Public Accounting Firm

 

To the Board of Directors and Shareholders of Ctrip.com International, Ltd.:

 

In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of income and comprehensive income, of shareholder’s equity and of cash flows present fairly, in all material respects, the financial position of Ctrip.com International, Ltd. (the “Company”) and its subsidiaries at December 31, 2014 and December 31, 2013, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2014 in conformity with accounting principles generally accepted in the United States of America.  Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2014, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for these financial statements, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in Report of Management on Internal Control over Financial Reporting appearing in Item 15 of the Company’s Annual Report on Form 20-F for the year ended December 31, 2014, not included herein.  Our responsibility is to express opinions on these financial statements and on the Company’s internal control over financial reporting based on our integrated audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).  Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects.  Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation.  Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk.  Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

 

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.  A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

 

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.  Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

 

/s/ PricewaterhouseCoopers Zhong Tian  LLP

Shanghai, the People’s Republic of China

 

April 27, 2015, except for the effect of the change in the ratio of American depositary shares to ordinary shares as described in Note 22 to the consolidated financial statements, as to which the date is December 1, 2015

 

2

 

CTRIP.COM INTERNATIONAL, LTD.

 

CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME

FOR THE YEARS ENDED DECEMBER 31, 2012, 2013 AND 2014

 

 

 

2012

 

2013

 

2014

 

2014

 

 

 

RMB

 

RMB

 

RMB

 

US$

 

 

 

 

 

 

 

 

 

 

 

Revenues:

 

 

 

 

 

 

 

 

 

Accommodation reservation

 

1,702,500,571

 

2,214,170,887

 

3,201,426,933

 

515,976,362

 

Transportation ticketing

 

1,690,285,903

 

2,161,784,259

 

2,950,072,484

 

475,465,378

 

Packaged-tour

 

689,660,631

 

935,684,729

 

1,055,369,205

 

170,094,640

 

Corporate travel

 

199,756,068

 

266,988,534

 

373,407,012

 

60,182,286

 

Others

 

126,989,085

 

138,388,653

 

192,281,473

 

30,990,148

 

Total revenues

 

4,409,192,258

 

5,717,017,062

 

7,772,557,107

 

1,252,708,814

 

Less: business tax and related surcharges

 

(250,401,009

)

(330,271,520

)

(425,638,738

)

(68,600,512

)

Net revenues

 

4,158,791,249

 

5,386,745,542

 

7,346,918,369

 

1,184,108,302

 

 

 

 

 

 

 

 

 

 

 

Cost of revenues

 

(1,037,791,093

)

(1,386,767,067

)

(2,100,606,413

)

(338,556,299

)

 

 

 

 

 

 

 

 

 

 

Gross profit

 

3,121,000,156

 

3,999,978,475

 

5,246,311,956

 

845,552,003

 

 

 

 

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

 

 

 

 

Product development

 

(911,904,722

)

(1,245,719,192

)

(2,321,348,753

)

(374,133,506

)

Sales and marketing

 

(984,002,165

)

(1,269,412,720

)

(2,214,209,719

)

(356,865,828

)

General and administrative

 

(570,487,457

)

(646,404,879

)

(861,550,628

)

(138,856,756

)

Total operating expenses

 

(2,466,394,344

)

(3,161,536,791

)

(5,397,109,100

)

(869,856,090

)

Income/(loss) from operations

 

654,605,812

 

838,441,684

 

(150,797,144

)

(24,304,087

)

 

 

 

 

 

 

 

 

 

 

Interest income

 

177,144,144

 

200,068,533

 

304,583,544

 

49,089,956

 

Interest expense

 

(11,344,180

)

(57,043,756

)

(162,354,675

)

(26,166,824

)

Other income (net)

 

130,287,943

 

163,122,374

 

144,006,435

 

23,209,624

 

Income before income tax expense, equity in income of affiliates and non-controlling interests

 

950,693,719

 

1,144,588,835

 

135,438,160

 

21,828,669

 

 

 

 

 

 

 

 

 

 

 

Income tax expense

 

(294,525,956

)

(293,740,322

)

(130,821,156

)

(21,084,543

)

Equity in income of affiliates

 

34,343,000

 

55,554,072

 

87,005,341

 

14,022,716

 

Net income

 

690,510,763

 

906,402,585

 

91,622,345

 

14,766,842

 

 

 

 

 

 

 

 

 

 

 

Net loss attributable to non-controlling interests

 

23,895,101

 

91,917,099

 

151,117,436

 

24,355,710

 

Net income attributable to Ctrip’s shareholders

 

714,405,864

 

998,319,684

 

242,739,781

 

39,122,552

 

 

 

 

 

 

 

 

 

 

 

Net income

 

690,510,763

 

906,402,585

 

91,622,345

 

14,766,842

 

Other comprehensive income:

 

 

 

 

 

 

 

 

 

Foreign currency translation

 

21,039,744

 

(14,167,524

)

(66,759,799

)

(10,759,727

)

Unrealized securities holding gains , net of tax

 

92,647,858

 

445,580,779

 

137,704,595

 

22,193,952

 

Total comprehensive income

 

804,198,365

 

1,337,815,840

 

162,567,141

 

26,201,067

 

 

 

 

 

 

 

 

 

 

 

Comprehensive loss attributable to non-controlling interests

 

23,895,101

 

91,917,099

 

151,117,436

 

24,355,710

 

Comprehensive income attributable to Ctrip’s shareholders

 

828,093,466

 

1,429,732,939

 

313,684,577

 

50,556,777

 

 

 

 

 

 

 

 

 

 

 

Earnings per ordinary share

 

 

 

 

 

 

 

 

 

— Basic

 

20.87

 

30.34

 

7.08

 

1.14

 

— Diluted

 

19.92

 

26.63

 

6.35

 

1.02

 

 

 

 

 

 

 

 

 

 

 

Earnings per ADS

 

 

 

 

 

 

 

 

 

— Basic

 

2.61

 

3.79

 

0.89

 

0.15

 

— Diluted

 

2.49

 

3.33

 

0.80

 

0.13

 

 

 

 

 

 

 

 

 

 

 

Weighted average ordinary shares outstanding

 

 

 

 

 

 

 

 

 

— Basic shares

 

34,236,761

 

32,905,601

 

34,289,170

 

34,289,170

 

— Diluted shares

 

36,090,785

 

38,069,841

 

38,207,858

 

38,207,858

 

 

 

 

 

 

 

 

 

 

 

Share-based compensation included in Operating expense above is as follows:

 

 

 

 

 

 

 

 

 

Product development

 

132,583,177

 

138,668,196

 

184,664,576

 

29,762,527

 

Sales and marketing

 

55,892,394

 

49,104,528

 

54,391,508

 

8,766,320

 

General and administrative

 

243,245,751

 

250,156,753

 

257,587,405

 

41,515,554

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

3


 

CTRIP.COM INTERNATIONAL, LTD.

 

CONSOLIDATED BALANCE SHEETS

AS OF DECEMBER 31, 2013 AND 2014

 

 

 

2013

 

2014

 

2014

 

 

 

RMB

 

RMB

 

US$

 

 

 

 

 

 

 

 

 

ASSETS

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

Cash and cash equivalents

 

7,138,344,814

 

5,300,887,799

 

854,348,032

 

Restricted cash

 

739,543,614

 

836,394,951

 

134,802,397

 

Short-term investment

 

3,635,090,955

 

6,438,854,587

 

1,037,754,986

 

Accounts receivable, net

 

1,518,230,029

 

1,826,765,949

 

294,421,228

 

Due from related parties

 

21,774,669

 

10,568,937

 

1,703,404

 

Prepayments and other current assets

 

1,215,756,287

 

2,469,707,335

 

398,044,569

 

Deferred tax assets, current

 

96,979,500

 

193,503,366

 

31,187,082

 

Total current assets

 

14,365,719,868

 

17,076,682,924

 

2,752,261,698

 

 

 

 

 

 

 

 

 

Long-term deposits and prepayments

 

559,185,652

 

306,661,011

 

49,424,783

 

Long-term loan receivable

 

178,584,102

 

192,871,939

 

31,085,314

 

Long-term receivables due from related parties

 

8,166,667

 

510,039,284

 

82,203,411

 

Land use rights

 

107,476,794

 

104,568,868

 

16,853,442

 

Property, equipment and software

 

1,412,943,693

 

5,220,626,461

 

841,412,252

 

Investments

 

2,857,213,480

 

5,318,756,447

 

857,227,935

 

Goodwill

 

972,531,184

 

1,892,507,708

 

305,016,876

 

Intangible assets

 

356,653,022

 

668,202,371

 

107,694,673

 

Total assets

 

20,818,474,462

 

31,290,917,013

 

5,043,180,384

 

 

 

 

 

 

 

 

 

LIABILITIES

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

Short-term debt

 

774,599,341

 

3,560,488,641

 

573,846,604

 

Accounts payable

 

1,637,545,824

 

2,304,111,525

 

371,355,369

 

Due to related parties

 

11,216,780

 

17,049,103

 

2,747,817

 

Salary and welfare payable

 

257,641,763

 

525,157,105

 

84,639,961

 

Taxes payable

 

315,299,656

 

339,452,319

 

54,709,783

 

Advances from customers

 

2,451,931,450

 

3,937,477,522

 

634,606,183

 

Accrued liability for customer reward program

 

284,668,935

 

430,852,908

 

69,440,884

 

Other payables and accruals

 

635,104,949

 

1,600,113,658

 

257,891,508

 

Total current liabilities

 

6,368,008,698

 

12,714,702,781

 

2,049,238,109

 

 

 

 

 

 

 

 

 

Deferred tax liabilities, non-current

 

63,197,155

 

132,506,644

 

21,356,194

 

Long-term Debt

 

5,657,182,650

 

8,065,980,000

 

1,300,000,000

 

 

 

 

 

 

 

 

 

Total liabilities

 

12,088,388,503

 

20,913,189,425

 

3,370,594,303

 

 

 

 

 

 

 

 

 

Commitments and contingencies (Note 21)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shareholders’ equity

 

 

 

 

 

 

 

Share capital (US$0.01 par value; 100,000,000 shares authorized, 33,828,251 and 35,146,982 shares issued and outstanding as of December 31, 2013 and 2014, respectively.)

 

3,033,490

 

3,085,272

 

497,256

 

Additional paid-in capital

 

4,088,484,766

 

4,828,021,816

 

778,135,870

 

Statutory reserves

 

118,449,230

 

134,098,747

 

21,612,795

 

Accumulated other comprehensive income

 

372,634,580

 

443,579,376

 

71,492,018

 

Retained earnings

 

5,498,934,733

 

5,726,024,997

 

922,867,711

 

Less: Treasury stock (3,777,087 and 3,323,262 shares as of December 31, 2013 and 2014, respectively.)

 

(1,551,141,268

)

(1,605,630,913

)

(258,780,729

)

Total Ctrip’s shareholders’ equity

 

8,530,395,531

 

9,529,179,295

 

1,535,824,921

 

 

 

 

 

 

 

 

 

Non-controlling interests

 

199,690,428

 

848,548,293

 

136,761,160

 

 

 

 

 

 

 

 

 

Total shareholders’ equity

 

8,730,085,959

 

10,377,727,588

 

1,672,586,081

 

 

 

 

 

 

 

 

 

Total liabilities and shareholders’ equity

 

20,818,474,462

 

31,290,917,013

 

5,043,180,384

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

4

 

CTRIP.COM INTERNATIONAL, LTD.

 

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

FOR THE YEARS ENDED DECEMBER 31, 2012, 2013 AND 2014

 

 

 

Ordinary shares
(US$0.01 par value)

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Number of
shares

 

Par

 

Additional
paid-in

 

Statutory

 

other
comprehensive

 

Retained

 

Treasury
stock -

 

Treasury

 

Total Ctrip’s
shareholders’

 

Non-controlling

 

Total
shareholders’

 

 

 

outstanding

 

value

 

capital

 

reserves

 

income/(loss)

 

earnings

 

shares

 

stock

 

equity

 

interests

 

equity

 

 

 

 

 

RMB

 

RMB

 

RMB

 

RMB

 

RMB

 

 

 

RMB

 

RMB

 

RMB

 

RMB

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance as of December 31, 2011

 

35,849,473

 

2,939,527

 

3,465,924,424

 

98,049,668

 

(172,466,277

)

3,806,608,747

 

242,832

 

(158,761,225

)

7,042,294,864

 

102,770,969

 

7,145,065,833

 

Issuance of common stock pursuant to share incentive plan

 

627,635

 

39,617

 

93,215,551

 

—

 

—

 

—

 

—

 

—

 

93,255,168

 

—

 

93,255,168

 

Share-based compensation

 

—

 

—

 

429,165,035

 

—

 

—

 

—

 

—

 

—

 

429,165,035

 

—

 

429,165,035

 

Appropriations to statutory reserves

 

—

 

—

 

—

 

5,172,844

 

—

 

(5,172,844

)

—

 

—

 

—

 

—

 

—

 

Repurchasing common stock

 

(4,122,474

)

—

 

—

 

—

 

—

 

—

 

4,122,474

 

(1,733,127,675

)

(1,733,127,675

)

—

 

(1,733,127,675

)

Foreign currency translation adjustments

 

—

 

—

 

—

 

—

 

21,039,744

 

—

 

—

 

—

 

21,039,744

 

—

 

21,039,744

 

Unrealized securities holding gains

 

—

 

—

 

—

 

—

 

92,647,858

 

—

 

—

 

—

 

92,647,858

 

—

 

92,647,858

 

Purchasing of Purchased Call Option

 

—

 

—

 

(346,009,222

)

—

 

—

 

—

 

—

 

—

 

(346,009,222

)

—

 

(346,009,222

)

Sale of Issued Warrants

 

—

 

—

 

167,503,950

 

—

 

—

 

—

 

—

 

—

 

167,503,950

 

—

 

167,503,950

 

Purchasing and settlement Capped Call Option

 

—

 

—

 

4,809,282

 

—

 

—

 

—

 

—

 

—

 

4,809,282

 

—

 

4,809,282

 

Net income/(loss)

 

—

 

—

 

—

 

—

 

—

 

714,405,864

 

—

 

—

 

714,405,864

 

(23,895,101

)

690,510,763

 

Disposal of a stake of shares of a subsidiary

 

—

 

—

 

17,577,884

 

—

 

—

 

—

 

—

 

—

 

17,577,884

 

2,674,521

 

20,252,405

 

Issuance of convertible preferred shares by a subsidiary

 

—

 

—

 

—

 

—

 

—

 

—

 

—

 

—

 

—

 

67,243,193

 

67,243,193

 

Acquisition of a subsidiary

 

—

 

—

 

—

 

—

 

—

 

—

 

—

 

—

 

—

 

12,000,000

 

12,000,000

 

Acquisition of additional stake in a subsidiary

 

—

 

—

 

(13,930,677

)

—

 

—

 

—

 

—

 

—

 

(13,930,677

)

(65,546,044

)

(79,476,721

)

Balance as of December 31, 2012

 

32,354,634

 

2,979,144

 

3,818,256,227

 

103,222,512

 

(58,778,675

)

4,515,841,767

 

4,365,306

 

(1,891,888,900

)

6,489,632,075

 

95,247,538

 

6,584,879,613

 

 

5

 

CTRIP.COM INTERNATIONAL, LTD.

 

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

FOR THE YEARS ENDED DECEMBER 31, 2012, 2013 AND 2014

 

 

 

Ordinary shares
(US$0.01 par value)

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Number of
shares

 

Par

 

Additional
paid-in

 

Statutory

 

other
comprehensive

 

Retained

 

Treasury
stock -

 

Treasury

 

Total Ctrip’s
shareholders’

 

Non-controlling

 

Total
shareholders’

 

 

 

outstanding

 

value

 

capital

 

reserves

 

income/(loss)

 

earnings

 

shares

 

stock

 

equity

 

interests

 

equity

 

 

 

 

 

RMB

 

RMB

 

RMB

 

RMB

 

RMB

 

 

 

RMB

 

RMB

 

RMB

 

RMB

 

Issuance of common stock pursuant to share incentive plan

 

885,398

 

54,346

 

194,142,177

 

—

 

—

 

—

 

—

 

—

 

194,196,523

 

—

 

194,196,523

 

Share-based compensation

 

—

 

—

 

440,992,258

 

—

 

—

 

—

 

—

 

—

 

440,992,258

 

—

 

440,992,258

 

Appropriations to statutory reserves

 

—

 

—

 

—

 

15,226,718

 

—

 

(15,226,718

)

—

 

—

 

—

 

—

 

—

 

Foreign currency translation adjustments

 

—

 

—

 

—

 

—

 

(14,167,524

)

—

 

—

 

—

 

(14,167,524

)

—

 

(14,167,524

)

Unrealized securities holding gains

 

—

 

—

 

—

 

—

 

445,580,779

 

—

 

—

 

—

 

445,580,779

 

—

 

445,580,779

 

Purchasing of Purchased Call Option

 

—

 

—

 

(842,694,944

)

—

 

—

 

—

 

—

 

—

 

(842,694,944

)

—

 

(842,694,944

)

Sale of Issued Warrants

 

—

 

—

 

470,838,904

 

—

 

—

 

—

 

—

 

—

 

470,838,904

 

—

 

470,838,904

 

Early Termination of Call Option

 

—

 

—

 

70,270,919

 

—

 

—

 

—

 

—

 

—

 

70,270,919

 

—

 

70,270,919

 

Early Conversion of Convertible Notes

 

588,219

 

—

 

(63,288,632

)

—

 

—

 

—

 

(588,219

)

340,747,632

 

277,459,000

 

—

 

277,459,000

 

Net income / (loss)

 

—

 

—

 

—

 

—

 

—

 

998,319,684

 

—

 

—

 

998,319,684

 

(91,917,099

)

906,402,585

 

Issuance of convertible preferred shares by a subsidiary

 

—

 

—

 

—

 

—

 

—

 

—

 

—

 

—

 

—

 

132,709,989

 

132,709,989

 

Acquisition of a subsidiary

 

—

 

—

 

—

 

—

 

—

 

—

 

—

 

—

 

—

 

63,700,000

 

63,700,000

 

Acquisition of additional stake in subsidiaries

 

—

 

—

 

(32,143

)

—

 

—

 

—

 

—

 

—

 

(32,143

)

(50,000

)

(82,143

)

Balance as of December 31, 2013

 

33,828,251

 

3,033,490

 

4,088,484,766

 

118,449,230

 

372,634,580

 

5,498,934,733

 

3,777,087

 

(1,551,141,268

)

8,530,395,531

 

199,690,428

 

8,730,085,959

 

 

6

 

CTRIP.COM INTERNATIONAL, LTD.

 

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

FOR THE YEARS ENDED DECEMBER 31, 2012, 2013 AND 2014

 

 

 

Ordinary shares
(US$0.01 par value)

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Number of
shares

 

Par

 

Additional
paid-in

 

Statutory

 

other
comprehensive

 

Retained

 

Treasury
stock -

 

Treasury

 

Total Ctrip’s
shareholders’

 

Non-controlling

 

Total
shareholders’

 

 

 

outstanding

 

value

 

capital

 

reserves

 

income/(loss)

 

earnings

 

shares

 

stock

 

equity

 

interests

 

equity

 

 

 

 

 

RMB

 

RMB

 

RMB

 

RMB

 

RMB

 

 

 

RMB

 

RMB

 

RMB

 

RMB

 

Issuance of common stock pursuant to share incentive plan

 

835,042

 

51,483

 

221,534,465

 

—

 

—

 

—

 

—

 

—

 

221,585,948

 

—

 

221,585,948

 

Share-based compensation

 

—

 

—

 

496,643,489

 

—

 

—

 

—

 

—

 

—

 

496,643,489

 

—

 

496,643,489

 

Appropriations to statutory reserves

 

—

 

—

 

—

 

15,649,517

 

—

 

(15,649,517

)

—

 

—

 

—

 

—

 

—

 

Repurchasing common stock

 

(392,306

)

—

 

—

 

—

 

—

 

—

 

392,306

 

(446,155,147

)

(446,155,147

)

—

 

(446,155,147

)

Foreign currency translation adjustments

 

—

 

—

 

—

 

—

 

(66,759,799

)

—

 

—

 

—

 

(66,759,799

)

—

 

(66,759,799

)

Unrealized securities holding gains

 

—

 

—

 

—

 

—

 

137,704,595

 

—

 

—

 

—

 

137,704,595

 

—

 

137,704,595

 

Early Conversion of Convertible Notes

 

846,131

 

—

 

8,945,339

 

—

 

—

 

—

 

(846,131

)

391,665,502

 

400,610,841

 

—

 

400,610,841

 

Net income / (loss)

 

—

 

—

 

—

 

—

 

—

 

242,739,781

 

—

 

—

 

242,739,781

 

(151,117,436

)

91,622,345

 

Disposal of a subsidiary

 

—

 

—

 

—

 

—

 

—

 

—

 

—

 

—

 

—

 

(280,075

)

(280,075

)

Issuance of convertible preferred shares by a subsidiary

 

—

 

—

 

—

 

—

 

—

 

—

 

—

 

—

 

—

 

186,057,768

 

186,057,768

 

Acquisition of a subsidiary

 

—

 

—

 

—

 

—

 

—

 

—

 

—

 

—

 

—

 

658,466,145

 

658,466,145

 

Acquisition of additional stake in subsidiaries

 

29,864

 

299

 

12,413,757

 

—

 

—

 

—

 

—

 

—

 

12,414,056

 

(44,268,537

)

(31,854,481

)

Balance as of December 31, 2014

 

35,146,982

 

3,085,272

 

4,828,021,816

 

134,098,747

 

443,579,376

 

5,726,024,997

 

3,323,262

 

(1,605,630,913

)

9,529,179,295

 

848,548,293

 

10,377,727,588

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

7

 

CTRIP.COM INTERNATIONAL, LTD.

 

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE YEARS ENDED DECEMBER 31, 2012, 2013 AND 2014

 

 

 

2012

 

2013

 

2014

 

2014

 

 

 

RMB

 

RMB

 

RMB

 

US$

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

 

Net income

 

690,510,763

 

906,402,585

 

91,622,345

 

14,766,842

 

Adjustments to reconcile net income to cash provided by operating activities:

 

 

 

 

 

 

 

 

 

Share-based compensation

 

431,721,322

 

437,929,477

 

496,643,489

 

80,044,401

 

Equity in income of affiliates

 

(34,343,000

)

(55,554,072

)

(87,005,341

)

(14,022,716

)

Gain on deconsolidation of subsidiaries

 

(44,432,052

)

—

 

(789,193

)

(127,195

)

Loss from disposal of property, equipment and software

 

653,191

 

11,946,443

 

3,751,452

 

604,624

 

Gain on disposal of cost method investment

 

—

 

(4,014,829

)

—

 

—

 

Gain on disposal of equity investment

 

—

 

(592,742

)

—

 

—

 

Loss from disposal of a subsidiary

 

—

 

—

 

1,529,046

 

246,437

 

Gain from the re-measurement of the previously held equity interest to the fair value in the business acquisition

 

—

 

—

 

(100,185,800

)

(16,147,020

)

Loss from impairment of long-term investment

 

—

 

—

 

33,000,000

 

5,318,635

 

Provision for doubtful accounts

 

376,164

 

2,842,681

 

11,737,580

 

1,891,755

 

Depreciation of property, equipment and software

 

88,462,807

 

110,494,928

 

173,786,973

 

28,009,376

 

Amortization of intangible assets and land use rights

 

10,538,382

 

10,545,854

 

8,334,028

 

1,343,202

 

Deferred income tax benefit

 

(22,757,864

)

(35,871,972

)

(97,573,997

)

(15,726,073

)

Changes in current assets and liabilities net of assets acquired and liabilities assumed/disposed of in business combinations/dispositions :

 

 

 

 

 

 

 

 

 

Increase in accounts receivable

 

(193,874,838

)

(487,446,257

)

(261,973,182

)

(42,222,413

)

(Increase)/Decrease in due from related parties

 

(333,610

)

(12,363,165

)

2,352,014

 

379,076

 

Increase in prepayments and other current assets

 

(118,239,096

)

(398,015,862

)

(1,218,273,146

)

(196,349,990

)

(Increase) /Decrease in long-term deposits

 

(7,479,664

)

19,406,141

 

(27,406,657

)

(4,417,151

)

Increase in accounts payable

 

255,160,851

 

537,669,487

 

585,953,759

 

94,438,603

 

Increase in due to related parties

 

1,677,658

 

583,234

 

6,057,681

 

976,321

 

Increase in salary and welfare payable

 

85,511,674

 

25,720,555

 

259,440,083

 

41,814,151

 

Increase/(Decrease) in taxes payable

 

(3,054,768

)

98,025,837

 

23,797,376

 

3,835,441

 

Increase in advances from customers

 

310,497,590

 

1,001,717,032

 

1,469,414,155

 

236,826,573

 

Increase in accrued liability for customer reward program

 

55,805,114

 

67,120,782

 

146,183,973

 

23,560,580

 

Increase in other payables and accruals

 

147,967,182

 

216,281,215

 

438,207,218

 

70,626,182

 

 

 

 

 

 

 

 

 

 

 

Net cash provided by operating activities

 

1,654,367,806

 

2,452,827,352

 

1,958,603,856

 

315,669,641

 

 

 

 

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

 

 

 

 

Purchase of property, equipment and software

 

(543,123,309

)

(651,765,217

)

(4,788,676,371

)

(771,794,535

)

Cash paid for long-term investments

 

—

 

(965,421,399

)

(2,078,378,807

)

(334,973,858

)

Cash paid for acquisition, net of cash acquired

 

(29,018,885

)

(119,739,607

)

(130,124,251

)

(20,972,223

)

Purchase of intangible assets

 

—

 

—

 

(9,000,000

)

(1,450,537

)

(Increase) /Decrease in restricted cash

 

(558,620,548

)

31,954,414

 

(94,988,241

)

(15,309,326

)

Decrease/ (Increase) in short-term investment

 

(123,698,692

)

(2,219,940,665

)

(2,799,807,028

)

(451,246,983

)

Increase in long-term loan receivable

 

—

 

(178,584,102

)

—

 

—

 

Decrease in long-term receivables due from related parties

 

—

 

—

 

496,368,000

 

80,000,000

 

Cash received from disposal of equity investment

 

—

 

4,209,926

 

—

 

—

 

Cash received from disposal of cost method investment

 

—

 

13,142,920

 

—

 

—

 

Cash received from deconsolidation of a subsidiary, net of cash disposed

 

—

 

—

 

45,569,216

 

7,344,424

 

Cash received from disposal of a subsidiary net of cash disposed

 

14,556,966

 

—

 

(7,373,416

)

(1,188,379

)

 

 

 

 

 

 

 

 

 

 

Net cash used in investing activities

 

(1,239,904,468

)

(4,086,143,730

)

(9,366,410,898

)

(1,509,591,417

)

 

8


 

CTRIP.COM INTERNATIONAL, LTD.

 

CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)

FOR THE YEARS ENDED DECEMBER 31, 2012, 2013 AND 2014

 

 

 

2012

 

2013

 

2014

 

2014

 

 

 

RMB

 

RMB

 

RMB

 

US$

 

Cash flows from financing activities:

 

 

 

 

 

 

 

 

 

Proceeds from short-term bank loans

 

453,478,628

 

321,120,713

 

2,325,694,972

 

374,833,990

 

Proceeds from exercise of share options

 

81,911,154

 

180,261,090

 

184,579,173

 

29,748,763

 

Repurchase of common stock

 

(1,733,127,675

)

—

 

(446,155,147

)

(71,907,157

)

Cash paid to non-controlling investors

 

(40,289,731

)

(82,143

)

(36,792,354

)

(5,929,851

)

Cash received from non-controlling investors in connection with the establishment of subsidiary

 

—

 

—

 

139,393,178

 

22,466,102

 

Proceeds from issuance convertible preferred shares by a subsidiary

 

63,709,828

 

132,709,989

 

186,475,640

 

30,054,418

 

Proceeds from issuance of senior convertible notes, net of issuance costs

 

1,097,195,400

 

4,723,511,720

 

3,069,000,000

 

494,633,014

 

Proceeds from sale of warrants

 

167,503,950

 

470,838,904

 

—

 

—

 

Purchase of Purchased Call Option

 

(346,009,222

)

(842,694,944

)

—

 

—

 

Cash inflow (outflow) for Capped equity

 

(259,935,853

)

264,745,135

 

—

 

—

 

Early Termination of Call Option

 

—

 

70,270,919

 

—

 

—

 

Convertible Notes early conversion

 

—

 

(4,706,419

)

—

 

—

 

 

 

 

 

 

 

 

 

 

 

Net cash (used in) provided by financing activities

 

(515,563,521

)

5,315,974,964

 

5,422,195,462

 

873,899,279

 

 

 

 

 

 

 

 

 

 

 

Effect of foreign exchange rate changes on cash and cash equivalents

 

19,204,727

 

34,153,266

 

148,154,565

 

23,878,182

 

 

 

 

 

 

 

 

 

 

 

Net increase (decrease) in cash and cash equivalents

 

(81,895,456

)

3,716,811,852

 

(1,837,457,015

)

(296,144,315

)

Cash and cash equivalents, beginning of year

 

3,503,428,418

 

3,421,532,962

 

7,138,344,814

 

1,150,492,347

 

Cash and cash equivalents, end of year

 

3,421,532,962

 

7,138,344,814

 

5,300,887,799

 

854,348,032

 

 

 

 

 

 

 

 

 

 

 

Supplemental disclosure of cash flow information

 

 

 

 

 

 

 

 

 

Cash paid during the year for income taxes

 

350,444,946

 

271,482,184

 

261,734,551

 

42,183,952

 

Cash paid for interest, net of amounts capitalized

 

3,364,678

 

19,276,294

 

31,144,846

 

5,019,638

 

 

 

 

 

 

 

 

 

 

 

Supplemental schedule of non-cash investing and financing activities

 

 

 

 

 

 

 

 

 

Receivables incurred for disposal of investment

 

—

 

12,250,000

 

—

 

—

 

Conversion of convertible senior notes

 

—

 

—

 

400,610,842

 

64,566,748

 

Non-cash consideration paid for business acquisitions and investments

 

—

 

—

 

(169,784,697

)

(27,364,326

)

Accruals related to purchase of property, equipment and software

 

(34,450,253

)

(37,038,698

)

(258,632,797

)

(41,684,040

)

Unpaid cash consideration for business acquisitions (Note 2)

 

(19,742,776

)

(23,773,221

)

(306,966,884

)

(49,474,081

)

 

The accompanying notes are an integral part of these consolidated financial statements.

 

9

 

CTRIP.COM INTERNATIONAL, LTD.

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Amounts expressed in RENMINBI (RMB) unless otherwise stated)

 

1.  ORGANIZATION AND NATURE OF OPERATIONS

 

The accompanying consolidated financial statements include the financial statements of Ctrip.com International, Ltd. (the “Company”), its subsidiaries, VIEs and VIEs’ subsidiaries. The Company, its subsidiaries, the consolidated VIEs and their subsidiaries are collectively referred to as the “Group”.

 

The Group is principally engaged in the provision of travel related services including accommodation reservation, transportation ticketing, packaged-tour, corporate travel management services, as well as, to a much lesser extent, Internet-related advertising and other related services.

 

2.  PRINCIPAL ACCOUNTING POLICIES

 

Basis of presentation

 

The accompanying consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America (“US GAAP”).

 

The preparation of financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosures of contingent assets and liabilities at the balance sheet dates and the reported amounts of revenues and expenses during the reporting periods. Actual results could materially differ from those estimates.

 

Consolidation

 

The consolidated financial statements include the financial statements of the Company, its subsidiaries, VIEs and VIEs’ subsidiaries. All significant transactions and balances between the Company, its subsidiaries, VIEs and VIEs’ subsidiaries have been eliminated upon consolidation.

 

A subsidiary is an entity in which the Company, directly or indirectly, controls more than one half of the voting power; has the power to appoint or remove the majority of the members of the board of directors; to cast a majority of votes at the meeting of the board of directors or to govern the financial and operating policies of the investee under a statute or agreement among the shareholders or equity holders.

 

The Company has adopted the guidance codified in Accounting Standard Codification 810, Consolidations (“ASC 810”) on accounting for VIEs and their respective subsidiaries, which requires certain variable interest entities to be consolidated by the primary beneficiary of the entity in which it has a controlling financial interest. A VIE is an entity with one or more of the following characteristics: (a) the total equity investment at risk is not sufficient to permit the entity to finance its activities without additional financial support; (b) as a group, the holders of the equity investment at risk lack the ability to make certain decisions, the obligation to absorb expected losses or the right to receive expected residual returns, or (c) an equity investor has voting rights that are disproportionate to its economic interest and substantially all of the entity’s activities are on behalf of the investor. Accordingly, the financial statements of the following VIEs and VIEs’ subsidiaries are consolidated into the Company’s financial statements since July 1, 2003 or their respective date of establishment/acquisition, whichever is later:

 

The following is a summary of the Company’s major VIEs and VIEs’ subsidiaries:

 

Name of VIE and VIEs’ subsidiaries

 

Date of establishment/acquisition

 

 

 

Shanghai Ctrip Commerce Co., Ltd. (“Shanghai Ctrip Commerce”)

 

Established on July 18, 2000

Beijing Ctrip International Travel Agency Co., Ltd. (“Beijing Ctrip”)

 

Acquired on January 15, 2002

Guangzhou Ctrip International Travel Agency Co., Ltd. (“Guangzhou Ctrip”)

 

Established on April 28, 2003

Shanghai Ctrip International Travel Agency Co., Ltd. (“Shanghai Ctrip” formerly Shanghai Ctrip Charming International Travel Agency Co., Ltd.)

 

Acquired on September 23, 2003

Shenzhen Ctrip Travel Agency Co., Ltd. (“Shenzhen Ctrip”)

 

Established on April 13, 2004

Ctrip Insurance Agency Co., Ltd. (“Ctrip Insurance”)

 

Established on July 25, 2011

Shanghai Huacheng Southwest International Travel Agency Co., Ltd. (“Shanghai Huacheng” formerly Shanghai Huacheng Southwest Travel Agency Co., Ltd.)

 

Established on March 13, 2001

Chengdu Ctrip Travel Agency Co., Ltd. (“Chengdu Ctrip”)

 

Established on January 8, 2007

Chengdu Ctrip International Travel Agency Co., Ltd. (“Chengdu Ctrip International”)

 

Established on November 4, 2008

 

10


 

For the years ended December 31, 2012, 2013 and 2014, the Company is considered the primary beneficiary of a VIE or VIEs’ subsidiary and consolidated the VIE or VIEs’ subsidiary if the Company had variable interests, that will absorb the entity’s expected losses, receive the entity’s expected residual returns, or both.

 

Major variable interest entities and their subsidiaries

 

As of December 31, 2014, the Company conducts a part of its operations through a series of agreements with certain VIEs and VIEs’ subsidiaries as stated in above. These VIEs and VIEs’ subsidiaries are used solely to facilitate the Group’s participation in Internet content provision, advertising business, travel agency and air-ticketing services in the People’s Republic of China (“PRC”) where foreign ownership is restricted.

 

Shanghai Ctrip Commerce is a domestic company incorporated in Shanghai, the PRC. Shanghai Ctrip Commerce holds a value-added telecommunications business license and is primarily engaged in the provision of advertising business on the Internet website. Two senior officers of the Company collectively hold 100% of the equity interest in Shanghai Ctrip Commerce. The registered capital of Shanghai Ctrip Commerce was RMB30,000,000 as of December 31, 2014.

 

Beijing Ctrip is a domestic company incorporated in Beijing, the PRC. Beijing Ctrip holds an air transport sales agency license, domestic and cross-border travel agency license and is mainly engaged in the provision of air-ticketing services and packaged tour services. A senior officer of the Company and Shanghai Ctrip Commerce collectively hold 100% of the equity interest in Beijing Ctrip. The registered capital of Beijing Ctrip was RMB40,000,000 as of December 31, 2014.

 

Guangzhou Ctrip is a domestic company incorporated in Guangzhou, the PRC. Guangzhou Ctrip holds air transport sales agency license, domestic and cross-border travel agency license and is mainly engaged in the provision of air-ticketing services and packaged tour services. Two senior officers of the Company collectively hold 100% of the equity interest in Guangzhou Ctrip. The registered capital of Guangzhou Ctrip was RMB3,000,000 as of December 31, 2014.

 

Shanghai Ctrip is a domestic company incorporated in Shanghai, the PRC. Shanghai Ctrip holds domestic and cross-border travel agency licenses, air transport sales agency license and mainly provides domestic and cross-border tour services. In September 2012, the Company purchased of the ownership interests from the unrelated minority shareholder and effected a simultaneous reduction of capital of Shanghai Ctrip. Upon completion of the above transactions, a senior officer of the Company control 100% of the equity interest in Shanghai Ctrip. The registered capital of Shanghai Ctrip was RMB10,000,000 as of December 31, 2014.

 

Shenzhen Ctrip is a domestic company incorporated in Shenzhen, the PRC. Shenzhen Ctrip holds air transport sales agency license and domestic travel agency license and is engaged in the provision of air-ticketing service. Two senior officers of the Company collectively hold 100% of the equity interest in Shenzhen Ctrip. The registered capital of Shenzhen Ctrip was RMB2,500,000 as of December 31, 2014.

 

Ctrip Insurance is an insurance agency incorporated in Shanghai, the PRC. Ctrip Insurance was established in July 2011. Ctrip Insurance holds an insurance agency business license. Shanghai Ctrip Commerce and Ctrip Computer Technology (Shanghai) Co., Ltd. (“Ctrip Computer Technology”) hold 100% of the equity interest in Ctrip Insurance. The registered capital of Ctrip Insurance was RMB50,000,000 as of December 31, 2014.

 

Shanghai Huacheng is a domestic company incorporated in Shanghai, the PRC. Shanghai Huacheng holds a domestic travel agency license and an air transport sales agency license and mainly provides domestic tour services and air-ticketing services. Shanghai Ctrip Commerce holds 100% of the equity interest in Shanghai Huacheng. The registered capital of Shanghai Huacheng was RMB100,000,000 as of December 31, 2014.

 

Chengdu Ctrip is a domestic company incorporated in Chengdu, the PRC. Chengdu Ctrip holds air transport sales agency license and domestic travel agency license and is engaged in the provision of air-ticketing service. Shanghai Ctrip holds 100% of the equity interest in Chengdu Ctrip. The registered capital of Chengdu Ctrip was RMB11,500,000 as of December 31, 2014.

 

11


 

Chengdu Ctrip International is a domestic company incorporated in Chengdu, the PRC. Chengdu Ctrip International holds domestic and cross-border travel agency licenses, air transport sales agency license and mainly provides domestic and cross-border tour services. Shanghai Ctrip holds 100% of the equity interest in Chengdu Ctrip International. The registered capital of Chengdu Ctrip International was RMB2,000,000 as of December 31, 2014.

 

The capital injected by senior officers or senior officer’s family member are funded by the Company and are recorded as long-term business loans to related parties. The Company does not have any ownership interest in these VIEs and VIEs’ subsidiaries.

 

As of December 31, 2014, the Company has various agreements with its consolidated VIEs and VIEs’ subsidiaries, including loan agreements, exclusive technical consulting and services agreements, share pledge agreements, exclusive option agreements and other operating agreements.

 

Details of certain key agreements with the VIEs are as follows:

 

Powers of Attorney: Each of the shareholders of our affiliated Chinese entities signed an irrevocable power of attorney to appoint Ctrip Computer Technology (Shanghai) Co., Ltd. or another wholly owned subsidiary of ours, as attorney-in-fact to vote, by itself or any other person to be designated at its discretion, on all matters of our affiliated Chinese entities. Each power of attorney will remain effective during the existence of the applicable affiliated Chinese entity. The Power of Attorney shall remain effective as long as the applicable affiliated Chinese entity exists, and the shareholders of our affiliated Chinese entities are not entitled to terminate or amend the terms of the Power of Attorneys without prior written consent from us.

 

Amended and Restated Technical Consulting and Services Agreement: Ctrip Computer Technology, Ctrip Travel Network and Ctrip Travel Information provide our affiliated Chinese entities with technical consulting and related services and staff training and information services. We also maintain their network platforms. In consideration for our services, our affiliated Chinese entities agree to pay us service fees as calculated in such manner as determined by us from time to time based on the nature of service, which may be adjusted periodically. For 2014, our affiliated Chinese entities paid Ctrip Computer Technology and Ctrip Travel Network a quarterly fee based on the number of air tickets sold and the number of packaged-tour products sold in the quarter, at an average rate from RMB2 (US$0.3) to RMB19 (US$3) per ticket and from RMB8 (US$1) to RMB58 (US$9) per person per tour. Although the service fees are typically determined based on the number of air tickets sold and packaged tour products sold, given the fact that the nominee shareholders of our affiliated Chinese entities have irrevocably appointed the employees of our subsidiaries to vote on their behalf on all matters they are entitled to vote on, we have the right to determine the level of service fees paid and therefore receive substantially all of the economic benefits of our affiliated Chinese entities in the form of service fees. The services fees paid by all of our affiliated Chinese entities as a percentage of their total net income were 82.7%, 105.9% and 109.4% for the years ended December 31, 2012, 2013 and 2014. The initial term of these agreements is 10 years and may be renewed automatically in 10-year terms unless we disapprove the extension. We retain the exclusive right to terminate the agreements at any time by delivering a 30-day advance written notice to the applicable affiliate Chinese entity.

 

Amended and Restated Share Pledge Agreements: The shareholders of our affiliated Chinese entities have pledged their respective equity interests in our affiliated Chinese entities as a guarantee for the performance of all the obligations under the other contractual arrangements, including payment by our affiliated Chinese entities of the technical and consulting services fees to us under the amended and restated technical consulting and services agreements, repayment of the business loan under the amended and restated business loan agreements and performance of obligations under the amended and restated exclusive option agreements, each agreement as described herein. In the event any of our affiliated Chinese entity breaches any of its obligations or any shareholder of our affiliated Chinese entities breaches his/her obligations, as the case may be, under these agreements, we are entitled to enforce the equity pledge right and sell or otherwise dispose of the pledged equity interests, and retain the proceeds from such sale or require any of them to transfer his or her equity interest without consideration to the PRC citizen(s) designated by us. These amended and restated share pledge agreements came into effect on the day when the respective pledgors became shareholders of our affiliated Chinese entities, and shall expire two years after the pledgor and the affiliated Chinese entities no longer undertake any obligations under the above-referenced agreements.

 

12


 

Amended and Restated Business Loan Arrangements: Under the amended and restated business loan agreements we entered into with the shareholders of our affiliated Chinese entities, we extended long-term business loans to these shareholders of our affiliated Chinese entities with the sole purpose of providing funds necessary for the capitalization or acquisition of our affiliated Chinese entities. These loan amounts were injected into the affiliated Chinese entities as capitals and cannot be accessed for any personal uses. The amended and restated business loan agreements shall remain effective until the parties have fully performed their respective obligations under the agreement, and the shareholders of our affiliated Chinese entities have no right to unilaterally terminate these agreements. In the event that the PRC government lifts its substantial restrictions on foreign ownership of the air-ticketing, travel agency, or value-added telecommunications business in China, as applicable, we will exercise our exclusive option to purchase all of the outstanding equity interests of our affiliated Chinese entities, as described in the following paragraph, and the amended and restated business loan agreements will be cancelled in connection with such purchase. However, it is uncertain when, if at all, the PRC government will lift any or all of these restrictions.

 

Amended and Restated Exclusive Option Agreements: As consideration for our entering into the amended and restated business loan agreements described above, each of the shareholders of our affiliated Chinese entities has granted us an exclusive, irrevocable option to purchase, or designate one or more person(s) at our discretion to purchase, all of their equity interests in our affiliated Chinese entities at any time we desire, subject to compliance with the applicable PRC laws and regulations. We may exercise the option by issuing a written notice to the relevant affiliated Chinese entity. The purchase price shall be equal to the contribution actually made by the shareholder for the relevant equity interest. Therefore, if we exercise these options, we may choose to cancel the outstanding loans we extended to the shareholders of our affiliated Chinese entities pursuant to the amended and restated business loan agreements as the loans were used solely for equity contribution purposes. The initial term of these agreements is 10 years and may be renewed automatically in 10-year terms unless we disapprove the extension. We retain the exclusive right to terminate the agreements at any time by delivering a written notice to the applicable affiliate Chinese entity.

 

The affiliated Chinese entities and their shareholders agree not to enter into any transaction that would affect the assets, obligations, rights or operations of the affiliated Chinese entities without the Company’s prior written consent. They also agree to accept the Company’s guidance with respect to day-to-day operations, financial management systems and the appointment and dismissal of key employees.

 

In addition, the Company also enters into amended and restated technical consulting and services agreements with its majority or wholly owned subsidiaries of the affiliated Chinese entities, such as Chengdu Ctrip and Chengdu Ctrip International, and these subsidiaries pay the Company service fees based on the level of services provided. The existence of such amended and restated technical consulting and services agreements provides the Company with the enhanced ability to transfer economic benefits of these majority or wholly owned subsidiaries of the affiliated Chinese entities to us in exchange for the services provided, and this is in addition to the Company’s existing ability to consolidate and extract the economic benefits of these majority or wholly owned subsidiaries of the affiliated Chinese entities (for instance, the affiliated Chinese entities may cause the economic benefits to be channeled to them in the form of dividends, which then may be further consolidated and absorbed by the Company through the contractual arrangements described above).

 

Risks in relation to contractual arrangements between the Company’s PRC subsidiaries and its affiliated Chinese entities:

 

The Company has been advised by Commerce & Finance Law Offices, its PRC legal counsel, that its contractual arrangements with its consolidated VIEs as described in the Company’s annual report are valid, binding and enforceable under the current laws and regulations of China. Based on such legal opinion and the management’s knowledge and experience, the Company believes that its contractual arrangements with its consolidated VIEs are in compliance with current PRC laws and legally enforceable. However, there may be in the event that the affiliated Chinese entities and their respective shareholders fail to perform their contractual obligations, the Company may have to rely on the PRC legal system to enforce its rights. The PRC legal system is based on written statutes. Prior court decisions may be cited for reference but have limited precedential value. Since 1979, PRC legislation and regulations have significantly enhanced the protections afforded to various forms of foreign investments in China. However, since the PRC legal system is still evolving, the interpretations of many laws, regulations and rules are not always uniform and enforcement of these laws, regulations and rules involve uncertainties, which may limit remedies available to us. In addition, any litigation in China may be protracted and result in substantial costs and diversion of resources and management attention. Due to the uncertainties with respect to the PRC legal system, the PRC government authorities may ultimately take a view contrary to the opinion of its PRC legal counsel with respect to the enforceability of the contractual arrangements.

 

13


 

There are, however, substantial uncertainties regarding the interpretation and application of current or future PRC laws and regulations. Accordingly, the Company cannot be assured that the PRC government authorities will not ultimately take a view that is contrary to the Company’s belief and the opinion of its PRC legal counsel. On January 19, 2015, the Ministry of Commerce of the PRC, or (the “MOFCOM”) released for public comments a proposed PRC law (the “Draft FIE Law”) which includes VIEs within the scope of entities that could be considered to be foreign invested enterprises (or “FIEs”) and may be subject to restrictions under existing PRC law on foreign investment in certain categories of industries. Specifically, the Draft FIE Law introduces the concept of “actual control” for determining whether an entity is considered to be an FIE. In addition to control through direct or indirect ownership on equity, the Draft FIE Law includes control through contractual arrangements within the definition of “actual control.” If the Draft FIE Law is passed by the People’s Congress of the PRC and goes into effect in its current form, these provisions regarding control through contractual arrangements could be construed to reach the Company’s VIE arrangements, and as a result the Company’s VIEs could become explicitly subject to the current restrictions on foreign investment in certain categories of industry. The Draft FIE Law includes provisions that would exempt from the definition of FIEs where the ultimate controlling shareholders are either entities organized under PRC law or individuals who are PRC citizens. The Draft FIE Law is silent as to what type of enforcement action might be taken against existing VIEs that operate in restricted or prohibited industries and are not controlled by entities organized under PRC law or individuals who are  PRC citizens. If the contractual arrangements establishing the Company’s VIE structure are found to be in violation of any existing law and regulations or future PRC laws and regulations or under the Draft FIE Law if it becomes effective, the relevant PRC government authorities will have broad discretion in dealing with such violation, including, without limitation, levying fines, confiscating our income or the income of our affiliated Chinese entities, revoking our business licenses or the business licenses of our affiliated Chinese entities, requiring us and our affiliated Chinese entities to restructure our ownership structure or operations and requiring us or our affiliated Chinese entities to discontinue any portion or all of our value-added telecommunications, air-ticketing, travel agency or advertising businesses. Any of these actions could cause significant disruption to the Company’s business operations, and have a severe adverse impact on the Company’s cash flows, financial position and operating performance. If the imposing of these penalties cause the Company to lose its rights to direct the activities of and receive economic benefits from its VIEs, which in turn may restrict the Company’s ability to consolidate and reflect in its financial statements the financial position and results of operations of its VIEs.

 

Summary financial information of the Group’s VIEs in the consolidated financial statements

 

Pursuant to the contractual arrangements with the VIEs, the Company has the power to direct activities of the VIEs, and can have assets transferred freely out of the VIEs without any restrictions. Therefore the Company considers that there is no asset of a consolidated VIE that can be used only to settle obligations of the VIE, except for registered capital and PRC statutory reserves of the VIEs amounting to a total of RMB514 million as of December 31, 2014. As all the consolidated VIEs are incorporated as limited liability companies under the PRC Company Law, creditors of the VIEs do not have recourse to the general credit of the Company for any of the liabilities of the consolidated VIEs.

 

Summary financial information of the VIEs, which represents aggregated financial information of the VIEs and their respective subsidiaries included in the accompanying consolidated financial statements, is as follows:

 

 

 

As of December 31,

 

 

 

2013

 

2014

 

 

 

RMB

 

RMB

 

Total assets

 

5,982,258,881

 

13,495,852,174

 

Less: Inter-company receivables

 

(373,041,663

)

(1,424,351,080

)

Total assets excluding inter-company

 

5,609,217,218

 

12,071,501,094

 

Total liabilities

 

5,287,287,035

 

12,509,239,945

 

Less: Inter-company payables

 

(1,442,636,737

)

(6,133,068,354

)

Total liabilities excluding inter-company

 

3,844,650,298

 

6,376,171,591

 

 

As of December 31, 2013 and 2014, the VIEs’ assets mainly consisted of short-term investment (December 31, 2013: RMB1.6 billion, December 31, 2014: RMB 3.1 billion), cash and cash equivalent (December 31, 2013: RMB1.5 billion, December 31, 2014: RMB 2.6 billion), prepayments and other current assets (December 31, 2013: RMB912 million, December 31, 2014: RMB2.0 billion), investments (non-current) (December 31, 2013: RMB73 million, December 31, 2014: RMB1.6 billion) and accounts receivables (December 31, 2013: RMB1.1 billion, December 31, 2014: RMB1.4 billion). The inter-company receivables of RMB373 million and RMB RMB1.4 billion as of December 31, 2013 and 2014 mainly represented the cash paid by a VIE to one of the Company’s WFOEs for treasury cash management purpose.

 

As of December 31, 2013 and 2014, the VIEs’ liabilities mainly consisted of advance from customers (December 31, 2013: RMB2.1 billion , December 31, 2014: RMB3.5 billion), accounts payable (December 31, 2013: RMB1.3 billion, December 31, 2014: RMB1.8 billion), other payables and accruals (December 31, 2013: RMB181 million, December 31, 2014: RMB588 million), salary and welfare payable (December 31, 2013: RMB119 million, December 31, 2014: RMB195 million) and taxes payable (December 31, 2013: RMB46 million, December 31, 2014: RMB45 million). The inter-company payables as of December 31, 2013 and 2014 were RMB1.4 billion and RMB6.1 billion, respectively, which primarily consisted of the payables due to Ctrip.com (Hong Kong) Limited (“Ctrip HK”), one of the Company’s wholly-owned subsidiaries, for its payment of overseas air tickets and tour packages on behalf of a VIE and another VIEs’ subsidiary and the service fees payable to the WFOEs under the technical consulting and services agreements, which are operational in nature from the VIEs and their subsidiaries’ perspectives.

 

14


 

 

 

For the year ended December 31,

 

 

 

2012

 

2013

 

2014

 

 

 

RMB

 

RMB

 

RMB

 

Net revenues

 

2,465,286,325

 

3,137,211,893

 

4,138,380,618

 

Cost of revenues

 

644,886,101

 

904,328,902

 

1,252,538,920

 

Net income / (loss)

 

198,929,052

 

(74,463,933

)

(87,193,139

)

 

As aforementioned, the VIEs mainly conduct air-ticketing, travel agency, advertising and value-added telecommunication businesses. Revenues from VIEs accounted for around 56% of the Company’s total revenues in 2014. The air-ticketing and packaged-tour revenues continued to increase in 2014, primarily driven by the increase in the air-ticketing volume and leisure travel volume.

 

The VIEs’ net income before the deduction of the inter-company consulting fee charges were RMB1.1 billion, RMB1.3 billion and RMB1.1 billion for the years ended December 31, 2012, 2013 and 2014, respectively.

 

The amount of service fees paid by all the VIEs as a percentage of the VIEs’ total net income were 82.7%, 105.9%and 109.4% for the years ended December 31, 2012, 2013 and 2014, respectively.

 

The WFOEs are the sole and exclusive provider of technical consulting and related services and information services for the VIEs. Pursuant to the Exclusive Technical Consulting and Service Agreements, the VIEs pay service fees to the WFOEs based on the VIEs’ actual operating results. The WFOEs are entitled to receive substantially all of the net income and transfer a majority of the economic benefits in the form of service fees from the VIEs and VIEs’ subsidiaries to the WFOEs. The WFOEs did not request service fee payments of RMB286 million from Chengdu Ctrip and Chengdu Ctrip International during the years ended December 31 2012, primarily for tax planning purpose. In 2013, Chengdu Ctrip and Chengdu Ctrip International started to pay service fee to WFOEs, and the retained earnings of 2013 and 2014 have been transferred to the WFOEs, respectively. For remaining undistributed retained earnings, tax planning strategies are in place to support their enterprise income tax free treatment.

 

Currently there is no contractual arrangement that could require the Company to provide additional financial support to the consolidated VIEs. As the Company is conducting certain business in the PRC mainly through the VIEs, the Company may provide such support on a discretionary basis in the future, which could expose the Company to a loss.

 

Foreign currencies

 

The Group’s reporting currency is RMB. The Company’s functional currency is US$. The Company’s operations are conducted through the subsidiaries and VIEs where the local currency is the functional currency and the financial statements of those subsidiaries are translated from their respective functional currencies into RMB.

 

Transactions denominated in currencies other than functional currencies are translated at the exchange rates quoted by the People’s Bank of China (the “PBOC”), the Hong Kong Association of Banks (the “HKAB”) or major Taiwan banks, prevailing or averaged at the dates of the transaction for PRC and Hong Kong subsidiaries and ezTravel, a Taiwan subsidiary respectively. Gains and losses resulting from foreign currency transactions are included in the consolidated statements of income and comprehensive income. Monetary assets and liabilities denominated in foreign currencies are translated using the applicable exchange rates quoted by the PBOC, HKAB or banks located in Taiwan at the balance sheet dates. All such exchange gains and losses are included in the statements of income.

 

Assets and liabilities of the group companies are translated from their respective functional currencies to the reporting currency at the exchange rates at the balance sheet dates, equity accounts are translated at historical exchange rates and revenues and expenses are translated at the average exchange rates in effect during the reporting period. The exchange differences for the translation of group companies with non-RMB functional currency into the RMB functional currency are included in foreign currency translation adjustments, which is a separate component of shareholders’ equity on the consolidated financial statements.

 

Translations of amounts from RMB into US$ are solely for the convenience of the reader and were calculated at the rate of US$1.00 = RMB6.2046 on December 31, 2014, representing the certificated exchange rate published by the Federal Reserve Board. No representation is intended to imply that the RMB amounts could have been, or could be, converted, realized or settled into US$ at that rate on December 31, 2014, or at any other rate.

 

Cash and cash equivalents

 

Cash includes currency on hand and deposits held by financial institutions that can be added to or withdrawn without limitation. Cash equivalents represent short-term, highly liquid investments that are readily convertible to known amounts of cash and with original maturities from the date of purchase of generally three months or less.

 

15


 

Restricted cash

 

Restricted cash represents cash that cannot be withdrawn without the permission of third parties. The Group’s restricted cash is substantially cash balance on deposit required by its business partners and commercial banks.

 

Short-term investment

 

Short-term investments represent the investments issued by commercial banks or other financial institutions with a variable interest rate indexed to the performance of underlying assets within one year. The Company elected the fair value method at the date of initial recognition and carried these investments subsequently at fair value. Changes in the fair value are reflected in the consolidated statements of income and comprehensive income.

 

Long term loan receivable

 

Long-term loan receivables are recorded at cost and compounded accrued interests as we do not intend to sell the security, or it is more likely than not that the company will not be required to sell the security before full recovery of our cost. The Company evaluates the qualitative criteria to determine whether we expect to recover our cost.

 

Land use rights

 

Land use rights represent the prepayments for usage of the parcels of land where the office buildings are located, are recorded at cost, and are amortized over their respective lease periods (usually over 40 to 50 years).

 

Property, equipment and software

 

Property, equipment and software are stated at cost less accumulated depreciation and amortization. Depreciation and amortization are computed using the straight-line method over the following estimated useful lives, taking into account any estimated residual value:

 

Building

 

20-30 years

 

Leasehold improvements

 

Lesser of the term of the lease or the estimated useful lives of the assets

 

Website-related equipment

 

5 years

 

Computer equipment

 

3-5 years

 

Furniture and fixtures

 

3-5 years

 

Software

 

3-5 years

 

 

Construction in progress is stated at cost. Construction in progress mainly refers to costs associated with the purchase of building in Shanghai Sky SOHO and construction of information and technology center in Chengdu before the buildings are put into service. All direct costs related to the new buildings are capitalized as construction in progress until it is substantially completed and available for use.

 

Investments

 

The Company investments include cost method investments, equity method investments and available-for-sale investments in certain publicly traded companies and privately-held companies.

 

Cost method is used for investments over which the Company does not have the ability to exercise significant influence. Gain or losses are realized when such investments are sold or when dividends are declared or payments are received. In October 2013, the Company contributed cash in return for 5% equity shares in Zhong An Online Property Insurance Co., Ltd. (“Zhong An Online”). In December 2013, the Company acquired approximately 4% equity shares in Keystone Lodging Holdings Limited (“Keystone”), which in 2013 merged with 7 Days Group Holdings Limited (“7 Days”), a leading economy hotel chain based in China. In 2014, dividends of RMB39 million are received from Keystone. Cost method of accounting was applied to both transactions due to lack of ability to exercise significant influence (Note 8). No new cost method investment transactions have occurred in 2014.

 

The Company applies equity method in accounting for our investments in entities in which the Company has the ability to exercise significant influence but does not own a majority equity interest or otherwise controls. In 2008, the Company acquired equity interest in Homeinns Hotel Group (“Homeinns” formerly Home Inns & Hotels Management Inc.) and on May 21, 2009, the Company started to have the ability to exercise significant influence and meeting requirement to apply equity method of accounting. In 2014, through a series of transactions, the Company culminated 35% share capital of Skyseas Holding International Ltd. (“Skyseas”) and provided a loan of US$80 million to Skyseas to finance its purchase of a cruise ship. The Company therefore has the ability to exercise significant influence on Skyseas and applied equity method to account for the investment (Note 8). Unrealized gains on transactions between the Company and the affiliated entity are eliminated to the extent of the Company’s interest in the affiliated entity; unrealized losses are also eliminated unless the transaction provides evidence of an impairment of the asset transferred.

 

16


 

The Company classifies its investments in debt and equity securities into one of three categories and accounts for these as follows: (i) debt securities that the Company has the positive intent and the ability to hold to maturity are classified as “held to maturity” and reported at amortized cost; (ii) debt and equity securities that are bought and held principally for the purpose of selling them in the near term are classified as “trading securities” with unrealized holding gains and losses included in earnings; (iii) debt and equity securities not classified as held to maturity or as trading securities are classified as “available-for-sale” and reported at fair value through other comprehensive income. The Company has designated its investment in commons shares of China Lodging Group, Limited (“Hanting”), Tuniu Corporation (“Tuniu”) and eHi Car Services Limited(“eHi”) as available-for-sale equity securities, investment in shares with liquidation preference right of Tongcheng Network Technology Share Co., Ltd. (“LY.com”) and a travel agency focusing on teenager market as available-for-sale equity securities and its investments in convertible redeemable preferred shares (“Preferred Share”) of Easy Go Inc.(“Easy Go”), Dining Secretary China Limited (“Dining Secretary”) , Happy City Holdings Limited(“Happy City”) and a big-data advertisement company as available-for-sale debt securities in accordance with Accounting Standard Codification (“ASC”) 320-10, respectively (Note 8). Unrealized gains and losses on available-for-sale securities are excluded from earnings and reported as accumulated other comprehensive income (loss), net of tax. Realized gains or losses are charged to earnings during the period in which the gains or losses are realized.

 

The Company monitors its investments for other-than-temporary impairment by considering factors including, but not limited to, current economic and market conditions, the operating performance of the companies including current earnings trends and other company-specific information.

 

Fair value measurement of financial instruments

 

Financial instruments of the Group primarily comprise of cash and cash equivalents, restricted cash, short-term investments, accounts receivable, due from related parties, available-for-sale investments, accounts payable, due to related parties, advances from customers, short-term bank borrowings, other short-term liabilities and long-term debts. As of December 31, 2013 and 2014, carrying values of these financial instruments except for short-term investments and available-for-sale investments approximated their fair values because of their generally short maturities, and the carrying value of the long-term debts also approximates their fair value, as they bear interest at rates determined based on prevailing interest rates in the market. The Company reports short-term investments and available-for-sale investments at fair value at each balance sheet date and changes in fair value are reflected in the statements of income and comprehensive income.

 

The Company does not have any financial liabilities which must be measured at fair value on a recurring basis.

 

We measure our financial assets and liabilities using inputs from the following three levels of the fair value hierarchy. The three levels are as follows:

 

Level 1 inputs are unadjusted quoted prices in active markets for identical assets that the management has the ability to access at the measurement date.

 

Level 2 inputs include quoted prices for similar assets in active markets, quoted prices for identical or similar assets in markets that are not active, inputs other than quoted prices that are observable for the asset (i.e., interest rates, yield curves, etc.), and inputs that are derived principally from or corroborated by observable market data by correlation or other means (market corroborated inputs).

 

Level 3 includes unobservable inputs that reflect the management’s assumptions about the assumptions that market participants would use in pricing the asset. The management develops these inputs based on the best information available, including the own data.

 

Business combination

 

U.S. GAAP requires that all business combinations not involving entities or businesses under common control be accounted for under the purchase method. From January 1, 2009, the Group adopted ASC 805, “Business combinations”. Following this adoption, the cost of an acquisition is measured as the aggregate of the fair values at the date of exchange of the assets given, liabilities incurred, and equity instruments issued. The costs directly attributable to the acquisition are expensed as incurred. Identifiable assets, liabilities and contingent liabilities acquired or assumed are measured separately at their fair value as of the acquisition date, irrespective of the extent of any non-controlling interests. The excess of the (i) the total of cost of acquisition, fair value of the non-controlling interests and acquisition date fair value of any previously held equity interest in the acquiree over (ii) the fair value of the identifiable net assets of the acquiree is recorded as goodwill. If the cost of acquisition is less than the fair value of the net assets of the subsidiary acquired, the difference is recognized directly in the consolidated statements of income and comprehensive income.

 

17


 

The determination and allocation of fair values to the identifiable assets acquired and liabilities assumed is based on various assumptions and valuation methodologies requiring considerable management judgment. The most significant variables in these valuations are discount rates, terminal values, the number of years on which to base the cash flow projections, as well as the assumptions and estimates used to determine the cash inflows and outflows. Management determines discount rates to be used based on the risk inherent in the related activity’s current business model and industry comparisons. Terminal values are based on the expected life of products and forecasted life cycle and forecasted cash flows over that period. Although we believe that the assumptions applied in the determination are reasonable based on information available at the date of acquisition, actual results may differ from the forecasted amounts and the difference could be material.

 

Acquisitions

 

Wing On Travel

 

In May 2010, to develop and expand our overseas business, our wholly-owned subsidiary C-Travel, a Cayman Island company, successfully completed the transaction to acquire 90% of the issued share capital of Wing On Travel’s travel service segment, a Hong Kong based travel service provider that offers packaged-tours as well as air tickets and hotel reservation services. We obtained control over Wing On Travel and have consolidated its financial statements since then. The total purchase price for the transaction is approximately RMB598 million (US$88 million). The cash payment is approximately RMB454 million (approximately US$68 million) after the Company assumed net current liability of Wing On Travel as of acquisition date. In February, 2012, Ctrip acquired the remaining 10% of the issued share capital of Wing On Travel’s travel service segment as operated through HKWOT (BVI) Limited, at a consideration of approximately RMB60 million (US$9.4 million). The purchase of the remaining 10% non-controlling interests was initiated by the Company is treated as an equity transaction. The difference between the book value of the 10% non-controlling interests and the cash consideration of Rmb21.7 million was recorded as additional paid in capital. Upon completion of this share purchase, Ctrip holds 100% of the share capital of Wing On Travel. Based on the Company’s assessment, financial results of Wing On Travel were not considered material to the Group for the years ended December 31, 2012, 2013 and 2014.

 

Travel agencies

 

The Company completed several transactions to acquire controlling shares of certain travel agencies to enrich its products and to expand business. The Company makes estimates and judgments in determining the fair value of the acquired assets and liabilities, based in part on independent appraisal reports as well as its experience with purchasing similar assets and liabilities in similar industries. The amount excess of the purchase price over the fair value of the identifiable assets and liabilities acquired is recorded as goodwill.

 

In August, 2013, the Company completed the transaction to acquire controlling shares of a B2B hotel reservation company. The purchase consideration is approximately RMB47 million (US$8 million). The financial results of the acquired entity have been included in the Company’s consolidated financial statements since the acquisition date. In February, 2014, Ctrip acquired the remaining share capital of this B2B hotel reservation company at a consideration of approximately RMB44 million (US$7 million). The purchase of the remaining non-controlling interests initiated by the Company was treated as an equity transaction. The difference between the book value of the remaining non-controlling interests and the cash consideration was recorded as additional paid in capital. Upon completion of this share purchase, Ctrip holds 100% of the share capital of the B2B hotel reservation company.

 

In August, 2013, the Company completed the transaction to acquire 100% of the share capital of a wholesaler operated hotel reservation and air ticketing services. The purchase consideration is HK$125 million (US$16 million).

 

In January, 2014, the Company completed the transaction to acquire a 51% controlling interest of an online trip package service provider. The purchase consideration is RMB139 million (US$23 million). The results of the acquired entity’s operations have been included in the consolidated financial statements of the Company since the acquisition date. On the acquisition date, the allocation of the purchase price of the assets acquired and liabilities assumed based on their fair values was as follows. The non-controlling interest represents the fair value of the 49% equity interest not held by the Company:

 

18

 

 

 

RMB

 

Net assets

 

13,176,760

 

Identifiable intangible assets — trademark and domain

 

61,564,134

 

Deferred tax liabilities

 

(9,234,620

)

Non-controlling interests

 

(134,009,200

)

Goodwill

 

207,981,890

 

Total purchase consideration

 

139,478,964

 

 

In December, 2014, the Company completed the transaction to acquire approximately 43% equity stake and obtained majority voting power of an offline travel agency. The purchase consideration is approximately RMB308 million (US$50 million). As of December 31, 2014, the total unpaid consideration was amounted to RMB 196 million and will be paid in 2015. The financial results of the acquired entity have been included in the Company’s consolidated financial statements since the acquisition date. On the acquisition date, the allocation of the purchase price of the assets acquired and liabilities assumed based on their fair values was as follows:

 

 

 

RMB

 

Net assets (including the cash acquired of RMB142 million)

 

164,411,042

 

Identifiable intangible assets – customer list

 

69,700,000

 

Identifiable intangible assets – trademark

 

174,800,000

 

Deferred tax liabilities

 

(61,125,000

)

Non-controlling interests

 

(370,656,000

)

Goodwill

 

330,669,958

 

Total purchase consideration

 

307,800,000

 

 

A technology company focusing on hotel customer reviews

 

In November 2013, the Company completed the transaction to acquire 35% equity shares in a technology company focusing on hotel customer reviews. The Company applied equity method to account for the investment. The total investment cost is RMB 29 million.

 

In October, 2014, the Company acquired the remaining 65% equity shares and obtained control with total purchase consideration of approximately RMB240 million which includes the cash consideration of RMB 115 million and the swapped non-controlling interest of one of the Company’s subsidiaries with the fair value of RMB 125 million. The Company also recognized a gain from the re-measurement of its previously held 35% equity interest to the fair value with amount of RMB100 million. As of December 31, 2014, the total unpaid cash consideration was RMB 97 million and will be paid in 2015. The financial results of the acquired company have been included in the Company’s consolidated financial statements since the date the Company obtained control and were not significant to the Company for the year ended December 31, 2014. On the acquisition date, the allocation of the purchase price of the assets acquired and liabilities assumed based on their fair values was as follows:

 

 

 

RMB

 

Net assets

 

2,134,170

 

Goodwill

 

366,884,722

 

Previously held equity interest

 

(129,360,000

)

Total purchase consideration

 

239,658,892

 

 

Based on the Company’s assessment, financial results of the above mentioned acquired companies were not considered material to the Group for the years ended December 31, 2013 and 2014.

 

Other acquisitions

 

From time to time, the Company selectively acquired or invested in businesses that complement our existing business, and will continue to do so in the future. Other than disclosed above, none of such acquisitions or investments is material to our businesses or financial results.

 

Goodwill and other intangible assets

 

Goodwill represents the excess of the purchase price over the fair value of the identifiable assets and liabilities acquired as a result of the Company’s acquisitions of interests in its subsidiaries and consolidated VIEs.

 

19


 

Goodwill is not amortized but is reviewed at least annually for impairment or earlier, if an indication of impairment exists. Recoverability of goodwill is evaluated using a two-step process. In the first step, the fair value of a reporting unit is compared to its carrying value. If the fair value of a reporting unit exceeds the carrying value of the net assets assigned to a reporting unit, goodwill is considered not impaired and no further testing is required. If the carrying value of the net assets assigned to a reporting unit exceeds the fair value of a reporting unit, the second step of the impairment test is performed in order to determine the implied fair value of a reporting unit’s goodwill. Determining the implied fair value of goodwill requires valuation of a reporting unit’s tangible and intangible assets and liabilities in a manner similar to the allocation of purchase price in a business combination. If the carrying value of a reporting unit’s goodwill exceeds its implied fair value, goodwill is deemed impaired and is written down to the extent of the difference. The Company estimates total fair value of the reporting unit using discounted cash flow analysis, and makes assumptions regarding future revenue, gross margins, working capital levels, investments in new products, capital spending, tax, cash flows, and the terminal value of the reporting unit.

 

As of December 31, 2014, the step one analysis performed indicated that the fair value of the Company’s reporting units was substantially greater than the respective carrying value. There was no impairment of goodwill during the years ended December 31, 2012, 2013 and 2014. Each quarter the Company reviews the events and circumstances to determine if goodwill impairment may be indicated.

 

Separately identifiable intangible assets that have determinable lives continue to be amortized and consist primarily of non-compete agreements, customer list, supplier relationship, technology patent and a cross-border travel agency license as of December 31, 2013 and 2014. The Company amortizes intangible assets on a straight-line basis over their estimated useful lives, which is three to ten years. The estimated life of amortized intangibles is reassessed if circumstances occur that indicate the life has changed. Other intangible assets that have indefinite useful life primarily include trademark and domain names as of December 31, 2013 and 2014. The Company evaluates indefinite-lived intangible assets each reporting period to determine whether events and circumstances continue to support an indefinite useful life. If an intangible asset that is not being amortized is subsequently determined to have a finite useful life, the asset is tested for impairment.

 

The Company reviews intangible assets with indefinite lives annually for impairment.

 

No impairment on other intangible assets was recognized for the years ended December 31, 2012, 2013 and 2014.

 

Impairment of long-lived assets

 

Long-lived assets (including intangible with definite lives) are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Reviews are performed to determine whether the carrying value of asset group is impaired, based on comparison to undiscounted expected future cash flows. If this comparison indicates that there is impairment, the Group recognizes impairment of long-lived assets to the extent the carrying amount of such assets exceeds the fair value.

 

No impairment of long-lived assets was recognized for the years ended December 31, 2012, 2013, and 2014.

 

Accrued liability for customer reward program

 

The Group’s customers participate in a reward program, which provides travel awards and other gifts to members based on accumulated membership points that vary depending on the services rendered and fees paid. The estimated incremental costs to provide free travel and other gifts are recognized as sales and marketing expense in the statements of income and comprehensive income and accrued for as a current liability as members accumulate points. As members redeem awards or their entitlements expire, the accrued liability is reduced correspondingly. As of December 31, 2013, and 2014, the Group’s accrued liability for its customer reward program amounted to RMB285 million and RMB431 million, respectively, based on the estimated liabilities under the customer reward program. Our expenses for the customer rewards program were approximately RMB157million, RMB203 million and RMB355 million for the years ended December 31, 2012, 2013 and 2014.

 

Deferred revenue

 

In 2011, the Group launched a coupon program, through which the Group provides coupons for customers who book selected hotels online through website. Customers who use the coupons receive credits in their virtual cash accounts upon check-out from the hotels and reviews for hotels submitted. Customers may redeem the amount of credits in their virtual cash account in cash, voucher, or mobile phone credit. In accordance with ASC 605-50 “Revenue Recognition: Customer Payments and Incentives”, the Group accounts for the estimated cost of future usage of coupons as contra-revenue or sales and marketing expenses in the consolidated statements.

 

20


 

Revenue recognition

 

The Group conducts its principal businesses in Great China Area primarily through Ctrip Computer Technology (Shanghai) Co., Ltd. (“Ctrip Computer Technology”), Ctrip Travel Information Technology (Shanghai) Co., Ltd. (“Ctrip Travel Information”), Ctrip Travel Network Technology (Shanghai) Co., Ltd. (“Ctrip Travel Network”), Ctrip Information Technology (Nantong) Co., Ltd. (“Ctrip Information Technology”), ezTravel and Wing On Travel. Some of the operations of Ctrip Computer Technology and Ctrip Travel Network are conducted through a series of services and other agreements with the VIEs and VIE subsidiaries.

 

Ctrip Computer Technology, Ctrip Travel Information, Ctrip Travel Network, Ctrip Information Technology and the VIEs are subject to business tax and related surcharges on the provision of taxable services in the PRC, which include hotel reservation and ticketing services provided to customers. In the statements of income and comprehensive income, business tax and related surcharges are deducted from revenues to arrive at net revenues.

 

The Group presents revenues on a net basis generally. Revenues are recognized at gross amounts received from customers in cases where the Group undertakes the majority of the business risks and acts as principal related to the services provided. The amount of revenues recognized at gross basis was immaterial during the years ended December 31, 2012, 2013 and 2014, respectively.

 

In November 2011, the Ministry of Finance released Circular Caishui [2011] No. 111 mandating Shanghai to carry out a pilot program of tax reform. Effective January 1, 2012, selected entities within modern service industries will switch from a business tax payer to a value-added tax (‘‘VAT’’) payer. In May 2013, the Ministry of Finance released Circular Caishui [2013] No. 37 to extend the tax reform nationwide. Effective August 1, 2013, entities within transportation service and selected modern service industries will switch from a business tax payer to a VAT payer.

 

Accommodation reservation services

 

The Group receives commissions from travel suppliers for hotel room reservations through the Group’s transaction and service platform. Commissions from hotel reservation services rendered are recognized after hotel customers have completed their stay at the applicable hotel and upon confirmation of pending payment of the commissions by the hotel. Contracts with certain travel suppliers contain incentive commissions typically subject to achieving specific performance targets and such incentive commissions are recognized when it is reasonably assured that the Group is entitled to such incentive commissions. The Group generally receives incentive commissions from monthly arrangements with hotels based on the number of hotel room reservations where customers have completed their stay. The Group presents revenues from such transactions on a net basis in the statements of income and comprehensive income as the Group, generally, does not assume inventory risks and has no obligations for cancelled hotel reservations.

 

Transportation ticketing services

 

Transportation ticketing services revenues mainly represent revenues from reservations of air tickets, railway tickets and other related services. The Group receives commissions from travel suppliers for ticketing services through the Group’s transaction and service platform under various services agreements. Commissions from ticketing services rendered are recognized after tickets are issued. The Group presents revenues from such transactions on a net basis in the statements of income as the Group, generally, does not assume inventory risks and has no obligations for cancelled airline ticket reservations. Loss due to obligations for cancelled airline ticket reservations is minimal in the past.

 

Packaged-tour

 

The Group receives referral fees from travel product providers for packaged-tour products and services through the Group’s transaction and service platform. Referral fees are recognized as commissions on a net basis after the packaged-tour service are rendered and collections are reasonably assured.

 

Shanghai Ctrip, Beijing Ctrip, Guangzhou Ctrip, Shenzhen Ctrip and Wing On Travel conduct domestic and cross-border travel tour services. Revenues, mainly referral fees, are recognized as commissions on a net basis after the services are rendered.

 

Corporate travel

 

Corporate travel management revenues primarily include commissions from air ticket booking, hotel reservation and packaged-tour services rendered to corporate clients. The Group contracts with corporate clients based on service fee model. Travel reservations are made via on-line and off-line services for air tickets, hotel and package-tour. Revenue is recognized on a net basis after the services are rendered, e.g. air tickets are issued, hotel stays or packaged-tour are completed, and collections are reasonably assured.

 

Other businesses

 

Other businesses comprise primarily of online advertising services, the sale of Property Management System (“PMS”), and related maintenance service.

 

21


 

Shanghai Ctrip Commerce receives advertising revenues, which principally represent the sale of banners or sponsorship on the website from customers. Advertising revenues are recognized ratably over the fixed term of the agreement as services are provided.

 

Software Hotel Information conducts sale of PMS and related maintenance service. The sale of PMS is recognized upon customer acceptance. Maintenance service is recognized ratably over the term of the maintenance contract on a straight-line basis.

 

Allowance for doubtful accounts

 

Accounts receivable are recorded at the invoiced amount and do not bear interest. The Company reviews on a periodic basis for doubtful accounts for the outstanding trade receivable balances based on historical experience and information available. Additionally, we make specific bad debt provisions based on (i) our specific assessment of the collectability of all significant accounts; and (ii) any specific knowledge we have acquired that might indicate that an account is uncollectible. The facts and circumstances of each account may require us to use substantial judgment in assessing its collectability. The following table summarized the details of the Company’s allowance for doubtful accounts:

 

 

 

2012

 

2013

 

2014

 

 

 

RMB

 

RMB

 

RMB

 

Balance at beginning of year

 

4,974,138

 

4,351,963

 

5,896,903

 

Provision for doubtful accounts

 

376,164

 

2,842,681

 

11,737,580

 

Write-offs

 

(998,339

)

(1,297,741

)

(2,927,299

)

Balance at end of period

 

4,351,963

 

5,896,903

 

14,707,184

 

 

Cost of revenues

 

Cost of revenues consists primarily of payroll compensation of customer service center personnel, credit card service fee, telecommunication expenses, direct cost of principal travel tour services, depreciation, rentals and related expenses incurred by the Group’s transaction and service platform which are directly attributable to the rendering of the Group’s travel related services and other businesses.

 

Product development

 

Product development expenses include expenses incurred by the Group to develop the Group’s travel supplier networks as well as to maintain, monitor and manage the Group’s transaction and service platform. The Group recognizes website, software and mobile applications development costs in accordance with ASC 350-50 “Website development costs” and ASC 350-40 “Software — internal use software” respectively. The Group expenses all costs that are incurred in connection with the planning and implementation phases of development and costs that are associated with repair or maintenance of the existing websites and mobile applications or the development of software or mobile applications for internal use and websites content.

 

Sales and marketing

 

Sales and marketing expenses consist primarily of costs of payroll and related compensation for the Company’s sales and marketing personnel, advertising expenses, and other related marketing and promotion expenses. Advertising expenses, amounting to approximately RMB276 million, RMB538 million and RMB1.2 billion for the years ended December 31, 2012, 2013 and 2014 respectively, are charged to the statements of income as incurred.

 

Share-based compensation

 

Under ASC 718, the Company applied the Black-Scholes valuation model in determining the fair value of options granted. Risk-free interest rates are based on US Treasury yield for the terms consistent with the expected life of award at the time of grant. Expected life is based on historical exercise patterns, for options granted before 2008 which the Company has historical data of and believes are representative of future behavior. For options granted since 2008, the Company used simplified method to estimate its expected life. Expected dividend yield is determined in view of the Company’s historical dividend payout rate and future business plan. The Company estimates expected volatility at the date of grant based on historical volatilities. The Company recognizes compensation expense on all share-based awards on a straight-line basis over the requisite service period. Forfeiture rate is estimated based on historical forfeiture patterns and adjusted to reflect future change in circumstances and facts, if any. If actual forfeitures differ from those estimates, we may need to revise those estimates used in subsequent periods.

 

22


 

ASC 718 requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from initial estimates. Share-based compensation expense was recorded net of estimated forfeitures such that expense was recorded only for those share-based awards that are expected to vest.

 

According to ASC 718, a change in any of the terms or conditions of stock options shall be accounted for as a modification of the plan. Therefore, the Company calculates incremental compensation cost of a modification as the excess of the fair value of the modified option over the fair value of the original option immediately before its terms are modified, measured based on the share price and other pertinent factors at the modification date. For vested options, the Company would recognize incremental compensation cost in the period the modification occurs and for unvested options, the Company would recognize, over the remaining requisite service period, the sum of the incremental compensation cost and the remaining unrecognized compensation cost for the original award on the modification date.

 

According to ASC 718, the Company classifies options or similar instruments as liabilities if the entity can be required under any circumstances to settle the option or similar instrument by transferring cash or other assets and such cash settlement is probable. The percentage of the fair value that is accrued as compensation cost at the end of each period shall equal the percentage of the requisite service that has been rendered at that date. Changes in fair value of the liability classified award that occur during the requisite service period shall be recognized as compensation cost over that period. Changes in fair value that occur after the end of the requisite service period are compensation cost of the period in which the changes occur. Any difference between the amount for which a liability award is settled and its fair value at the settlement date as estimated is an adjustment of compensation cost in the period of settlement.

 

Share incentive plans

 

On November 5, 2004, the Company’s board of directors adopted a 2005 Employee’s Stock Option Plan (“2005 Option Plan”). The 2005 Option Plan was approved by the shareholders of the Company in October 2005. The Company has reserved 3,000,000 ordinary shares for future issuances of options under the 2005 Option Plan. The terms of the 2005 Option Plan are substantially similar to the Company’s 2003 Option Plan. As of December 31, 2013 and 2014, 587,596 and 386,310 options were outstanding under the 2005 Option Plan respectively.

 

On October 17, 2007, the Company adopted a 2007 Share Incentive Plan (“2007 Incentive Plan”), which was approved by the shareholders of the Company on June 15, 2007. Under the 2007 Incentive Plan, the maximum aggregate number of shares, which may be issued pursuant to all share-based awards (including Incentive Share Options and Restricted Share Units (“RSU”)), is one million ordinary shares as of the first business day of 2007, plus an annual increase of one million shares to be added on the first business day of each calendar year beginning in 2008 to 2016. Under the 2007 Incentive Plan, the directors may, at their discretion, grant any employees, officers, directors and consultants of the Company and/or its subsidiaries such share-based awards. Shares options granted under 2007 Incentive Plan are vested over a period of 4 years. RSUs granted under 2007 Incentive Plan have a restricted period for 4 years. As of December 31, 2013 and 2014, 3,543,136 and 4,585,868 options and 623,424 and 1,058,608 RSUs were outstanding under the 2007 Incentive Plan.

 

Option modification

 

In January 2012, the compensation committee passed a resolution to replace all options that previously granted under the 2007 incentive plan but with exercise price above $120.00 per ordinary share, with maximum of 518,017 restricted share units (RSU) of the Company based on the conversion ratio at 4:1 (“the Replacement”). The total options modified approximate 1.9 million and the Company incurred no incremental cost for such modification.

 

A summary of option activity under the share option plans

 

The following table summarized the Company’s share option activity under all the option plans (in US$, except shares):

 

 

 

Number of
Shares

 

Weighted
Average
Exercise
Price

 

Weighted
Average
Remaining
Contractual
Life (Years)

 

Aggregate
Intrinsic
Value

 

Outstanding at December 31, 2011

 

5,433,541

 

85.02

 

5.59

 

144,827,231

 

Granted

 

961,980

 

79.55

 

 

 

 

 

Exercised

 

(502,991

)

29.39

 

 

 

 

 

Forfeited

 

(71,623

)

136.67

 

 

 

 

 

Converted to RSU in January 2012

 

(1,901,372

)

91.8

 

 

 

 

 

Outstanding at December 31, 2012

 

3,919,535

 

64.81

 

5.14

 

57,772,345

 

Granted

 

945,106

 

79.70

 

 

 

 

 

Exercised

 

(660,459

)

48.05

 

 

 

 

 

Forfeited

 

(73,450

)

91.75

 

 

 

 

 

Outstanding at December 31, 2013

 

4,130,732

 

70.42

 

4.99

 

528,988,489

 

Granted

 

1,472,449

 

172.56

 

 

 

 

 

Exercised

 

(573,351

)

62.52

 

 

 

 

 

Forfeited

 

(57,652

)

117.63

 

 

 

 

 

Outstanding at December 31, 2014

 

4,972,178

 

101.03

 

5.17

 

405,399,251

 

Vested and expect to vest at December 31, 2014

 

4,755,245

 

99.67

 

5.10

 

394,059,498

 

Exercisable at December 31, 2014

 

2,260,520

 

65.37

 

3.36

 

263,652,339

 

 

23


 

The Company’s current practice is to issue new shares to satisfy share option exercises.

 

The expected-to-vest options are the result of applying the pre-vesting forfeiture rate assumptions of 8% to total unvested options.

 

The aggregate intrinsic value in the table above represents the total intrinsic value (the aggregate difference between the Company’s closing stock price of US$182 as of December 31, 2014 and the exercise price for in-the-money options) that would have been received by the option holders if all in-the-money options had been exercised on December 31, 2014.

 

The total intrinsic value of options exercised during the years ended December 31, 2012, 2013 and 2014 were US$34million US$99 million and US$148 million, respectively.

 

The following table summarizes information related to outstanding and exercisable options as of December 31, 2014 (in US$, except shares):

 

 

 

Outstanding

 

Exercisable

 

Range of
Exercise Prices

 

Number of
shares

 

Weighted-Average
Exercise Price

 

Weighted-average
Remaining
Contractual
Life (Years)

 

Number of
shares

 

Weighted-Average
Exercise Price

 

Weighted-average
Remaining
Contractual
Life (Years)

 

35.00-44.99

 

1,092,164

 

38.03

 

2.10

 

1,092,164

 

38.03

 

2.10

 

45.00-58.99

 

41,007

 

58.39

 

0.12

 

41,007

 

58.39

 

0.12

 

59.00-77.99

 

1,281,421

 

76.87

 

5.99

 

376,408

 

75.33

 

5.89

 

78.00-96.99

 

640,510

 

91.20

 

4.29

 

405,003

 

93.08

 

3.73

 

97.00-129.99

 

427,259

 

105.57

 

4.66

 

324,269

 

106.44

 

4.59

 

130.00-249.99

 

1,489,817

 

172.09

 

7.37

 

21,669

 

150.58

 

4.09

 

 

 

4,972,178

 

 

 

 

 

2,260,520

 

 

 

 

 

 

The weighted average fair value of options granted during the years ended December 31, 2012, 2013 and 2014 was US$38.01, US$38.40 and US$78.10 per share, respectively.

 

As of December 31, 2014, there was US$129 million of total unrecognized compensation cost, net of estimated forfeitures, related to unvested share options which are expected to be recognized over a weighted average period of 2.7 year. Total unrecognized compensation cost may be adjusted for future changes in estimated forfeitures. Total cash received from the exercise of share options amounted to RMB81,911,154, RMB180,261,090 and RMB184,579,173 for the year ended December 31, 2012, 2013 and 2014, respectively.

 

The Company calculated the estimated fair value of share options on the date of grant using the Black-Scholes pricing model with the following assumptions for the years ended December 31, 2012, 2013 and 2014:

 

 

 

2012

 

2013

 

2014

 

Risk-free interest rate

 

0.71%-1.05%

 

0.69%-0.87%

 

1.66%-1.75%

 

Expected life (years)

 

5.0

 

5.0

 

5.0

 

Expected dividend yield

 

0%

 

0%

 

0%

 

Volatility

 

56%

 

56%

 

49%-52%

 

Fair value of options at grant date per share

 

from US$33.44

 

from US$37.96

 

from US$74.98

 

 

 

to US$42.18

 

to US$39.69

 

to US$109.57

 

 

A summary of RSUs activities under the share option plans

 

The Company granted 164,976, 259,365 and 761,514 RSUs to employees with 4 year requisite service period for the years ended December 31, 2012, 2013 and 2014, respectively. In additional, pursuant to the Replacement mentioned above, another 475,343 RSUs replaced the 1,901,372 options initially granted under the 2007 incentive plan.

 

24


 

The following table summarized the Company’s RSUs activities under all option plans (in US$, except shares):

 

 

 

Number of
Shares

 

Weighted
average grant
date fair
value(US$)

 

Restricted shares

 

 

 

 

 

Outstanding at December 31, 2011

 

190,916

 

130.29

 

Granted

 

164,976

 

82.34

 

Converted from option in January 2012

 

475,343

 

—

 

Exercised

 

(124,644

)

129.84

 

Forfeited

 

(60,290

)

128.27

 

Unvested at December 31, 2012

 

646,301

 

101.30

*

Granted

 

259,365

 

79.23

 

Exercised

 

(224,939

)

118.54

 

Forfeited

 

(57,303

)

85.40

 

Unvested at December 31, 2013

 

623,424

 

83.60

*

Granted

 

761,514

 

185.40

 

Exercised

 

(261,692

)

86.82

 

Forfeited

 

(64,638

)

148.02

 

Unvested at December 31, 2014

 

1,058,608

 

158.55

 

 

* It does not include the impact of restricted shares converted from option.

 

Total share-based compensation cost for the RSUs amounted to US$12.5million, US$13.2 million and US$32.3 million for the years ended December 31, 2012, 2013 and 2014, respectively. As of December 31, 2014, there was US$129 million unrecognized compensation cost, net of estimated forfeitures, related to unvested restricted shares, which are to be recognized over a weighted average vesting period of 2.8 years. Total unrecognized compensation cost may be adjusted for future changes in estimated forfeitures.

 

Operating leases

 

Leases where substantially all the rewards and risks of ownership of assets remain with the leasing company are accounted for as operating leases. Payments made under operating leases net of any incentives received by the Group from the leasing company are charged to the statements of income on a straight-line basis over the lease periods.

 

Taxation

 

Deferred income taxes are provided using the balance sheet liability method. Under this method, deferred income taxes are recognized for the tax consequences of significant temporary differences by applying enacted statutory rates applicable to future years to differences between the financial statement carrying amounts and the tax bases of existing assets and liabilities. The tax base of an asset or liability is the amount attributed to that asset or liability for tax purposes. The effect on deferred taxes of a change in tax rates is recognized in income in the period enacted. A valuation allowance is provided to reduce the amount of deferred tax assets if it is considered unlikely that some portion of, or all of, the deferred tax assets will not be realized.

 

Effective January 1, 2007, the Company adopted ASC 740, “Income Taxes”. It clarifies the accounting for uncertainty in income taxes recognized in the Company’s consolidated financial statements and prescribes a more likely than not threshold for financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. It also provides guidance on derecognition of income tax assets and liabilities, classification of current and deferred income tax assets and liabilities, accounting for interest and penalties associated with tax positions, accounting for income taxes in interim periods, and income tax disclosures.

 

As of both December 31, 2013 and 2014, the Company did not record any liability for uncertain tax positions. The Company’s policy is to recognize, if any, tax related interest as interest expenses and penalties as general and administrative expenses. For 2014 and 2013, the Company did not have any interest and penalties associated with tax positions.

 

25


 

Other income (net)

 

Other income primarily consists of financial subsidies, investment income and foreign exchange gains/(losses). Financial subsidies from local PRC government authority were recorded as other income in the consolidated statements of income. There are no defined rules and regulations to govern the criteria necessary for companies to enjoy such benefits and the amount of financial subsidy are determined at the discretion of the relevant government authority. Financial subsidies are recognized as other income when received. Components of other income for the years ended December 31, 2012, 2013 and 2014 were as follows:

 

 

 

2012

 

2013

 

2014

 

 

 

RMB

 

RMB

 

RMB

 

Financial subsidies

 

90,280,139

 

119,697,248

 

132,094,928

 

Dividends from a cost method investment

 

—

 

—

 

39,036,138

 

Bank charges

 

(10,628,266

)

(18,940,474

)

(49,713,255

)

Foreign exchange gains/(losses)

 

(9,781,057

)

32,523,857

 

(55,930,392

)

Reimbursement from the depository

 

7,914,706

 

17,507,842

 

—

 

Loss from disposal of property, equipment and software

 

(653,191

)

(11,946,443

)

—

 

Gain from the re-measurement of the previously held equity interest to the fair value in the business acquisition (Note 2)

 

—

 

—

 

100,185,800

 

Loss from impairment of long-term investment (Note 9)

 

—

 

—

 

(33,000,000

)

Gain/(loss) on disposal of cost method investment

 

—

 

4,014,829

 

(1,529,046

)

Gain on disposal of equity investment

 

—

 

592,742

 

—

 

Gain on deconsolidation of subsidiaries

 

44,432,052

 

—

 

789,193

 

Others

 

8,723,560

 

19,672,773

 

12,073,069

 

Total

 

130,287,943

 

163,122,374

 

144,006,435

 

 

Statutory reserves

 

The Company’s PRC subsidiaries and the VIEs are required to allocate at least 10% of their after-tax profit to the general reserve in accordance with the PRC accounting standards and regulations. The allocation to the general reserve can be stopped if such reserve has reached 50% of the registered capital of each company. Appropriations to the enterprise expansion fund, staff welfare and bonus fund are at the discretion of the board of directors of Ctrip Computer Technology, Ctrip Travel Information, Ctrip Travel Network, Ctrip Information Technology and Software Hotel Information, the subsidiaries of the Company. Appropriations to discretionary surplus reserve are at the discretion of the board of directors of the VIEs. These reserves can only be used for specific purposes and are not transferable to the Company in form of loans, advances, or cash dividends. During the years ended December 31, 2012, 2013, and 2014, appropriations to statutory reserves have been made of approximately RMB3.4 million, RMB13.5 million, and RMB15.6 million, respectively. The Company’s subsidiary in Taiwan, ezTravel, is required to allocate 10% of its after-tax profit to the statutory reserve in accordance with the Taiwan regulations. During the years ended December 31, 2012 and 2013, appropriations to statutory reserves equivalent to approximately RMB1.8 million and RMB 1.7 million have been made, respectively. There is no such regulation of providing statutory reserve in Hong Kong.

 

Dividends

 

Dividends are recognized when declared.

 

PRC regulations currently permit payment of dividends only out of accumulated profits as determined in accordance with PRC accounting standards and regulations. The Company’s PRC subsidiaries can only distribute dividends after they have met the PRC requirements for appropriation to statutory reserves. Additionally, as the Company does not have any direct ownership in the VIEs, the VIEs cannot directly distribute dividends to the Company. The PRC government imposes control over its foreign currency reserves in part through direct regulation of the conversion of RMB into foreign exchange and through restrictions on foreign trade. As substantially all of our revenues are in RMB, any restrictions on currency exchange may limit our ability to use revenue generated in RMB to fund our business activities outside China or to make dividend payments in U.S. dollars. Restricted net assets of the Company’s PRC subsidiaries and VIEs not distributable in the form of dividends to the parent as a result of the aforesaid PRC regulations and other restrictions were RMB1.9 billion as of December 31, 2014.

 

As a result of the aforementioned PRC regulation and the Company’s organizational structure, accumulated profits of the subsidiaries in PRC distributable in the form of dividends to the parent as of December 31, 2012, 2013 and 2014 were RMB3.6 billion, RMB4.6 billion and RMB5.0 billion, respectively. The Company’s PRC subsidiaries and VIEs are able to enter into royalty and trademark license agreements or certain other contractual arrangements at the sole discretion of the Company, for which the compensatory element of the arrangement is deducted from the accumulated profits.

 

Effective January 1, 2008, current CIT Law imposes a 10% withholding income tax for dividends distributed by foreign invested enterprises to their immediate holding companies outside mainland China. A lower withholding tax rate will be applied if there is a tax treaty arrangement between mainland China and the jurisdiction of the foreign holding company. Distributions to holding companies in Hong Kong that satisfy certain requirements specified by PRC tax authorities, for example, will be subject to a 5% withholding tax rate.

 

26

 

On June 13, 2012, the Company announced that the board of the Company has approved dividend distribution of US$300 million from its PRC subsidiaries to fund a new share repurchase program whereby Ctrip may purchase its own American depositary shares (“ADSs”). This dividend distribution was a one-time event out of the Company’s normal business course, and withholding tax is recorded only for such transaction accordingly. The PRC withholding tax amounted US$15 million was recorded in the Company’s 2012 financial results (Note 15).

 

Earnings per share

 

In accordance with “Computation of Earnings Per Share”, basic earnings per share is computed by dividing net income attributable to common shareholders by the weighted average number of common shares outstanding during the year. Diluted earnings per share is calculated by dividing net income attributable to common shareholders as adjusted for the effect of dilutive ordinary equivalent shares, if any, by the weighted average number of ordinary and dilutive ordinary equivalent shares outstanding during the year. Dilutive ordinary equivalent shares consist of ordinary shares issuable upon the exercise of outstanding share options (using the treasury stock method).

 

Treasury stock

 

On July 30, 2008 and September 30, 2008 our board of directors and shareholders respectively approved a US$15 million share repurchase plan. On September 29, 2011, our board of directors approved another US$100 million share repurchase plan. On June 13, 2012, our board of directors approved a US$300 million share repurchase plan. And on April 3, 2014, our board of directors approved a US$600 million share repurchase plan. The share-repurchase programs do not require the Company to acquire a specific number of shares and may be suspended or discontinued at any time.

 

Treasury stock consists of ADS repurchased by the Group under these three plans. In October 2013, US$45.5 million convertible senior notes issued in 2012 was early converted and 588,219 shares of repurchased treasury stock were delivered to bond holders. In 2014, US$61.6 million convertible senior notes issued in 2012 was converted and 846,131 shares of repurchased treasury stock were delivered to bond holders. As of December 31, 2014, the Company had 3,323,262 shares treasury stock at total cost of US$259 million. Treasury stock is accounted for under the cost method.

 

Segment reporting

 

The Company operates and manages its business as a single segment. Resources are allocated and performance is assessed by the CEO, whom is determined to be the Chief Operating Decision Maker (CODM). Since the Company operates in one reportable segment, all financial segment and product information required by this statement can be found in the Consolidated Statements.

 

The Company primarily generates its revenues from customers in Great China Area, and assets of the Company are also located in Great China Area. Accordingly, no geographical segments are presented.

 

Recent accounting pronouncements

 

In March of 2013, the FASB issued ASU 2013-05, “Foreign Currency Matters (Topic 830), Parent’s Accounting for the Cumulative Translation Adjustment upon Derecognition of Certain Subsidiaries or Groups of Assets within a Foreign Entity or of an Investment in a Foreign Entity.” The amendments clarify the applicable guidance for the release of the cumulative translation adjustment when 1. an entity ceases to have a controlling financial interest in a subsidiary or group of assets that is a nonprofit activity or a business (other than a sale of in substance real estate or conveyance of oil and gas mineral rights) within a foreign entity; 2. there is a loss of a controlling financial interest in a foreign entity or a step acquisition involving an equity method investment that is a foreign entity; and 3. sales or transfers of a controlling financial interest within a foreign entity is the same irrespective of whether the sale or transfer is of a subsidiary or a group of assets (other than a sale of in substance real estate or conveyance of oil and gas mineral rights) that is a nonprofit activity or business. The amendments are effective prospectively for fiscal years (and interim reporting periods within those years) beginning after December 15, 2013. The Company adopted ASU 2013-05 effective January 1, 2014. Such adoption did not have a material effect on the Company’s financial position or results of operations.

 

In March of 2013, the FASB issued ASU 2013-11, “Income Taxes (Topic 740) Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists”. The amendment clarifies that an unrecognized tax benefit, or a portion of an unrecognized tax benefit, should be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward, except as follows. To the extent a net operating loss carryforward, a similar tax loss, or a tax credit carryforward is not available at the reporting date under the tax law of the applicable jurisdiction to settle any additional income taxes that would result from the disallowance of a tax position or the tax law of the applicable jurisdiction does not require the entity to use, and the entity does not intend to use, the deferred tax asset for such purpose, the unrecognized tax benefit should be presented in the financial statements as a liability and should not be combined with deferred tax assets. The assessment of whether a deferred tax asset is available is based on the unrecognized tax benefit and deferred tax asset that exist at the reporting date and should be made presuming disallowance of the tax position at the reporting date. The amendments are effective for fiscal years, and interim periods within those years, beginning after December 15, 2013. The Company adopted ASU 2013-11 effective January 1, 2014. Such adoption did not have a material effect on the Company’s financial position or results of operations.

 

27


 

In April 2014, the FASB issued ASU 2014-08, “Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity”. This update changed the threshold for reporting discontinued operations and added new disclosures for disposals. Under the updated guidance, a discontinued operation is defined as a component or group of components that is disposed of or is classified as held for sale and represents a strategic shift that has (or will have) a major effect on an entity’s operations and financial results. This ASU is effective prospectively for fiscal years, and interim periods within those years, beginning after December 15, 2014. This ASU is not reasonably expected in the future to have a material impact on the Company’s consolidated financial statements, because the Company does not have discontinued operations or disposals of components of an Entity.

 

In May 2014, the FASB and IASB issued their converged standard on revenue recognition. The objective of the revenue standard ASU 2014-09, “Revenue from Contracts with Customers (Topic 606)” is to provide a single, comprehensive revenue recognition model for all contracts with customers to improve comparability within industries, across industries, and across capital markets. The revenue standard contains principles that an entity will apply to determine the measurement of revenue and timing of when it is recognized. The underlying principle is that an entity will recognize revenue to depict the transfer of goods or services to customers at an amount that the entity expects to be entitled to in exchange for those goods or services. For public companies, the revenue standard is effective for the first interim period within annual reporting periods beginning after December 15, 2016 and early adoption is not permitted. The Company is in the process of evaluating the impact of the standard on its consolidated financial statements.

 

In February 2015, the FASB issued the ASU 2015-02, “Amendments to the Consolidation Analysis”.  The objective of issuing the amendments in this Update is to change the analysis that a reporting entity must perform to determine whether it should consolidate certain types of legal entities. The amendments in this Update are an improvement to current US GAAP because they simplify the Codification and reduce the number of consolidation models through the elimination of the indefinite deferral of Statement 167 and because they place more emphasis on risk of loss when determining a controlling financial interest.  The amendments in this Update are effective for public business entities for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2015. Early adoption is permitted, including adoption in an interim period. If an entity early adopts the amendments in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period. A reporting entity may apply the amendments in this Update using a modified retrospective approach by recording a cumulative-effect adjustment to equity as of the beginning of the fiscal year of adoption. A reporting entity also may apply the amendments retrospectively. The Company is in the process of evaluating the impact of the standard on its consolidated financial statements.

 

Certain risks and concentration

 

Financial instruments that potentially subject the Company to significant concentrations of credit risk consist primarily of cash and cash equivalents, restricted cash, short-term investment, accounts receivable, amounts due from related parties, prepayments and other current assets. As of December 31, 2012, 2013 and 2014, substantially all of the Company’s cash and cash equivalents, restricted cash and short-term investment were held in major financial institutions located in the PRC and in Hong Kong, which management considers to be of high credit quality. Accounts receivable are generally unsecured and denominated in RMB, and are derived from revenues earned from operations arising primarily in the PRC.

 

No individual customer accounted for more than 10% of net revenues for the years ended December 31, 2012, 2013 and 2014. No individual customer accounted for more than 10% of accounts receivable as of December 31, 2013 and 2014.

 

3.  PREPAYMENTS AND OTHER CURRENT ASSETS

 

Components of prepayments and other current assets as of December 31, 2013 and 2014 were as follows:

 

 

 

2013

 

2014

 

 

 

RMB

 

RMB

 

Prepayments and deposits to vendors

 

1,083,771,955

 

2,277,055,303

 

Receivables from financial institution

 

28,303,638

 

65,310,413

 

Interest receivable

 

55,861,029

 

39,436,993

 

Employee advances

 

10,476,537

 

24,041,438

 

Prepayments for property and equipment

 

4,575,720

 

5,047,856

 

Others

 

32,767,408

 

58,815,332

 

Total

 

1,215,756,287

 

2,469,707,335

 

 

28


 

4.  LONG-TERM DEPOSITS AND PREPAYMENTS

 

The Group’s subsidiaries and VIEs are required to pay certain amounts of deposit to airline companies to obtain blank air tickets for sales to customers. The subsidiaries and VIEs are also required to pay deposit to local travel bureau as pledge for insurance of traveler’s safety.

 

Components of long-term deposit and prepayments as of December 31, 2013 and 2014 were as follows:

 

 

 

2013

 

2014

 

 

 

RMB

 

RMB

 

Deposits paid to airline suppliers

 

127,011,881

 

128,845,051

 

Unamortized debt issuance cost

 

127,815,384

 

81,391,948

 

Deposits paid to hotel suppliers

 

13,009,271

 

42,495,335

 

Deposits paid to lessor

 

15,161,665

 

16,165,551

 

Deposits paid to travel bureau

 

2,051,195

 

1,387,812

 

Prepayments for fixed assets

 

263,626,283

 

—

 

Others

 

10,509,973

 

36,375,314

 

Total

 

559,185,652

 

306,661,011

 

 

5.  LONG-TERM LOAN RECEIVABLE

 

In December, 2013, in connection with the investment on Keystone (Note 8), the Company entered into a loan agreement with Felicity Investment Holdings Limited (“Felicity”) for a total amount of approximately US$29.5 million with a 5% compounded annual interest rate. The balance of the loan and the compounded accrued interests will be received at the end of the 5 year term of the loan. The loan receivable is fully collateralized with shares of Keystone held by Felicity. As of December 31, 2014, the balance of the loan and the compounded accrued interests was approximately US$31 million.

 

6.  LAND USE RIGHTS

 

The Company’s land use rights are related to the payment to acquire three land use rights, the first one is at total cost of approximately RMB68 million for approximately 17,000 square meters of land in Shanghai, on which the Group has built an information and technology center. The second one was acquired at RMB49 million for approximately 19,500 square meters of land in Nantong, which was put into use in May, 2010. The third one was RMB10 million for approximately 9,000 square meters of land in Chengdu, on which the Group has built an information and technology center of West China. According to land use right policy in the PRC, the Company has a 50-year use right over the land in Shanghai, a 40-year use right over the land in Nantong, and a 50-year use right over the land in Chengdu, which are used as the basis for amortization, respectively. Amortization expense for the years ended December 31, 2012, 2013 and 2014 was approximately RMB2.8 million, RMB3.2 million and RMB2.9 million, respectively. As of December 31, 2013 and 2014, the net book value was RMB107,476,794 and RMB 104,568,868, respectively.

 

7.  PROPERTY, EQUIPMENT AND SOFTWARE

 

Property, equipment and software and its related accumulated depreciation and amortization as of December 31, 2013 and 2014 were as follows:

 

 

 

2013

 

2014

 

 

 

RMB

 

RMB

 

Buildings

 

1,050,102,815

 

1,928,090,705

 

Computer equipment

 

256,542,169

 

350,022,706

 

Website-related equipment

 

135,116,574

 

246,791,832

 

Furniture and fixtures

 

60,468,480

 

86,013,103

 

Software

 

52,640,160

 

76,484,726

 

Leasehold improvements

 

44,835,912

 

51,638,809

 

Construction in progress

 

199,363,516

 

3,014,154,910

 

Less: accumulated depreciation and amortization

 

(386,125,933

)

(532,570,330

)

Total net book value

 

1,412,943,693

 

5,220,626,461

 

 

In 2014, the Company entered into an agreement to acquire building in Shanghai Sky SOHO. All direct costs of the building in Sky SOHO were originally capitalized as construction in progress.

 

29


 

Depreciation expense for the years ended December 31, 2012, 2013 and 2014 was RMB88,462,807, RMB110,494,928 and RMB 173,786,973, respectively.

 

8.  INVESTMENTS

 

The Company’s long-term investments consisting of cost method investments, equity method investments and available-for-sale securities as of December 31, 2013 and 2014 were as follows:

 

 

 

2013

 

2014

 

 

 

RMB

 

RMB

 

Available-for-sale securities

 

 

 

 

 

LY.com (available-for-sale)

 

—

 

1,547,844,523

 

Hanting (available-for-sale)

 

1,016,455,767

 

898,828,511

 

Easy Go (available-for-sale)

 

143,904,165

 

627,905,501

 

eHi (available-for-sale)

 

570,977,550

 

535,024,052

 

Tuniu (available-for-sale)

 

—

 

216,690,294

 

A travel agency focusing on teenager market (available-for-sale)

 

—

 

81,000,000

 

A big-data advertisement company (available-for-sale)

 

—

 

62,046,000

 

Happy City (available-for-sale)

 

37,358,327

 

35,422,062

 

Dining Secretary (available-for-sale)

 

56,242,365

 

29,046,000

 

Equity method investments

 

 

 

 

 

Homeinns (equity method)

 

801,550,868

 

902,964,928

 

Skyseas (equity method)

 

—

 

161,828,826

 

A technology company focusing on hotel customer reviews (formerly equity method)

 

21,665,182

 

—

 

Cost method investments

 

 

 

 

 

Keystone (cost method)

 

155,330,749

 

158,217,350

 

Zhong An Online (cost method)

 

50,000,000

 

50,000,000

 

Others

 

3,728,507

 

11,938,400

 

Total net book value

 

2,857,213,480

 

5,318,756,447

 

 

LY.com

 

In April, 2014, the Company purchased a minority stake of LY.com, a leading local attraction ticket service provider, with a cash consideration of approximately RMB1.4 billion. According to the purchase and shareholders agreement, the Company has the substantive liquidation preference right which allows the Company to receive a priority in liquidation assets allocation over the other shareholders under the liquidation events. With such liquidation preference, the investment is not considered to be in substance of LY.com’s common stock. Therefore, the Company recorded this investment as an available-for-sale equity security and subsequently measured at its fair value.

 

Hanting

 

On March 31, 2010, the Company purchased newly issued 7,202,482 shares from Hanting in a private placement. On the same day, the Company purchased an aggregate of 11,646,964 shares of Hanting from the then shareholders. In addition, on March 31, 2010, the Company purchased 800,000 ADSs representing 3,200,000 shares of Hanting in its initial public offering (“IPO”). All transactions were made at a purchase price of US$12.25 per ADS, or US$3.0625 per share, which is the then IPO price. The total purchase cost is US$67.5 million (approximately RMB461 million). Upon the closing of the transactions described above, the Company holds an aggregate of 22,049,446 shares of Hanting (including 3,200,000 shares represented by ADSs), representing approximately 9% of Hanting’s total outstanding shares as of March 31, 2010. The Company has one out of seven seats in Hanting.

 

Given the level of investment, the Company applies ASC-320-25 to account for its investment in Hanting. The Company classified the investment as “available for sale” as the Company does not have the ability to exercise significant influence and measured the fair value at every period end (Note 9). Unrealized holding gains and losses for available-for-sale securities are reported in other comprehensive income until realized.

 

The closing price of Hanting as of December 31, 2014 is US$26.28 per ADS. As of December 31 2014, the Company recorded the investment in Hanting at a fair value of RMB899 million (approximately US$145 million), with RMB480 million increase in fair value of the investment credited to other comprehensive income.

 

Easy Go

 

In December 2013 and August 2014, the Company completed the transactions to acquire equity stake of Easy Go by subscribing its Series B and Series C convertible preferred shares with a total consideration of US$53 million.

 

30


 

The Company recorded this investment as an available-for-sale debt since the preferred shares purchased by the Company are redeemable at the option of the Company and are not in substance of common stocks. Subsequent to initial recognition, the available-for-sale debt security is measured at fair value at every period end (Note 9). Unrealized holding gains and losses for available-for-sale securities are reported in other comprehensive income until realized. As of December 31 2014, the Company recorded the investment in Easy Go at a fair value of RMB628 million (approximately US$101 million), with RMB299 million increase in fair value of the investment credited to other comprehensive income.

 

eHi

 

In December 2013 and April 2014, the Company completed the transactions to acquire equity stake of eHi, one of the largest car rental companies in China, by subscribing its Series E and Series E Plus convertible preferred shares with a total consideration of approximately US$107 million. In November 2014, with the consummation of eHi’s initial public offering, the convertible preferred shares held by the Company were converted into common share of eHi. In November, 2014, the Company purchased US$10 million additional common shares at its IPO price. Upon the closing of the transactions described above, the Company held an aggregate equity interest of approximately 18.5% of eHi’s total outstanding share as of December 31, 2014. The Company has one out of seven seats in eHi.

 

The Company continued to record this investment as an available-for-sale debt security since the Company does not have the ability to exercise significant influence. The available-for-sale debt security is measured at fair value at every period end (Note 9). Unrealized holding gains and losses for available-for-sale securities are reported in other comprehensive income until realized.

 

The closing price of eHi as of December 31, 2014 is US$8.16 per ADS. As of December 31 2014, the Company recorded the investment in eHi at a fair value of RMB535 million (approximately US$86 million), with RMB191 million decrease in fair value of the investment credited to other comprehensive income.

 

Tuniu

 

In May, 2014, the Company purchased 1,666,667 ADSs representing 5,000,000 shares of Tuniu upon its IPO. The transaction was made at a purchase price of US$9 per ADS, or US$3 per share, which is the then IPO price. The total purchase cost is US$15 million (RMB93 million). In addition, in December, 2014, the Company purchased 3,731,034 newly issued class A ordinary shares of Tuniu at a purchase price of US$12 per ADS, or US$4 per share. Upon the closing of the transactions described above, the Company held an aggregate equity interest approximately 4.6% of Tuniu’s total outstanding shares as of December 31, 2014. The Company has one out of nine seats in Tuniu

 

Given the level of investment, the Company applies ASC-320-25 to account for its investment in Tuniu. The Company classified the investment as “available for sale” and measured the fair value at every period end (Note 9). Unrealized holding gains and losses for available-for-sale securities are reported in other comprehensive income until realized.

 

The closing price of Tuniu as of December 31, 2014 is US$12 per ADS. As of December 31 2014, the Company recorded the investment in Tuniu at a fair value of RMB217 million (US$35 million), with RMB31 million increase in fair value of the investment credited to other comprehensive income.

 

A travel agency focusing on teenager market

 

In August, 2014, the Company completed the transactions to acquire a minority stake of a travel agency focusing on teenager market, with a cash consideration of RMB81 million. According to the purchase and shareholders agreement, the Company has the substantive liquidation preference right which allows the Company to receive a priority in the liquidation assets allocation over the other shareholders under the liquidation events. With such liquidation preference, the investment is not considered to be in substance of the acquired entity’s common stock. Therefore, the Company recorded this investment as an available-for-sale equity security and subsequently measured at its fair value. There is no significant change in fair value of the investment from the initial investment day to December 31, 2014.

 

A big-data advertisement company

 

In August 2014, the Company completed the transactions to acquire a minority stake of Seris B preferred shares of a big-data advertisement company with a total consideration of US$10 million.

 

The Company recorded this investment as an available-for-sale debt since the Company does not have the ability to exercise significant influence and the preferred shares purchased by the Company are redeemable at the option of the Company. Subsequent to initial recognition, the available-for-sale debt security is measured at fair value at every period end (Note 9). Unrealized holding gains and losses for available-for-sale securities are reported in other comprehensive income until realized. There is no significant change in fair value of the investment from the initial investment day to December 31, 2014.

 

31


 

Happy City

 

In June 2013, the Company entered into agreements to acquire a minority stake of the Series A preferred shares in Happy City, a privately owned mobile application software company, with total consideration of US$6 million. Happy City is engaged in development and operation of a mobile application for hotel searching and booking.

 

The Company recorded this investment as an available-for-sale debt security since the preferred shares purchased by the Company are redeemable at the option of the Company and are not common stocks in substance. Subsequent to initial recognition, the available-for-sale debt security is measured at fair value at every period end (Note 9). Unrealized holding gains and losses for available-for-sale securities are reported in other comprehensive income until realized. The decrease in fair value of the investment in Happy City of RMB2 million (US$0.3 million) was recorded to other comprehensive income as of December 31, 2014.

 

Dining Secretary

 

In November 2010, the Company completed the transactions to acquire a minority stake of Dining Secretary’s Series B convertible preferred shares with total consideration of US$10 million. Dining Secretary is a provider of free online and offline restaurant reservations for diners.

 

The Company recorded this investment as an available-for-sale debt security. Subsequent to initial recognition, the available-for-sale debt security is measured at fair value at every period end (Note 9). Unrealized holding gains and losses for available-for-sale securities are reported in other comprehensive income until realized. As of December 31 2014, the Company recorded an other than temporary investment impairment of RMB33 million in Dining Secretary based on the difference of its fair value and cost with the previously recognized unrealized loss in other comprehensive income with amount of RMB4 million reversed. The decrease in fair value of the investment in Dining Secretary of RMB33 million (US$5 million) was recorded to other income as of December 31, 2014.

 

Homeinns

 

The Company purchased ADSs of Homeinns from time to time through the open market and in a private placement transaction. As of December 31, 2014, the Company held an aggregate equity interest of approximately 15.1% of the outstanding shares of Homeinns (or 14,400,765 shares). Given the level of investment and the common directors on Board of both companies, the Company applied equity method of accounting to account for the investment in Homeinns.

 

The Company calculated equity in income or losses of investment in Homeinns on one quarter lag basis, as allowed, as the financial statements of Homeinns were not available within a sufficient time period.

 

On October 1, 2011, Homeinns completed a transaction to acquire 100% equity interest in a business, pursuant to which Homeinns issued additional ordinary shares as part of the total consideration. As a result, the Company’s equity interest in Homeinns effectively decreased from 17.5% to 15.1%. In accordance with ASC 323-10-40-1, the Company accounts for a share issuance by an investee as if the investor had sold a proportionate share of its investment. The issuance price per share of the newly issued capital by the investee is higher than the Company’s average per share carrying amount, thus the Company recognized the non-cash gain of RMB39.3 million for the period ended December 31, 2012 as a result of the equity dilution impact. The Company picks up equity calculation of Homeinns on a quarter lag basis, as the Company is not able to timely obtain all necessary financial information from Homeinns to perform the equity investment reconciliations between the Company and Homeinns.

 

The carrying amount and unrealized securities holding profit for investment in Homeinns as of December 31, 2013 and 2014 were as follows:

 

 

 

2013

 

2014

 

 

 

RMB

 

RMB

 

Investment cost

 

 

 

 

 

Balance at beginning of year

 

570,709,828

 

554,626,285

 

Foreign currency translation

 

(16,083,543

)

14,052,966

 

Total investment cost

 

554,626,285

 

568,679,251

 

 

 

 

 

 

 

Value booked under equity method

 

 

 

 

 

Share of cumulative profit

 

265,745,783

 

357,085,613

 

Amortization of identifiable intangible assets, net of tax

 

(18,821,200

)

(22,799,936

)

Total booked value under equity method.

 

246,924,583

 

334,285,677

 

 

 

 

 

 

 

Net book value

 

801,550,868

 

902,964,928

 

 

 

32


 

In 2014, among the share of cumulative profit of Hominns, the Company recognized gain as a result of the equity dilution impact in Homeinns with amount of RMB 12 million.

 

The financial information of Homeinns as of and for the twelve months ended September 30, 2013 and 2014 is as follows:

 

 

 

2013

 

2014

 

 

 

RMB (’000)

 

RMB (’000)

 

 

 

 

 

 

 

Current assets

 

1,621,982

 

1,230,755

 

Non-current assets

 

7,755,635

 

8,030,078

 

Current liabilities

 

1,776,838

 

1,751,016

 

Non-current liabilities

 

3,292,033

 

2,546,507

 

Retain earnings

 

1,175,874

 

1,568,795

 

Non-controlling interest

 

19,429

 

15,188

 

Total shareholders’ equity

 

4,308,746

 

4,963,310

 

Total revenues

 

6,208,970

 

6,657,128

 

Net Revenues

 

5,825,490

 

6,247,843

 

Income from operations

 

455,294

 

643,675

 

Net income

 

191,009

 

446,490

 

Net (loss) / income attributable to Homeinns Group’s shareholders

 

189,650

 

441,396

 

 

The closing price of Homeinns as of December 31, 2014 is US$30.02 per ADS, the aggregate market value of the Company’s investment in Homeinns is approximately RMB1.3 billion (US$216 million).

 

Skyseas

 

In September 2014, the Company made a US$ 52.5 million investment in a 70% equity stake of Skyeas, a cruise company, which targets to provide Chinese customers the world-class and tailor-made cruise products. The Company also provided a loan with amount of US$ 160 million to Skyseas at the interest rate of 3% per annum. Concurrently, Skyseas purchased a cruise ship from Royal Caribbean Cruises Ltd. (“RCL”) with amount of US$ 220 million. Thus the Company obtained the control over Skyseas and its financial results were consolidated with the Company’s consolidated financial statements on its incorporation.

 

In November 2014, the Company entered into a share transfer agreement with RCL to transfer 35% share capital of Skyseas to RCL for US$ 26.3 million, representing the Company’s original cost for the investment. RCL also provided US$ 80 million loan to Skyseas from the US$ 160 million provided by the Company. After the transaction, the Company and RCL each owns 35% of Skyseas, with the remaining equity interest being owned by Skyseas management and a private equity fund and each provided a loan to Skyseas with amount of US$ 80 million. The Company has two out of five board seats of Skyseas and is entitled to appoint the senior management, including CEO. The Company lost the ability to control Skyseas after the share transfer. Therefore, the Company has applied equity method to account for the investment since December 2014 due to the Company continues to maintain the ability to exercise the significant influence. There was no gain or loss on the loss of control and deconsolidation though the Company deconsolidated cash of US$ 19 million in the transactions.

 

Starway Hotels (Hong Kong) Limited (“Starway Hong Kong”)

 

In May 2012, the Company sold 51% equity interest of Starway Hong Kong to Hanting. Pursuant to the agreement, Hanting was granted the right to purchase the remaining 49% equity interest of Starway Hong Kong, at its sole discretion at any time following April 15, 2012 until and including the first anniversary of the transaction closing date. The deal was consummated on May 1, 2012. In November 2013, the Company further sold the remaining 49% equity interest of Starway Hong Kong to Hanting.

 

Keystone

 

On December 3, 2013, the Company acquired approximately 4% equity shares in Keystone Lodging Holdings Limited (“Keystone”), which in 2013, merged with 7 Days Group Holdings Limited (“7 Days”), a leading economy hotel chain based in China. The total consideration given was RMB155 million (US$25.5 million). The Company applied cost method of accounting to account for the investment due to lack of ability to exercise significant influence.

 

 

33


 

Zhong An Online

 

In October 2013, the Company entered into agreements to contribute a 5% equity stake in Zhong An Online Property Insurance Co., Ltd, China’s first online insurance company. The capital contribution is RMB50 million. The Company applied cost method of accounting to account for the investment due to lack of ability to exercise significant influence.

 

Other investments included equity investments in certain privately-held companies.

 

As of December 31, 2012, 2013 and 2014, no impairments have been recorded for these investments. As of December 31, 2014, the equity-method investments, on an individual basis or on an aggregated basis by any combination are not significant for the Company.

 

9. FAIR VALUE MEASUREMENT

 

In accordance with ASC 820-10, the Company measures short-term investments and available-for-sale investments at fair value on a recurring basis. Available-for-sale investments classified within Level 1 are valued using quoted market prices that currently available on a securities exchange registered with the Securities and Exchange Commission (SEC). Short-term investments classified within Level 2 are valued using directly or indirectly observable inputs in the market place. The available-for-sale investments classified within Level 3 are valued based on a model utilizing unobservable inputs which require significant management judgment and estimation. The estimated fair value of long-term loans approximated the carrying amount as of December 31, 2013 and 2014, as the interest rates of the long-term loans are considered as approximate the current rate for comparable loans at the respective balance sheet dates.

 

Assets measured at fair value on a recurring basis are summarized below:

 

 

 

Fair Value Measurement at
December 31, 2014 Using

 

 

 

 

 

 

 

Quoted Prices
in Active
Market for
Identical Assets
(Level 1)

 

Significant Other
Observable
Inputs
(Level 2)

 

Unobservable
inputs
(Level 3)

 

Fair Value at December 31, 2014

 

 

 

RMB

 

RMB

 

RMB

 

RMB

 

US$

 

Short-term investments

 

 

 

 

 

 

 

 

 

 

 

Financial products

 

—

 

5,990,483,880

 

—

 

5,990,483,880

 

965,490,746

 

Time deposits

 

—

 

448,370,707

 

—

 

448,370,707

 

72,264,240

 

Available-for-sale investments

 

 

 

 

 

 

 

 

 

 

 

LY.com

 

—

 

—

 

1,547,844,523

 

1,547,844,523

 

249,467,254

 

Hanting

 

898,828,511

 

—

 

—

 

898,828,511

 

144,864,860

 

Easy Go

 

—

 

—

 

627,905,501

 

627,905,501

 

101,199,997

 

eHi

 

535,024,052

 

—

 

—

 

535,024,052

 

86,230,225

 

Tuniu

 

216,690,294

 

—

 

—

 

216,690,294

 

34,924,136

 

A travel agency focusing on teenager market

 

—

 

—

 

81,000,000

 

81,000,000

 

13,054,830

 

A big-data advertisement company

 

—

 

—

 

62,046,000

 

62,046,000

 

10,000,000

 

Happy City

 

—

 

—

 

35,422,062

 

35,422,062

 

5,709,000

 

Dining Secretary

 

—

 

—

 

29,046,000

 

29,046,000

 

4,681,365

 

Total

 

1,650,542,857

 

6,438,854,587

 

2,383,264,086

 

10,472,661,530

 

1,687,886,653

 

 

34

 

 

 

Fair Value Measurement at
December 31, 2013 Using

 

 

 

 

 

 

 

Quoted Prices
in Active
Market for
Identical Assets
(Level 1)

 

Significant Other
Observable
Inputs
(Level 2)

 

Unobservable
inputs
(Level 3)

 

Fair Value at December 31, 2013

 

 

 

RMB

 

RMB

 

RMB

 

RMB

 

US$

 

Short-term investments

 

 

 

 

 

 

 

 

 

 

 

Financial products

 

—

 

3,375,477,351

 

—

 

3,375,477,351

 

557,589,136

 

Time deposits

 

—

 

259,613,604

 

—

 

259,613,604

 

42,885,112

 

Available-for-sale investments

 

 

 

 

 

 

 

 

 

 

 

Hanting

 

1,016,455,767

 

—

 

—

 

1,016,455,767

 

167,906,530

 

eHi

 

—

 

—

 

570,977,550

 

570,977,550

 

94,318,772

 

Easy Go

 

—

 

—

 

143,904,165

 

143,904,165

 

23,771,275

 

Dining Secretary

 

—

 

—

 

56,242,365

 

56,242,365

 

9,290,577

 

Happy City

 

—

 

—

 

37,358,327

 

37,358,327

 

6,171,156

 

Total

 

1,016,455,767

 

3,635,090,955

 

808,482,407

 

5,460,029,129

 

901,932,558

 

 

The roll forward of Level 3 LY.com’s investment is as following:

 

 

 

Amount

 

 

 

RMB

 

Fair value of available-for-sale(Level 3) investment as at December 31, 2013

 

—

 

Investment in common share of LY.com

 

1,414,285,714

 

Transfer in and/or out of Level 3

 

—

 

The change in fair value of the investment in LY.com

 

133,558,809

 

Fair value of available-for-sale (Level 3) investment as at December 31, 2014

 

1,547,844,523

 

 

 

 

 

Fair value of available-for-sale investment (Level 3) as at December 31, 2014 (US$)

 

249,467,254

 

 

The significant unobservable inputs used in the valuation are as following:

 

Valuation Technique

 

Unobservable Input

 

Parameter value

Discounted cash flow

 

Weighted average cost of capital (“WACC”)

 

19%

 

 

Terminal growth rate

 

3%

 

 

Lack of marketability discount (“LoMD”)

 

28%

Option pricing model

 

Time to liquidation

 

3 years

 

 

Risk-free rate

 

3.43%

 

 

Expected volatility

 

50.89 %

 

 

Probability

 

Liquidation scenario: 20%
IPO scenario: 80%

 

 

Dividend yield

 

Nil

 

The roll forward of Level 3 Easy Go’s investment is as following:

 

 

 

Amount

 

 

 

RMB

 

Fair value of available-for-sale(Level 3) investment as at December 31, 2012

 

—

 

Investment in Series B Preferred Shares of Easy Go

 

139,633,000

 

Transfer in and/or out of Level 3

 

—

 

The change in fair value of the investment in Easy Go

 

4,271,165

 

Fair value of available-for-sale (Level 3) investment as at December 31, 2013

 

143,904,165

 

Investment in Series C Preferred Shares of Easy Go

 

184,377,000

 

Transfer in and/or out of Level 3

 

—

 

Effect of exchange rate change

 

4,833,800

 

The change in fair value of the investment in Easy Go

 

294,790,536

 

Fair value of available-for-sale (Level 3) investment as at December 31, 2014

 

627,905,501

 

 

 

 

 

Fair value of available-for-sale investment (Level 3) as at December 31, 2014 (US$)

 

101,199,997

 

 

The fair value of the investment in Easy Go is determined by the investment in Series C Preferred Shares of Easy Go which was close to year end.

 

The roll forward of Level 3 travel agency focusing on teenager market’s investment is as following:

 

 

 

Amount

 

 

 

RMB

 

Fair value of available-for-sale (Level 3) investment as at December 31, 2013

 

—

 

Investment in equity interest of a travel agency focusing on teenager market

 

81,000,000

 

Transfer in and/or out of Level 3

 

—

 

The change in fair value of the investment in a travel agency focusing on teenager market

 

—

 

Fair value of available-for-sale (Level 3) investment as at December 31, 2014

 

81, 000,000

 

 

 

 

 

Fair value of available-for-sale investment (Level 3) as at December 31, 2014 (US$)

 

13,054,830

 

 

35


 

The fair value of the investment in the travel agency focusing on teenager market’s is determined by the investment in this travel agency focusing on teenager market’s which was close to year end.

 

The roll forward of Level 3 big-data service company in digital advertising’s investment is as following:

 

 

 

Amount

 

 

 

RMB

 

Fair value of available-for-sale (Level 3) investment as at December 31, 2013

 

—

 

Investment in Series B Preferred Shares of a big-data advertisement company

 

61,425,000

 

Transfer in and/or out of Level 3

 

—

 

Effect of exchange rate change

 

621,000

 

The change in fair value of the investment in a big-data advertisement company

 

—

 

Fair value of available-for-sale (Level 3) investment as at December 31, 2014

 

62,046,000

 

 

 

 

 

Fair value of available-for-sale investment (Level 3) as at December 31, 2014 (US$)

 

10,000,000

 

 

The fair value of the investment in the big-data service company is determined by the investment in this big-data service company which was close to year end.

 

The roll forward of Level 3 Happy City’s investment is as following:

 

 

 

Amount

 

 

 

RMB

 

Fair value of available-for-sale(Level 3) investment as at December 31, 2012

 

—

 

Investment in Series A Preferred Shares of Happy City

 

36,715,800

 

Transfer in and/or out of Level 3

 

—

 

The change in fair value of the investment in Happy City

 

642,527

 

Fair value of available-for-sale (Level 3) investment as at December 31, 2013

 

37,358,327

 

Investment in Series A Preferred Shares of Happy City

 

—

 

Transfer in and/or out of Level 3

 

—

 

Effect of exchange rate change

 

511,800

 

The change in fair value of the investment in Happy City

 

(2,448,066

)

Fair value of available-for-sale (Level 3) investment as at December 31, 2014

 

35,422,061

 

 

 

 

 

Fair value of available-for-sale investment (Level 3) as at December 31, 2014 (US$)

 

5,709,000

 

 

The significant unobservable inputs used in the valuation are as following:

 

Valuation Technique

 

Unobservable Input

 

Parameter value

Discounted cash flow

 

Weighted average cost of capital (“WACC”)

 

27.67%

 

 

Terminal growth rate

 

3%

 

 

Lack of marketability discount (“LoMD”)

 

25%

Option pricing model

 

Time to liquidation

 

2.67 years

 

 

Risk-free rate

 

1.567%

 

 

Expected volatility

 

45.4%

 

 

Probability

 

Liquidation scenario: 50%
Redemption scenario: 50%

 

 

Dividend yield

 

Nil

 

The roll forward of Level 3 Dining Secretary’s investment is as following:

 

 

 

Amount

 

 

 

RMB

 

Fair value of available-for-sale (Level 3) investment as at December 31, 2012

 

60,234,118

 

Investment in Series B Preferred Shares of Dining Secretary

 

—

 

Transfer in and/or out of Level 3

 

—

 

Effect of exchange rate change

 

(1,764,000

)

The change in fair value of the investment in Dining Secretary

 

(2,227,753

)

Fair value of available-for-sale (Level 3) investment as at December 31, 2013

 

56,242,365

 

Investment in Series B Preferred Shares of Dining Secretary

 

—

 

Transfer in and/or out of Level 3

 

—

 

Effect of exchange rate change

 

1,509,000

 

The change in fair value of the investment in Dining Secretary

 

(28,705,365

)

Fair value of available-for-sale (Level 3) investment as at December 31, 2014

 

29,046,000

 

 

 

 

 

Fair value of available-for-sale investment (Level 3) as at December 31, 2014 (US$)

 

4,681,365

 

 

36


 

The significant unobservable inputs used in the valuation are as following:

 

Valuation Technique

 

Unobservable Input

 

Parameter value

Discounted cash flow

 

Weighted average cost of capital (“WACC”)

 

27.94%

 

 

Terminal growth rate

 

3%

 

 

Lack of marketability discount (“LoMD”)

 

25%

Option pricing model

 

Time to liquidation

 

3.01 years

 

 

Risk-free rate

 

4.13%

 

 

Expected volatility

 

41.4%

 

 

Probability

 

Liquidation scenario: 45%
Redemption scenario: 45%
IPO scenario: 10%

 

 

Dividend yield

 

Nil

 

Based on the review of various factors of Dining Secretary, including, but not limited to its current market condition, operating performance and current and expected earnings trend, the Company determined the decline in fair value of Dining Secretary to below its carrying value is other than temporary. Accordingly, an impairment with amount of RMB33 million based on the difference of its fair value and cost was provided in other income with a reversal of the previously recognized unrealized loss of RMB4 million recorded in other comprehensive income.

 

The Company determined the fair value of their investment by using an income approach concluding on the overall investee’s equity value and allocating this value to the various classes of preferred and common shares by using an option-pricing method. The determination of the fair value was assisted by an independent appraisal, based on estimates, judgments and information of other comparable public companies.

 

10.  GOODWILL

 

The changes in the carrying amount of goodwill for the years ended December 31, 2013 and 2014 were as follows:

 

 

 

2013

 

2014

 

 

 

RMB

 

RMB

 

 

 

 

 

 

 

Balance at beginning of year

 

822,585,341

 

972,531,184

 

Acquisition of a technology company focusing on hotel customer reviews (Note 2)

 

—

 

366,884,722

 

Acquisition of an offline travel agency (Note 2)

 

—

 

330,669,958

 

Acquisition of an online trip package service provider (Note 2)

 

—

 

207,981,890

 

Acquisition of a B2B hotel reservation company (Note 2)

 

72,406,431

 

1,400,000

 

Acquisition of a wholesaler operated hotel reservation and air ticketing services (Note 2)

 

43,993,740

 

3,656,496

 

Others

 

33,545,672

 

9,383,458

 

Balance at end of period

 

972,531,184

 

1,892,507,708

 

 

In November, 2014, the Company completed the transaction to acquire controlling shares of a technology company focusing on hotel customer reviews. Goodwill of RMB367 million was recognized from this acquisition. In December, 2014, the Company completed the transaction to acquire controlling voting interests of an offline travel agency. Goodwill of RMB331 million was recognized from this acquisition. In January, 2014, the Company completed the transaction to acquire controlling shares of an online trip package service provider. Goodwill of RMB208 million was recognized from this acquisition (Note 2). In 2013, the Company purchased controlling shares of a B2B hotel reservation company. Goodwill of RMB72 million was recognized from this acquisition. In August 2013, the Company purchased 100% equity interest of a wholesaler operated hotel reservation and air ticketing services. Goodwill of RMB44 million was recognized from this acquisition.

 

37


 

From time to time, the Company selectively acquired or invested in businesses that complement our existing business. In 2012, the Company invested in a high-end travel agency and a railway ticket agency. In 2013, other than the acquisitions above, the Company further invested in a company engaged in operating a mobile application for online interactive travel forums. In 2014, other than the acquisitions above, the Company invested in an online travel information and experience sharing platform operator. The excess of the total cost of acquisition, fair value of the non-controlling interests and acquisition date fair value of any previously held equity interest in the acquiree over the fair value of the identifiable net assets of the acquiree are recorded as goodwill.

 

Goodwill arose from the business combination completed in the years ended December 31, 2014 has been allocated to the single reporting unit of the Group. Goodwill represents the synergy effects of the business combination.

 

11.  INTANGIBLE ASSETS

 

Intangible assets as of December 31, 2013 and 2014 were as follows:

 

 

 

2013

 

2014

 

 

 

RMB

 

RMB

 

Intangible assets

 

 

 

 

 

Intangible assets to be amortized

 

 

 

 

 

Non-compete agreements

 

11,479,610

 

11,479,610

 

Customer list

 

15,942,578

 

85,642,578

 

Supplier Relationship

 

27,780,000

 

27,780,000

 

Technology patent

 

9,240,000

 

9,240,000

 

Cross-border travel agency license

 

1,117,277

 

1,117,277

 

Others

 

790,000

 

790,000

 

Intangible assets not subject to amortization

 

 

 

 

 

Trade mark

 

314,329,235

 

551,381,191

 

Golf membership certificate

 

4,200,000

 

4,200,000

 

Others

 

8,785,287

 

17,783,205

 

 

 

393,663,987

 

709,413,861

 

Less: accumulated amortization

 

 

 

 

 

Intangible assets to be amortized

 

 

 

 

 

Non-compete agreements

 

(11,479,610

)

(11,479,610

)

Customer list

 

(11,982,578

)

(13,247,103

)

Supplier Relationship

 

(3,178,333

)

(5,956,333

)

Technology patent

 

(9,240,000

)

(9,240,000

)

Cross-border travel agency license

 

(1,117,277

)

(1,117,277

)

Others

 

(13,167

)

(171,167

)

 

 

(37,010,965

)

(41,211,490

)

Net book value

 

 

 

 

 

Intangible assets to be amortized

 

 

 

 

 

Non-compete agreements

 

—

 

—

 

Customer list

 

3,960,000

 

72,395,475

 

Supplier Relationship

 

24,601,667

 

21,823,667

 

Technology patent

 

—

 

—

 

Cross-border travel agency license

 

—

 

—

 

Others

 

776,833

 

618,833

 

Intangible assets not subject to amortization

 

 

 

 

 

Trade mark

 

314,329,235

 

551,381,191

 

Golf membership certificate

 

4,200,000

 

4,200,000

 

Others

 

8,785,287

 

17,783,205

 

 

 

356,653,022

 

668,202,371

 

 

Finite-lived intangible assets are tested for impairment if impairment indicators arise. The Company amortizes its finite-lived intangible assets using the straight-line method:

 

Customer list

 

3-10 years

 

Supplier Relationship

 

10 years

 

Technology patent

 

5 years

 

Cross-border travel agency license

 

8 years

 

 

Amortization expense for the years ended December 31, 2012, 2013 and 2014 was approximately RMB7,736,767, RMB7,363,364 and RMB5,426,102 respectively.

 

38


 

The annual estimated amortization expense for intangible assets subject to amortization for the five succeeding years is as follows:

 

 

 

Amortization

 

 

 

RMB

 

 

 

 

 

2015

 

13,373,143

 

2016

 

13,373,143

 

2017

 

13,373,143

 

2018

 

13,359,976

 

2019

 

13,215,143

 

 

 

66,694,548

 

 

12. SHORT-TERM DEBT

 

 

 

2013

 

2014

 

 

 

RMB

 

RMB

 

Short-term borrowings

 

774,599,341

 

3,132,061,011

 

2017 Convertible Senior Notes(Note 17)

 

—

 

428,427,630

 

Total

 

774,599,341

 

3,560,488,641

 

 

As of December 31, 2014, the Group obtained nine borrowings of RMB1.6 billion (US$264.9 million) in aggregate collateralized by a bank deposit of RMB1.0 billion classified as short-term investment at one of the Company’s wholly-owned subsidiaries. The annual interest rate of borrowings is approximately from 2.3% to 2.4%. The Company is in compliance with the loan covenant at December 31, 2014.

 

As of December 31, 2014, the Group obtained six borrowings of RMB1.5 billion (US$237.9 million) in aggregate collateralized by bank deposits of RMB380 million and RMB480 million classified as restricted cash and short-term investment provided by one of the Company’s wholly-owned subsidiaries. The annual interest rate of borrowings is approximately from 2.2% to 3.0%. The Company is in compliance with the loan covenant at December 31, 2014.

 

13.  RELATED PARTY TRANSACTIONS

 

During the years ended December 31, 2012, 2013 and 2014 significant related party transactions were as follows:

 

 

 

2012

 

2013

 

2014

 

 

 

RMB

 

RMB

 

RMB

 

Commissions from Homeinns (a)

 

35,932,452

 

38,709,984

 

38,139,325

 

Commissions from Hanting (a)

 

10,988,806

 

17,127,847

 

19,234,632

 

Consideration for disposal of majority equity share of Starway Hong Kong to Hanting

 

17,131,759

 

16,459,926

 

—

 

Shareholders’ loan and interest to Skyseas (c)

 

—

 

—

 

505,955,950

 

Entrusted loan and interest to a technology company focusing on hotel customer reviews (b)

 

—

 

13,374,109

 

694,577

 

Commissions from Starway Hong Kong (d)

 

7,118,150

 

6,146,474

 

—

 

Commissions to LY.com (e)

 

—

 

—

 

76,093,733

 

Purchase of tour package from Ananda Travel Service (Aust.) Pty Limited (“Ananda”) (f)

 

32,989,774

 

32,738,333

 

27,197,283

 

Printing expenses to Joyu Tourism Operating Group (“Joyu”) (g)

 

2,160,000

 

—

 

—

 

 

(a)         The Company’s hotel supplier, Homeinns has two directors in common with the Company. Homeinns closed the acquisition of Motel 168 International Holdings Limited (“Motel 168”) on September 30, 2011 and consolidated its financial results thereafter. Commissions from Homeinns presented above include the commissions from Motel 168 starting from October 1, 2011 to December 31, 2014. Another hotel supplier, Hanting, has a director in common with the Company and a director who is a family member of one of our officers. In May 2012, the Company sold 51% equity interest of Starway Hong Kong to Hanting with a total consideration of RMB17.1 million and deconsolidated Starway Hong Kong upon the closing of the deal. On November 30, 2013, Hanting further acquired 49% equity interest of Starway Hong Kong from the Company with a total consideration of RMB16.5 million. The remaining purchase price of RMB12.25 million will be paid in a 3-year installment plan. From then on, the Company does not directly hold any equity interest of Starway Hong Kong. Commissions from Hanting presented above include the commissions from Starway Hong Kong starting from December 1, 2013 to December 31, 2013. Homeinns and Hanting have entered into agreements with us, respectively, to provide hotel rooms for our customers. Commissions from Homeinns and Hanting for the years ended December 31, 2012, 2013 and 2014 are presented as above.

 

39


 

(b)         In September 2013, the Company entered into agreements with a technology company focusing on hotel customer reviews to provide entrusted loan of RMB13 million. The entrusted loan has a one-year maturity period. The balance of entrusted loan together with the interest for the year ended December 31, 2013 is presented as above.

 

(c)          As of December 31, 2014, the Company provided shareholder’s loan of US$80 million to Skyseas. The interest rate is 3% per annum currently and shall be subject to annual review and adjustment with mutual consent. The loan is guaranteed by a vessel mortgage and shall be paid back by installments through 2020. The balance of the loan together with the interest for the year ended December 31, 2014 is presented as above.

 

(d)         Starway Hong Kong entered into agreements with the Company to provide hotel rooms for our customers. Commissions from Starway Hong Kong started from the deconsolidation date to the year ended December 31, 2012 and started from January 1, 2013 to November 30, 2013 is presented as above.

 

(e)          In April, 2014, the Company purchased a minority stake of LY.com. The Company has entered into agreements to provide hotel rooms to LY.com. Commissions to LY.com starting from April, 2014 to December 31, 2014 are presented as above.

 

(f)           The Company’s tour package supplier, Ananda is an associate of Wing On Travel. Tour package purchase from Ananda for the years ended December 31, 2012, 2013 and 2014 is presented as above.

 

(g)          The Company entered into printing agreements with TripTX Travel Media Group, one of the subsidiaries of Joyu Tourism Operating Group. Joyu Tourism Operating Group has a director in common with the Company. Total printing expense to Joyu Tourism Operating Group for the years ended December 31, 2012 are presented as above.

 

As of December 31, 2013 and 2014, significant balances with related parties were as follows:

 

 

 

2013

 

2014

 

 

 

RMB

 

RMB

 

Due from related parties, current:

 

 

 

 

 

Due from Hanting

 

5,592,854

 

6,402,931

 

Due from Homeinns

 

3,029,166

 

4,166,006

 

Due from a company operates hotel public sentiment information management system

 

13,152,649

 

—

 

 

 

21,774,669

 

10,568,937

 

 

 

 

 

 

 

Due from related parties, non-current:

 

 

 

 

 

Due from Skyseas

 

—

 

505,955,950

 

Due from Hanting

 

8,166,667

 

4,083,334

 

 

 

8,166,667

 

510,039,284

 

 

 

 

 

 

 

Due to related parties, current:

 

 

 

 

 

Due to LY.com

 

—

 

10,250,334

 

Due to Ananda

 

10,216,780

 

5,798,769

 

Due to Hanting

 

1,000,000

 

1,000,000

 

 

 

11,216,780

 

17,049,103

 

 

The amounts due from and due to related parties as of December 31, 2013 and 2014 primarily resulted from the transactions disclosed above and revenue received and expenses paid on behalf of each other. They are not collateralized and have normal business payment terms.

 

14.  EMPLOYEE BENEFITS

 

The Group’s employee benefit primarily related to the full-time employees of the PRC subsidiaries and the VIEs, including medical care, welfare subsidies, unemployment insurance and pension benefits. The full-time employees in the PRC subsidiaries and the VIEs are required to accrue for these benefits based on certain percentages of the employees’ salaries in accordance with the relevant PRC regulations and make contributions to the state-sponsored pension and medical plans out of the amounts accrued for medical and pension benefits. The PRC government is responsible for the medical benefits and ultimate pension liability to these employees. The total expenses recorded for such employee benefits amounted to RMB334,150,368, RMB440,884,906 and RMB724,852,573 for the years ended December 31, 2012, 2013 and 2014 respectively.

 

40


 

15.  TAXATION

 

Cayman Islands

 

Under the current laws of Cayman Islands, the Company is not subject to tax on income or capital gain. In addition, upon payments of dividends by the Company to its shareholders, no Cayman Islands withholding tax will be imposed.

 

Hong Kong

 

The Company’s subsidiaries registered in the Hong Kong are subject to Hong Kong Profits Tax (“CIT”) on the taxable income as reported in their respective statutory financial statements adjusted in accordance with relevant Hong Kong tax laws. The applicable tax rate is 16.5% in Hong Kong.

 

Taiwan

 

The Company’s consolidated entities registered in the Taiwan are subject to Taiwan Enterprise Income Tax (“CIT”) on the taxable income as reported in their respective statutory financial statements adjusted in accordance with relevant Taiwan income tax laws. The applicable tax rate is 17% in Taiwan.

 

China

 

The Company’s subsidiaries and VIEs registered in the PRC are subject to PRC Corporate Income Tax (“CIT”) on the taxable income as reported in their respective statutory financial statements adjusted in accordance with relevant PRC income tax laws.

 

In 2007, the National People’s Congress passed new PRC CIT Law and Detailed Implementation Rules of China CIT Law. The CIT laws were effective on January 1, 2008. The CIT laws apply a general enterprise income tax rate of 25% to both foreign-invested enterprises and domestic enterprises. Preferential tax treatments will continue to be granted to enterprises, which conduct business in certain encouraged sectors and to enterprises otherwise classified as a high and new technology enterprise. In December 2008, the Company’s subsidiaries, Ctrip Computer Technology, Ctrip Travel Information, Ctrip Travel Network and Software Hotel Information obtained approval for the High New Tech Enterprises status. The applicable tax rate for High New Tech Enterprise is 15%, which was effective retroactively as of January 1, 2008. The High New Tech Enterprises qualification has a three-year effective period which expired on December 31, 2010. These four entities reapplied for the qualification in 2011 and 2014, and obtained approval from government authority. The High New Tech Enterprises qualification will expired on December 31, 2016.

 

In 2002, China’s State Administration of Taxation passed an implementation for the preferential tax treatment in China’s Western Region. Enterprises falling within the Catalog of Encouraged Industries in the Western Region (“Old Catalog”) enjoyed a preferential income tax rate of 15% from 2001 to 2010. In 2011, Chengdu Ctrip and Chengdu Ctrip International obtained approval to use the 15% tax rate for 2010 income tax. The qualification has an effective period which expired on December 31, 2010. The Company applied 25% rate for CIT filling in 2011. In 2012, China’s State Administration of Taxation extended the period to 2020. In 2012, Chengdu Ctrip and Chengdu Ctrip International obtained approval from local tax authorities to apply the 15% tax rate for 2011 tax filing with an effective period from 2012 to 2015. In 2013, Chengdu Information Technology Co., Ltd. (“Chengdu Information”) obtained approval from local tax authorities to apply the 15% tax rate for 2012 tax filing with an effective period from 2013 to 2016. In 2014, a new Catalog of Encouraged Industries in the Western Region (“New Catalog”) has been released. Under the “New Catalog”, the Company may apply the 15% rate for CIT filing upon agreement by the in-charge tax authorities.

 

In 2013, in accordance with CIT Law, the applicable CIT rates are 25%, except for aforementioned four subsidiaries qualified for High New Tech Enterprises, Chengdu Ctrip, Chengdu Ctrip International and Chengdu Information.

 

Pursuant to the CIT Law and Circular Caishui [2008]No.1 issued by Ministry of Finance of China on February 22, 2008, the dividends declared out of the profits earned after January 1, 2008 by a foreign invested enterprise(“FIE”) to its immediate holding company outside mainland China would be subject to withholding taxes. A favorable withholding tax rate will be applied if there is a tax treaty arrangement between Mainland China and the jurisdiction of the foreign holding company and other supplementary guidance/requirements stipulated by State Administration of Taxation (“SAT”) and tax treaty are met and proper procedures have been gone through. The Company’s subsidiaries, Ctrip Computer Technology, Ctrip Travel Information, Ctrip Travel Network, and Ctrip Information Technology are considered FIEs and are directly held by our subsidiaries in Hong Kong. According to double tax arrangement between Mainland and Hong Kong Special Administrative Region, dividends payable by an FIE in mainland China to the company in Hong Kong will be subject to 5% withholding tax, subject to approval of the tax authority. All of these foreign invested enterprises will be subject to the withholding tax for their earnings generated after January 1, 2008. The Company expects to indefinitely reinvest undistributed earnings generated after January 1, 2008 in the onshore PRC entities. As a result, no deferred tax liability was provided on the outside basis difference from undistributed earnings after January 1, 2008.

 

41


 

On June 13, 2012, the board of the Company has approved dividend distribution of US$300 million from its PRC subsidiaries to fund a new share repurchase program whereby Ctrip may purchase its own American depositary shares (“ADSs”). The dividends paid by the Company’s PRC subsidiaries to the Company through its Hong Kong subsidiary is subject to a 5% PRC withholding tax, of which RMB95 million (US$15 million) is accrued as of December 31, 2012.

 

The dividend distribution on June 13, 2012 aforesaid was a one-time event out of the Company’s normal business course, and withholding tax is recorded only for such transaction accordingly. The Company expects to indefinitely reinvest the remaining undistributed earnings generated after January 1, 2008 in the onshore PRC entities. As a result, no additional deferred tax liability was provided on the outside basis difference for the remaining undistributed earnings of RMB4.6 billion after January 1, 2008.

 

Composition of income tax expense

 

The current and deferred portion of income tax expense included in the consolidated statements of income for the years ended December 31, 2012, 2013 and 2014 were as follows:

 

 

 

2012

 

2013

 

2014

 

 

 

RMB

 

RMB

 

RMB

 

Current income tax expense

 

317,283,820

 

329,612,294

 

228,395,153

 

Deferred tax benefit

 

(22,757,864

)

(35,871,972

)

(97,573,997

)

Income tax expense

 

294,525,956

 

293,740,322

 

130,821,156

 

 

Income tax expense was RMB131 million (US$21 million) in the year ended December 31, 2014, decrease from RMB294 million in the year ended 2013. The effective income tax rate in year ended December 31, 2014 was 97%, as compared to 26% in the year ended 2013, mainly due to an increase in valuation allowance against certain deferred tax assets due to more tax losses generated from certain subsidiaries in 2014 that are not expected to be recovered.

 

Reconciliation of the differences between statutory tax rate and the effective tax rate

 

The reconciliation between the statutory CIT rate and the Group’s effective tax rate for the years ended December 31, 2012, 2013 and 2014 were as follows:

 

 

 

2012

 

2013

 

2014

 

Statutory CIT rate

 

25

%

25

%

25

%

Tax differential from statutory rate applicable to Subsidiaries

 

(17

)%

(15

)%

(98

)%

Non-deductible expenses incurred

 

10

%

11

%

106

%

Change in valuation allowance

 

3

%

5

%

64

%

Withholding tax

 

10

%

—

 

—

 

Effective CIT rate

 

31

%

26

%

97

%

 

Significant components of deferred tax assets and liabilities:

 

 

 

2013

 

2014

 

 

 

RMB

 

RMB

 

Deferred tax assets:

 

 

 

 

 

Loss carry forward

 

86,735,795

 

200,151,440

 

Accrued liability for customer reward related programs

 

60,078,932

 

82,762,839

 

Accrued staff salary

 

34,842,016

 

74,414,938

 

Others

 

2,058,552

 

19,623,649

 

Less: Valuation allowance of deferred tax assets

 

(86,735,795

)

(183,449,500

)

Total deferred tax assets

 

96,979,500

 

193,503,366

 

 

 

 

 

 

 

Deferred tax liabilities, non-current:

 

 

 

 

 

Recognition of intangible assets arise from business combinations

 

(63,197,155

)

(132,506,644

)

 

 

 

 

 

 

Net deferred tax assets

 

33,782,345

 

60,996,722

 

 

Movement of valuation allowances:

 

 

 

2012

 

2013

 

2014

 

 

 

RMB

 

RMB

 

RMB

 

Balance at beginning of year

 

14,785,786

 

37,852,274

 

86,735,795

 

Current year additions

 

27,991,746

 

48,883,521

 

96,713,705

 

Current year disposal due to divestitures

 

(4,925,258

)

—

 

—

 

Balance at end of year

 

37,852,274

 

86,735,795

 

183,449,500

 

 

42

 

As of December 31, 2013 and 2014, valuation allowance of RMB87 million and RMB183 million was provided for operating loss carry forwards related to certain subsidiary based on then assessment where it is more likely than not that such deferred tax assets will not be realized. If events were to occur in the future that would allow us to realize more of our deferred tax assets than the presently recorded net amount, an adjustment would be made to the deferred tax assets that would increase income for the period when those events occurred.

 

As of December 31, 2014, the Group had net operating tax loss carry forwards amounted to RMB801 million which will expire from 2015 to 2018 if not used.

 

The provisions for income taxes for the years ended December 31, 2012, 2013 and 2014 differ from the amounts computed by applying the CIT primarily due to preferential tax rate enjoyed by certain of the Company’s subsidiaries and VIEs in the PRC.

 

The following table sets forth the effect of preferential tax on China operations:

 

 

 

2012

 

2013

 

2014

 

 

 

RMB

 

RMB

 

RMB

 

Tax holiday effect

 

119,971,884

 

146,321,156

 

85,036,934

 

Basic net income per ADS effect

 

0.88

 

1.11

 

0.62

 

Diluted net income per ADS effect

 

0.83

 

0.96

 

0.56

 

 

16.       OTHER PAYABLES AND ACCRUALS

 

Components of other payables and accruals as of December 31, 2013 and 2014 were as follows:

 

 

 

2013

 

2014

 

 

 

RMB

 

RMB

 

Accrued operating expenses

 

330,863,616

 

528,143,100

 

Payable for acquisition

 

23,773,221

 

306,966,884

 

Accruals for property and equipment

 

37,038,698

 

258,632,797

 

Electronic coupon

 

133,306,380

 

198,874,547

 

Deposits received from suppliers and packaged-tour customers

 

33,769,690

 

92,500,850

 

Deposit for special bonus program

 

—

 

80,799,443

 

Interest payable

 

13,838,961

 

32,931,518

 

Due to employees for stock option proceeds received on their behalf

 

28,413,780

 

23,992,381

 

Others

 

34,100,603

 

77,272,138

 

Total

 

635,104,949

 

1,600,113,658

 

 

In September, 2014, the Company established a special bonus program. Under this program, the Company provides the bonus units to the selected employees and the employees are required to provide deposit to participate such program. The bonus is calculated based on certain agreed-upon performance merits and is paid together with the deposit. As of December, 2014, the Company recognized RMB81 million in payable for employees deposit.

 

17.       LONG-TERM DEBT

 

 

 

2013

 

2014

 

 

 

RMB

 

RMB

 

2017 Convertible Senior Notes

 

814,222,650

 

—

 

2018 Convertible Senior Notes

 

4,842,960,000

 

4,963,680,000

 

Priceline Convertible Notes

 

—

 

3,102,300,000

 

Total

 

5,657,182,650

 

8,065,980,000

 

 

Description of 2017 Convertible Senior Notes

 

On September 24, 2012, the Company issued US$180 million in aggregate principle amount of 0.5% Convertible Senior Notes due September 15, 2017 (the “Notes”) at par. The Notes may be converted, under certain circumstances, based on an initial conversion rate of 51.7116 American depository shares (“ADS”) per US$1,000 principal amount of the Notes (which represents an initial conversion price of US$19.34 per ADS).

 

The net proceeds to the Company from the issuance of the Notes were US$175 million. The Company pays cash interest at an annual rate of 0.5% on the Notes, payable semi-annually in arrears on March 15 and September 15 of each year, beginning March 15, 2013. Debt issuance costs were US$5.4 million and are being amortized to interest expense to the first put date of the Notes (September 15, 2015).

 

43


 

The Notes are general senior unsecured obligations and rank (1) senior in right of payment to any of the Company’s future indebtedness that is expressly subordinated in right of payment to the Notes, (2) equal in right of payment to any of the Company’s future indebtedness and other liabilities of the Company that are not so subordinated, (3) junior in right of payment to any of the Company’s secured indebtedness to the extent of the value of the assets securing such indebtedness and (4) structurally junior to all future indebtedness incurred by the Company’s subsidiaries and their other liabilities (including trade payables).

 

Concurrently with the issuance of the Notes, the Company purchased a call option (“Purchased Call Option”) and sold warrants (“Sold Warrants”). The separate Purchased Call Option and Sold Warrants are structured to reduce the potential future economic dilution associated with the conversion of the Notes and to increase the initial conversion price to US$26.37 per ADS. Each of these components is discussed separately below:

 

Purchase Call Option

 

Counterparty agreed to sell to the Company up to approximately 9.3 million shares of the Company’s ADS, which is the number of ADS initially issuable upon conversion of the Notes in full, at a price of US$19.34 per ADS. The Purchased Call Option will be settled by the counterparty in ADSs and will terminate upon the maturity date of the Notes. Settlement of the Purchased Call Option in ADSs, based on the number of ADSs issued upon conversion of the Notes, on the expiration date would result in the Company receiving shares equivalent to the number of shares issuable by the Company upon conversion of the Notes. Should there be an early termination of the Purchased Call Option, the number of ADSs potentially received by the Company will depend upon 1) the then existing overall market conditions, 2) the Company’s stock price, 3) the volatility of the Company’s stock, and 4) the amount of time remaining before expiration of the convertible note hedge.

 

Sold Warrants

 

The Company received US$26.6 million from the same counterparty from the sale of warrants to purchase up to approximately 9.3 million shares of the Company’s ADS at an exercise price of US$26.37 per ADS. The warrants had an expected life of 5 years and expire on September 15, 2017. At expiration, the Company may, at its option, elect to settle the warrants on a net share basis. As of December 31, 2014, the warrants had not been exercised and remained outstanding.

 

Evaluation that transactions should be viewed as a single unit:

 

In accordance with ASC 815-10-15, the Company concluded that the offering of the Notes, Purchased Call Option and the Issued Warrants (1) do not entail the same risks as the Notes involve interest, credit and equity risks, whereas the Purchased Call Option and Issued Warrants transaction was intended to reduce the equity dilution risk for the Company and (2) have a valid business purpose and economic need for structuring the transactions separately as the Company wanted to mitigate future dilution upon conversion of the Notes, as such required that the purchased call option is an American style option which is physical settled whereas the warrant is a European style instrument that allows net share settlement or cash settlement at the choice of the Company. Therefore, the offering of the Notes, Purchased Call Option and Issued Warrants transactions should be accounted for as separate transactions.

 

The Company has accounted for the Notes in accordance with ASC 470, as a single instrument as a long-term debt. The value of the Notes is measured by the cash received. As of December 31, 2014, RMB428 million (US$69 million) is reclassified as short-term debt to present the Notes may be redeemed within one year(Note 12).

 

The key terms of the Notes are as follows:

 

Redemption

 

Contingent redemption option

 

The Notes are not redeemable prior to the maturity date of September 15, 2017, except as described below. The holders of the Notes (the “Holders”) have a non-contingent option to require the Company to repurchase for cash all or any portion of their Notes on September 15, 2015. The repurchase price will equal 100% of the principal amount of the Notes to be repurchased plus accrued and unpaid interest, if any, to, but excluding, the repurchase date. If a fundamental change (as defined in the Indenture) occurs prior to the maturity date, the Holders may require the Company to purchase for cash all or any portion of the Notes at a purchase price equal to 100% of the principal amount of the Notes to be purchased plus accrued and unpaid interest, if any, to, but excluding, the fundamental change purchase date. The Holders have the option to require the Company to repurchase the Notes, in whole or in part, in the event of a fundamental change for an amount equal to the 100% of the principal amount and any accrued and unpaid interest in the event of fundamental changes. The Company believes that the likelihood of occurrence of events considered a fundamental change is remote.

 

44


 

The contingent redemption option is assessed in accordance with ASC 815-15-25-42. The contingent redemption option is considered clearly and closely related to its debt host and does not meet the requirement for bifurcation as the Notes were issued at par and the repurchase feature requires the issuer to settle the option by delivering par plus accrued and unpaid interest, the Notes holder would recover all of their initial investment. Additionally, since the Notes holder can only recover its initial investment upon exercise of its option, there are no interest rate scenarios under which the embedded derivative would at least double the investor’s initial rate of return.

 

Non-contingent redemption option

 

On or after September 15, 2015 (after year 3), the Holders have the right to require the issuer to redeem, at 100% of the loan’s principal amount plus accrued and unpaid interest, in which circumstance the Holders would recover substantially all of their initial investment.

 

Since the Holders can only recover its initial investment upon exercise of its option, there are no interest rate scenarios under which the embedded derivative would at least double the investor’s initial rate of return. Therefore, the embedded repurchase feature (put option) is considered clearly and closely related to the debt host pursuant to ASC 815-15-25-1 and does not meet the requirements for bifurcation.

 

Conversion

 

The Holders may convert their Notes in integral multiples of US$1,000 principle amount at an initial conversion rate of US$19.34 per ADS, at any time prior to the maturity date of September 15, 2017. Upon conversion of the Notes, the Company will deliver shares of the Company’s ADS. The conversion rate is subject to adjustment in certain events, such as distribution of dividends and stock splits. In addition, upon a make-whole fundamental change (as defined in the Indenture), the Company will, under certain circumstances, increase the applicable conversion rate for a holder that elects to convert its Notes in connection with such make-whole fundamental change.

 

In accordance with ASC 815-10-15-83, the conversion option meets the definition of a derivative. However, bifurcation of conversion option from the Notes is not required as the scope exception prescribed in ASC 815-10-15-74 is met as the conversion option is considered indexed to the entity’s own stock and classified in stockholders’ equity.

 

Early conversion of 2017 Convertible Senior Notes

 

The Company offered the public tranche of the 2017 Notes holders to convert their Notes early, through an inducement. The inducement we offered included the original term’s ratio for ADS conversion plus a cash incentive of 1.5%-2.0%. As a result of the inducement, in 2013, US$45.5 million of the notes was tendered, or 2.35 million ADS at the initial conversion rate of 51.7116 ADS per note. In 2014, US$61.6 million of the notes was tendered, or 3.4 million ADS at the initial conversion rate of 51.7116 ADS per note. These conversions did not materially impact the current shares outstanding.

 

Early termination of Call Option

 

The above early conversion of 2017 Convertible Senior Notes also resulted in an early termination of a call option we entered into during 2012, of which the Company has received US$ 11.6 million from this early termination.

 

Description of 2018 Convertible Senior Notes

 

On October 17, 2013, the Company issued US$800 million in aggregate principle amount of 1.25% Convertible Senior Notes due October 15, 2018 (the “Notes”) at par. The Notes may be converted, under certain circumstances, based on an initial conversion rate of 12.7568 American depository shares (“ADS”) per US$1,000 principal amount of the Notes (which represents an initial conversion price of US$78.39 per ADS).

 

The net proceeds to the Company from the issuance of the Notes were US$780 million. The Company pays cash interest at an annual rate of 1.25% on the Notes, payable semi-annually in arrears on April 15 and October 15 of each year, beginning April 15, 2014. Debt issuance costs were US$19.6 million and are being amortized to interest expense to the maturity date of the Notes (October 15, 2018).

 

The Notes are general senior unsecured obligations and rank (1) senior in right of payment to any of the Company’s future indebtedness that is expressly subordinated in right of payment to the Notes, (2) equal in right of payment to any of the Company’s future indebtedness and other liabilities of the Company that are not so subordinated, (3) junior in right of payment to any of the Company’s secured indebtedness to the extent of the value of the assets securing such indebtedness and (4) structurally junior to all future indebtedness incurred by the Company’s subsidiaries and their other liabilities (including trade payables).

 

45


 

Concurrently with the issuance of the Notes, the Company purchased a call option (“Purchased Call Option”) and sold warrants (“Sold Warrants”). The separate Purchased Call Option and Sold Warrants are structured to reduce the potential future economic dilution associated with the conversion of the Notes and to increase the initial conversion price to US$96.27 per ADS. Each of these components is discussed separately below:

 

Purchase Call Option

 

Counterparty agreed to sell to the Company up to approximately 10.2 million shares of the Company’s ADS, which is the number of ADS initially issuable upon conversion of the Notes in full, at a price of US$78.39 per ADS. The Purchased Call Option will be settled in ADSs and will terminate upon the maturity date of the Notes. Settlement of the Purchased Call Option in ADSs, based on the number of ADSs issued upon conversion of the Notes, on the expiration date would result in the Company receiving shares equivalent to the number of shares issuable by the Company upon conversion of the Notes. Should there be an early termination of the Purchased Call Option, the number of ADSs potentially received by the Company will depend upon 1) the then existing overall market conditions, 2) the Company’s stock price, 3) the volatility of the Company’s stock, and 4) the amount of time remaining before expiration of the convertible note hedge.

 

Sold Warrants

 

The Company received US$77.2 million from the same counterparty from the sale of warrants to purchase up to approximately 10.2 million shares of the Company’s ADS at an exercise price of US$96.27 per ADS. The warrants had an expected life of 5 years and expire on October 15, 2018. At expiration, the Company may, at its option, elect to settle the warrants on a net share basis. As of December 31, 2014, the warrants had not been exercised and remained outstanding.

 

Use of Proceeds

 

The Company used a portion of the net proceeds of the offering to pay the associated cost of the convertible note hedge transaction, after such cost is partially offset by the proceeds to the Company from the sale of the warrant transaction. The remainder of the net proceeds from this offering is planned to be used for other general corporate purposes, including working capital needs and potential acquisitions of complementary businesses, as well as potential ADS repurchases and note retirement from time to time.

 

Evaluation that transactions should be viewed as a single unit:

 

In accordance with ASC 815-10-15, the Company concluded that the offering of the Notes, Purchased Call Option and the Issued Warrants (1) do not entail the same risks as the Notes involve interest, credit and equity risks, whereas the Purchased Call Option and Issued Warrants transaction was intended to reduce the equity dilution risk for the Company and (2) have a valid business purpose and economic need for structuring the transactions separately as the Company wanted to mitigate future dilution upon conversion of the Notes, as such required that the purchased call option is an American style option which is physical settled whereas the warrant is a European style instrument that allows net share settlement or cash settlement at the choice of the Company. Therefore, the offering of the Notes, Purchased Call Option and Issued Warrants transactions should be accounted for as separate transactions.

 

The Company has accounted for the Notes in accordance with ASC 470, as a single instrument as a long-term debt. The value of the Notes is measured by the cash received. As of December 31, 2014, RMB5.0 billion (US$800 million) is accounted as the value of the Notes in long-term debt.

 

The key terms of the Notes are as follows:

 

Redemption

 

Contingent redemption option

 

The Notes are not redeemable prior to the maturity date of October 15, 2018, except as described below. The holders of the Notes (the “Holders”) have a non-contingent option to require the Company to repurchase for cash all or any portion of their Notes on October 15, 2016. The repurchase price will equal 100% of the principal amount of the Notes to be repurchased plus accrued and unpaid interest, if any, to, but excluding, the repurchase date. If a fundamental change (as defined in the Indenture) occurs prior to the maturity date, the Holders may require the Company to purchase for cash all or any portion of the Notes at a purchase price equal to 100% of the principal amount of the Notes to be purchased plus accrued and unpaid interest, if any, to, but excluding, the fundamental change purchase date. The Holders have the option to require the Company to repurchase the Notes, in whole or in part, in the event of a fundamental change for an amount equal to the 100% of the principal amount and any accrued and unpaid interest in the event of fundamental changes. The Company believes that the likelihood of occurrence of events considered a fundamental change is remote.

 

46


 

The contingent redemption option is assessed in accordance with ASC 815-15-25-42. The contingent redemption option is considered clearly and closely related to its debt host and does not meet the requirement for bifurcation as the Notes were issued at par and the repurchase feature requires the issuer to settle the option by delivering par plus accrued and unpaid interest, the Notes holder would recover all of their initial investment. Additionally, since the Notes holder can only recover its initial investment upon exercise of its option, there are no interest rate scenarios under which the embedded derivative would at least double the investor’s initial rate of return.

 

Non-contingent redemption option

 

On or after October 15, 2016 (after year 3), the Holders have the right to require the issuer to redeem, at 100% of the loan’s principal amount plus accrued and unpaid interest, in which circumstance the Holders would recover substantially all of their initial investment.

 

Since the Holders can only recover its initial investment upon exercise of its option, there are no interest rate scenarios under which the embedded derivative would at least double the investor’s initial rate of return. Therefore, the embedded repurchase feature (put option) is considered clearly and closely related to the debt host pursuant to ASC 815-15-25-1 and does not meet the requirements for bifurcation.

 

Conversion

 

The Holders may convert their Notes in integral multiples of US$1,000 principle amount at an initial conversion rate of US$78.39 per ADS, at any time prior to the maturity date of October 15, 2018. Upon conversion of the Notes, the Company will deliver shares of the Company’s ADS. The conversion rate is subject to adjustment in certain events, such as distribution of dividends and stock splits. In addition, upon a make-whole fundamental change (as defined in the Indenture), the Company will, under certain circumstances, increase the applicable conversion rate for a holder that elects to convert its Notes in connection with such make-whole fundamental change.

 

In accordance with ASC 815-10-15-83, the conversion option meets the definition of a derivative. However, bifurcation of conversion option from the Notes is not required as the scope exception prescribed in ASC 815-10-15-74 is met as the conversion option is considered indexed to the entity’s own stock and classified in stockholders’ equity.

 

Assessment of Beneficial Conversion Feature and Contingent Beneficial Conversion Feature:

 

As the conversion options are not bifurcated, the Company has assessed the beneficial conversion feature (“BCF”), as of commitment date as defined in ASC 470-20. There was no BCF attribute to the Notes as the set conversion price for the Notes was greater than the fair value of the ordinary share price at date of issuance.

 

The Holders have the option to convert upon a fundamental change, if Holders decide to convert in connection with a fundamental change; the number of shares issuable upon conversion will be increased. The Company will have to assess for the contingent BCF using a measurement date upon issuance of the Notes, upon occurrence of such adjustment. The settlement of the conversion is based on a make-whole provision resulting from a fundamental change, this feature is consistent with ASC 815-40-55-46 (example 19), therefore the Company concludes that this feature is also considered indexed to its own stock.

 

Accounting for Debt Issuance Costs:

 

The debt issuance costs were recorded as deferred issuance costs and are amortized as interest expense, using the effective interest method, over the term of the Notes pursuant to ASC 835-30-35-2.

 

Accounting for Purchased Call Option:

 

In accordance with ASC 815-10-15-83, the Purchased Call Option meets the definition of a derivative instrument. However, the scope exception in accordance with ASC 815-10-15-74 applies to the Purchased Call Option as it is indexed to its own stock, and the Purchased Call Option meets the requirements of ASC 815 and would be classified in stockholders’ equity, therefore, the cost paid for Purchased Call Option was accounted for within stockholders’ equity, and subsequent changes in fair value will not be recorded.

 

47


 

Accounting for Issued Warrants:

 

The Company assessed that the Issued Warrants are not liabilities within scope of ASC 480-10-25. The Issued Warrants are legally detachable from the Notes and Purchased Call Option and separately exercisable as such meets the definition of a freestanding derivative instrument pursuant to ASC 815. However, the scope exception in accordance with ASC 815-10-15-74 applies to Warrants and it meets the requirements of ASC 815 that would be classified in stockholders’ equity. Therefore, the Warrants were initially accounted for within stockholders’ equity, and subsequent changes in fair value will not be recorded.

 

Description of Priceline Convertible Notes

 

On August 7, 2014, the Company issued Convertible Senior Notes (the “Notes”) at an aggregate principal amount of US$500 million to the Priceline Group. The Notes are due on August 7, 2019 and bear interest of 1% annually which will be paid semi-annually beginning on August 7, 2014. The Notes will be convertible into the Company’s American Depositary Shares (“ADSs”) with an initial conversion price of approximately US$81.36 per ADS.

 

The Company has accounted for the Notes in accordance with ASC 470, as a single instrument within the consolidated financial statements. The value of the Notes is measured by the cash received. The Company recorded the interest expenses according to its annual interest rate.

 

In addition, the Company has granted the Priceline Group permission to acquire the Company’s shares in the open market over the next twelve months, so that combined with the shares convertible under the bond, the Priceline Group may hold up to 10% of the Company’s outstanding shares. As the potential purchase will be conducted by the market price, there is no accounting implication.

 

18.       TREASURY STOCK

 

Accelerated share repurchase arrangement

 

On September 26, 2012, the Company entered into a Capped Call Option Transaction Agreement (the “Agreement”) for an initial notion amount of US$75 million with JP Morgan Chase Bank, National Association. The transaction enables the Company to execute a treasury stock repurchase up to 4.4 million ADSs upon maturity on December 19, 2012. The Agreement consists of two components, a treasure stock repurchase prepayment of US$62,182,346 (purchased call option) with a strike price of US$0.0001 per ADS, plus a warrant (a written call option) with an upper strike price of US$14.3621 per ADS. The total strike notion amount for the Capped Call Option Transaction is US$63,749,958.

 

Upon maturity:

 

·                  If the ADS trading price is above upper strike price (US$14.3621 per ADS), Ctrip retains a premium of US$1,567,612 and the initial cash prepayment of US$62,182,346 in cash or a number of ADSs that is calculated by dividing the cash settlement amount of US$63,749,958 by the maturity date’s trading price per ADS;

·                  If the ADS trading price is below upper strike price (US$14.3621 per ADS), Ctrip receives a fixed number of 4,438,763 ADSs.

 

The Capped Call Option Transaction meet the criteria for being indexed to the Company’s own stock and is therefore be excluded from the scope of ASC 815. The initial cash payment is recorded within shareholders’ equity as a component of additional paid in capital.

 

On December 19, 2012, the Capped Call Option Transaction expired with cash settlement. The difference between cash settlement and cash prepayment has been accounted for as an equity transaction with the amount recorded in additional paid in capital. As the ADS trading price is above the upper strike price, the Company selected cash settlement of the Capped Call Option amounting to US$63.7 million.

 

In October 2013, US$45.5 million convertible senior notes issued in 2012 were early converted and 588,219 shares of repurchased treasury stock were delivered to the notes holders. As of December 31, 2013, the Company had 3,777,087 shares treasury stock at total cost of US$256 million.

 

In 2014, US$61.6 million convertible senior notes issued in 2012 were early converted and 846,131 shares of repurchased treasury stock were delivered to the notes holders. As of December 31, 2014, the Company had 3,323,262 shares treasury stock at total cost of US$259 million.

 

19.       NON-CONTROLLING INTERESTS

 

As of December 31, 2014, the Company’s majority-owned subsidiaries and VIEs which are consolidated in the consolidated financial statements but with non-controlling interests recognized mainly include an offline travel agency, a technology company focusing on hotel customer reviews, an online trip package service provider, Tujia.com International Co., Ltd (“Tujia”) and ezTravel.

 

48


 

Non-controlling interests include the common shares in the consolidated subsidiaries or VIE subsidiaries and preferred shares issued by the Company’s subsidiaries. The balance is summarized as follows:

 

 

 

December 31, 2013

 

December 31, 2014

 

 

 

RMB

 

RMB

 

 

 

 

 

 

 

An offline travel agency (Note 2)

 

—

 

367,705,496

 

A technology company focusing on hotel customer reviews (Note 2)

 

—

 

125,442,240

 

An online trip package service provider (Note 2)

 

—

 

136,890,011

 

Tujia

 

83,133,600

 

130,343,575

 

ezTravel

 

21,475,705

 

22,769,589

 

Others

 

95,081,123

 

65,397,382

 

 

 

199,690,428

 

848,548,293

 

 

In October 2012, February 2013 and June 2014, a subsidiary of the Company, Tujia, entered into a series of agreements with C-Travel, a wholly owned subsidiary of the Company, and other institutional investors to issue 70,380,000 Series A redeemable convertible preferred shares (“Series A preferred shares”) with total consideration of US$14.6 million, 33,333,333 Series B redeemable convertible preferred shares (“Series B preferred shares”) with total consideration of US$36.7 million and 30,465,080 Series C redeemable convertible preferred shares (“Series C preferred shares”) with total consideration of US$75 million, respectively. All of the Series A Preferred Shares, the Series B Preferred Shares and the Series C Preferred Shares issued by Tujia are collectively referred to as the “Preferred Shares”. The Company assessed it has the right to consolidate Tujia after the issuance of Series A, B and C redeemable convertible preferred shares.

 

In December, 2014, the Company completed the transaction to acquire the equity stake and held majority voting power of an offline travel agency (Note 2).

 

In November, 2014, the Company completed the transaction to acquire controlling shares of a technology company focusing on hotel customer reviews (Note 2).

 

In January, 2014, the Company completed the transaction to acquire controlling shares of an online trip package service provider (Note 2).

 

The shares of the above mentioned companies held by investors other than Ctrip are recorded as non-controlling interests.

 

20.       EARNINGS PER SHARE

 

Basic earnings per share and diluted earnings per share were calculated as follows:

 

 

 

2012

 

2013

 

2014

 

 

 

RMB

 

RMB

 

RMB

 

Numerator:

 

 

 

 

 

 

 

Net income attributable to Ctrip’s shareholders

 

714,405,864

 

998,319,684

 

242,739,781

 

Eliminate the dilutive effect of interest expense of convertible bond

 

4,617,398

 

15,496,021

 

—

 

Numerator for diluted earnings per share

 

719,023,262

 

1,013,815,705

 

242,739,781

 

 

 

 

 

 

 

 

 

Denominator:

 

 

 

 

 

 

 

Denominator for basic earnings per ordinary share - weighted average ordinary shares outstanding

 

34,236,761

 

32,905,601

 

34,289,170

 

Dilutive effect of share options

 

1,230,941

 

2,359,614

 

3,106,496

 

Dilutive effect of convertible bond

 

623,083

 

2,206,157

 

—

 

Dilutive effect of convertible bond sold warrants

 

—

 

598,469

 

812,192

 

Denominator for diluted earnings per ordinary share

 

36,090,785

 

38,069,841

 

38,207,858

 

 

 

 

 

 

 

 

 

Basic earnings per ordinary share

 

20.87

 

30.34

 

7.08

 

Diluted earnings per ordinary share

 

19.92

 

26.63

 

6.35

 

 

 

 

 

 

 

 

 

Basic earnings per ADS *

 

2.61

 

3.79

 

0.89

 

Diluted earnings per ADS *

 

2.49

 

3.33

 

0.80

 

 

*      On November 18, the Company announced that it will change the ratio of its American depositary shares (‘‘ADSs’’) to ordinary shares from four (4) ADSs representing one (1) ordinary share to eight (8) ADSs representing one (1) ordinary share, effective December 1, 2015. The earning per share of the Company for each of the three years in the period ended December 31, 2014 presented in this financial statement has been retrospectively adjusted to reflect such effect.

 

49


 

The 2018 convertible senior notes and the Priceline convertible notes were not included in the computation of diluted EPS in 2014 because the inclusion of such instrument would be anti-dilutive.

 

For the years ended December 31, 2012, 2013 and 2014, the Company had securities which could potentially dilute basic earnings per share in the future, which were excluded from the computation of diluted earnings per share as their effects would have been anti-dilutive. Such weighted average numbers of ordinary shares outstanding are as following:

 

 

 

2012

 

2013

 

2014

 

 

 

RMB

 

RMB

 

RMB

 

 

 

 

 

 

 

 

 

2017 convertible senior notes

 

—

 

—

 

1,587,142

 

2018 convertible senior notes

 

—

 

524,249

 

2,551,346

 

Priceline convertible notes

 

—

 

—

 

614,535

 

Outstanding weighted average stock options

 

1,779,507

 

251,266

 

74,104

 

Sold Warrants

 

299,319

 

870,425

 

1,996,407

 

 

 

2,078,826

 

1,645,940

 

6,823,534

 

 

21.       COMMITMENTS AND CONTINGENCIES

 

Operating lease commitments

 

The Company has entered into leasing arrangements relating to office premises that are classified as operating leases for the periods from 2015 to 2019. Future minimum lease payments for non-cancelable operating leases are as follows:

 

 

 

Office Premises

 

 

 

RMB

 

2015

 

170,867,421

 

2016

 

101,503,975

 

2017

 

58,110,956

 

2018

 

23,039,320

 

2019

 

11,583,618

 

Thereafter

 

14,102,255

 

 

 

379,207,545

 

 

Rental expense amounted to RMB94 million, RMB118 million and RMB144 million for the years ended December 31, 2012, 2013 and 2014, respectively. Rental expense is charged to the statements of income and comprehensive income when incurred.

 

Capital commitments

 

As of December 31, 2014, the Company had outstanding capital commitments totaling RMB70 million, which consisted of capital expenditures of property, equipment and software.

 

Guarantee

 

In connection with our air ticketing business, the Group is required by the Civil Aviation Administration of China, International Air Transport Association, and local airline companies to pay deposits in order to or to provide other guarantees obtain blank air tickets. As of December 31, 2014, the amount under these guarantee arrangements was approximately RMB884 million.

 

Based on historical experience and information currently available, we do not believe that it is probable that we will be required to pay any amount under these guarantee arrangements. Therefore, we have not recorded any liability beyond what is required in connection with these guarantee arrangements.

 

Contingencies

 

The Company is not currently a party to any pending material litigation or other legal proceeding or claims.

 

50


 

The Company is incorporated in Cayman Islands and is considered as a foreign entity under PRC laws. Due to the restrictions on foreign ownership of the air-ticketing, travel agency, advertising and internet content provision businesses, the Company conducts these businesses partly through various VIEs. These VIEs hold the licenses and approvals that are essential for the Company’s business operations. In the opinion of the Company’s PRC legal counsel, the current ownership structures and the contractual arrangements with these VIEs and their shareholders as well as the operations of these VIEs are in compliance with all existing PRC laws, rules and regulations. However, there may be changes and other developments in PRC laws and regulations. Accordingly, the Company cannot be assured that PRC government authorities will not take a view in the future contrary to the opinion of the Company’s PRC legal counsel. If the current ownership structures of the Company and its contractual arrangements with VIEs were found to be in violation of any existing or future PRC laws or regulations, the Company may be required to restructure its ownership structure and operations in China to comply with changing and new Chinese laws and regulations.

 

22.  SUBSEQUENT EVENTS

 

In January, 2015, the Company completed an investment transaction in Travelfusion by purchasing a majority stake in the company. Travelfusion is a UK-based leading online Low Cost Carrier (LCC) travel content aggregator and innovator of Direct Connect global distribution solutions.

 

On November 18, the Company announced that it will change the ratio of its American depositary shares (‘‘ADSs’’) to ordinary shares from four (4) ADSs representing one (1) ordinary share to eight (8) ADSs representing one (1) ordinary share, effective December 1, 2015. The earning per share of the Company for each of the three years in the period ended December 31, 2014 presented in this financial statement has been retrospectively adjusted to reflect such effect.

 

51

 



Exhibit 99.4

 

INDEX TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

Audited consolidated balance sheet as of December 31, 2014 and unaudited interim condensed consolidated balance sheet as of September 30, 2015

 

 

 

Unaudited interim condensed consolidated statements of comprehensive loss for the nine monthss ended September 30, 2014 and 2015

 

 

 

Unaudited interim condensed consolidated statements of cash flows for the nine months ended September 30, 2014 and 2015

 

 

 

Notes to the unaudited interim condensed consolidated financial statements for the nine months ended September 30, 2014 and 2015

 

 

1


 

QUNAR CAYMAN ISLANDS LIMITED

AUDITED CONSOLIDATED BALANCE SHEET AS OF DECEMBER 31, 2014 AND UNAUDITED INTERIM CONDENSED CONSOLIDATED BALANCE SHEET AS OF SEPTEMBER 30, 2015

(Amounts in thousands of Renminbi (“RMB”) and U. S. dollars (“US$”),

except for number of shares and per share (or ADS) data)

 

 

 

 

 

As of

 

 

 

 

 

December 31,

 

September 30,

 

September 30,

 

 

 

Notes

 

2014

 

2015

 

2015

 

 

 

 

 

RMB

 

RMB

 

US$

 

 

 

 

 

 

 

(Unaudited)

 

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

ASSETS

 

 

 

 

 

 

 

 

 

Current assets

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

 

 

812,972

 

4,056,784

 

638,301

 

Restricted cash

 

 

 

236,929

 

1,851,184

 

291,268

 

Funds receivable

 

 

 

413,084

 

729,965

 

114,854

 

Short-term investments

 

 

 

—

 

255,121

 

40,141

 

Accounts receivable, net

 

3

 

165,404

 

360,707

 

56,754

 

Due from related parties

 

12

 

39,951

 

143,484

 

22,576

 

Prepayments and other current assets

 

4

 

259,734

 

845,834

 

133,085

 

Deferred tax assets

 

 

 

22,859

 

28,044

 

4,412

 

Total current assets

 

 

 

1,950,933

 

8,271,123

 

1,301,391

 

 

 

 

 

 

 

 

 

 

 

Non-current assets

 

 

 

 

 

 

 

 

 

Property and equipment, net

 

6

 

149,307

 

208,919

 

32,872

 

Intangible assets, net

 

 

 

2,849

 

12,936

 

2,035

 

Long-term investments

 

5

 

103,175

 

610,605

 

96,074

 

Goodwill

 

8

 

—

 

10,755

 

1,692

 

Other non-current assets

 

 

 

61,453

 

100,565

 

15,823

 

Total non-current assets

 

 

 

316,784

 

943,780

 

148,496

 

 

 

 

 

 

 

 

 

 

 

TOTAL ASSETS

 

 

 

2,267,717

 

9,214,903

 

1,449,887

 

 

 

 

 

 

 

 

 

 

 

LIABILITIES AND SHAREHOLDERS’ (DEFICIT) EQUITY

 

 

 

 

 

 

 

 

 

Current liabilities (including current liabilities of the Affiliated PRC Entities without recourse to the Company amounting to RMB844,484 and RMB1,991,058 (US$313,276) as of December 31, 2014 (audited) and September 30, 2015 (unaudited), respectively) (Note 1)

 

 

 

 

 

 

 

 

 

Short-term loan

 

7

 

—

 

643,500

 

101,249

 

Customer advances and deposits

 

 

 

258,992

 

340,852

 

53,630

 

Due to related parties

 

12

 

6,305

 

1,240,317

 

195,153

 

Accounts payable

 

 

 

19,813

 

42,083

 

6,622

 

Salaries and welfare payable

 

 

 

201,433

 

420,600

 

66,178

 

Income tax payable

 

 

 

22,821

 

27,557

 

4,336

 

Accrued expenses and other current liabilities

 

9

 

1,155,547

 

2,300,703

 

361,996

 

Warrant liability

 

12

 

701,776

 

—

 

—

 

Total current liabilities

 

 

 

2,366,687

 

5,015,612

 

789,164

 

 

 

 

 

 

 

 

 

 

 

Non-current liabilities (including non-current liabilities of the Affiliated PRC Entities without recourse to the Company amounting to RMB3,429 and RMB6,413 (US$1,009) as of December 31, 2014 (audited) and September 30, 2015 (unaudited), respectively) (Note 1)

 

 

 

 

 

 

 

 

 

Long-term debt

 

10

 

—

 

2,576,913

 

405,456

 

Deferred tax liabilities ,non-current

 

 

 

—

 

1,363

 

214

 

Other non-current liabilities

 

 

 

71,616

 

80,849

 

12,721

 

Total non-current liabilities

 

 

 

71,616

 

2,659,125

 

418,391

 

 

 

 

 

 

 

 

 

 

 

Total liabilities

 

 

 

2,438,303

 

7,674,737

 

1,207,555

 

 

2


 

QUNAR CAYMAN ISLANDS LIMITED

AUDITED CONSOLIDATED BALANCE SHEET AS OF DECEMBER 31, 2014 AND UNAUDITED

INTERIM CONDENSED CONSOLIDATED BALANCE SHEET AS OF SEPTEMBER 30, 2015

(CONTINUED)

(Amounts in thousands of Renminbi (“RMB”) and U. S. dollars (“US$”),

except for number of shares and per share (or ADS) data)

 

 

 

 

 

As of

 

 

 

 

 

December 31,

 

September 30,

 

September 30,

 

 

 

Notes

 

2014

 

2015

 

2015

 

 

 

 

 

RMB

 

RMB

 

US$

 

 

 

 

 

 

 

(Unaudited)

 

(Unaudited)

 

Commitments and contingencies

 

19

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shareholders’ (deficit) equity

 

 

 

 

 

 

 

 

 

Class A Ordinary shares (US$ 0.001 par value of per share; 303,344,804 shares authorized as at December 31, 2014 and September 30, 2015, respectively; 224,299,179 and 195,220,191 shares issued and outstanding as of December 31, 2014 (audited) and September 30, 2015 (unaudited), respectively)

 

 

 

1,426

 

1,242

 

195

 

Class B Ordinary shares (US$ 0.001 par value of per share; 496,655,196 shares authorized as at December 31, 2014 and September 30, 2015, respectively; 134,376,522 and 200,118,965 shares issued and outstanding as of December 31, 2014 (audited) and September 30, 2015 (unaudited), respectively)

 

 

 

831

 

1,243

 

196

 

Additional paid-in capital

 

 

 

2,069,313

 

5,942,987

 

935,079

 

Accumulated other comprehensive income

 

13

 

4,163

 

85,206

 

13,406

 

Accumulated deficit

 

 

 

(2,246,319

)

(4,498,060

)

(707,732

)

 

 

 

 

 

 

 

 

 

 

Total Qunar Cayman Islands Limited’s shareholders’ (deficit) equity

 

 

 

(170,586

)

1,532,618

 

241,144

 

 

 

 

 

 

 

 

 

 

 

Noncontrolling interests

 

 

 

—

 

7,548

 

1,188

 

 

 

 

 

 

 

 

 

 

 

Total shareholders’ (deficit) equity

 

 

 

(170,586

)

1,540,166

 

242,332

 

 

 

 

 

 

 

 

 

 

 

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY

 

 

 

2,267,717

 

9,214,903

 

1,449,887

 

 

The accompanying notes are an integral part of the unaudited interim condensed consolidated financial statements.

 

3


 

QUNAR CAYMAN ISLANDS LIMITED

UNAUDITED INTERIM CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2014 and 2015

(Amounts in thousands of Renminbi (“RMB”) and U. S. dollars (“US$”),

except for number of shares and per share (or ADS) data)

 

 

 

 

 

Nine months ended

 

 

 

Notes

 

September 30,
2014

 

September 30,
2015

 

September 30,
2015

 

 

 

 

 

RMB

 

RMB

 

US$

 

 

 

 

 

(Unaudited)

 

(Unaudited)

 

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

Revenues

 

 

 

 

 

 

 

 

 

Flight and flight related services

 

 

 

826,802

 

1,570,795

 

247,151

 

Accommodation reservation services

 

 

 

245,083

 

937,826

 

147,559

 

Display advertising services

 

 

 

61,152

 

86,806

 

13,658

 

Other services

 

 

 

103,960

 

281,748

 

44,331

 

 

 

 

 

 

 

 

 

 

 

Total revenues

 

 

 

1,236,997

 

2,877,175

 

452,699

 

Cost of revenues

 

 

 

(317,223

)

(925,813

)

(145,669

)

Gross profit

 

 

 

919,774

 

1,951,362

 

307,030

 

 

 

 

 

 

 

 

 

 

 

Operating expenses

 

 

 

 

 

 

 

 

 

Product developments

 

 

 

(532,410

)

(1,046,755

)

(164,698

)

Product sourcing

 

 

 

(206,347

)

(445,963

)

(70,169

)

 

 

 

 

 

 

 

 

 

 

Sales and marketing (including amounts contributed by and paid to a related party amounting to RMB145,470 and RMB158,772 (US$24,981), for the nine months ended September 30, 2014 and 2015, respectively)

 

 

 

(612,010

)

(1,798,834

)

(283,030

)

General and administrative

 

 

 

(297,021

)

(390,047

)

(61,371

)

Online marketing expense for Baidu Zhixin Cooperation

 

 

 

(450,163

)

(37,178

)

(5,850

)

 

 

 

 

 

 

 

 

 

 

Operating loss

 

 

 

(1,178,177

)

(1,767,415

)

(278,088

)

 

 

 

 

 

 

 

 

 

 

Change in fair value of warrant liability

 

12

 

—

 

(397,987

)

(62,620

)

Interest income(expense), net

 

 

 

26,652

 

(54,309

)

(8,545

)

Foreign exchange loss, net

 

 

 

(13,287

)

(31,903

)

(5,019

)

Other income, net

 

 

 

3,153

 

8,422

 

1,325

 

Loss before income taxes

 

 

 

(1,161,659

)

(2,243,192

)

(352,947

)

 

 

 

 

 

 

 

 

 

 

Income tax expense

 

11

 

(9,780

)

(11,237

)

(1,768

)

Equity in loss of an affiliated company, net of tax

 

 

 

—

 

(2,121

)

(334

)

 

 

 

 

 

 

 

 

 

 

Net loss

 

 

 

(1,171,439

)

(2,256,550

)

(355,049

)

Net loss attributable to noncontrolling interests

 

 

 

—

 

(4,809

)

(757

)

 

 

 

 

 

 

 

 

 

 

Net loss attributable to Qunar Cayman Islands Limited’s shareholders

 

 

 

(1,171,439

)

(2,251,741

)

(354,292

)

 

4


 

QUNAR CAYMAN ISLANDS LIMITED

UNAUDITED INTERIM CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

FOR THE NINE MONTHS ENDEDSEPTEMBER 30, 2014 and 2015(CONTINUED)

(Amounts in thousands of Renminbi (“RMB”) and U. S. dollars (“US$”),

except for number of shares and per share (or ADS) data)

 

 

 

 

 

Nine months ended

 

 

 

Notes

 

September 30,
2014

 

September 30,
2015

 

September 30,
2015

 

 

 

 

 

RMB

 

RMB

 

US$

 

 

 

 

 

(Unaudited)

 

(Unaudited)

 

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive income, net of tax of nil

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustments

 

 

 

28,012

 

81,043

 

12,751

 

Comprehensive loss

 

 

 

(1,143,427

)

(2,170,698

)

(341,541

)

 

 

 

 

 

 

 

 

 

 

Less: comprehensive loss attributable to noncontrolling interests

 

 

 

—

 

(4,809

)

(757

)

 

 

 

 

 

 

 

 

 

 

Comprehensive loss attributable to Qunar Cayman Islands Limited’s shareholders

 

 

 

(1,143,427

)

(2,165,889

)

(340,784

)

 

 

 

 

 

 

 

 

 

 

Loss per share for ordinary shares

 

 

 

 

 

 

 

 

 

Basic and diluted

 

 

 

(3.35

)

(6.03

)

(0.95

)

Loss per ADS (each ADS represents three Class B ordinary shares)

 

 

 

 

 

 

 

 

 

Basic and diluted

 

 

 

(10.05

)

(18.09

)

(2.85

)

Weighted average number of ordinary shares used in computation:

 

 

 

 

 

 

 

 

 

Class A ordinary shares:

 

 

 

 

 

 

 

 

 

Basic

 

15

 

276,228,305

 

221,976,494

 

221,976,494

 

Diluted

 

15

 

276,228,305

 

221,976,494

 

221,976,494

 

Class B ordinary shares:

 

 

 

 

 

 

 

 

 

Basic

 

15

 

73,304,082

 

151,578,106

 

151,578,106

 

Diluted

 

15

 

349,532,387

 

373,554,600

 

373,554,600

 

 

The accompanying notes are an integral part of the unaudited interim condensed consolidated financial statements.

 

5


 

QUNAR CAYMAN ISLANDS LIMITED

UNAUDITED INTERIM CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS FOR THE NINE

MONTHS ENDED SEPTEMBER 30, 2014 and 2015

(Amounts in thousands of Renminbi (“RMB”) and U. S. dollars (“US$”),

except for number of shares and per share data)

 

 

 

 

 

Nine months ended

 

 

 

Notes

 

September 30,
2014

 

September 30,
2015

 

September 30,
2015

 

 

 

 

 

RMB

 

RMB

 

US$

 

 

 

 

 

(Unaudited)

 

(Unaudited)

 

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net cash used for operating activities

 

 

 

(350,894

)

(2,056,545

)

(323,579

)

 

 

 

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

 

 

 

 

Acquisitions of property and equipment

 

 

 

(124,003

)

(153,242

)

(24,111

)

Acquisition of intangible assets

 

 

 

—

 

(849

)

(134

)

Purchase of short-term investments

 

 

 

(246,061

)

(254,216

)

(39,999

)

Proceeds from maturity of short-term investments

 

 

 

734,233

 

—

 

—

 

Payments for long-term investments

 

 

 

(55,698

)

(506,337

)

(79,668

)

Acquisition of business, net of cash acquired

 

 

 

—

 

(7,910

)

(1,244

)

Net cash provided by (used for) investing activities

 

 

 

308,471

 

(922,554

)

(145,156

)

 

 

 

 

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

 

 

 

 

Proceeds from issuance of ordinary shares

 

 

 

—

 

1,932,019

 

303,987

 

Proceeds from exercise of share options

 

 

 

9,912

 

4,850

 

763

 

Proceeds from noncontrolling interests

 

 

 

—

 

1,000

 

158

 

Proceeds from short-term loan

 

 

 

—

 

643,500

 

101,249

 

Restricted cash pledged on short-term loan

 

 

 

—

 

(650,000

)

(102,272

)

Proceeds from issuance of long-term debt

 

 

 

—

 

3,103,303

 

488,278

 

Payment for debt issue cost

 

 

 

—

 

(52,565

)

(8,271

)

Loans from related parties

 

12

 

—

 

1,134,000

 

178,425

 

 

 

 

 

 

 

 

 

 

 

Net cash provided by financing activities

 

 

 

9,912

 

6,116,107

 

962,317

 

 

 

 

 

 

 

 

 

 

 

Effect of exchange rate changes on cash and cash equivalents

 

 

 

25,784

 

106,804

 

16,805

 

Net (decrease) increase in cash and cash equivalents

 

 

 

(6,727

)

3,243,812

 

510,387

 

Cash and cash equivalents at beginning of the period

 

 

 

980,129

 

812,972

 

127,914

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents at end of the period

 

 

 

973,402

 

4,056,784

 

638,301

 

 

 

 

 

 

 

 

 

 

 

Supplemental cash flow disclosures:

 

 

 

 

 

 

 

 

 

Interest paid

 

 

 

—

 

319

 

50

 

Income taxes paid

 

 

 

3,059

 

3,014

 

474

 

Acquisitions of property and equipment included in accounts payable

 

 

 

8,610

 

12,000

 

1,888

 

 

The accompanying notes are an integral part of the unaudited interim condensed consolidated financial statements

 

6

 

QUNAR CAYMAN ISLANDS LIMITED

NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2014 AND 2015

(Amounts in thousands of Renminbi (“RMB”) and U. S. dollars (“US$”),

except for number of shares and per share data)

 

1.                   Basis of Presentation

 

Qunar Cayman Islands Limited (the “Company” or “Qunar”) is a limited company incorporated on July 31, 2006 and domiciled in the Cayman Islands. The Company is principally engaged in the operation of an online travel commerce platform with the provision of flight and flight related, accommodation reservation and other travel related services as well as display advertising services primarily in the People’s Republic of China (“PRC”).

 

On January 31, 2015, the Company acquired a 55% controlling equity interest of a travel service provider for a total consideration of RMB11,000 (Note 14).

 

On May 15, 2015, the Company injected cash of RMB10,000, in setting up Beijing Xiaoyaotianxia Technology Company Limited and holds 55% of equity interest.

 

These unaudited interim condensed consolidated financial statements of the Company have been prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) for interim financial information using accounting policies that are consistent with those used in the preparation of the Company’s audited consolidated financial statements for the year ended December 31, 2014. Accordingly, these unaudited interim condensed consolidated financial statements do not include all of the information and footnotes required by U.S. GAAP for annual financial statements.

 

In the opinion of management, the accompanying unaudited interim condensed consolidated financial statements contain all normal recurring adjustments necessary to present fairly the financial position, operating results and cash flows of the Company for each of the periods presented. The results of operations for the nine months ended September 30, 2015 are not necessarily indicative of results to be expected for any other interim period or for the full year of 2015. The condensed consolidated balance sheet as of December 31, 2014 was derived from the audited consolidated financial statements at that date but does not include all of the disclosures required by U.S. GAAP for annual financial statements. These unaudited condensed consolidated financial statements should be read in conjunction with the Company’s consolidated financial statements for the year ended December 31, 2014.

 

In order to comply with the PRC law and regulations which prohibit foreign control of companies involved in internet content, the Company operates its website and conducts a portion of its display advertising businesses in the PRC through Qunar.com Beijing Information Technology Company Limited (“VIE”) and its wholly-owned subsidiaries, collectively known as the “principal Affiliated PRC Entities.”. The paid-in capital of the VIE was funded by Beijing Qunar Software Technology Company Limited (the “WFOE”) through loans extended to the VIE’s shareholders (the “Nominee Shareholders”). The effective control of the VIE is held by the Company, through a series of contractual agreements (the “Contractual Agreements”) entered into in October 2006, as amended. As a result of the Contractual Agreements, the Company maintains the ability to control the VIE, is entitled to substantially all of the economic benefits from the VIE, and is obligated to absorb all of the VIE’s expected losses.

 

Despite the lack of technical majority ownership, there exists a parent-subsidiary relationship between the Company and the VIE through the irrevocable power of attorney agreement, whereby the Nominee Shareholders effectively assigned all of their voting rights underlying their equity interests in the VIE to the Company. In addition, through the Contractual Agreements, the Company demonstrates its ability and intention to continue to absorb substantially all of the expected losses and profits of the VIE.

 

With respect to the VIE, the Board of Directors of the Company approves the annual budget, financial statements and material contracts of the VIE after the review by senior management of the Company. Senior management of the Company is also generally responsible for the review and approval of sales contracts, credit approval policies, pricing policies, the display of advertisements as well as the appointments and terminations of personnel. In addition, the WFOE is mainly responsible for acquiring significant bandwidth and traffic, marketing and product developments for the VIE. Therefore, the Company directs the activities of the VIE that most significantly impact their economic performance.

 

7


 

QUNAR CAYMAN ISLANDS LIMITED

NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE NINE MONTHS ENDED SEPTEMBER, 2014 AND 2015

(Amounts in thousands of Renminbi (“RMB”) and U.S. dollars (“US$”),

except for number of shares and per share data)

 

1.         Basis of Presentation (continued)

 

As a result of the above, the Company consolidates the VIE in accordance with SEC Regulation SX-3A-02 and Accounting Standards Codification (“ASC”) 810, Consolidation.

 

The following is a summary of the Contractual Agreements:

 

(1) Power of Attorney Agreement: Pursuant to the power of attorney agreement signed between the Nominee Shareholders and the WFOE, the Nominee Shareholders gave the WFOE an irrevocable proxy to exercise all of their voting rights as shareholders of the VIE and sign and/or stamp on behalf of the Nominee Shareholders, all related legal documents pertinent to the exercise of their rights in their capacity as the shareholders of the VIE. The WFOE is also entitled to transfer or assign its voting rights to any other person or entity at its own discretion and without giving prior notice to the Nominee Shareholders or obtaining their consent. The Nominee Shareholders have also irrevocably and permanently waived their rights to terminate this proxy. The proxy will only end when the equity interests of the VIE have been transferred to the Company, the WFOE or their designee or upon the dissolution of the VIE, whichever is earlier.

 

(2) Loan Agreement: Pursuant to the loan agreement between the Nominee Shareholders and the WFOE, the WFOE granted interest free loans amounting to RMB 1,000 for the Nominee Shareholders’ contributions to the VIE. The manner and timing of the repayment is at the sole discretion of the WFOE and at the Nominee Shareholders’ option may be in the form of transferring the VIE’s equity interest to the WFOE or its designees.

 

(3) Equity Option Agreement: Pursuant to the equity option agreement entered into between the Nominee Shareholders, the Company and the WFOE, the Nominee Shareholders granted to the Company/ WFOE or their designees an exclusive and irrevocable option to purchase all their equity interests in the VIE. The exercise consideration should be based on the loan amount as described above or the minimum consideration permitted by the PRC laws, whichever is higher. The Company/ WFOE or their designees may exercise such option at any time until it has acquired all equity interests of the VIE. This agreement terminates when all the equity interests have been transferred or when the obligations by the Nominee Shareholders have been fully performed, whichever is later.

 

(4) Exclusive Technical Consulting and Services Agreement: Pursuant to the exclusive technical consulting and services agreement entered into by the WFOE and the VIE, the VIE engaged the WFOE as their exclusive provider of technical, marketing and management consulting services for an initial term of 30 years, which will be automatically extended for another 10 years upon expiration. The VIE is required to pay to the WFOE service fees determined mutually by the parties. The WFOE will exclusively own any intellectual property arising from the performance of this agreement. The agreement can be terminated mutually by the parties.

 

8


 

QUNAR CAYMAN ISLANDS LIMITED

NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE NINE MONTHS ENDED SEPTEMBER, 2014 AND 2015

(Amounts in thousands of Renminbi (“RMB”) and U.S. dollars (“US$”),

except for number of shares and per share data)

 

1.          Basis of Presentation (continued)

 

(5) Equity Interest Pledge Agreement: Pursuant to the equity interest pledge agreement entered into between the Nominee Shareholders and the WFOE, the Nominee Shareholders pledged all of their equity interests in the VIE to the WFOE as collateral to secure their obligations under the above agreements. The Nominee Shareholders may not transfer or dispose of their equity interests in the VIE until all the obligations under the agreements above have been performed and the equity interests in the VIE have been transferred to the WFOE, the Company and/or their designees. The Nominee Shareholders also cannot create any pledge or encumbrance on the equity interests in the VIE without the WFOE’s prior written consent. The WFOE is entitled to transfer or assign in full or in part the equity interests pledged. In the event of default, the WFOE as the pledgee will be entitled to dispose of the pledged equity interests at any time through transfer or assignment. The WFOE also has the right to collect dividends from the equity interests. The equity interest pledge agreement will terminate after all the obligations under these agreements have been satisfied in full and the pledged equity interests have been transferred to the WFOE, the Company and/or their designees. The equity interest pledge agreement may only be early terminated by the WFOE unilaterally. The equity pledge has also been registered with the local administration for industry and commerce and remains effective until all payments due under the exclusive technical consulting and services agreement have been fulfilled by the VIE.

 

In May 2012, the Contractual Agreements were supplemented by the following terms:

 

·             Dividends and distributions are not permitted without the prior consent of the WFOE. To the extent there is a dividend or distribution, the Nominee Shareholders will remit the amounts in full to the WFOE immediately;

 

·             The Nominee Shareholders agreed that the total consideration received from the transfer of any part of the equity interests or sale of assets of the VIE will first be applied to the outstanding balance under the loan and exclusive technical consulting and services agreements. After full repayment of the outstanding balance, any remaining consideration will be remitted in full to the WFOE as a nonreciprocal transfer;

 

·             With respect to the loan agreement, the term of the loan shall continue indefinitely until all the obligations have been fulfilled. The WFOE may at its discretion determine the time and manner for the repayment and the Nominee Shareholders’ option as to the form of repayment is superseded;

 

·             With respect to the equity option agreement, the method of payment of the equity option shall be determined at the discretion of the WFOE. In the event of liquidation or dissolution of the VIE, all assets shall be sold to the WFOE at the lowest selling price permitted by the applicable PRC law, and any proceeds from the transfer and any residual interests in the VIE shall be remitted to the WFOE immediately. The Company also agrees to fund the WFOE if and when the VIE requires financial support from the WFOE, to the extent allowed by law, to the VIE for its operations and forego the right to seek repayment;

 

·             The appointment of any individuals to exercise the powers and rights assigned pursuant to the power of attorney agreement requires the approval of the Company. All the activities in relation to such powers and rights assigned are directed and approved by the Company; and

 

·             With respect to the exclusive technical consulting and services agreement, the service fees are determined based on a predetermined formula based on the financial performance of the VIE and can be adjusted by the WFOE unilaterally. The terms of the exclusive technical consulting and services agreement will continue to be in effect until it is terminated by the WFOE.

 

9


 

QUNAR CAYMAN ISLANDS LIMITED

NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE NINE MONTHS ENDED SEPTEMBER, 2014 AND 2015

(Amounts in thousands of Renminbi (“RMB”) and U.S. dollars (“US$”),

except for number of shares and per share data)

 

1.          Basis of Presentation (continued)

 

In October 2012, the power of attorney agreement, loan agreement, equity option agreement, and exclusive technical consulting and services agreement were also updated to reflect an additional capital contribution amounting to RMB10,000 to the VIE by the WFOE. The supplemental terms of the Contractual Agreements entered into in May 2012 remain effective.

 

As a result of the power of attorney has since been effectively reassigned to the Company which has the power to direct the activities of the VIE that most significantly impact the VIE’s economic performance. The Company is also obligated to absorb the expected losses of the VIE through the financial support as described above. The Company and the WFOE, as a group of related parties, have held all of the variable interests of the VIE. The Company has been determined to be most closely associated with the VIE within the group of related parties and has replaced the WFOE as the primary beneficiary of the VIE since May 2012. As the VIE was subject to indirect control by the Company through the WFOE immediately before and direct control immediately after the Contractual Agreements were supplemented, the change of the primary beneficiary of the VIE was accounted for as a common control transaction based on the carrying amount of the net assets transferred.

 

The Company and other PRC entities and their respective nominee shareholders entered into a series of agreements substantially similar to the above Contractual Agreements. Through these agreements, the Company demonstrates its ability and intention to continue to absorb substantially all of the expected losses and profits of these other PRC entities and direct the activities of these other PRC entities that most significantly impact their economic performance. Therefore, the Company also consolidates these other PRC entities in accordance with SEC Regulation SX-3A-02 and Accounting Standards Codification (“ASC”) 810, Consolidation.

 

The principal Affiliated PRC Entities and other PRC entities are collectively known as the “Affiliated PRC Entities.”

 

The carrying amounts and classifications of the assets and liabilities of the Company’s Affiliated PRC Entities are as follows:

 

 

 

As of

 

 

 

December 31,

 

September 30,

 

September 30,

 

 

 

2014

 

2015

 

2015

 

 

 

RMB

 

RMB

 

US$

 

 

 

 

 

(Unaudited)

 

(Unaudited)

 

Current assets

 

1,011,311

 

3,194,705

 

502,660

 

Non-current assets

 

75,910

 

497,331

 

78,251

 

Total assets

 

1,087,221

 

3,692,036

 

580,911

 

Current liabilities

 

1,076,484

 

3,740,496

 

588,535

 

Non-current liabilities

 

3,429

 

6,413

 

1,009

 

Total liabilities

 

1,079,913

 

3,746,909

 

589,544

 

 

10


 

QUNAR CAYMAN ISLANDS LIMITED

NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE NINE MONTHS ENDED SEPTEMBER, 2014 AND 2015

(Amounts in thousands of Renminbi (“RMB”) and U.S. dollars (“US$”),

except for number of shares and per share data)

 

1.                   Basis of Presentation (continued)

 

The financial performance and cash flows of the Affiliated PRC Entities are as follows:

 

 

 

Nine months ended

 

 

 

September 30,

 

September 30,

 

September 30,

 

 

 

2014

 

2015

 

2015

 

 

 

RMB

 

RMB

 

US$

 

 

 

(Unaudited)

 

(Unaudited)

 

(Unaudited)

 

Revenues

 

191,768

 

1,059,088

 

166,639

 

Cost of revenues

 

123,850

 

817,603

 

128,643

 

Net loss

 

(24,421

)

(65,330

)

(10,279

)

Net cash (used for) provided by operating activities

 

(21,677

)

121,337

 

19,091

 

Net cash used for investing activities

 

(37,123

)

(389,313

)

(61,255

)

Net cash provided by financing activities

 

2,674

 

507,000

 

79,772

 

 

As of December 31, 2014 and September 30, 2015, the current liabilities of the Affiliated PRC Entities included amounts due to WFOE and the Company of RMB232,000 and RMB1,749,438 (US$275,259), respectively, which were eliminated upon consolidation by the Company.

 

There was no pledge or collateralization of the Affiliated PRC Entities’ assets and the Company has not provided any financial support that it was not previously contractually required to provide to the Affiliated PRC Entities.

 

The Affiliated PRC Entities contributed 11.7% and 20.2% of the Company’s consolidated revenues for the nine months ended September 30, 2014 and 2015, respectively.

 

2.                   Summary of significant accounting policies

 

Principles of consolidation

 

The unaudited interim condensed consolidated financial statements include the financial statements of the Company, its subsidiaries and the Affiliated PRC Entities of which the Company or a subsidiary of the Company is the primary beneficiary. All significant intercompany transactions and balances between the Company, its subsidiaries and the Affiliated PRC Entities are eliminated upon consolidation.

 

Use of estimates

 

The preparation of the unaudited interim condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the period. Areas where management uses subjective judgment include, but are not limited to, estimating the provision for account receivables, the useful lives of senior unsecured long-lived and intangible assets, the fair value of warrant liability and other derivatives embedded in convertible notes and the cancelation rate of air travel facilitating services sold; determining the purchase price allocation of business combination and share-based compensation expenses; assessing the impairment of long-term investments and long-lived assets, realizability of deferred tax assets, unrecognized tax benefits, and contingencies. Management bases the estimates on historical experience and various other assumptions that are believed to be reasonable, the results of which form the basis for making judgments about the carrying values of assets and liabilities. Actual results could differ from these estimates.

 

11


 

QUNAR CAYMAN ISLANDS LIMITED

NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE NINE MONTHS ENDED SEPTEMBER, 2014 AND 2015

(Amounts in thousands of Renminbi (“RMB”) and U.S. dollars (“US$”),

except for number of shares and per share data)

 

2.                   Summary of significant accounting policies (continued)

 

Convenience translation

 

Amounts in U.S. dollars are presented for the convenience of the reader and are translated at the noon buying rate of 6.3556 per US$1.00 on September 30, 2015 in the City of New York for cable transfers of RMB as certified for customs purposes by the Federal Reserve Bank of New York. No representation is made that the RMB amounts could have been, or could be, converted into US$ at such rate.

 

Reclassification of revenue amounts

 

The Company presented its revenue in the categories of flight and flight related services, accommodation reservation services, display advertising services and other services beginning January 1, 2015. Therefore, comparative amounts for the nine months ended September 30, 2014 were reclassified to conform to the current period presentation. Such reclassifications had no effect on net loss, total assets, total liabilities or total shareholders’ (deficit) equity as previously reported.

 

Revenue recognition

 

In 2015, the Company pre-purchases air tickets and hotel rooms from airlines and hotels and sells to end users. On such transactions, the Company acts as a principal and presents revenues on a gross basis. Revenues recognized on a gross basis represent the sales prices of the air tickets and hotel rooms sold to end users, and the costs of the air tickets and hotel rooms paid to the airlines and hotels are recorded as “cost of services” in the unaudited interim condensed consolidated statements of comprehensive loss.

 

Coupon programs

 

In 2015, the Company launched programs through which the Company offers coupons to end users, primarily under its pay for performance services business model where the Company acts as an agent to its customers including OTA, airlines and hotels. For the coupons that were voluntarily offered by the Company without the end users completing concurrent purchases, the Company recognizes the amounts of coupons redeemed by the end users as marketing expense when the future purchases are made, as these coupons are only redeemable against future purchases on the Company’s website or mobile platform by end users but not redeemable for cash. Whereas the Company recognizes the amounts of coupons redeemed by the end users that were issued in connection with completed purchases as reduction of revenue.

 

Short-term investments

 

All highly liquid investments with original maturities of greater than three months, but less than 12 months, are classified as short-term investments. As of December 31, 2014 and September 30, 2015, the Company held fixed time deposits amounting to nil and RMB255,121 (US$40,141) in commercial banks with original maturities of greater than three months but less than a year, respectively. Interest income for short-term investments ofRMB9,684, RMB905 (US$142) was recognized in the unaudited interim condensed consolidated statements of comprehensive loss for the nine months ended September 30, 2014 and 2015, respectively.

 

Equity method investments

 

Investments in entities in which the Company can exercise significant influence but does not own a majority equity interest or control are accounted for using the equity method of accounting in accordance with ASC topic 323 (“ASC 323”), Investments-Equity Method and Joint Ventures. Under the equity method, the Company initially records its investment at cost and the difference between the cost of the equity investee and the fair value of the underlying equity in the net assets of the equity investee is recognized as equity method goodwill, which is included in the equity

 

12


 

QUNAR CAYMAN ISLANDS LIMITED

NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE NINE MONTHS ENDED SEPTEMBER, 2014 AND 2015

(Amounts in thousands of Renminbi (“RMB”) and U.S. dollars (“US$”),

except for number of shares and per share data)

 

method investment on the consolidated balance sheets. The Company subsequently adjusts the carrying amount of the investment to recognize the Company’s proportionate share of each equity investee’s net income or loss into earnings after the date of investment. The Company will discontinue applying the equity method if an investment (and additional financial supports to the investee, if any) has been reduced to zero. An impairment loss on the equity method investments is recognized in earnings when the decline in value is determined to be other-than-temporary.

 

Convertible debt instruments

 

ASC topic 815 (“ASC 815”), Derivatives and Hedging, requires all contracts which meet the definition of a derivative to be recognized on the balance sheet as either assets or liabilities and recorded at fair value. Changes in the fair value of derivative financial instruments are recognized periodically in earnings if it does not qualify for hedge accounting. The Company considers the Cash Conversion Subsections under ASC subtopic 470-20 (“ASC 470-20”), Debt with Conversion and Other Options, on its convertible debt instruments that may be settled in cash or other assets upon conversion, including partial cash settlement, unless the embedded conversion option is required to be separately accounted for as a derivative instrument under ASC 815. Under ASC470-20, the debt component is initially measured at its fair value considering all terms except the conversion option. The equity component is measured as the residual amount, reflecting the interest cost paid with the conversion option. The excess of the principal amount of the liability component over its carrying amount shall be amortized to interest cost using the interest method. The equity component shall not be remeasured as long as it continues to meet the equity classification.

 

If a convertible debt instrument within the scope of the Cash Conversion Subsections contains embedded features other than the embedded conversion option, ASC 815 shall be applied to determine if any of those features must be separately accounted for as a derivative instrument. Transaction costs incurred with third parties other than the investors and that directly relate to the issuance of convertible debt instruments within the scope of the Cash Conversion Subsections are allocated to the liability and equity components in proportion to the allocation of proceeds and accounted for as debt and equity issuance costs, respectively.

 

13

 

QUNAR CAYMAN ISLANDS LIMITED

NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE NINE MONTHS ENDED SEPTEMBER, 2014 AND 2015

(Amounts in thousands of Renminbi (“RMB”) and U.S. dollars (“US$”),

except for number of shares and per share data)

 

2.                   Summary of significant accounting policies (continued)

 

Business combinations

 

The Company accounts for its business combinations using the acquisition method of accounting in accordance with ASC topic 805 (“ASC 805”): Business Combinations. The acquisition method of accounting requires all of the following steps: (i) identifying the acquirer, (ii) determining the acquisition date, (iii) recognizing and measuring the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree and (iv) recognizing and measuring goodwill or a gain from a bargain purchase. The consideration transferred in a business combination is measured as the aggregate of the fair values at the date of exchange of the assets given, liabilities incurred, and equity instruments issued as well as the contingent considerations and all contractual contingencies as of the acquisition date. The costs directly attributable to the acquisition are expensed as incurred. Identifiable assets, liabilities and contingent liabilities acquired or assumed are measured separately at their fair value as of the acquisition date, irrespective of the extent of any noncontrolling interests. The excess of (i) the total of cost of acquisition, fair value of the noncontrolling interests and acquisition date fair value of any previously held equity interest in the acquiree over (ii) the fair value of the identifiable net assets of the acquiree, is recorded as goodwill. If the cost of acquisition is less than the fair value of the net assets of the subsidiary acquired, the difference is recognized directly in the consolidated statements of comprehensive loss as a gain.

 

The determination and allocation of fair values to the identifiable assets acquired, liabilities assumed and noncontrolling interests is based on various assumptions and valuation methodologies requiring considerable judgment from management. The most significant variables in these valuations are discount rates, terminal values, the number of years on which to base the cash flow projections, as well as the assumptions and estimates used to determine the cash inflows and outflows. The Company determines discount rates to be used based on the risk inherent in the related activity’s current business model and industry comparisons. Terminal values are based on the expected life of assets, forecasted life cycle and forecasted cash flows over that period.

 

Goodwill

 

Goodwill represents the excess of the purchase price over the amounts assigned to the fair value of the assets acquired and the liabilities assumed of acquired businesses. In accordance with ASC topic 350 (“ASC 350”), Intangibles—Goodwill and Other, goodwill is not amortized, but rather is tested for impairment annually or more frequently if indicators of impairment present. The Company assigns and assesses goodwill for impairment at the reporting unit level. The Company determined that it has only one reporting segment as a whole.

 

14


 

QUNAR CAYMAN ISLANDS LIMITED

NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE NINE MONTHS ENDED SEPTEMBER, 2014 AND 2015

(Amounts in thousands of Renminbi (“RMB”) and U.S. dollars (“US$”),

except for number of shares and per share data)

 

2.                   Summary of significant accounting policies (continued)

 

Recently issued accounting pronouncements

 

In April 2015, the FASB issued ASU No. 2015-03, Interest — Imputation of Interest (“ASU 2015-03”). To simplify presentation of debt issuance costs, ASU 2015-03 requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The recognition and measurement guidance for debt issuance costs are not affected by the amendments in this Update. ASU 2015-03 is effective for financial statements issued for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years. The Company adopted ASU 2015-03 in April 2015.

 

15


 

QUNAR CAYMAN ISLANDS LIMITED

NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE NINE MONTHS ENDED SEPTEMBER, 2014 AND 2015

(Amounts in thousands of Renminbi (“RMB”) and U.S. dollars (“US$”),

except for number of shares and per share data)

 

3.                  Accounts receivable, net

 

 

 

As of

 

 

 

December 31,

 

September 30,

 

September 30,

 

 

 

2014

 

2015

 

2015

 

 

 

RMB

 

RMB

 

US$

 

 

 

 

 

(Unaudited)

 

(Unaudited)

 

Accounts receivable

 

176,273

 

373,697

 

58,798

 

Less: allowance for doubtful accounts

 

(10,869

)

(12,990

)

(2,044

)

 

 

165,404

 

360,707

 

56,754

 

 

As of December 31, 2014 and September 30, 2015, all accounts receivable were due from third party customers.

 

The Company recognized additions to allowance for doubtful accounts amounting to RMB4,670 and RMB2,851 (US$449) within general and administrative expenses, for the nine months ended September 30, 2014 and 2015, respectively.

 

4.                  Prepayments and other current assets

 

 

 

As of

 

 

 

December 31,

 

September 30,

 

September 30,

 

 

 

2014

 

2015

 

2015

 

 

 

RMB

 

RMB

 

US$

 

 

 

 

 

(Unaudited)

 

(Unaudited)

 

Prepaid travel related data acquisition costs

 

24,043

 

17,515

 

2,756

 

Deposits and advance to suppliers

 

91,148

 

508,825

 

80,059

 

Other prepaid expenses

 

22,178

 

32,098

 

5,050

 

Receivable due from employees

 

33,578

 

53,897

 

8,480

 

Receivable related to employee share based awards

 

26,308

 

10,355

 

1,629

 

Other receivables

 

62,479

 

223,144

 

35,111

 

 

 

 

 

 

 

 

 

Total

 

259,734

 

845,834

 

133,085

 

 

5.                  Long-term investments

 

The Company’ long-term investments consist of cost method investments and equity method investment. No impairment of long-term investments occurred as of December 31, 2014 and September 30, 2015, respectively.

 

Cost method investments

 

The carrying amount of the Company’s cost method investments was RMB103,175 and RMB547,976 (US$86,220) as of December 31, 2014 and September 30, 2015, respectively.

 

Equity method investments

 

The Company holds 58.75% equity interest in an entity engaged in the ticketing business in the PRC. The carrying amount of equity method investment was nil and RMB62,629 (US$9,854) as of December 31, 2014 and September 30, 2015, respectively.

 

16


 

QUNAR CAYMAN ISLANDS LIMITED

NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE NINE MONTHS ENDED SEPTEMBER, 2014 AND 2015

(Amounts in thousands of Renminbi (“RMB”) and U.S. dollars (“US$”),

except for number of shares and per share data)

 

6.                   Property and equipment, net

 

 

 

As of

 

 

 

December 31,

 

September 30,

 

September 30,

 

 

 

2014

 

2015

 

2015

 

 

 

RMB

 

RMB

 

US$

 

 

 

 

 

(Unaudited)

 

(Unaudited)

 

Office furniture and equipment

 

33,112

 

40,412

 

6,358

 

Office computer equipment

 

56,089

 

71,297

 

11,218

 

Servers and network equipment

 

84,219

 

139,503

 

21,950

 

Software

 

17,030

 

26,653

 

4,194

 

Digital locks

 

4,551

 

40,201

 

6,325

 

Leasehold improvements

 

55,811

 

73,397

 

11,548

 

Total

 

250,812

 

391,463

 

61,593

 

Accumulated depreciation

 

(101,505

)

(182,544

)

(28,721

)

 

 

 

 

 

 

 

 

Property and equipment, net

 

149,307

 

208,919

 

32,872

 

 

Depreciation expenses for the nine months ended September 30, 2014 and 2015, was RMB32,653 and RMB81,850 (US$12,878), respectively.

 

7.                   Short-term loan

 

On September 14, 2015, the Company obtained a RMB denominated loan with a principal amount of RMB643,500 (US$101,249) from Xiamen International Bank at an annual interest rate of 1.62%. The short-term bank loan matures in one year and is guaranteed by a deposit of RMB650,000 (US$102,272) by an overseas subsidiary. Interest expense of nil and RMB492 (US$77) was recognized for the nine months ended September 30, 2014 and 2015, respectively.

 

8.                   Goodwill

 

Changes in the carrying amount of goodwill for the nine months ended September 30, 2015:

 

 

 

Total

 

 

 

RMB

 

Balance as of December 31, 2014

 

—

 

Goodwill acquired during the period

 

10,755

 

Impairment

 

—

 

 

 

 

 

Balance as of September 30, 2015

 

10,755

 

 

 

 

 

Balance as of September 30, 2015 in US$

 

1,692

 

 

Goodwill is not deductible for tax purposes and is not amortized but tested for impairment at least annually.

 

17


 

QUNAR CAYMAN ISLANDS LIMITED

NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE NINE MONTHS ENDED SEPTEMBER, 2014 AND 2015

(Amounts in thousands of Renminbi (“RMB”) and U.S. dollars (“US$”),

except for number of shares and per share data)

 

9.                   Accrued expenses and other current liabilities

 

Accrued expenses and other current liabilities consist of the following:

 

 

 

As of

 

 

 

December 31,

 

September 30,

 

September 30,

 

 

 

2014

 

2015

 

2015

 

 

 

RMB

 

RMB

 

US$

 

 

 

 

 

(Unaudited)

 

(Unaudited)

 

Payable to travel service providers (“TSP”s)

 

673,990

 

1,434,486

 

225,704

 

Payable to end users

 

65,708

 

177,873

 

27,987

 

Accrued operating expenses

 

260,332

 

594,622

 

93,559

 

Contract termination loss provision

 

64,485

 

—

 

—

 

Payable to employees related to share based awards

 

32,305

 

27,762

 

4,368

 

Other tax payable

 

43,899

 

39,702

 

6,247

 

Accrued sales rebates

 

14,828

 

26,258

 

4,131

 

Total

 

1,155,547

 

2,300,703

 

361,996

 

 

10.            Long-term debt

 

On June 17, 2015, the Company issued US$500,000 senior unsecured convertible notes (the “Notes”) to third-parties, SL Camel Holding Ltd., Gaoling Fund L.P and YHG Investment L.P. The Notes bear interest at a coupon rate of 2% per annum with a maturity date of June 17, 2021. The significant terms of the Notes are summarized below:

 

Conversion and settlement method

 

The Notes are convertible at any time, at the holders’ option, into the Company’s ADSs, at an initial conversion price of US$55.00 per ADS, subject to adjustments under the terms of the Notes. Upon conversion, the Company shall pay or deliver its ADSs or cash, or any combination of cash and ADSs at the Company’s election.

 

Repurchase

 

If the Company undergoes a Fundamental Change as defined in the agreement, holders of the Notes have the right to require the Company to repurchase all or part of the at the repurchase price of 100% of the principal amount plus accrued and unpaid interest.

 

Redemption

 

Upon the occurrence of any of the Events of Default as defined in the agreement, the outstanding principal and accrued interest of the Notes will become due and payable in full.

 

18


 

QUNAR CAYMAN ISLANDS LIMITED

NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE NINE MONTHS ENDED SEPTEMBER, 2014 AND 2015

(Amounts in thousands of Renminbi (“RMB”) and U.S. dollars (“US$”),

except for number of shares and per share data)

 

10.            Long-term debt (continued)

 

Make-whole provision

 

In an event of Make-Whole Fundamental Change as defined in the agreement, the conversion rate applicable to each Note that is surrendered for conversion shall be increased to an amount based on a predetermined formula.

 

The Company accounted for the Notes under the cash conversion guidance under ASC 470-20 given the conversion option of the Notes is not required to be bifurcated under ASC 815. At issuance, the Company separated the Notes into equity component of RMB569,088 (US$89,541) and debt component of RMB2,534,215 (US$398,737). The allocated issuance costs to the debt component of RMB43,962 (US$6,917) were presented as direct deduction from the principal amounts of the Notes on the unaudited interim condensed consolidated balance sheets. The Company evaluated all the embedded derivative features and concluded that the make-whole provision feature of the Notes should be bifurcated from the debt host. As of the issuance date and September 30, 2015, the fair value of the make-whole feature was immaterial. For the nine months ended September 30, 2015, effective interest rate on the debt component of the Notes was 5.65% and the Company recognized interest expenses of RMB44,084(US$6,945).

 

11.            Income taxes

 

The Company’s effective tax rates were -0.84% and -0.50% for the nine months ended September 30, 2014 and 2015, respectively.

 

For the nine months ended September 30, 2014 and 2015, the Company recorded RMB4,786 and RMB7,808 (US$1,228) of unrecognized tax benefits, respectively, which primarily represented deemed revenues for income tax purposes. It is possible that the amount accrued will change in the next 12 months; however, an estimate of the range of the possible change cannot be made at this time.

 

As of September 30, 2015, unrecognized tax benefits of RMB58,942 (US$9,274) if ultimately recognized will impact the effective tax rate.

 

12.            Related party transactions

 

a) Related parties

 

Name of related parties

 

Relationship with the Company

Baidu, Inc.

 

Ultimate holding company

Baidu

 

Controlling shareholder of the Company

Baidu Online Network Technology (Beijing) Co., Ltd. (“Baidu Online”)

 

An entity controlled by Baidu

Beijing Baidu Netcom Science Technology Co., Ltd. (“Baidu Netcom”)

 

An entity controlled by Baidu

FuJian Bo Rui Websoft Technology Co., Ltd. (“Bo Rui”)

 

An entity controlled by Baidu

FuJian Bo Dong Cultural Communication Co., Ltd. (“Bo Dong”)

 

An entity controlled by Baidu

Beijing Nuo Mi Network Information Technology Co., Ltd. (“Nuo Mi”)

 

An entity controlled by Baidu

Baidu.com Times Technology (Beijing) Co., Ltd. (“Baidu Times”)

 

An entity controlled by Baidu

 

19

 

QUNAR CAYMAN ISLANDS LIMITED

NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE NINE MONTHS ENDED SEPTEMBER, 2014 AND 2015

(Amounts in thousands of Renminbi (“RMB”) and U.S. dollars (“US$”),

except for number of shares and per share data)

 

12.            Related party transactions(continued)

 

b) The Company had the following related party transactions for the nine months ended September 30, 2014 and 2015:

 

 

 

Nine months ended

 

 

 

September 30,

 

September 30,

 

September 30

 

 

 

2014

 

2015

 

2015

 

 

 

RMB

 

RMB

 

US$

 

 

 

(Unaudited)

 

(Unaudited)

 

(Unaudited)

 

Loans from Baidu Online (i)

 

—

 

1,134,000

 

178,425

 

Loan interest to Baidu (i)

 

—

 

27,576

 

4,339

 

Online marketing services from Baidu Zhixin Cooperation (ii)

 

450,162

 

37,173

 

5,849

 

Zhixin Compensation (ii)

 

—

 

(91,400

)

(14,381

)

Online marketing services from Baidu Online (iii)

 

269

 

64,001

 

10,070

 

Online marketing services from Baidu Netcom (iv)

 

133,906

 

79,483

 

12,506

 

Online marketing services from Baidu Times (vi)

 

4,028

 

11,405

 

1,794

 

Online marketing services contributed by Baidu, Inc. (v)

 

3,304

 

—

 

—

 

Online marketing services from Bo Rui

 

469

 

1,398

 

220

 

Online marketing services from Bo Dong

 

3,494

 

475

 

75

 

Online marketing service from Nuo Mi

 

—

 

2,010

 

316

 

 

(i)                                      On February 27, 2014, Qunar entered into a US$300,000 revolving credit facility agreement with Baidu. The three-year credit facility bears no commitment fee. Any drawdown bears interest at a rate of 90% of the benchmark lending rate published by the People’s Bank of China and shall be repaid within three years from the drawdown date. Qunar is allowed to repay its outstanding debt obligation at maturity either by cash or by issuance of Class B shares. The applicable share conversion price will be determined by the prevailing share price at the maturity date. On March 12 and May 4, 2015, Qunar drew down RMB507,000 and RMB627,000, respectively, pursuant to the agreement.

 

(ii)                                   On October 1, 2013, the Company and Baidu entered into the Zhixin Cooperation Agreement for an initial term starting from November 21, 2013 to December 31, 2016. On June 1, 2015, Baidu and the Company agreed to terminate the Zhixin Cooperation Agreement with immediate effect without admission of any breach by any party. Both party agreed that Baidu would pay the Company a cash consideration of RMB207,000 (USD32,570) in connection with the termination. The online marketing expense for Baidu Zhixin Cooperation was RMB450,162 and RMB37,173 (US$5,849) for the nine months ended September 30, 2014 and 2015, respectively. During the nine months ended September 30, 2014 and 2015, nil and RMB91,400 (US$14,381) were recognized as deduction to expense, respectively.

 

Concurrently with the termination, Baidu fully exercised the first independent tranche of the Baidu Warrants for services provided to the Company in 2014 into 11,450,000 of the Company’s Class B ordinary shares for no additional consideration. The remeasurement loss for those warrants immediately before they were exercised in 2015 was RMB397,987 (US$62,620) which was recorded in “Change in fair value of the warrant liability” on the Company’s unaudited interim condensed consolidated statements of comprehensive loss. The cash consideration received from Baidu was recorded in “Accrued expenses and other current liabilities” on the Company’s unaudited interim condensed consolidated balance sheet to be recognized prospectively against future Baidu service payments pursuant to ASC 605-50-45-13 as consideration received from a vendor.

 

20


 

QUNAR CAYMAN ISLANDS LIMITED

NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE NINE MONTHS ENDED SEPTEMBER, 2014 AND 2015

(Amounts in thousands of Renminbi (“RMB”) and U.S. dollars (“US$”),

except for number of shares and per share data)

 

12.            Related party transactions(continued)

 

b) The Company had the following related party transactions for the nine months ended September 30, 2014 and 2015: (continued)

 

(iii)                                On June 1, 2015, the Company and Baidu entered into a business cooperation agreement, under which Baidu agreed to grant the Company an exclusive right to integrate its hotel information and products into the personal computer and mobile versions of Baidu Maps. The Company will display location-based hotel data through the Baidu Maps interface. Users can click on the displayed hotels to view hotels and to complete bookings. The Company pays Baidu cash amount at a certain percentage of gross revenue the Company earns in exchange for the services Baidu provides to the Company. This agreement will expire in May 2016 subject to renewal negotiation between both parties.

 

(iv)                               During the nine months ended September 30, 2014 and 2015, Baidu Netcom provided online marketing services amounting to RMB 133,906 and RMB 79,483 (US$12,506) to the Company, respectively. As one of the largest online marketing service providers in the PRC, Baidu Netcom typically requires upfront payments from its customers. As of September 30, 2014 and September 30, 2015, such payments amounted to RMB22,000 and RMB6,600 (US$1,038), respectively. The related services are expected to be delivered within the next 12 months.

 

(v)                                  The Company and Baidu, Inc. entered into a business cooperation agreement, whereby Baidu, Inc. provides free online marketing services and directs user traffic to the Company’s website. The Company recorded online marketing expenses based on the Company’s estimate of the expenses that would have been incurred if the Company had operated as an unaffiliated entity with a corresponding credit to additional paid in capital. The term of the business cooperation agreement is for an initial term of three years (the “Initial Term”); provided, however that notwithstanding Baidu, Inc.’s Non-Competition Undertaking to the Company survive until the later of (i) the expiration of the Initial Term and (ii) the date on which Baidu, Inc. and its controlled affiliates hold less than 50% of the voting power attaching to the outstanding shares of the Company (on a fully-diluted basis). The business cooperation agreement expired in July 2014. Upon its expiration, the Company started to pay Baidu, Inc. for the aforementioned online marketing services provided.

 

21


 

QUNAR CAYMAN ISLANDS LIMITED

NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE NINE MONTHS ENDED SEPTEMBER, 2014 AND 2015

(Amounts in thousands of Renminbi (“RMB”) and U.S. dollars (“US$”),

except for number of shares and per share data)

 

12.            Related party transactions (continued)

 

c) The Company had the following related party balances outstanding as of December 31, 2014 and September 30, 2015:

 

 

 

As of

 

 

 

December 31,

 

September 30,

 

September 30,

 

 

 

2014

 

2015

 

2015

 

 

 

RMB

 

RMB

 

US$

 

 

 

 

 

(Unaudited)

 

(Unaudited)

 

Current assets

 

 

 

 

 

 

 

Due from related parties:

 

 

 

 

 

 

 

Baidu Netcom

 

25,210

 

6,600

 

1,038

 

Baidu Times

 

3,670

 

84,107

 

13,234

 

Nuo Mi

 

11,071

 

52,777

 

8,304

 

Total due from related parties

 

39,951

 

143,484

 

22,576

 

 

 

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

 

 

Due to related parties:

 

 

 

 

 

 

 

Baidu Online

 

—

 

1,161,576

 

182,764

 

Baidu Inc.

 

4,714

 

68,741

 

10,816

 

Bo Rui

 

50

 

743

 

117

 

Nuo Mi

 

377

 

2,386

 

375

 

Baidu Netcom

 

—

 

6,871

 

1,081

 

Bo Dong

 

396

 

—

 

—

 

Baidu Times

 

768

 

—

 

—

 

Total due to related parties

 

6,305

 

1,240,317

 

195,153

 

 

Except as disclosed above, balances with related parties are unsecured, interest-free and repayable upon demand.

 

13.            Shareholders’ equity

 

Ordinary shares

 

In June 2015, the Company issued 6,842,106 ADSs, equivalent to 20,526,318 Class B ordinary shares as a result of public offering. In June 2015, 11,450,000 shares of Class B ordinary shares were issued as a result of Baidu’s exercise of the 2014 Baidu Warrants (Note 12).

 

In September 2015, 29,078,988 shares of Class A ordinary shares were exchanged into Class B ordinary shares.

 

In the nine months ended September 30, 2015, 4,687,137 shares of Class B Ordinary shares were issued from share options exercised.

 

Accumulated other comprehensive income

 

The movement of accumulated other comprehensive income is as follows:

 

 

 

Foreign currency
translation adjustments

 

 

 

 

 

Balance as of December 31, 2014

 

4,163

 

Other comprehensive income

 

81,043

 

Balance as of September 30, 2015

 

85,206

 

Balance as of September 30, 2015, in US$ (Unaudited)

 

13,406

 

 

22


 

QUNAR CAYMAN ISLANDS LIMITED

NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE NINE MONTHS ENDED SEPTEMBER, 2014 AND 2015

(Amounts in thousands of Renminbi (“RMB”) and U.S. dollars (“US$”),

except for number of shares and per share data)

 

14.            Business acquisition

 

On January 31, 2015, the Company acquired a 55% controlling equity interest of a travel service provider to enrich its products and achieve synergies. Total consideration of the acquisition was RMB11,000 in cash to be paid in two installments. Each installment payment is dependent on acquiree and its the selling shareholders fulfilling certain administrative and operational conditions. The agreement also provides a call option that allows the Company to purchase the remaining 45% equity interest in the acquiree. As the remaining 45% equity interest is held by three non-controlling selling shareholders where the underlying shares of the acquiree are not publicly traded, the call option is an embedded feature in its shares, which does not qualify for bifurcation accounting. As of September 30, 2015, the Company paid RMB10,200 (US$1,605).

 

No purchase price allocation or pro forma results of operation of this acquisition have been presented because management considers the effect of the acquisition is immaterial to the Company’s consolidated financial results.

 

The revenue and net loss of the acquiree since the acquisition date included in the interim condensed consolidated statement of operations for the nine months ended September 30, 2015 were RMB1,720 (US$271) and RMB8,741 (US$1,375), respectively.

 

23


 

QUNAR CAYMAN ISLANDS LIMITED

NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2014 AND 2015

(Amounts in thousands of Renminbi (“RMB”) and U. S. dollars (“US$”),

except for number of shares and per share data)

 

15.            Loss per share

 

Basic and diluted loss per share for each of the periods presented is calculated as follows:

 

 

 

Nine months ended September 30

 

 

 

2014

 

2014

 

2015

 

2015

 

2015

 

2015

 

 

 

Class A

 

Class B

 

Class A

 

Class A

 

Class B

 

Class B

 

 

 

RMB

 

RMB

 

RMB

 

US$

 

RMB

 

US$

 

 

 

(Unaudited)

 

(Unaudited)

 

(Unaudited)

 

(Unaudited)

 

(Unaudited)

 

(Unaudited)

 

Basic loss per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

Numerator:

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss attributable to ordinary shareholders for computing basic loss per share

 

(925,764

)

(245,675

)

(1,338,047

)

(210,530

)

(913,694

)

(143,762

)

Denominator:

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average number of ordinary shares outstanding, basic

 

276,228,305

 

73,304,082

 

221,976,494

 

221,976,494

 

151,578,106

 

151,578,106

 

Basic loss per share:

 

(3.35

)

(3.35

)

(6.03

)

(0.95

)

(6.03

)

(0.95

)

Basic loss per ADS:

 

 

 

(10.05

)

 

 

 

 

(18.09

)

(2.85

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Diluted loss per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

Numerator:

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss attributable to ordinary shareholders for computing diluted loss per share

 

(925,764

)

(245,675

)

(1,338,047

)

(210,530

)

(913,694

)

(143,762

)

Reallocation of net loss attributable to ordinary shareholders as a result of conversion of Class A to Class B ordinary shares

 

—

 

(925,764

)

—

 

—

 

(1,338,047

)

(210,530

)

Net loss attributable to ordinary shareholders for computing diluted loss per share

 

(925,764

)

(1,171,439

)

(1,338,047

)

(210,530

)

(2,251,741

)

(354,292

)

Denominator:

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average ordinary shares outstanding

 

276,228,305

 

73,304,082

 

221,976,494

 

221,976,494

 

151,578,106

 

151,578,106

 

Conversion of Class A to Class B ordinary shares

 

—

 

276,228,305

 

—

 

—

 

221,976,494

 

221,976,494

 

Weighted-average number of shares outstanding- diluted

 

276,228,305

 

349,532,387

 

221,976,494

 

221,976,494

 

373,554,600

 

373,554,600

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Diluted loss per share:

 

(3.35

)

(3.35

)

(6.03

)

(0.95

)

(6.03

)

(0.95

)

Diluted loss per ADS:

 

 

 

(10.05

)

 

 

 

 

(18.09

)

(2.85

)

 

The Company computes loss per Class A and Class B ordinary shares in accordance with ASC 260, Earnings Per Share, using the two class method. Under the two-class method, net income is allocated between Class A and Class B ordinary shares. Holders of Class A ordinary shares and Class B ordinary shares have the same rights except for conversion and voting rights. Each Class A ordinary share is convertible into one Class B ordinary share at any time, while Class B ordinary shares cannot be converted into Class A ordinary shares under any circumstances. Each Class A ordinary share is entitled to three votes and each Class B ordinary share is entitled to one vote.

 

The effects of all outstanding share options (Note 16) and the Notes (Note 10) have been excluded from the computation of diluted loss per share for the periods presented as their effects would be anti-dilutive.

 

24


 

QUNAR CAYMAN ISLANDS LIMITED

NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2014 AND 2015

(Amounts in thousands of Renminbi (“RMB”) and U. S. dollars (“US$”),

except for number of shares and per share data)

16.            Share-based compensation

 

In November 2007, the Company’s shareholders approved the 2007 Share Incentive Plan (the “2007 Plan”), which is administered by the Board of Directors or any of its committees. Under the Plan, the Board of Directors may grant options to its employees, directors and consultants. On February 12, 2015, the Company’s shareholders approved an amendment of the 2007 Plan at the annual general meeting. Pursuant to the amendment, the maximum number of shares that may be issued under the 2007 Plan shall increase on January 1 of each of 2015, 2016 and 2017 by 2.65% of the then outstanding shares, and on January 1, 2018 for remainder of the term of the 2007 Plan by 1.5% of the then outstanding shares.

 

Under the 2007 Plan, the Company granted 6,766,586 and 8,516,649 share options to employees during the nine months period ended September 30, 2015 and 2014, respectively.

 

The following table summarizes total compensation cost recognized:

 

 

 

Nine months ended

 

 

 

September 30,

 

September 30,

 

September 30,

 

 

 

2014

 

2015

 

2015

 

 

 

RMB

 

RMB

 

US$

 

 

 

(Unaudited)

 

(Unaudited)

 

(Unaudited)

 

Product developments

 

43,319

 

91,772

 

14,440

 

Product sourcing

 

1,197

 

6,043

 

951

 

Sales and marketing

 

8,438

 

27,037

 

4,254

 

General and administrative

 

148,188

 

155,251

 

24,427

 

 

 

201,142

 

280,103

 

44,072

 

 

17.            Restricted net assets

 

As a result of PRC laws and regulations, the Company’s PRC subsidiaries and PRC Affiliated Entities are restricted in its ability to transfer a portion of its net assets to the Company. As of September 30, 2015, the net assets subject to restriction is nil.

 

25


 

QUNAR CAYMAN ISLANDS LIMITED

NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE NINE MONTHS ENDED SEPTEMBER, 2014 AND 2015

(Amounts in thousands of Renminbi (“RMB”) and U.S. dollars (“US$”),

except for number of shares and per share data)

 

18.         Fair value measurement

 

Financial assets and liabilities of the Company primarily comprise of cash and cash equivalents, short-term investments, restricted cash, funds receivable, accounts receivable, due from and due to related parties, employee housing loan receivables, customer advances and deposits, accounts payable, short-term loan, other payables, the Notes and warrant liability. As of December 31, 2014 and September 30, 2015, the carrying values of these financial instruments, except for employee housing loan receivables, employee housing loan receivable, the Notes and warrant liability, approximated their fair values due to the short-term nature of these instruments.

 

The fair value of the employee housing loan receivables has been calculated by discounting the expected future cash flows using rates currently available for instruments with similar terms, credit risk and remaining maturities. The calculated fair value approximates the carrying amount of the outstanding employee housing loan receivables. The warrant liability was recorded at fair value on the issuance date and subsequently adjusted to the fair value at each reporting date. The liability component of the Notes was initially recorded at fair value net of issuance costs, with subsequent accretion to face value.

 

ASC topic 820 (“ASC 820”), Fair Value Measurements and Disclosures, establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value as follows:

 

Level 1 - Observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets

Level 2 - Include other inputs that are directly or indirectly observable in the marketplace

Level 3 - Unobservable inputs which are supported by little or no market activity

 

ASC 820 describes three main approaches to measuring the fair value of assets and liabilities: (1) market approach; (2) income approach and (3) cost approach. The market approach uses prices and other relevant information generated from market transactions involving identical or comparable assets or liabilities. The income approach uses valuation techniques to convert future amounts to a single present value amount. The measurement is based on the value indicated by current market expectations about those future amounts. The cost approach is based on the amount that would currently be required to replace an asset.

 

In accordance with ASC 820, the Company measured the Baidu Warrants at fair value on a recurring basis. Baidu Warrants were classified as Level 2 by using the binomial-tree model with exogenous credit risk developed by Tsiveriotis and Fernandes (1998) based on inputs that are directly and indirectly observable in the market.

 

Assets and liabilities measured at fair value as of December 31, 2014 are summarized as below:

 

 

 

Fair Value Measurement or Disclosure
at December 31, 2014 Using

 

 

 

Quoted Prices in Active

Market for Identical
Assets

 

Significant Other
Observable Inputs

 

Unobservable inputs

 

 

 

(Level 1)

 

(Level 2)

 

(Level 3)

 

 

 

RMB

 

RMB

 

RMB

 

Recurring

 

 

 

 

 

 

 

Warrant liability

 

—

 

701,776

 

—

 

Total liability measured at fair value

 

—

 

701,776

 

—

 

 

26


 

QUNAR CAYMAN ISLANDS LIMITED

NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE NINE MONTHS ENDED SEPTEMBER, 2014 AND 2015

(Amounts in thousands of Renminbi (“RMB”) and U.S. dollars (“US$”),

except for number of shares and per share data)

 

18.            Fair value measurement (continued)

 

No asset or liability was measured at fair value as of September 30, 2015 as the Baidu Warrants were exercised (Note 12).

 

The Company has no assets or liabilities measured or disclosed at fair value on a recurring basis using significant unobservable inputs (Level 3) for the nine months ended September 30, 2014 and 2015.

 

19.         Commitments and contingencies

 

Operating lease commitments

 

The Company leases office facilities and server racks under non-cancelable operating leases expiring on different dates. Payments under operating leases are expensed on a straight-line basis over the periods of their respective leases, and the terms of the leases do not contain rent escalation, contingent rent, renewal, or purchase options. There are no restrictions placed upon the Company by entering into these leases.

 

Future minimum payments under non-cancelable operating leases consist of the following as of September 30, 2015:

 

 

 

RMB

 

US$

 

Three months ending December 31, 2015

 

75,681

 

11,908

 

Year ending December 31, 2016

 

204,029

 

32,102

 

Year ending December 31, 2017

 

54,781

 

8,619

 

Year ending December 31, 2018

 

3,678

 

579

 

Year ending December 31, 2019 and thereafter

 

2,606

 

410

 

 

 

340,775

 

53,618

 

 

Capital Commitments

 

The Company’s capital commitments relate primarily to commitments in connection with the expansion and improvement of its network infrastructure and renovation of its offices. Total capital commitments contracted but not yet reflected in the unaudited interim condensed consolidated financial statements amounted to RMB 29,786 and RMB24,140 (US$3,798) as of December 31, 2014 and September 30, 2015, respectively. All of the commitments relating to the network infrastructure and renovation on the offices are to be fulfilled within the next year.

 

27


 

QUNAR CAYMAN ISLANDS LIMITED

NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE NINE MONTHS ENDED SEPTEMBER, 2014 AND 2015

(Amounts in thousands of Renminbi (“RMB”) and U.S. dollars (“US$”),

except for number of shares and per share data)

 

19.            Commitments and contingencies (continued)

 

Loss contingencies

 

With respect to display advertising services, the Company, as an industry practice in the PRC, regularly provides such services at a discount to its standard rates. These discounts are in the form of free advertising elements, of which the duration and other terms of services are specified as part of the revenue contract. The value-added tax pilot program replaced the business tax rules for advertising services in Beijing effective from September 1, 2012. There are uncertainties under the current value-added tax rules as to whether these free elements should constitute deemed services in addition to the chargeable elements rather than discounts to the overall revenue arrangements for tax purposes and thus be subject to value-added tax at the standard rates of services. The Company currently considers that such free elements do not give rise to deemed services for value-added tax purposes and the value-add tax for a revenue contract is calculated based on the total consideration for the overall arrangements. The rules related to the value-added tax pilot program are still evolving and the timing of the promulgation of the final tax rules or related interpretation is uncertain. The maximum estimated amount for this reasonably possible contingency up to September 30, 2015 was RMB7,179 (US$1,132).

 

Legal contingency

 

The Company received the final judgment (the “Final Judgment”) from the Beijing High People’s Court (the “Court”) with respect to the contract dispute with a TSP over the Distribution Agreement. In the Final Judgment, the Court upheld the prior judgment of the Beijing No. 1 Intermediate People’s Court from January 2015.

 

20.            Subsequent events

 

On October 26, 2015, the Company’s largest shareholder, Baidu, Inc., exchanged 178,702,519 Class A ordinary shares and 11,450,000 Class B ordinary shares of its ownership interest in the Company to Ctrip.com International, Ltd. (“Ctrip”). The exchange ratio is 1 Qunar ADS to 0.725 Ctrip ADSs.  After the completion of the transaction, Ctrip owns 190,152,519 Class B ordinary shares of Qunar, and became the largest shareholder of the Company.

 

On November 18, 2015, the Company entered into an agreement with Ctrip, pursuant to which, the employee equity awards of the Company shall be convertible to Ctrip ADSs at the ratio of 1 Qunar ADS to 0.725 Ctrip ADS. The management voluntarily undertakes that this exchange program will become effective only upon receiving consent from existing the shareholders representing the majority of all the outstanding fully diluted shares of the Company, including convertible bonds on an as converted basis, that are not owned by Baidu, Ctrip, or the management as of October 23, 2015.

 

28



Exhibit 99.5

 

QUNAR CAYMAN ISLANDS LIMITED

 

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

 

 

Page

 

 

Report of independent registered public accounting firm

2

 

 

Consolidated balance sheets as of December 31, 2013 and 2014

3

 

 

Consolidated statements of comprehensive loss for the years ended December 31, 2012, 2013 and 2014

5

 

 

Consolidated statements of cash flows for the years ended December 31, 2012, 2013 and 2014

6

 

 

Consolidated statements of changes in shareholders’ equity (deficit) for the years ended December 31, 2012, 2013 and 2014

7

 

 

Notes to the consolidated financial statements for the years ended December 31, 2012, 2013 and 2014

8

 

 

Additional information —financial statements Schedule 1

45

 

1

 

Report of Independent Registered Public Accounting Firm

 

The Board of Directors and Shareholders of Qunar Cayman Islands Limited

 

We have audited the accompanying consolidated balance sheets of Qunar Cayman Islands Limited (the “Company”) as of December 31, 2014 and 2013, and the related consolidated statements of comprehensive loss, cash flows and changes in shareholders’ equity (deficit) for each of the three years in the period ended December 31, 2014. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

 

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

 

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Qunar Cayman Islands Limited at December 31, 2014 and 2013, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2014, in conformity with U.S. generally accepted accounting principles.

 

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Qunar Cayman Islands Limited’s internal control over financial reporting as of December 31, 2014, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated April 29, 2015 expressed an unqualified opinion thereon.

 

/s/ Ernst & Young Hua Ming LLP

 

Beijing, the People’s Republic of China

 

April 29, 2015

 

 

2

 

 

QUNAR CAYMAN ISLANDS LIMITED

 

CONSOLIDATED BALANCE SHEETS

(Amounts in thousands of Renminbi (“RMB”) and US dollars (“US$”),

except for number of shares and per share data)

 

 

 

 

 

As of December 31,

 

 

 

 

 

2013

 

2014

 

 

 

Notes

 

RMB

 

RMB

 

US$

 

 

 

 

 

 

 

 

 

 

 

ASSETS

 

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

 

 

980,129

 

812,972

 

131,027

 

Restricted cash

 

 

 

163,506

 

236,929

 

38,186

 

Funds receivable

 

 

 

241,122

 

413,084

 

66,577

 

Short-term investments

 

 

 

485,945

 

—

 

—

 

Accounts receivable, net

 

3

 

99,892

 

165,404

 

26,658

 

Due from related parties

 

11

 

10,000

 

39,951

 

6,439

 

Prepayments and other current assets

 

4

 

66,104

 

259,734

 

41,862

 

Deferred tax assets

 

10

 

8,436

 

22,859

 

3,684

 

Total current assets

 

 

 

2,055,134

 

1,950,933

 

314,433

 

 

 

 

 

 

 

 

 

 

 

Non-current assets:

 

 

 

 

 

 

 

 

 

Property and equipment, net

 

5

 

45,690

 

149,307

 

24,064

 

Intangible assets

 

7

 

—

 

2,849

 

459

 

Long-term investments

 

6

 

—

 

103,175

 

16,629

 

Other non-current assets

 

18

 

23,951

 

61,453

 

9,904

 

 

 

 

 

 

 

 

 

 

 

Total non-current assets

 

 

 

69,641

 

316,784

 

51,056

 

 

 

 

 

 

 

 

 

 

 

Total assets

 

 

 

2,124,775

 

2,267,717

 

365,489

 

 

3


 

QUNAR CAYMAN ISLANDS LIMITED

 

CONSOLIDATED BALANCE SHEETS (CONTINUED)

(Amounts in thousands of Renminbi (“RMB”) and US dollars (“US$”),

except for number of shares and per share data)

 

 

 

 

 

As of December 31,

 

 

 

 

 

2013

 

2014

 

 

 

Notes

 

RMB

 

RMB

 

US$

 

 

 

 

 

 

 

 

 

 

 

LIABILITIES AND SHAREHOLDERS’ EQUITY (DEFICIT)

 

 

 

 

 

 

 

 

 

Current liabilities (including current liabilities of the Affiliated PRC Entities without recourse to the Company amounting to RMB384,561 and RMB 844,484(US$136,106) as of December 31, 2013 and 2014, respectively) (note 1):

 

 

 

 

 

 

 

 

 

Customer advances and deposits

 

 

 

164,679

 

258,992

 

41,742

 

Due to related parties

 

11

 

4,492

 

6,305

 

1,016

 

Accounts payable

 

 

 

5,087

 

19,813

 

3,193

 

Salaries and welfare payable

 

 

 

85,977

 

201,433

 

32,465

 

Income tax payable

 

 

 

5,764

 

22,821

 

3,678

 

Accrued expenses and other current liabilities

 

8

 

438,486

 

1,155,547

 

186,240

 

Warrant liability

 

11,19

 

—

 

701,776

 

113,106

 

Total current liabilities

 

 

 

704,485

 

2,366,687

 

381,440

 

Non-current liabilities (including non-current liabilities of the Affiliated PRC Entities without recourse to the Company amounting to RMB3,125 and RMB3,429 (US$553) as of December 31, 2013 and 2014, respectively):

 

 

 

 

 

 

 

 

 

Non-current liabilities

 

 

 

57,863

 

71,616

 

11,542

 

 

 

 

 

 

 

 

 

 

 

Total non-current liabilities

 

 

 

57,863

 

71,616

 

11,542

 

 

 

 

 

 

 

 

 

 

 

Total liabilities

 

 

 

762,348

 

2,438,303

 

392,982

 

 

 

 

 

 

 

 

 

 

 

Commitments and contingencies

 

20

 

 

 

 

 

 

 

Shareholders’ equity(deficit):

 

 

 

 

 

 

 

 

 

Class A ordinary shares (par value of US$0.001 per share; 303,344,804 shares authorized as at December 31, 2013 and 2014, respectively; 302,850,254 and 224,299,179 shares issued and outstanding as at December 31, 2013 and 2014, respectively)

 

14

 

1,914

 

1,426

 

230

 

Class B ordinary shares (par value of US$0.001 per share; 496,655,196 shares authorized as at December 31, 2013 and 2014, respectively; 39,332,950 and 134,376,522 shares issued and outstanding as at December 31, 2013 and 2014, respectively)

 

14

 

240

 

831

 

134

 

Additional paid-in capital

 

 

 

1,788,167

 

2,069,313

 

333,513

 

Accumulated other comprehensive (loss) income

 

13

 

(28,476

)

4,163

 

671

 

Accumulated deficit

 

 

 

(399,418

)

(2,246,319

)

(362,041

)

 

 

 

 

 

 

 

 

 

 

Total shareholders’ equity(deficit)

 

 

 

1,362,427

 

(170,586

)

(27,493

)

 

 

 

 

 

 

 

 

 

 

Total liabilities and shareholders’ equity(deficit)

 

 

 

2,124,775

 

2,267,717

 

365,489

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

4


 

QUNAR CAYMAN ISLANDS LIMITED

 

CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(Amounts in thousands of Renminbi (“RMB”) and US dollars (“US$”),

except for number of shares and per share (or ADS) data)

 

 

 

 

 

Years ended December 31,

 

 

 

 

 

2012

 

2013

 

2014

 

 

 

Notes

 

RMB

 

RMB

 

RMB

 

US$

 

Revenues

 

 

 

 

 

 

 

 

 

 

 

Pay-for-performance services

 

9

 

446,550

 

772,114

 

1,666,653

 

268,616

 

Display advertising services

 

9

 

46,670

 

63,503

 

87,894

 

14,166

 

Other services

 

9

 

8,505

 

15,305

 

2,208

 

356

 

 

 

 

 

 

 

 

 

 

 

 

 

Total revenues

 

 

 

501,725

 

850,922

 

1,756,755

 

283,138

 

Cost of revenues

 

 

 

(95,787

)

(173,395

)

(454,902

)

(73,317

)

 

 

 

 

 

 

 

 

 

 

 

 

Gross profit

 

 

 

405,938

 

677,527

 

1,301,853

 

209,821

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

Product developments

 

 

 

(187,266

)

(319,021

)

(774,511

)

(124,829

)

Product sourcing

 

 

 

(26,947

)

(67,271

)

(316,903

)

(51,075

)

Sales and marketing (including services contributed by and rendered by related parties amounting to RMB6,650, RMB5,920 and RMB3,304 (US$533) and RMB74,296, RMB92,930 and RMB183,146 (US$29,518), respectively, for the years ended December 31, 2012, 2013 and 2014, respectively)

 

11

 

(216,853

)

(315,506

)

(890,861

)

(143,581

)

General and administrative (including services rendered by a related party amounting to RMB81, nil and nil for the years ended December 31, 2012, 2013 and 2014, respectively)

 

11

 

(50,574

)

(129,209

)

(399,914

)

(64,454

)

Online marketing expense for Baidu Zhixin Cooperation

 

11

 

—

 

—

 

(699,983

)

(112,817

)

Contract termination loss provision

 

20

 

—

 

—

 

(64,485

)

(10,393

)

 

 

 

 

 

 

 

 

 

 

 

 

Operating loss

 

 

 

(75,702

)

(153,480

)

(1,844,804

)

(297,328

)

Interest income, net

 

 

 

832

 

4,757

 

31,329

 

5,049

 

Foreign exchange (loss) gain, net

 

 

 

(656

)

1,469

 

(20,739

)

(3,343

)

Other income, net

 

 

 

363

 

1,057

 

4,873

 

785

 

 

 

 

 

 

 

 

 

 

 

 

 

Loss before income taxes

 

 

 

(75,163

)

(146,197

)

(1,829,341

)

(294,837

)

Income tax expense

 

10

 

(15,950

)

(41,092

)

(17,560

)

(2,830

)

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

 

 

(91,113

)

(187,289

)

(1,846,901

)

(297,667

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loss per share for ordinary shares

 

 

 

 

 

 

 

 

 

 

 

Basic and diluted

 

15

 

(0.32

)

(0.61

)

(5.26

)

(0.85

)

Loss per ADS (each ADS represents three Class B ordinary shares)

 

 

 

 

 

 

 

 

 

 

 

Basic and diluted

 

15

 

(0.96

)

(1.83

)

(15.78

)

(2.55

)

Weighted average number of ordinary shares used in computation:

 

 

 

 

 

 

 

 

 

 

 

Ordinary shares:

 

 

 

 

 

 

 

 

 

 

 

Basic

 

15

 

281,682,508

 

—

 

—

 

—

 

Diluted

 

15

 

281,682,508

 

—

 

—

 

—

 

Class A ordinary shares:

 

 

 

 

 

 

 

 

 

 

 

Basic

 

15

 

—

 

299,524,536

 

266,696,495

 

266,696,495

 

Diluted

 

15

 

—

 

299,524,536

 

266,696,495

 

266,696,495

 

Class B ordinary shares:

 

 

 

 

 

 

 

 

 

 

 

Basic

 

15

 

—

 

6,403,973

 

84,713,813

 

84,713,813

 

Diluted

 

15

 

—

 

305,928,509

 

351,410,308

 

351,410,308

 

Other comprehensive (loss) income, net of tax of nil

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustments

 

13

 

(542

)

(16,873

)

32,639

 

5,260

 

 

 

 

 

 

 

 

 

 

 

 

 

Comprehensive loss

 

 

 

(91,655

)

(204,162

)

(1,814,262

)

(292,407

)

 

The accompanying notes are an integral part of these consolidated financial statements.

 

5


 

QUNAR CAYMAN ISLANDS LIMITED

 

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Amounts in thousands of Renminbi (“RMB”) and US dollars (“US$”))

 

 

 

 

 

Years ended December 31,

 

 

 

 

 

2012

 

2013

 

2014

 

 

 

Notes

 

RMB

 

RMB

 

RMB

 

US$

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

 

 

(91,113

)

(187,289

)

(1,846,901

)

(297,667

)

Adjustments to reconcile net loss to net cash from operating activities:

 

 

 

 

 

 

 

 

 

 

 

Depreciation expenses

 

5

 

16,876

 

22,735

 

52,048

 

8,389

 

Allowance for doubtful debts

 

3

 

1,928

 

7,038

 

2,199

 

354

 

Share-based compensation related to equity awards

 

 

 

16,973

 

58,170

 

265,924

 

42,859

 

Online marketing expenses for Baidu Zhixin Cooperation

 

11

 

—

 

—

 

699,983

 

112,817

 

Marketing services contributed by a related party

 

11

 

6,650

 

5,920

 

3,304

 

533

 

Imputed interest on loan due to a related party

 

11

 

421

 

2,050

 

—

 

—

 

Payment of Employee Consenting Equity Right Holder (“CERH”) Fees

 

 

 

—

 

(9,982

)

(2,980

)

(480

)

Changes in assets and liabilities

 

 

 

 

 

 

 

 

 

 

 

Restricted cash

 

 

 

(48,926

)

(114,459

)

(73,423

)

(11,834

)

Accounts receivable

 

 

 

(9,708

)

(61,299

)

(67,711

)

(10,913

)

Funds receivable

 

 

 

(27,491

)

(210,284

)

(171,962

)

(27,715

)

Prepayments and other current assets

 

4

 

(19,836

)

(21,233

)

(193,630

)

(31,207

)

Deferred tax assets, current

 

10

 

—

 

(8,436

)

(14,423

)

(2,325

)

Due from related parties

 

11

 

(6,550

)

(2,400

)

(29,951

)

(4,827

)

Other non-current assets

 

 

 

4,793

 

(20,310

)

(28,972

)

(4,669

)

Customer advances and deposits

 

 

 

34,873

 

95,598

 

94,313

 

15,200

 

Accounts payable

 

 

 

(770

)

2,925

 

11,318

 

1,824

 

Salaries and welfare payable

 

 

 

19,808

 

42,308

 

115,456

 

18,608

 

Income tax payable

 

 

 

576

 

4,598

 

17,057

 

2,749

 

Accrued expenses and other current liabilities

 

8

 

90,678

 

289,870

 

717,061

 

115,568

 

Due to related parties

 

11

 

200

 

4,292

 

1,813

 

292

 

Non-current liabilities

 

 

 

14,456

 

40,269

 

13,753

 

2,217

 

 

 

 

 

 

 

 

 

 

 

 

 

Net cash provided by (used for) operating activities

 

 

 

3,838

 

(59,919

)

(435,724

)

(70,227

)

 

 

 

 

 

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

 

 

 

 

 

 

Acquisitions of property and equipment

 

 

 

(23,484

)

(39,314

)

(160,786

)

(25,914

)

Acquisition of intangible assets

 

 

 

—

 

—

 

(2,849

)

(459

)

Payments to purchase of short-term investments

 

 

 

(29,626

)

(671,165

)

(242,901

)

(39,149

)

Proceeds from maturity of short-term investments

 

 

 

127,499

 

185,741

 

740,551

 

119,355

 

Payments for long-term investments

 

 

 

—

 

—

 

(103,175

)

(16,629

)

Net cash provided by (used for) investing activities

 

 

 

74,389

 

(524,738

)

230,840

 

37,204

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

 

 

 

 

 

 

Proceeds from issuance of ordinary shares

 

14

 

—

 

354,586

 

—

 

—

 

Proceeds from issuance of Class B ordinary shares, net of initial public offering costs

 

 

 

—

 

1,083,272

 

—

 

—

 

Proceeds from issuance of ordinary shares previously subject to escrow

 

 

 

—

 

17,298

 

—

 

—

 

Proceeds from exercise of share options

 

 

 

2,538

 

1,474

 

15,001

 

2,418

 

Loans from related parties

 

11

 

150,000

 

150,000

 

 

 

 

 

Repayment of loans due to related parties

 

11

 

(100,000

)

(200,000

)

—

 

—

 

Loans to related parties

 

11

 

(31,156

)

(68,886

)

—

 

—

 

Proceeds from repayment of loans due from related parties

 

11

 

—

 

98,975

 

—

 

—

 

Distribution

 

14

 

(74,256

)

(4,638

)

—

 

—

 

 

 

 

 

 

 

 

 

 

 

 

 

Net cash (used for) provided by financing activities

 

 

 

(52,874

)

1,432,081

 

15,001

 

2,418

 

 

 

 

 

 

 

 

 

 

 

 

 

Effect of exchange rate changes on cash and cash equivalents

 

 

 

(287

)

(15,806

)

22,726

 

3,664

 

Net increase (decrease) in cash and cash equivalents

 

 

 

25,066

 

831,618

 

(167,157

)

(26,941

)

Cash and cash equivalents at beginning of the year

 

 

 

123,445

 

148,511

 

980,129

 

157,968

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents at end of the year

 

 

 

148,511

 

980,129

 

812,972

 

131,027

 

 

 

 

 

 

 

 

 

 

 

 

 

Supplemental cash flow disclosures:

 

 

 

 

 

 

 

 

 

 

 

Income taxes paid

 

 

 

(2,260

)

(8,852

)

(4,319

)

(696

)

Acquisitions of equipment included in accounts payable

 

 

 

632

 

122

 

3,408

 

549

 

 

The accompanying notes are an integral part of these consolidated financial statements

 

6

 

 

QUNAR CAYMAN ISLANDS LIMITED

 

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (DEFICIT)

(Amounts in thousands of Renminbi (“RMB”) and US dollars (“US$”), except for number of shares)

 

 

 

Ordinary shares

 

Class A
Ordinary shares

 

Class B
Ordinary shares

 

Additional paid-in
capital

 

Accumulated other
comprehensive (loss)
income
(note 13)

 

Accumulated
 deficit

 

Total shareholders’
 (deficit) equity

 

 

 

Number of shares

 

RMB

 

Number of shares

 

RMB

 

Number of
shares

 

RMB

 

RMB

 

RMB

 

RMB

 

RMB

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at December 31, 2011

 

181,402,116

 

1,172

 

—

 

—

 

—

 

—

 

(742,946

)

(11,061

)

(121,016

)

(873,851

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

—

 

—

 

—

 

—

 

—

 

—

 

—

 

—

 

(91,113

)

(91,113

)

Other comprehensive loss

 

—

 

—

 

—

 

—

 

—

 

—

 

—

 

(542

)

—

 

(542

)

Online marketing services contributed by a related party (note 11)

 

 

 

 

 

 

 

 

 

 

 

 

 

6,650

 

 

 

 

 

6,650

 

Imputed interest on loan due to related party (note 11)

 

 

 

 

 

 

 

 

 

 

 

 

 

421

 

 

 

 

 

421

 

Exercise of stock options

 

—

 

—

 

—

 

—

 

—

 

—

 

2,538

 

—

 

—

 

2,538

 

Share-based compensation

 

—

 

—

 

—

 

—

 

—

 

—

 

16,973

 

—

 

—

 

16,973

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at December 31, 2012

 

181,402,116

 

1,172

 

—

 

—

 

—

 

—

 

(716,364

)

(11,603

)

(212,129

)

(938,924

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

—

 

—

 

—

 

—

 

—

 

—

 

—

 

—

 

(187,289

)

(187,289

)

Other comprehensive loss

 

—

 

—

 

—

 

—

 

—

 

—

 

—

 

(16,873

)

—

 

(16,873

)

Issuance of ordinary shares (note 14)

 

21,662,296

 

135

 

—

 

—

 

—

 

—

 

354,451

 

—

 

—

 

354,586

 

Re-designation of ordinary shares to Class A ordinary shares (note 14)

 

(203,064,412

)

(1,307

)

203,064,412

 

1,307

 

—

 

—

 

—

 

—

 

—

 

—

 

Conversion of Class A ordinary shares to Class B ordinary shares by a shareholder (note 14)

 

—

 

—

 

(494,550

)

(3

)

494,550

 

3

 

—

 

—

 

—

 

—

 

Issuance of Class B ordinary shares (note 14)

 

—

 

—

 

—

 

—

 

38,838,400

 

237

 

1,182,878

 

—

 

—

 

1,183,115

 

Initial public offering costs

 

—

 

—

 

—

 

—

 

—

 

—

 

(101,146

)

—

 

—

 

(101,146

)

Proceeds from issuance of ordinary shares previously subject to escrow (note 1)

 

—

 

—

 

—

 

—

 

—

 

—

 

17,298

 

—

 

—

 

17,298

 

Distribution and payment of CERH Fees

 

—

 

—

 

—

 

—

 

—

 

—

 

(14,620

)

—

 

—

 

(14,620

)

Reclassification of the redeemable ordinary shares from mezzanine equity to Class A ordinary shares in permanent equity (note 14)

 

—

 

—

 

100,280,392

 

610

 

—

 

—

 

998,056

 

—

 

—

 

998,666

 

Online marketing services contributed by a related party (note 11)

 

 

 

 

 

 

 

 

 

 

 

 

 

5,920

 

 

 

 

 

5,920

 

Imputed interest on loan due to related party (note 11)

 

 

 

 

 

 

 

 

 

 

 

 

 

2,050

 

 

 

 

 

2,050

 

Exercise of stock options

 

—

 

—

 

—

 

—

 

—

 

—

 

1,474

 

—

 

—

 

1,474

 

Share-based compensation

 

—

 

—

 

—

 

—

 

—

 

—

 

58,170

 

—

 

—

 

58,170

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at December 31, 2013

 

—

 

—

 

302,850,254

 

1,914

 

39,332,950

 

240

 

1,788,167

 

(28,476

)

(399,418

)

1,362,427

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1,846,901

)

(1,846,901

)

Other comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

32,639

 

 

 

32,639

 

Distribution and payment of CERH Fees

 

—

 

—

 

—

 

—

 

—

 

—

 

(2,980

)

—

 

—

 

(2,980

)

Online marketing services contributed by a related party (note 11)

 

—

 

—

 

—

 

—

 

—

 

—

 

3,304

 

—

 

—

 

3,304

 

Exercise of stock options

 

—

 

—

 

—

 

—

 

16,492,497

 

103

 

14,898

 

—

 

—

 

15,001

 

Share-based compensation

 

—

 

—

 

—

 

—

 

—

 

—

 

265,924

 

—

 

—

 

265,924

 

Transfer of Class A ordinary shares to Class B ordinary shares

 

—

 

—

 

(78,551,075

)

(488

)

78,551,075

 

488

 

—

 

—

 

—

 

—

 

Balance at December 31, 2014

 

—

 

—

 

224,299,179

 

1,426

 

134,376,522

 

831

 

2,069,313

 

4,163

 

(2,246,319

)

(170,586

)

Balance at December 31, 2014, in US$

 

 

 

—

 

 

 

230

 

 

 

134

 

333,513

 

671

 

(362,041

)

(27,493

)

 

The accompanying notes are an integral part of these consolidated financial statements.

 

7

 

QUNAR CAYMAN ISLANDS LIMITED

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED DECEMBER 31, 2012, 2013 AND 2014

(Amounts in thousands of Renminbi (“RMB”) and US dollars (“US$”) except for number of shares)

 

1.                                      ORGANIZATION

 

Qunar Cayman Islands Limited (the “Company” or “Qunar”) is a limited company incorporated on July 31, 2006 and domiciled in the Cayman Islands. The Company is principally engaged in the operation of an online travel commerce platform with the provision of pay-for-performance services, display advertising services and other services in the People’s Republic of China (“PRC”).

 

The Company’s principal subsidiaries and its principal Affiliated PRC Entities as of December 31, 2014 are as follows:

 

Company

 

Date of
incorporation

 

Place of
incorporation

 

Percentage of
direct ownership
by the Company

 

Principal activities

 

Principal subsidiaries of the Company:

 

 

 

 

 

 

 

 

 

Queen’s Road Travel Information Limited (“Queen’s Road”)

 

August 6, 2010

 

Hong Kong

 

100

%

Pay-for-performance services;

Display advertising services

 

Beijing Qunar Software Technology Company Limited (“WFOE”)

 

October 10, 2006

 

PRC

 

100

%

Pay-for-performance services

 

Shanghai Qianlima Network Technology Co. Ltd., a wholly owned subsidiary of the WFOE

 

November 16,2012

 

PRC

 

100

%

Display advertising services

 

Principal Affiliated PRC Entities

 

 

 

 

 

 

 

 

 

Qunar.com Beijing Information Technology Company Limited (“VIE”)

 

March 17, 2006

 

PRC

 

Nil

 

Display advertising services

 

Beijing JiaXin HaoYuan Information Technology Company Ltd. (“Jiaxinhaoyuan”), a wholly owned subsidiary of the VIE

 

August 26, 2010

 

PRC

 

Nil

 

Pay-for-performance services

 

Beijing JinDuYuanYou Information Technology Company Ltd. (“Jinduyuanyou”), a wholly owned subsidiary of the VIE

 

December 12, 2011

 

PRC

 

Nil

 

Pay-for-performance services

 

Qingdao Yi Lu Tong Xing International Travel Agency Co., Ltd. (“Qingdao”), a wholly owned subsidiary of the VIE

 

April 12, 2012

 

PRC

 

Nil

 

Pay-for-performance services

 

Shenzhen Zhongchengtai Insurance Brokerage Co. Ltd. (“Zhongchengtai”), a wholly owned subsidiary of the VIE

 

September 9, 2013

 

PRC

 

Nil

 

Pay-for-performance services

 

 

8


 

QUNAR CAYMAN ISLANDS LIMITED

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED DECEMBER 31, 2012, 2013 AND 2014

(Amounts in thousands of Renminbi (“RMB”) and US dollars (“US$”) except for number of shares)

 

The VIE and its wholly-owned subsidiaries above are collectively known as the “principal Affiliated PRC Entities.”

 

On July 20, 2011, Baidu Holdings Limited (“Baidu”) subscribed to 181,402,116 of the Company’s ordinary shares, representing 62.01% of the equity interest of the Company (60% of the equity interest of the Company on a fully diluted basis) for a total consideration of US$ 306,000 (RMB1,976,515) (the “Baidu Transaction”). 85% of the total consideration or US$260,100 (RMB1,680,039) was remitted upon closing of the Baidu Transaction. The rest of the consideration amounting to US$45,900 was remitted to an escrow account which was released in full at the end of the escrow period in January 2013 as all the conditions related to the escrow were fulfilled.

 

On November 1, 2013, the Company completed its initial public offering (“IPO”) and a private placement concurrently with the IPO on the NASDAQ Global Market raising total gross proceeds of US$194.2 million, representing 12,612,800 American Depositary Shares (“ADSs”) at the price of US$15.00 per ADS and 1,000,000 Class B ordinary shares at the price of US$5.00 per share. Each ADS represents three Class B ordinary shares. Upon the closing of the IPO, the total number of ordinary shares outstanding was 342,183,204, comprised of 302,850,254 Class A ordinary shares and 39,332,950 Class B ordinary shares; and Baidu remains the Company’s controlling shareholder, holding 54.1% of the equity interest. Baidu, Inc., the parent company of Baidu, is the Company’s ultimate holding company.

 

In 2014, the Company launched the apartment rental business through a 50% owned entity, which was fully consolidated through a contractual agreement with the other 50% shareholder, a related party.

 

In order to comply with the PRC law and regulations which prohibit foreign control of companies involved in Internet content, the Company operates its website and conducts a portion of its display advertising businesses in the PRC through the principal Affiliated PRC Entities. The paid-in capital of the VIE was funded by the WFOE through loans extended to the VIE’s shareholders (the “Nominee Shareholders”). The effective control of the VIE is held by the Company, through a series of contractual agreements (the “Contractual Agreements”) entered into in October 2006, as amended. As a result of the Contractual Agreements, the Company maintains the ability to control the VIE, is entitled to substantially all of the economic benefits from the VIE, and is obligated to absorb all of the VIE’s expected losses.

 

Despite the lack of technical majority ownership, there exists a parent-subsidiary relationship between the Company and the VIE through the irrevocable power of attorney agreement, whereby the Nominee Shareholders effectively assigned all of their voting rights underlying their equity interests in the VIE to the Company. In addition, through the Contractual Agreements, the Company demonstrates its ability and intention to continue to absorb substantially all of the expected losses and profits of the VIE.

 

With respect to the VIE, the Board of Directors of the Company approves the annual budget, financial statements and material contracts of the VIE after the review by senior management of the Company. Senior management of the Company is also generally responsible for the review and approval of sales contracts, credit approval policies, pricing policies, the display of advertisements as well as the appointments and terminations of personnel. In addition, the WFOE is mainly responsible for acquiring significant bandwidth and traffic, marketing and product developments for the VIE. Therefore, the Company directs the activities of the VIE that most significantly impact their economic performance.

 

As a result of the above, the Company consolidates the VIE in accordance with SEC Regulation SX-3A-02 and Accounting Standards Codification (“ASC”) 810, Consolidation.

 

The following is a summary of the Contractual Agreements:

 

(1) Power of Attorney Agreement: Pursuant to the power of attorney agreement signed between the Nominee Shareholders and the WFOE, the Nominee Shareholders gave the WFOE an irrevocable proxy to exercise all of their voting rights as shareholders of the VIE and sign and/or stamp on behalf of the Nominee Shareholders, all related legal documents pertinent to the exercise of their rights in their capacity as the shareholders of the VIE. The WFOE is also entitled to transfer or assign its voting rights to any other person or entity at its own discretion and without giving prior notice to the Nominee Shareholders or obtaining their consent. The Nominee Shareholders have also irrevocably and permanently waived their rights to terminate this proxy. The proxy will only end when the equity interests of the VIE have been transferred to the Company, the WFOE or their designee or upon the dissolution of the VIE, whichever is earlier.

 

(2) Loan Agreement: Pursuant to the loan agreement between the Nominee Shareholders and the WFOE, the WFOE granted interest free loans amounting to RMB 1,000 for the Nominee Shareholders’ contributions to the VIE. The manner and timing of the repayment is at the sole discretion of the WFOE and at the Nominee Shareholders’ option may be in the form of transferring the VIE’s equity interest to the WFOE or its designees.

 

9


 

QUNAR CAYMAN ISLANDS LIMITED

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED DECEMBER 31, 2012, 2013 AND 2014

(Amounts in thousands of Renminbi (“RMB”) and US dollars (“US$”) except for number of shares)

 

(3) Equity Option Agreement: Pursuant to the equity option agreement entered into between the Nominee Shareholders, the Company and the WFOE, the Nominee Shareholders granted to the Company/ WFOE or their designees an exclusive and irrevocable option to purchase all their equity interests in the VIE. The exercise consideration should be based on the loan amount as described above or the minimum consideration permitted by the PRC laws, whichever is higher. The Company/ WFOE or their designees may exercise such option at any time until it has acquired all equity interests of the VIE. This agreement terminates when all the equity interests have been transferred or when the obligations by the Nominee Shareholders have been fully performed, whichever is later.

 

(4) Exclusive Technical Consulting and Services Agreement: Pursuant to the exclusive technical consulting and services agreement entered into by the WFOE and the VIE, the VIE engaged the WFOE as their exclusive provider of technical, marketing and management consulting services for an initial term of 30 years, which will be automatically extended for another 10 years upon expiration. The VIE is required to pay to the WFOE service fees determined mutually by the parties. The WFOE will exclusively own any intellectual property arising from the performance of this agreement. The agreement can be terminated mutually by the parties.

 

(5) Equity Interest Pledge Agreement: Pursuant to the equity interest pledge agreement entered into between the Nominee Shareholders and the WFOE, the Nominee Shareholders pledged all of their equity interests in the VIE to the WFOE as collateral to secure their obligations under the above agreements. The Nominee Shareholders may not transfer or dispose of their equity interests in the VIE until all the obligations under the agreements above have been performed and the equity interests in the VIE have been transferred to the WFOE, the Company and/or their designees. The Nominee Shareholders also cannot create any pledge or encumbrance on the equity interests in the VIE without the WFOE’s prior written consent. The WFOE is entitled to transfer or assign in full or in part the equity interests pledged. In the event of default, the WFOE as the pledgee will be entitled to dispose of the pledged equity interests at any time through transfer or assignment. The WFOE also has the right to collect dividends from the equity interests. The equity interest pledge agreement will terminate after all the obligations under these agreements have been satisfied in full and the pledged equity interests have been transferred to the WFOE, the Company and/or their designees. The equity interest pledge agreement may only be early terminated by the WFOE unilaterally. The equity pledge has also been registered with the local administration for industry and commerce and remains effective until all payments due under the exclusive technical consulting and services agreement have been fulfilled by the VIE.

 

10


 

QUNAR CAYMAN ISLANDS LIMITED

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED DECEMBER 31, 2012, 2013 AND 2014

(Amounts in thousands of Renminbi (“RMB”) and US dollars (“US$”) except for number of shares)

 

In May 2012, the Contractual Agreements were supplemented by the following terms:

 

·                                     Dividends and distributions are not permitted without the prior consent of the WFOE. To the extent there is a dividend or distribution, the Nominee Shareholders will remit the amounts in full to the WFOE immediately;

 

·                                     The Nominee Shareholders agreed that the total consideration received from the transfer of any part of the equity interests or sale of assets of the VIE will first be applied to the outstanding balance under the loan and exclusive technical consulting and services agreements. After full repayment of the outstanding balance, any remaining consideration will be remitted in full to the WFOE as a nonreciprocal transfer;

 

·                                     With respect to the loan agreement, the term of the loan shall continue indefinitely until all the obligations have been fulfilled. The WFOE may at its discretion determine the time and manner for the repayment and the Nominee Shareholders’ option as to the form of repayment is superseded;

 

·                                     With respect to the equity option agreement, the method of payment of the equity option shall be determined at the discretion of the WFOE. In the event of liquidation or dissolution of the VIE, all assets shall be sold to the WFOE at the lowest selling price permitted by the applicable PRC law, and any proceeds from the transfer and any residual interests in the VIE shall be remitted to the WFOE immediately. The Company also agrees to fund the WFOE if and when the VIE requires financial support from the WFOE, to the extent allowed by law, to the VIE for its operations and forego the right to seek repayment;

 

·                                     The appointment of any individuals to exercise the powers and rights assigned pursuant to the power of attorney agreement requires the approval of the Company. All the activities in relation to such powers and rights assigned are directed and approved by the Company; and

 

·                                     With respect to the exclusive technical consulting and services agreement, the service fees are determined based on a predetermined formula based on the financial performance of the VIE and can be adjusted by the WFOE unilaterally. The terms of the exclusive technical consulting and services agreement will continue to be in effect until it is terminated by the WFOE.

 

In October 2012, the power of attorney agreement, loan agreement, equity option agreement, and exclusive technical consulting and services agreement were also updated to reflect an additional capital contribution amounting to RMB10,000 to the VIE by the WFOE. The supplemental terms of the Contractual Agreements entered into in May 2012 remain effective.

 

As a result, the power of attorney has since been effectively reassigned to the Company which has the power to direct the activities of the VIE that most significantly impact the VIE’s economic performance. The Company is also obligated to absorb the expected losses of the VIE through the financial support as described above. The Company and the WFOE, as a group of related parties, have held all of the variable interests of the VIE. The Company has been determined to be most closely associated with the VIE within the group of related parties and has replaced the WFOE as the primary beneficiary of the VIE since May 2012. As the VIE was subject to indirect control by the Company through the WFOE immediately before and direct control immediately after the Contractual Agreements were supplemented, the change of the primary beneficiary of the VIE was accounted for as a common control transaction based on the carrying amount of the net assets transferred.

 

The Company and other PRC entities and their respective nominee shareholders entered into a series of agreements substantially similar to the above Contractual Agreements. Through these agreements, the Company demonstrates its ability and intention to continue to absorb substantially all of the expected losses and profits of these other PRC entities and direct the activities of these other PRC entities that most significantly impact their economic performance. Therefore, the Company also consolidates these other PRC entities in accordance with SEC Regulation SX-3A-02 and Accounting Standards Codification (“ASC”) 810, Consolidation.

 

The principal Affiliated PRC Entities and other PRC entities are collectively known as the “Affiliated PRC Entities.”

 

11


 

QUNAR CAYMAN ISLANDS LIMITED

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED DECEMBER 31, 2012, 2013 AND 2014

(Amounts in thousands of Renminbi (“RMB”) and US dollars (“US$”) except for number of shares)

 

The carrying amounts and classifications of the assets and liabilities of Affiliated PRC Entities are as follows:

 

 

 

As of December 31,

 

 

 

2013

 

2014

 

 

 

RMB

 

RMB

 

US$

 

Current assets

 

481,709

 

1,011,311

 

162,994

 

Non-current assets

 

1,481

 

75,910

 

12,234

 

 

 

 

 

 

 

 

 

Total assets

 

483,190

 

1,087,221

 

175,228

 

 

 

 

 

 

 

 

 

Current liabilities

 

468,769

 

1,076,484

 

173,498

 

Non-current liabilities

 

3,125

 

3,429

 

553

 

 

 

 

 

 

 

 

 

Total liabilities

 

471,894

 

1,079,913

 

174,051

 

 

The financial performance and cash flows of Affiliated PRC Entities are as follows:

 

 

 

Years ended December 31,

 

 

 

2012

 

2013

 

2014

 

 

 

RMB

 

RMB

 

RMB

 

US$

 

Revenues

 

80,344

 

82,474

 

371,555

 

59,884

 

 

 

 

 

 

 

 

 

 

 

Cost of revenues

 

32,743

 

45,298

 

215,981

 

34,810

 

 

 

 

 

 

 

 

 

 

 

Net (loss) income

 

(3,254

)

4,966

 

(10,990

)

(1,771

)

 

 

 

 

 

 

 

 

 

 

Net cash provided by operating activities

 

33,038

 

41,181

 

94,178

 

15,179

 

 

 

 

 

 

 

 

 

 

 

Net cash used in investing activities

 

(1,553

)

(961

)

(65,109

)

(10,493

)

 

 

 

 

 

 

 

 

 

 

Net cash provided by (used in) financing activities

 

60,000

 

(50,000

)

7,000

 

1,128

 

 

As of December 31, 2013 and 2014, the current liabilities of the Affiliated PRC Entities included amounts due to WFOE and the Company of RMB84,208 and RMB232,000 (US$37,392), respectively, which were eliminated upon consolidation by the Company.

 

There was no pledge or collateralization of the Affiliated PRC Entities’ assets and the Company has not provided any financial support that it was not previously contractually required to provide to the Affiliated PRC Entities.

 

2.                                      Summary of significant accounting policies

 

Basis of presentation

 

The consolidated financial statements of the Company have been prepared in accordance with United States generally accepted accounting principles (“U.S. GAAP”).

 

Principles of consolidation

 

The consolidated financial statements include the financial statements of the Company, its subsidiaries and the Affiliated PRC Entities of which the Company or a subsidiary of the Company is the primary beneficiary. All significant intercompany transactions and balances between the Company, its subsidiaries and the Affiliated PRC Entities are eliminated upon consolidation.

 

12

 

QUNAR CAYMAN ISLANDS LIMITED

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED DECEMBER 31, 2012, 2013 AND 2014

(Amounts in thousands of Renminbi (“RMB”) and US dollars (“US$”) except for number of shares)

 

Use of estimates

 

The preparation of the consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the period. Areas where management uses subjective judgment include, but are not limited to, estimating the useful lives of long-lived assets, estimating the fair value of the warrant liability, estimating the cancelation rate of air travel facilitating services sold, identifying separate accounting units and estimating rebates related to revenue transactions, assessing the impairment of long-term investments and long-lived assets, determining the provision for accounts receivable, share-based compensation expenses, realizability of deferred tax assets, unrecognized tax benefits, and contingencies. Management bases the estimates on historical experience and various other assumptions that are believed to be reasonable, the results of which form the basis for making judgments about the carrying values of assets and liabilities. Actual results could differ from these estimates.

 

Foreign currency translation and transactions

 

The functional currency of the Company and Queen’s Road is the United States dollar (“US$”). The Company’s PRC subsidiaries and the Affiliated PRC Entities determined their functional currency to be the Chinese Renminbi (“RMB”). The determination of the respective functional currency is based on the criteria of ASC 830, Foreign Currency Matters. The Company uses the RMB as its reporting currency. The Company uses the average exchange rate for the year and the exchange rate at the balance sheet date to translate the operating results and financial position, respectively. Translation differences are recorded in accumulated other comprehensive loss, a component of shareholders’ equity (deficit).

 

Transactions denominated in foreign currencies are remeasured into the functional currency at the exchange rates prevailing on the transaction dates. Foreign currency denominated financial assets and liabilities are remeasured at the exchange rates prevailing at the balance sheet date. Exchange gains and losses are included in the consolidated statements of comprehensive loss.

 

Convenience translation

 

Amounts in U.S. dollars are presented for the convenience of the reader and are translated at the noon buying rate of 6.2046 per US$1.00 on December 31, 2014 in the City of New York for cable transfers of RMB as certified for customs purposes by the Federal Reserve Bank of New York. No representation is made that the RMB amounts could have been, or could be, converted into US$ at such rate.

 

Reclassification of comparative amounts

 

The commission revenues earned from the provision of group-buying services is earned on a pay-for-performance basis. Therefore, comparative amounts for the prior periods have been reclassified from “other services” to “pay-for-performance services” to conform to the current period presentation. In addition, expenses incurred to develop and maintain the network of the Company’s travel service providers were recorded as product sourcing expenses as a separate line item. Comparative amounts for the prior periods have been reclassified from “sales and marketing” to “product sourcing” to conform to the current period presentation. Such reclassifications had no effect on net income, total assets, total liabilities or total shareholders’ equity (deficit) as previously reported.

 

13


 

QUNAR CAYMAN ISLANDS LIMITED

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED DECEMBER 31, 2012, 2013 AND 2014

(Amounts in thousands of Renminbi (“RMB”) and US dollars (“US$”) except for number of shares)

 

Fair value of financial instruments

 

Financial assets and liabilities of the Company primarily comprise of cash and cash equivalents, short-term investments, restricted cash, funds receivable, accounts receivable, due from and due to related parties, employee housing loan receivables (note 18) , customer advances and deposits, accounts payable and warrant liability. As of December 31, 2013 and 2014, the carrying values of these financial instruments, except for employee housing loan receivables and warrant liability, approximated their fair values due to the short-term nature of these instruments.

 

The fair value of the employee housing loan receivables has been calculated by discounting the expected future cash flows using rates currently available for instruments with similar terms, credit risk and remaining maturities. The calculated fair value approximates the carrying amount of the outstanding employee housing loan receivables.

 

The Baidu Warrants is measured at fair value at each reporting date until the final measurement date, which is the date of completion of services required to earn each relevant tranche. The Company determined the fair value of warrant liability with the assistance of an independent third-party valuation firm.

 

Cash and cash equivalents

 

Cash and cash equivalents consist of cash on hand and bank deposits, which are unrestricted as to withdrawal and use. All highly liquid investments with original stated maturity of three months or less are classified as cash equivalents.

 

Restricted cash

 

The Company acts as an intermediary between users and certain online travel agencies (“OTAs”), airline and hotel customers for the reservations originated through the Company’s website or mobile platform. The use of the cash collected from users for such reservations is restricted. Such restricted cash cannot be used for the operations of the Company or any other purpose not designated by users and is subject to remittance to these customers in a short period of time.

 

Restricted cash also includes cash deposits held by the Company’s banks for the issuance of guarantee letters to the Company’s business partners.

 

Short-term investments

 

Short-term investments, as of December 31, 2013, represented time deposits with original maturities exceeding three months held in various reputable financial institutions in the PRC and the United States. No such time deposits as of December 31, 2014.

 

Accounts receivable and allowance for doubtful accounts

 

Accounts receivable are recognized and carried at original invoiced amount less an allowance for any potential uncollectible amounts. An estimate for doubtful debts is made when the collection of the full amount is no longer probable. Bad debts are written off as incurred.

 

14


 

QUNAR CAYMAN ISLANDS LIMITED

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED DECEMBER 31, 2012, 2013 AND 2014

(Amounts in thousands of Renminbi (“RMB”) and US dollars (“US$”) except for number of shares)

 

The Company maintains allowances for doubtful accounts for estimated losses resulting from the failure of customers to make payments on time. The Company reviews the accounts receivable on a periodic basis and makes allowances when there is doubt as to the collectability of individual balances. In evaluating the collectability of individual receivable balances, the Company considers many factors, including the age of the balance, the customer’s historical payment history, its current credit-worthiness and current economic trends.

 

Funds receivable

 

Funds receivable are cash due from third-party on-line payment service providers, net of service fees, for clearing transactions. An allowance for doubtful accounts is recorded in the period in which a loss is determined to be probable. Receivable balances are written off after all collection efforts have been exhausted. As of December 31, 2013 and 2014, no allowance for doubtful accounts was provided for the funds receivable.

 

Property and equipment, net

 

Property and equipment are stated at cost and are depreciated using the straight-line method over the shorter of the estimated useful lives of the asset or the term of the related lease, as follows:

 

 

 

Estimated useful life

 

Office furniture and equipment

 

3 or 5 years

 

Office computer equipment

 

3 years

 

Servers and network equipment

 

3 years

 

Software

 

3 years

 

Digital locks*

 

3 years

 

Leasehold improvements

 

Over the shorter of the lease term or the estimated useful lives of the assets of up to 3 years

 

 

* The Company’s apartment rental operations required the usage of digital locks to secure the apartments being rented out.

 

Repair and maintenance costs are charged to expenses as incurred, whereas the cost of renewals and betterment that extends the useful lives of property and equipment is capitalized as additions to the related assets. Retirements, sales and disposals of assets are recorded by removing the cost and accumulated depreciation from the assets and accumulated depreciation accounts with any resulting gain or loss reflected in the consolidated statements of comprehensive loss.

 

Intangible assets

 

Intangible assets acquired, mainly comprising of a domain name is measured on initial recognition at cost. The domain name acquired may be used indefinitely without significant costs of renewal. The expected cash flows generated from the domain name is for an indefinite period. As a result, the domain name has been assessed as having an indefinite useful life. The domain name is not amortized, but instead tested for impairment at least annually, or more frequently if certain circumstances indicate a possible impairment may exist in accordance with ASC subtopic 350-30 (“ASC 350-30”), Intangibles-Goodwill and Other: General Intangibles Other than Goodwill. The Company performs its annual impairment assessment for acquired indefinite-lived intangible assets in December of each year.

 

Long-term investments

 

The Company’s long-term investments consist of cost method investments.

 

In accordance with ASC subtopic 325-20 (“ASC 325-20”), Investments-Other: Cost Method Investments, for investments in an investee over which the Company does not have significant influence and which do not have readily determinable fair value, the Company carries the investment at cost and only adjusts for other-than-temporary declines in fair value and distributions of earnings that exceed the Company’s share of earnings since its investment. Management regularly evaluates the impairment of the cost method investments based on performance and financial position of the investee as well as other evidence of market value. Such evaluation includes, but is not limited to, reviewing the investee’s cash position, recent financing, projected and historical financial performance, cash flow forecasts and financing needs. An impairment loss is recognized in earnings equal to the excess of the investment’s cost over its fair value at the balance sheet date of the reporting period for which the assessment is made. The fair value would then become the new cost basis of investment.

 

Cost method accounting is also applied to investments that are not considered as “in-substance” common stock investments, and do not have readily determinable fair values.

 

Impairment of long-lived assets

 

The Company evaluates its long-lived assets or asset group with finite lives for impairment whenever events or changes in circumstances (such as a significant adverse change to market conditions that will impact the future use of the assets) indicate that the carrying amount of its long-lived assets or asset group may not be fully recoverable. When these events occur, the Company evaluates the impairment by comparing the carrying amount of the assets to future undiscounted cash flows expected to result from the use of the assets and their eventual disposition. If the sum of the expected undiscounted cash flows is less than the carrying amount of the assets, the Company recognizes an impairment loss based on the excess of the carrying amount of the long lived assets or asset group over their fair value. Fair value is generally determined by discounting the cash flows expected to be generated by the assets or asset group when the market prices are not readily available for the long-lived assets or asset group. No impairment charge was recognized for any of the years presented.

 

15


 

QUNAR CAYMAN ISLANDS LIMITED

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED DECEMBER 31, 2012, 2013 AND 2014

(Amounts in thousands of Renminbi (“RMB”) and US dollars (“US$”) except for number of shares)

 

Revenue recognition

 

The Company’s revenue is primarily derived from pay-for-performance, display advertising services and other services. Revenue is recognized only when the persuasive evidence of an arrangement exists, the service has been performed, the price is fixed or determinable, and the collectability of the related fee is reasonably assured in accordance with ASC 605, Revenue Recognition (“ASC 605”). Specifically, contracts are signed to establish significant terms such as the price and specific services to be provided. The Company assesses the creditworthiness of its customers prior to signing the contracts to ensure collectability is reasonably assured. Non-refundable payments received before all of the relevant criteria for revenue recognition are satisfied are recorded as customer advances and deposits.

 

When pay-for-performance service and display advertising service arrangements with a customer involve multiple elements as defined in ASC 605-25, the total arrangement consideration is allocated to the separate deliverables on the basis of their relative selling price. Relative selling price is based on vendor specific objective evidence (“VSOE”) if available, third-party evidence (“TPE”) if VSOE is not available or management’s best estimate of selling price (“BESP”) if neither VSOE nor TPE are available. In determining its BESP for each deliverable, the Company considers its overall pricing model and objectives, as well as market or competitive conditions that may impact the price at which the Company would transact if the deliverables were sold regularly on a standalone basis. In addition, the consideration allocated to the delivered element is limited to the amount that is not contingent upon the delivery of additional deliverables or meeting other specified performance conditions. The Company monitors the conditions that affect its determination of selling price for each deliverable and reassesses such estimates periodically.

 

Pay-for-performance services

 

The Company’s pay-for-performance platform enables customers including OTAs, airlines, hotels, packaged tour providers and other travel service providers to place their links and related description on the Company’s search results list or next to the search results list provided to users of the Company’s website or mobile platform. Starting from January 2014, the Company integrated the online payment facilitating service as part of its pay-for-performance suite of services and bears the cost of the integrated pay-for-performance services. The Company records the cost for providing the integrated pay-for-performance services (including the online payment processing fee paid to the online payment platforms) as cost of revenues.

 

Cost-per-click

 

Revenue is recognized when the user clicks on the customer-sponsored links accessible on the Company’s website or through the Company’s mobile platform, and is directed to the customer’s online booking webpage and other revenue recognition criteria have been met.

 

The Company issues award credits to its customers based on the customers’ monthly spending on cost-per-click services in accordance with the service contracts. These award credits can only be used for future cost-per-click services and are not redeemable for cash. The Company accounts for these award credits granted to the customers in conjunction with a current sale of services analogous to a multiple-element arrangement in accordance with ASC 605-25. The monthly spending by the customer relating to cost-per-click services is allocated to the clicks sold and the award credits earned based on their relative-selling-prices, which is proportionate to the cost-per click services delivered and future cost-per click services to be delivered from the award credits applied. Therefore, revenue is recognized proportionately as services including those in connection to award credits are delivered to the customer. Deferred revenue as of December 31, 2013 and 2014 amounted to RMB1,424 and RMB 2,315 (US$373), respectively, which is recognized as the services are delivered within an estimated one month-period after the respective year-end.

 

16


 

QUNAR CAYMAN ISLANDS LIMITED

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED DECEMBER 31, 2012, 2013 AND 2014

(Amounts in thousands of Renminbi (“RMB”) and US dollars (“US$”) except for number of shares)

 

Cost-per-sale

 

The Company receives fees from OTAs, airlines, hotels and local tour agencies for reservations and sales facilitated through the Company’s website or mobile platform. Fees from air travel facilitating services including aviation insurance policies are recognized as revenue, where applicable, net of estimated cancellations upon the issuance of the air ticket by OTAs or airlines. The Company has a sufficient homogenous volume of transactions from its customers, and the evaluation of this historical data enables the Company to reasonably estimate cancellations. Estimated cancellations are recorded as a reduction of revenue in the same period revenue is recognized. Estimated cancellations were insignificant for the years ended December 31, 2012, 2013 and 2014. Fees from hotel reservation facilitating services are recognized upon the reservation of the hotel rooms or after confirmation with the hotel that the end user has completed his or her stay depending on the terms and conditions of the underlying contract. When the Company’s contracts with the hotel state that the Company earns the fees regardless of whether the end user completes his or her stay at the hotel, fees are recognized upon the reservation of the hotel room. The Company also receives fee from OTAs and local tour agencies (collectively, travel service providers or “TSP”) for the reservation of vacation packages on the Company’s website. After the end user has completed the reservation for the vacation packages on the Company’s website, the end user will provide its booking reference to the TSP for the TSP to fulfill the reservation. Upon receipt of the end user’s booking reference, the TSP will acknowledge and accept the underlying end user reservation in the Company’s reservation system. Revenue is recognized by the Company when its reservation system receives the TSP’s booking reference acknowledgement and when the four revenue recognition criteria in accordance with ASC 605 as shown above have been met. The Company has no further obligation after its reservation system receives the TSP booking reference acknowledgement. The Company considers the above arrangements in accordance with ASC 605 and has concluded that it acts as an agent. Therefore, the Company presents revenues from such transactions on a net basis in the consolidated statements of comprehensive loss.

 

Group-buying services

 

The Company generates commission revenues from selling group-buying vouchers for the offerings of products and services by its merchants, at discounted prices to its users. The Company devotes substantial resources in selecting qualifying merchants, thereby ensuring the quality of products and services sold by its merchants through the Company’s website. Once a merchant is selected, the Company contracts with the selected merchant for the specified product or service group-buying vouchers to be offered on the Company’s website or mobile platform, along with the timing of the offer, the voucher price and the price at which the Company will pay the merchant, shipping terms and conditions, if applicable, and the minimum threshold of vouchers for the specified product or service to be sold in order to validate the group-buying voucher offer.

 

The Company acts as an agent rather than as the principal in the delivery of the goods or services underlying the vouchers as it does not assume the risks and rewards of ownership of goods nor is it responsible for fulfillment, both of these are the responsibility of the merchant. The Company presents revenue on a net basis (representing the amount billed to users less the amount paid/payable to merchants) in accordance with ASC 605.

 

The Company’s users have the ability to hold the vouchers for full refund, and therefore, the underlying sale from which the Company earns the related commission revenue as an agent is not culminated until its users actually redeem their vouchers. Revenue recognition is deferred until the redemption of the group-buying vouchers by the users for the delivery of products or consumption of the services, at which time the underlying sale from which the Company earns its commission has been culminated and the Company has completed its service obligations to its merchants. The Company has no remaining obligations to its merchants after voucher redemption by its users.

 

Coupon program for hotel reservation facilitating services

 

Revenue from hotel reservation facilitating services is recognized after confirmation with the hotel that the end users have completed their stay. In January 2013, the Company launched a coupon program, through which the Company offers coupons to end users who make reservations with certain of its hotel customers through the Company’s website or mobile platform.

 

End users may redeem their coupons by submitting an online application within 30 days after the end user has completed his or her stay in the selected hotel as (i) cash that will be transferred by the Company to the end user’s bank account; or (ii) credits in the end user’s account for future flight or hotel reservations with the Company’s customers on the Company’s website or mobile platform.

 

Since the funding of the credits by the Company is paid in cash or provided as credits in the end user’s account as part of a revenue arrangement with its customer, the hotel, such payments by the Company is within the scope of ASC 605-50, Revenue Recognition: Customer Payments and Incentives in accordance with ASC 605-50-15-2. As the Company does not receive an identifiable benefit in return for the consideration (i.e. funding of the credits) that is sufficiently separable from the hotels’ purchase of reservation facilitating services from the Company, the funding of the credits to the end user, is recognized as a reduction of revenue simultaneously as the corresponding revenue is recognized in accordance with ASC 605-50-45-2. End user credits are reversed only if they are unredeemed upon expiration, which is 30 days after the end user’s hotel stay.

 

Credits to end users amounted to nil, RMB48,835 and RMB158,033 (US$25,470) for the years ended December 31, 2012, 2013 and 2014, respectively.

 

Display advertising services

 

The majority of the Company’s display advertising service arrangements involves multiple deliverables such as banner advertisements, logos and other media insertions that are delivered over the same period or different periods of time. The Company, as an industry practice in the PRC, regularly provides display advertising services at a discount to its standard rates. These discounts are in the form of free advertising elements, of which the duration and other terms of services are specified as part of the revenue contract. The banner advertisements, logos, other media insertions and free elements are each considered to be a separate deliverable in the multiple element arrangements.

 

Revenue is recognized ratably when the deliverables are published over the stated display period. The amount recognized is limited to the amount that is not contingent upon the delivery of additional deliverables or meeting other specified performance conditions.

 

Rebates provided to customers of display advertising services

 

The Company provides cash incentives in the form of rebates to certain advertising agencies based on the cumulative advertising volume during each fiscal year. Such rebates are recorded as a reduction of revenue in the period revenue is recognized in the Company’s consolidated financial statements in accordance with ASC 605. Rebates to advertising agencies amounted to RMB7,251 , RMB7,878 and RMB11,925 (US$1,922) for the years ended December 31, 2012, 2013 and 2014, respectively.

 

17


 

QUNAR CAYMAN ISLANDS LIMITED

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED DECEMBER 31, 2012, 2013 AND 2014

(Amounts in thousands of Renminbi (“RMB”) and US dollars (“US$”) except for number of shares)

 

Other services

 

The other services primarily represent commissions received from third-party online payment platforms for payments originating from user online bookings through the Company’s website or mobile platform. The commission is based on a contracted percentage of the total payments processed. Revenue is recognized, on a net basis, when the four revenue recognition criteria in accordance with ASC 605 as shown above have been met.

 

Cost of revenues

 

Cost of revenues consists primarily of sales taxes (including business tax and output value-added tax) and surcharges, online payment processing fees, travel related data acquisition costs, bandwidth and server hosting costs, depreciation, payroll and related costs of operations.

 

The Company incurs sales taxes and surcharges in connection with the provision of pay-for-performance services, display advertising service and other services in the PRC. According to ASC 605, the Company includes such taxes incurred in cost of revenues which amounted to RMB40,258, RMB83,641and RMB 164,894 (US$26,576) for the years ended December 31, 2012, 2013 and 2014, respectively.

 

18

 

QUNAR CAYMAN ISLANDS LIMITED

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED DECEMBER 31, 2012, 2013 AND 2014

(Amounts in thousands of Renminbi (“RMB”) and US dollars (“US$”) except for number of shares)

 

Advertising expenses

 

Advertising expenses, other than expense from Baidu Zhixin Cooperation, which primarily includes online marketing expenses and brand marketing expenses through various other forms of media, are included in sales and marketing expenses in the consolidated statements of comprehensive loss. Online marketing expenses include search engine fees, link placement fees and contextual advertising placement fees for the acquisition of traffic to the Company’s website or mobile platform when incurred. Online marketing expenses also include expenses incurred for the promotion of the Company’s mobile applications. Advertising expenses for the years ended December 31, 2012, 2013 and 2014 were RMB138,864, RMB208,230 and RMB595,476 (US$95,973), respectively. Expense from Baidu Zhixin Cooperation (note 11) was nil, nil and RMB699,983 (US$112,817) for the years ended December 31, 2012, 2013 and 2014, respectively.

 

Product sourcing

 

Product sourcing expenses primarily consist of expenses incurred to develop and maintain the network of the Company’s travel service providers. Product sourcing expenses for the years ended December 31, 2012, 2013 and 2014 were RMB26,947, RMB67,271, RMB316,903 (US$51,075), respectively.

 

Product developments

 

Product development expenses primarily consist of salaries and related compensations for product development personnel who are responsible for developing, improving as well as maintaining the Company’s website and mobile platform. Product development expenses are recognized as incurred. The Company recognizes website and software development costs in accordance with ASC 350, Intangibles-Goodwill and Other. The Company expenses all costs that are incurred in connection with the planning and implementation phases of development and costs that are associated with repair or maintenance of the existing websites or the development of software for internal use and website contents. The Company capitalizes software development costs that fulfill the capitalization criteria. Website and software development costs subject to capitalization have been insignificant.

 

Leases

 

Leases are classified as either capital or operating leases at the inception date. Leases that transfer substantially all the benefits and risks incidental to the ownership of assets are accounted for as if there was an acquisition of an asset and incurrence of an obligation at the inception of the lease. All other leases are accounted for as operating leases and such rental payments are expensed on a straight-line basis over the periods of their respective lease terms. The Company leases office space and server racks under operating lease agreements. Certain of the lease agreements contain rent holidays. Rent holidays are considered in determining the straight-line rent expense to be recorded over the lease term. The lease term begins on the date of initial possession of the lease property for purposes of recognizing lease expense on a straight-line basis over the term of the lease.

 

The Company had no capital leases as of December 31, 2013 and 2014.

 

19


 

QUNAR CAYMAN ISLANDS LIMITED

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED DECEMBER 31, 2012, 2013 AND 2014

(Amounts in thousands of Renminbi (“RMB”) and US dollars (“US$”) except for number of shares)

 

Income taxes

 

The Company follows the liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are determined based on the difference between the financial reporting and tax bases of assets and liabilities using enacted tax rates that will be in effect in the period in which the differences are expected to reverse. The Company records a valuation allowance to offset deferred tax assets if based on the weight of available evidence, it is more likely than not that some portion, or all, of the deferred tax assets will not be realized. The effect on deferred taxes of a change in tax rate is recognized in tax expense in the period that includes the enactment date of the change in tax rate.

 

In accordance with the provisions of ASC 740, Income taxes, the Company recognizes in its financial statements the benefit of a tax position if the tax position is more likely than not to prevail based on the facts and technical merits of the position. Tax positions that meet the “more likely than not” recognition threshold are measured at the largest amount of tax benefit that has a greater than fifty percent likelihood of being realized upon settlement. The Company estimates its liability for unrecognized tax benefits which may be affected by changing interpretations of laws, rulings by tax authorities, changes and/or developments with respect to tax audits, and expiration of the statute of limitations. The ultimate outcome for a particular tax position may not be determined with certainty prior to the conclusion of a tax audit and, in some cases, appeal or litigation process. The actual benefits ultimately realized may differ from the Company’s estimates. As each tax audit is concluded, adjustments, if any, are recorded in the Company’s financial statements. Additionally, in future periods, changes in facts, circumstances and new information may require the Company to adjust the recognition and measurement estimates with regard to individual tax positions. Changes in recognition and measurement estimates are recognized in the period in which the changes occur. The Company has elected to classify interest and penalties related to unrecognized tax benefits in the consolidated statements of comprehensive loss as income tax expense.

 

Share-based compensation

 

Options granted to employees

 

The Company applies ASC 718, Compensation — Stock Compensation (“ASC 718”) to account for its employee share-based compensation.

 

In accordance with ASC 718, the Company determines whether an award should be classified and accounted for as a liability award or equity award. All grants of share-based awards to employees classified as equity awards are recognized in the financial statements based on their grant date fair values. Specifically, the grant date fair value of share options are calculated using an option pricing model. The Company has elected to recognize compensation expense using the straight-line method for all employee equity awards granted with graded vesting based on service conditions provided that the amount of compensation cost recognized at any date is at least equal to the portion of the grant-date value of the options that are vested at that date.

 

For certain share options granted to corporate headquarter employees, there is a performance target that affects the exercisability of the award, which can be achieved after the requisite service period. That is, the employee would be eligible to vest in the award regardless of whether the employee is rendering service on the date the performance target is achieved. The Company accounts for the performance target as a performance condition. As such, the performance target shall not be reflected in estimating the fair value of the award at the grant date. Compensation cost shall be recognized in the period in which it becomes probable that the performance target will be achieved and should represent the compensation cost attributable to the period for which the requisite service already has been rendered. If the performance target becomes probable of being achieved before the end of the requisite service period, the remaining unrecognized compensation cost should be recognized prospectively over the remaining requisite service period.

 

The service inception date is the date at which the requisite service period begins. If it is determined that the service inception date precedes the grant date, recognition of compensation cost for the period between the service inception date and the grant date is based on the fair value of the award at the reporting dates that occur before the grant date. The service inception date precedes the grant date if an award is authorized, the recipient begins to provide services and either the award’s terms do not include a substantive future requisite service condition that exists at the grant date or the award contains a market or performance condition that if not satisfied during the service period preceding the grant date and following the inception of the arrangement results in forfeiture of the award. An award is authorized when all approval requirements are completed, including action by the Board of Directors approving the award and the number of options or other equity instruments to be issued to individual employees.

 

To the extent the required vesting conditions are not met resulting in the forfeiture of the share-based awards, previously recognized compensation expense relating to those awards are reversed. ASC 718 requires forfeitures to be estimated at the time of grant and revised, if necessary, in the subsequent period if actual forfeitures differ from initial estimates.

 

20


 

QUNAR CAYMAN ISLANDS LIMITED

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED DECEMBER 31, 2012, 2013 AND 2014

(Amounts in thousands of Renminbi (“RMB”) and US dollars (“US$”) except for number of shares)

 

Forfeiture rates are estimated based on historical and future expectations of employee turnover rates and are adjusted to reflect future changes in circumstances and facts, if any. Share-based compensation expense is recorded net of estimated forfeitures such that expense is recorded only for those share-based awards that are expected to vest. To the extent the Company revises these estimates in the future, the share-based payments could be materially impacted in the period of revision, as well as in following periods. The Black-Scholes-Merton option pricing model was applied in determining the estimated fair value of the options granted to employees.

 

The fair value of liabilities incurred in share-based payment transactions with employees are remeasured at the end of each reporting period through settlement. Changes in the fair value of a liability incurred under a share-based payment arrangement that occur during the requisite service period are recognized as compensation costs over that period.

 

Warrants issued to non-employees

 

The Company accounted for the warrants issued to non-employees following the measurement guidance in ASC505-50, Equity, Equity-Based Payments to Non-Employees and classified the warrants issued as a liability pursuant to the classification guidance in ASC 505-50-25-10 and ASC 718-10-25-11.

 

For the warrants issued to non-employees that is classified as a liability, it is measured at fair value at each reporting date until the final measurement date, which is the date of completion of services required to earn the warrants. The cost associated with the warrants issued is recognized ratably over the period of service required to earn each tranche of warrants. Upon vesting, the warrants should continue to be accounted for as a liability in accordance with ASC 480-10-25-8 and measured in accordance with ASC 480-10-30 and ASC 480-10-35 at every reporting period until the warrants are settled. Changes in the fair value of the vested warrants will be recognized in earnings in the accompanying consolidated statements of comprehensive loss.

 

21


 

QUNAR CAYMAN ISLANDS LIMITED

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED DECEMBER 31, 2012, 2013 AND 2014

(Amounts in thousands of Renminbi (“RMB”) and US dollars (“US$”) except for number of shares)

 

Loss per share

 

Loss per share is calculated in accordance with ASC 260, Earnings Per Share. Basic loss per common share is computed by dividing net loss attributable to holders of common shares by the weighted average number of common shares outstanding during the period using the two-class method.  Under the two-class method, net income is allocated between ordinary shares and participating securities based on dividends declared (or accumulated) and participating rights in undistributed earnings as if all the earnings for the reporting period had been distributed. For the year ended December 31, 2012 presented herein, the computation of basic loss per share using the two-class method is not applicable as the Company did not have any participating securities outstanding. For the years ended December 31, 2013 and 2014, the two-class method is applicable because the Company has two classes of ordinary shares outstanding, Class A and Class B ordinary shares, respectively (note 14). The participation rights (liquidation and dividend rights) of the holders of the Company’s Class A and Class B ordinary shares are identical, except with respect to voting and conversion. As a result, and in accordance with ASC 260, Earnings Per Share, the undistributed income for each year is allocated based on the contractual participation rights of the Class A and Class B ordinary shares. As the liquidation and dividend rights are identical, the undistributed income is allocated on a proportionate basis.

 

Basic loss per ordinary share is computed by dividing loss attributable to holders of ordinary shares by the weighted-average number of ordinary shares outstanding during the period. Diluted loss per share is calculated by dividing net loss attributable to ordinary shareholders as adjusted for the effect of dilutive ordinary equivalent shares, if any, by the weighted average number of ordinary and dilutive ordinary equivalent shares outstanding during the period. Ordinary equivalent shares consist of ordinary shares issuable upon the conversion of the share options, using the treasury stock method. Ordinary share equivalents are excluded from the computation of diluted loss per share if their effects would be anti-dilutive. Basic and diluted loss per ordinary share is presented in the Company’s consolidated statements of comprehensive loss.

 

Comprehensive loss

 

Comprehensive loss is defined to include all changes in shareholders’ equity (deficit) except those resulting from investments by owners and distributions to owners. Among other disclosures, ASC 220-10, Comprehensive Income: Overall requires that all items that are required to be recognized under current accounting standards as components of comprehensive income be reported in a financial statement that is displayed with the same prominence as other financial statements. For each of the periods presented, the Company’s comprehensive loss includes foreign currency translation adjustments and is presented in the consolidated statement of comprehensive loss. There have been no reclassifications out of accumulated other comprehensive (loss) income to net loss for the periods presented.

 

Segment reporting

 

In accordance with ASC 280, Segment Reporting, the Company’s chief operating decision maker, the Chief Executive Officer, reviews the consolidated results when making decisions about allocating resources and assessing performance of the Company as a whole and hence, the Company has only one reportable segment. The Company does not distinguish between markets or segments for the purpose of internal reporting. The Company’s long-lived assets are substantially all located in the PRC and substantially all the Company’s revenues are derived from within the PRC. Therefore, no geographical segments are presented.

 

Contingencies

 

When a loss contingency is at least reasonably possible, then the Company discloses an estimate of the loss or range of loss, if such estimate can be made and material, or states that such estimate is immaterial if it can be estimated but immaterial, or discloses that an estimate cannot be made. The assessment of whether a loss is probable or reasonably possible, and whether the loss or a range of loss is estimable, often involve complex judgments about future events. Management is often unable to estimate the loss or a range of loss, particularly where (i) the amounts including damages sought are indeterminate, (ii) the proceedings are in the early stages, or (iii) there is a lack of clear or consistent interpretation of laws specific to the matter among different jurisdictions. In such cases, there is considerable uncertainty regarding the timing or ultimate resolution of such matters, including eventual loss, fine, penalty or business impact, if any.

 

Concentration of risks

 

Concentration of credit risk

 

Financial instruments that are potentially subject to credit risk consist of cash and cash equivalents, short-term investments, restricted cash, accounts receivable, funds receivable, other receivables and employee housing loan receivables. The carrying amounts of these financial instruments represent the maximum amount of loss due to credit risk. The deposits placed with financial institutions are not protected by statutory or commercial insurance. In the event of bankruptcy of one of these financial institutions, the Company may be unlikely to claim its deposits back in full. Management believes that these financial institutions are of high credit quality and continually monitors the credit worthiness of these financial institutions.

 

Accounts receivable are typically unsecured and are derived from revenue earned from customers. The risk is mitigated by credit evaluations the Company performs on its customers’ financial conditions and ongoing monitoring process of outstanding balances. Employee housing loan receivables are typically unsecured. The risk is mitigated by the Company’s ongoing monitoring of outstanding balances. The Company maintains reserves for estimated credit losses and these losses have generally been within expectations. No customer individually represented greater than 10% of the total accounts receivable as of December 31, 2013 and 2014.

 

22

 

QUNAR CAYMAN ISLANDS LIMITED

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED DECEMBER 31, 2012, 2013 AND 2014

(Amounts in thousands of Renminbi (“RMB”) and US dollars (“US$”) except for number of shares)

 

Business, customer, political, social and economic risks

 

The Company participates in a dynamic high technology industry and believes that changes in any of the following areas could have a material adverse effect on the Company’s future financial position, results of operations or cash flows: changes in the overall demand for services and products; competitive pressures due to new entrants; advances and new trends in new technologies and industry standards; changes in bandwidth suppliers; changes in certain strategic relationships or customer relationships; regulatory considerations; copyright regulations; and risks associated with the Company’s ability to attract and retain employees necessary to support its growth.

 

The Company’s operations could be adversely affected by significant political, economic and social uncertainties in the PRC. Internet and advertising related businesses are subject to significant restrictions under current PRC laws and regulations. Specifically, foreign investors are not allowed to own more than a 50% equity interest in any Internet content provider business. In addition, PRC regulations generally require any foreign entities that invest in the advertising services industry to have at least a two-year track record with a principal business in the advertising industry outside of the PRC.

 

Currently, the Company conducts its operations in the PRC through Contractual Agreements entered between the Company, the WFOE and the Affiliated PRC Entities. Based on the opinion of TransAsia Lawyers, the Company’s PRC legal counsel, the corporate structure and Contractual Agreements of the Affiliated PRC Entities and the PRC subsidiaries are in compliance with all existing PRC laws and regulations. Therefore, in the opinion of management, (i) the ownership structure of the Company and the Affiliated PRC Entities is in compliance with existing PRC laws and regulations; (ii) the Contractual Agreements with the VIE  and its Nominee Shareholders are valid and binding, and will not result in any violation of PRC laws or regulations currently in effect; and (iii) the Company’s business operations are in compliance with existing PRC law and regulations in all material respects. However, the legal system in PRC is not as developed as in other jurisdictions, such as the United States. As a result, uncertainties in the PRC legal system could limit the Company’s ability to enforce these Contractual Agreements. In addition, the relevant regulatory authorities may find the current Contractual Agreements and businesses to be in violation of any existing or future PRC laws or regulations. If the Company or any of its current or future Affiliated PRC Entities are found in violation of any existing or future laws or regulations, or fail to obtain or maintain any of the required permits or approvals, the relevant PRC regulatory authorities would have broad discretion in dealing with such violations, including revoking the business licenses or operating licenses of the WFOE, and Affiliated PRC Entities, shutting down the Company’s servers or blocking the Company’s websites, discontinuing or placing restrictions or onerous conditions on the Company’s operations.

 

The Affiliated PRC Entities contributed 13.4%, 9.2% and 7.8% of the Company’s consolidated revenues for the years ended December 31, 2012, 2013 and 2014, respectively.

 

Currency convertibility risk

 

A majority of the Company’s sales and expenses and a significant portion of the Company’s assets and liabilities are denominated in RMB. On January 1, 1994, the PRC government abolished the dual rate system and introduced a single rate of exchange as quoted daily by the People’s Bank of China (the “PBOC”). However, the unification of the exchange rates does not imply that the RMB may be readily convertible into United States dollars or other foreign currencies. All foreign exchange transactions continue to take place either through the PBOC or other banks authorized to buy and sell foreign currencies at the exchange rates quoted by the PBOC. Approvals of foreign currency payments by the PBOC or other institutions require submitting a payment application form together with suppliers’ invoices, shipping documents and signed contracts.

 

Additionally, the value of the RMB is subject to changes in central government policies and international economic and political developments affecting supply and demand in the PRC foreign exchange trading system market.

 

23


 

QUNAR CAYMAN ISLANDS LIMITED

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED DECEMBER 31, 2012, 2013 AND 2014

(Amounts in thousands of Renminbi (“RMB”) and US dollars (“US$”) except for number of shares)

 

Foreign currency exchange rate risk

 

Since July 21, 2005, the RMB was permitted to fluctuate within a narrow and managed band against a basket of certain foreign currencies. There was appreciation of RMB against US$ of approximately 1.0% and 2.9% in the years ended December 31, 2012 and 2013 and depreciation of 2.4% in the year ended December 31, 2014, respectively. While the international reaction to the appreciation of the RMB has generally been positive, there remains significant international pressure on the PRC Government to adopt an even more flexible currency policy, which could result in appreciation or depreciation of the RMB against the US$. Any significant revaluation of RMB may materially and adversely affect the Company’s cash flows, revenues, earnings and financial position, and the value of, and any dividends payable on, the ADS in US$.

 

Recently issued accounting pronouncements

 

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers. ASU 2014-09 outlines a comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. The core principle of the revenue model is that an entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. ASU 2014-09 also requires significantly expanded disclosures about revenue recognition. For public entities, ASU 2014-09 is effective for annual reporting periods (including interim reporting periods within those periods) beginning after December 15, 2016. Early adoption is not permitted. The Company is currently evaluating the impact of the adoption of ASU 2014-09 on the Company’s consolidated financial statements.

 

In June 2014, the FASB issued ASU 2014-12, Compensation—Stock Compensation. ASU 2014-12 requires that a performance target that affects vesting and that could be achieved after the requisite service period be treated as a performance condition. A reporting entity should apply existing guidance in Topic 718 as it relates to awards with performance conditions that affect vesting to account for such awards. As such, the performance target should not be reflected in estimating the grant-date fair value of the award. Compensation cost should be recognized in the period in which it becomes probable that the performance target will be achieved and should represent the compensation cost attributable to the period(s) for which the requisite service has already been rendered. ASU 2014-12 is effective for annual reporting periods (including interim reporting periods within those periods) beginning after December 15, 2015. Early adoption is not permitted. The Company does not expect that the adoption of ASU 2014-12 will have impact to the consolidated financial statements as the new ASU is consistent with the Company’s current accounting policy.

 

In August 2014, the FASB issued ASU 2014-15, Presentation of Financial Statements—Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern. The guidance requires an entity to evaluate whether there are conditions or events, in the aggregate, that raise substantial doubt about the entity’s ability to continue as a going concern within one year after the date that the financial statements are issued and to provide related footnote disclosures in certain circumstances. The guidance is effective for the annual period ending after December 15, 2016, and for annual and interim periods thereafter. Early application is permitted. The adoption of this guidance is not expected to have a significant impact on the Company’s consolidated financial statements.

 

3.             Accounts receivable, net

 

 

 

As of December 31,

 

 

 

2013

 

2014

 

 

 

RMB

 

RMB

 

US$

 

Accounts receivable

 

108,650

 

176,273

 

28,410

 

Less: allowance for doubtful accounts

 

(8,758

)

(10,869

)

(1,752

)

 

 

 

 

 

 

 

 

 

 

99,892

 

165,404

 

26,658

 

 

24


 

QUNAR CAYMAN ISLANDS LIMITED

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED DECEMBER 31, 2012, 2013 AND 2014

(Amounts in thousands of Renminbi (“RMB”) and US dollars (“US$”) except for number of shares)

 

The movements in the allowance for doubtful accounts were as follows:

 

 

 

Years ended December 31,

 

 

 

2013

 

2014

 

 

 

RMB

 

RMB

 

US$

 

Balance at beginning of the year

 

2,022

 

8,758

 

1,412

 

Additions

 

7,038

 

2,199

 

354

 

Write-offs

 

(302

)

(88

)

(14

)

 

 

 

 

 

 

 

 

Balance at end of the year

 

8,758

 

10,869

 

1,752

 

 

The Company recognized additions to allowance for doubtful accounts amounting to RMB1,928, RMB7,038 and RMB2,199 (US$354) within general and administrative expenses, for the years ended December 31, 2012, 2013 and 2014, respectively.

 

4.             Prepayments and other current assets

 

 

 

As of December 31,

 

 

 

2013

 

2014

 

 

 

RMB

 

RMB

 

US$

 

Prepaid travel related data acquisition costs

 

22,598

 

24,043

 

3,875

 

Deposits and advance to suppliers

 

10,514

 

91,148

 

14,691

 

Prepaid expenses

 

16,972

 

22,178

 

3,574

 

Receivable due from employees

 

6,327

 

33,578

 

5,412

 

Receivable related to employee share based awards *

 

—

 

26,308

 

4,240

 

Other receivables

 

9,693

 

62,479

 

10,070

 

 

 

 

 

 

 

 

 

Total

 

66,104

 

259,734

 

41,862

 

 

* Starting from 2014, the Company used a broker to facilitate the exercise of share options by employees. As of December 31, 2013 and 2014, the share option proceeds receivable from the broker totaled nil and RMB26,308 (US$4,240), respectively.

 

5.             Property and equipment, net

 

 

 

As of December 31,

 

 

 

2013

 

2014

 

 

 

RMB

 

RMB

 

US$

 

Office furniture and equipment

 

9,792

 

33,112

 

5,337

 

Office computer equipment

 

22,538

 

56,089

 

9,040

 

Servers and network equipment

 

39,473

 

84,219

 

13,574

 

Software

 

9,613

 

17,030

 

2,745

 

Digital locks

 

—

 

4,551

 

733

 

Leasehold improvements

 

13,620

 

55,811

 

8,995

 

 

 

 

 

 

 

 

 

Total

 

95,036

 

250,812

 

40,424

 

Accumulated depreciation

 

(49,346

)

(101,505

)

(16,360

)

 

 

 

 

 

 

 

 

Property and equipment, net

 

45,690

 

149,307

 

24,064

 

 

Depreciation expenses for the years ended December 31, 2012, 2013 and 2014 were RMB16,876, RMB22,735 and RMB52,048 (US$8,389), respectively.

 

25


 

QUNAR CAYMAN ISLANDS LIMITED

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED DECEMBER 31, 2012, 2013 AND 2014

(Amounts in thousands of Renminbi (“RMB”) and US dollars (“US$”) except for number of shares)

 

6.             Long-term investments

 

The carrying amount of the Company’s cost method investments was nil and RMB103,175 (US$16,629) as of December 31, 2013 and 2014, respectively. No impairment of cost method investments occurred for the year ended December 31, 2013 and 2014, respectively.

 

7.             Intangible assets, net

 

The carrying amount of intangible assets is RMB2,849 (US$459), which relates to a domain name acquired in year 2014. No impairment to the domain name occurred for the year ended December 31, 2014.

 

8.             Accrued expenses and other current liabilities

 

 

 

As of December 31,

 

 

2013

 

2014

 

 

 

RMB

 

RMB

 

US$

 

Payable to travel service providers (“TSP”s)

 

319,814

 

673,990

 

108,627

 

Payable to end users

 

18,905

 

65,708

 

10,590

 

Accrued operating expenses

 

83,192

 

260,332

 

41,958

 

Contract termination loss provision (Note 20)

 

—

 

64,485

 

10,393

 

Payable to employees related to share based awards *

 

—

 

32,305

 

5,207

 

Other tax payable

 

5,575

 

43,899

 

7,075

 

Accrued sales rebates

 

11,000

 

14,828

 

2,390

 

 

 

 

 

 

 

 

 

Total

 

438,486

 

1,155,547

 

186,240

 

 

* Starting from 2014, the Company used a broker to facilitate the exercise of share options by employees. As of December 31, 2013 and 2014, the share option proceeds payables to employees totaled nil and RMB32,305 (US$5,207), respectively.

 

9.             Revenues

 

 

 

Years ended December 31,

 

 

 

2012

 

2013

 

2014

 

 

 

RMB

 

RMB

 

RMB

 

US$

 

Pay-for-performance services

 

446,550

 

772,114

 

1,666,653

 

268,616

 

Display advertising services

 

46,670

 

63,503

 

87,894

 

14,166

 

Other services

 

8,505

 

15,305

 

2,208

 

356

 

 

 

 

 

 

 

 

 

 

 

Total

 

501,725

 

850,922

 

1,756,755

 

283,138

 

 

The majority of the per-for-performance services are related to cost-per-click services and cost-per-sale services. The Company issues award credits to its customers based on the customers’ monthly spending on cost-per-click services in accordance with the service contracts. These award credits can only be used for future cost-per-click services and are not redeemable for cash. The Company accounts for these award credits granted to the customers in conjunction with a current sale of services analogous to a multiple-element arrangement in accordance with ASC 605-25. The monthly spending by the customer relating to cost-per-click services is allocated to the clicks sold and the award credits earned based on their relative-selling-prices, which is proportionate to the cost-per click services delivered and future cost-per click services to be delivered from the award credits applied. Therefore, revenue is recognized proportionately as services including those in connection to award credits are delivered to the customer. Deferred revenue as of December 31, 2013 and December 31, 2014 amounted to RMB1,424 and RMB2,315 (US$373), respectively, which is recognized as the services are delivered within an estimated one month-period after the respective period-end.

 

The majority of other services are related to commissions from third-party online payment platforms.

 

Revenue from pay-for-performance services are mainly comprised of the following travel service categories:

 

 

 

Years ended December 31,

 

 

 

2012

 

2013

 

2014

 

 

 

RMB

 

RMB

 

RMB

 

US$

 

Flights and flight related

 

307,708

 

551,123

 

1,171,229

 

188,768

 

Hotels

 

125,779

 

194,030

 

347,281

 

55,972

 

Others

 

13,063

 

26,961

 

148,143

 

23,876

 

 

 

 

 

 

 

 

 

 

 

Total

 

446,550

 

772,114

 

1,666,653

 

268,616

 

 

10.          Income taxes

 

Cayman Islands and Hong Kong

 

The Company is incorporated in the Cayman Islands. Under the current laws of the Cayman Islands, the Company is not subject to tax on income or capital gain. Additionally, upon payments of dividends by the Company to its shareholders, no Cayman Islands withholding tax will be imposed. Queen’s Road is incorporated in Hong Kong and is subject to Hong Kong profits tax rate of 16.5% for the years ended December 31, 2012, 2013 and 2014.

 

26


 

QUNAR CAYMAN ISLANDS LIMITED

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED DECEMBER 31, 2012, 2013 AND 2014

(Amounts in thousands of Renminbi (“RMB”) and US dollars (“US$”) except for number of shares)

 

PRC

 

The Company’s PRC subsidiaries and Affiliated PRC Entities are subject to the statutory rate of 25%, unless otherwise specified, in accordance with the Enterprise Income Tax law (the “EIT Law”), which was effective since January 1, 2008.

 

The WFOE and the VIE renewed their “High and New Technology Enterprises” (“HNTE”) status in December 2012 and are continued to subject to PRC tax at the preferential tax rate of 15% for three years from 2012 to 2014.

 

Under the EIT Law, dividends paid by PRC enterprises out of profits earned post-2007 to non-PRC tax resident investors are subject to PRC withholding tax at 10%. A lower withholding tax rate may be applied based on applicable tax treaty with certain jurisdictions.

 

Loss before income taxes consists of:

 

 

 

Years ended December 31,

 

 

 

2012

 

2013

 

2014

 

 

 

RMB

 

RMB

 

RMB

 

US$

 

Non-PRC

 

(21,688

)

(54,602

)

(954,438

)

(153,828

)

PRC

 

(53,475

)

(91,595

)

(874,903

)

(141,009

)

 

 

 

 

 

 

 

 

 

 

 

 

(75,163

)

(146,197

)

(1,829,341

)

(294,837

)

 

27

 

QUNAR CAYMAN ISLANDS LIMITED

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED DECEMBER 31, 2012, 2013 AND 2014

(Amounts in thousands of Renminbi (“RMB”) and US dollars (“US$”) except for number of shares)

 

The income tax expense is comprised of:

 

 

 

Years ended December 31,

 

 

 

2012

 

2013

 

2014

 

 

 

RMB

 

RMB

 

RMB

 

US$

 

Current

 

15,950

 

49,528

 

32,742

 

5,277

 

Deferred

 

—

 

(8,436

)

(15,182

)

(2,447

)

 

 

 

 

 

 

 

 

 

 

 

 

15,950

 

41,092

 

17,560

 

2,830

 

 

A reconciliation of the differences between the statutory tax rate and the effective tax rate for enterprise income tax is as follows:

 

 

 

 

 

Years ended December 31,

 

 

 

 

 

2012

 

2013

 

2014

 

 

 

Note

 

RMB

 

RMB

 

RMB

 

US$

 

Loss before income tax

 

 

 

(75,163

)

(146,197

)

(1,829,341

)

(294,837

)

Expected taxation at PRC EIT statutory rate of 25%

 

 

 

(18,790

)

(36,549

)

(457,335

)

(73,709

)

Effect of different tax rates in different jurisdictions

 

 

 

5,749

 

14,426

 

239,800

 

38,649

 

Research & development super-deduction

 

 

 

(11,210

)

(22,767

)

(33,391

)

(5,382

)

Effect of lower tax rate applicable to HNTE

 

 

 

(10,705

)

(20,502

)

49,341

 

7,952

 

Late payment interest

 

 

 

556

 

1,533

 

9,256

 

1,492

 

Adjustment of estimated income tax accruals

 

 

 

—

 

—

 

1,759

 

283

 

Deemed revenue

 

(i)

 

46,485

 

95,441

 

113,474

 

18,289

 

Non-deductible expenses

 

 

 

4,339

 

2,668

 

14,860

 

2,395

 

Changes in valuation allowance

 

 

 

(474

)

7,446

 

81,496

 

13,135

 

Non-taxable income

 

 

 

—

 

(604

)

(1,700

)

(274

)

 

 

 

 

 

 

 

 

 

 

 

 

Income tax expense

 

 

 

15,950

 

41,092

 

17,560

 

2,830

 

 

(i)           The Company acts as an agent for its air travel facilitating services including aviation insurance policies (the “Aviation Insurance Arrangements”) in accordance with ASC 605 and therefore, the Company presents revenues from such transactions on a net basis in the consolidated statements of comprehensive loss. Under the current PRC tax laws and regulations, the Company’s existing business arrangement more likely than not will subject the Company to income taxes on a gross basis for the Aviation Insurance Arrangements. The difference between the net revenue and the gross revenue is recognized as deemed revenue for additional income taxes. The associated income tax expense is calculated by applying the applicable tax rate to the deemed revenue amount and includes the late payment interest based on the applicable tax rules. The majority of the liabilities for unrecognized tax benefits represent tax positions taken with respect to deemed revenue. The unrecognized tax benefits are recorded in non-current liabilities in the consolidated balance sheets.

 

28


 

QUNAR CAYMAN ISLANDS LIMITED

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED DECEMBER 31, 2012, 2013 AND 2014

(Amounts in thousands of Renminbi (“RMB”) and US dollars (“US$”) except for number of shares)

 

The significant components of deferred taxes are as follows:

 

 

 

Years ended December 31,

 

 

 

2012

 

2013

 

2014

 

 

 

RMB

 

RMB

 

RMB

 

US$

 

Deferred tax assets, current portion:

 

 

 

 

 

 

 

 

 

Advertising expenses

 

—

 

1,198

 

163

 

26

 

Bad debt expenses

 

198

 

1,454

 

1,878

 

303

 

Deferred revenues

 

393

 

—

 

—

 

—

 

Expense cut-off

 

—

 

51

 

—

 

—

 

Depreciation expenses

 

—

 

—

 

45

 

7

 

Accrued expenses

 

2,430

 

10,518

 

77,708

 

12,524

 

Accrued salaries and welfare payable

 

6,494

 

13,225

 

30,549

 

4,924

 

Less: valuation allowance

 

(9,515

)

(18,010

)

(87,484

)

(14,100

)

 

 

 

 

 

 

 

 

 

 

Current deferred tax assets

 

—

 

8,436

 

22,859

 

3,684

 

 

 

 

 

 

 

 

 

 

 

Deferred tax assets, non-current portion:

 

 

 

 

 

 

 

 

 

Advertising expenses

 

1,394

 

—

 

6

 

1

 

Depreciation expenses

 

129

 

274

 

525

 

85

 

Tax loss carry forward

 

669

 

869

 

12,634

 

2,036

 

Less: valuation allowance

 

(2,192

)

(1,143

)

(13,165

)

(2,122

)

 

 

 

 

 

 

 

 

 

 

Non-current deferred tax assets

 

—

 

—

 

—

 

—

 

 

Valuation allowances have been provided on the deferred tax assets where, based on all available evidence, it was considered more likely than not that some portion or all of the recorded deferred tax assets will not be realized in future periods. The Company recorded full valuation allowance against deferred tax assets of entities that were in cumulative loss positions, as of December 31, 2012, 2013 and 2014.

 

As of December 31, 2014, the Company had net operating losses of approximately RMB1,829,341 (US$294,837), which can be carried forward to offset taxable income. The net operating loss will expire between 2016 to 2019, if not utilized.

 

For the year ended December 31, 2013, all consolidated entities were in a cumulative loss position except for two subsidiaries and two Affiliated PRC Entities. For the year ended December 31, 2014, all consolidated entities were in a cumulative loss position except for one subsidiary and four Affiliated PRC Entities. The undistributed earnings of the Company’s profit-making subsidiaries and Affiliated PRC Entities amounted to approximately RMB15,280 and RMB15,857(US$2,556) as of December 31, 2013 and 2014, respectively. The Company intended to indefinitely reinvest these undistributed earnings as of December 31, 2013 and 2014. Determination of the amount of unrecognized deferred tax liability related to the earnings that are indefinitely reinvested is not practical. Should the accumulated earnings be repatriated in the future, withholding tax should be payable.

 

Unrecognized tax benefits

 

For the years ended December 31, 2012, 2013, and 2014, the Company recorded RMB32,782, RMB83,677 and RMB152,865 (US$24,637) of unrecognized tax benefits, which primarily represent deemed revenues for income tax purposes. It is possible that the amount accrued will change in the next 12 months; however, an estimate of the range of the possible change cannot be made at this time.

 

As of December 31, 2012, 2013 and 2014, unrecognized tax benefits of RMB17,594, RMB57,199 and RMB58,818 (US$9,480), respectively, if ultimately recognized will impact the effective tax rate.

 

29


 

QUNAR CAYMAN ISLANDS LIMITED

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED DECEMBER 31, 2012, 2013 AND 2014

(Amounts in thousands of Renminbi (“RMB”) and US dollars (“US$”) except for number of shares)

 

The unrecognized tax benefit is as follows:

 

 

 

Years ended December 31,

 

 

 

2012

 

2013

 

2014

 

 

 

RMB

 

RMB

 

RMB

 

US$

 

Balance at January 1

 

5,502

 

32,782

 

83,677

 

13,486

 

Additions based on tax positions related to the current year

 

28,646

 

53,745

 

67,798

 

10,927

 

Additions for tax positions of prior years

 

—

 

—

 

6,401

 

1,032

 

Reductions based on tax positions related to prior years

 

(1,366

)

(2,850

)

(5,011

)

(808

)

 

 

 

 

 

 

 

 

 

 

Balance at December 31

 

32,782

 

83,677

 

152,865

 

24,637

 

 

During the years ended December 31, 2012, 2013 and 2014, the Company recognized late payment interest expense of RMB556, RMB1,533 and RMB9,256 (US$1,492), and penalties of nil, nil and nil, respectively, as part of income tax expense. The Company had accrued approximately RMB808, RMB2,341, and RMB11,597 (US$1,869) for the late payment of interest as of December 31, 2012, 2013 and 2014, respectively.

 

As of December 31, 2014, the tax years ended December 31, 2010 through 2014 for the Company’s PRC subsidiaries and the Affiliated PRC Entities remain subject to examination by the PRC tax authorities.

 

11.                                                       Related party transactions

 

a) Related parties

 

Name of related parties

 

Relationship with the Company

Baidu, Inc.

 

Ultimate holding company

 

 

 

Baidu

 

Controlling shareholder of the Company

 

 

 

Baidu Online Network Technology (Beijing) Co., Ltd. (“Baidu Online”)

 

An entity controlled by Baidu

 

 

 

Beijing Baidu Netcom Science Technology Co., Ltd. (“Baidu Netcom”)

 

An entity controlled by Baidu

 

 

 

FuJian Bo Rui Websoft Technology Co., Ltd. (“Bo Rui”)

 

An entity controlled by Baidu

 

 

 

FuJian Bo Dong Cultural Communication Co., Ltd. (“Bo Dong”)

 

An entity controlled by Baidu

 

 

 

Frederick Demopoulos

 

A shareholder of the Company

 

 

 

Beijing Nuo Mi Network Information Technology Co., Ltd. (“Nuo Mi)

 

An entity controlled by Baidu

 

 

 

Baidu.com Times Technology (Beijing) Co., Ltd. (“Baidu Times)

 

An entity controlled by Baidu

 

30


 

QUNAR CAYMAN ISLANDS LIMITED

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED DECEMBER 31, 2012, 2013 AND 2014

(Amounts in thousands of Renminbi (“RMB”) and US dollars (“US$”) except for number of shares)

 

b) Cooperation Agreement with Baidu, Inc.

 

On October 1, 2013, in order to further enhance the cooperation between the Company and Baidu in the online travel business through deepening integration, the Company and Baidu entered into the Zhixin Cooperation Agreement, for an initial term starting from November 21, 2013 until December 31, 2016, subject to an automatic renewal for seven years unless agreed otherwise by both parties. Under the Zhixin Cooperation Agreement, Baidu agreed to grant the Company the exclusive right to operate certain new search products on Baidu’s website for travel-related search results (the “Cooperation Platform”), and the Company may offer links to various travel-related products, including links to the Company’s website, such as airline tickets, hotels and certain commercial package tour products provided through the Cooperation Platform.

 

Pursuant to the Zhixin Cooperation Agreement, Baidu agreed to guarantee certain minimum page views to be generated from users of the Cooperation Platform, which will be no less than 2,190 million page views per year in 2014 and 2015, respectively, and no less than 2,196 million page views for 2016 (the “Minimum Traffic Guarantee” or “MTG”).

 

In exchange for the services to be performed under the Zhixin Cooperation Agreement, on November 21, 2013, the Company issued to Baidu warrants for 45,800,000 of the Company’s Class B Ordinary Shares (the “Baidu Warrants”), which is calculated by dividing US$229 million by the public offering price of the Company’s Class B ordinary shares, or US$5 per Class B ordinary share, subject to adjustments as discussed below. The Baidu Warrants have no exercise price; thus are more akin to nonvested redeemable restricted stock units. The Baidu Warrants are exercisable in independent tranches of 11,450,000 or 25% from January 15, 2015, 16,030,000 or 35% from January 15, 2016 and 18,320,000 or 40% from January 15, 2017 and will expire on December 31, 2019. As long as the pre-existing non-competition undertaking remains in effect, Baidu has the option to redeem all or part of the Baidu Warrants for (i) Class B ordinary shares (the “Share Settlement”); or (ii) cash equal to US$5 per warrant. If Baidu terminates its pre-existing non-competition undertaking, Baidu can only choose to settle a portion of the Baidu Warrants by Share Settlement to enable it to hold up to 49.9% of the Company’s voting rights and the remaining Baidu Warrants must be settled in cash at an amount that equals the higher of US$5 per Class B ordinary share or the average closing price of the Company’s Class B ordinary share on NASDAQ Global Market for the ten days preceding the settlement.

 

For any year during the initial term, if the Company fails to meet the applicable benchmark revenue (the “Benchmark Revenue”) as defined below, and Baidu fails to fulfill 90% of the applicable MTG (the “Benchmark MTG”), the number of underlying Class B ordinary shares issuable upon exercise of the relevant tranche of Baidu Warrants with respect to that year would be adjusted downward in proportion to the deficit of the Benchmark MTG. Under the Zhixin Cooperation Agreement, the Company has agreed to make its best business efforts to achieve an agreed-upon Benchmark Revenue of RMB480 million, RMB630 million and RMB800 million for the year 2014, 2015 and 2016, respectively. In any year that the Company’s revenues exceeds the Benchmark Revenue applicable to that year, Baidu will also be entitled to cash payment equal to 76% of the excess revenue for that year.

 

The Company accounted for the Baidu Warrants following the measurement guidance in ASC505-50, Equity, Equity-Based Payments to Non-Employees and classified the entire Baidu Warrants as a liability pursuant to the classification guidance in ASC 505-50-25-10 and ASC 718-10-25-11.

 

The Baidu Warrants is measured at fair value at each reporting date until the final measurement date, which is the date of completion of services required to earn each relevant tranche. The cost associated with the warrants issued pursuant to the Zhixin Cooperation Agreement has been recognized ratably over the period of service required to earn each tranche of warrants based upon the number of the Baidu Warrants and taking into account the potential effect of the downward adjustment to the number of underlying shares in the event the contractual benchmarks are not achieved by Baidu. Upon vesting, the Baidu Warrants should continue to be accounted for as a liability in accordance with ASC 480-10-25-8 and measured in accordance with ASC 480-10-30 and ASC 480-10-35 at every reporting period until the Baidu Warrants are settled. Changes in the fair value of each vested tranche of the Baidu Warrants will be recognized in earnings in the accompanying consolidated statements of comprehensive loss.

 

For the period from October 1, 2013 through December 31, 2013, the Cooperation Platform was still in the testing phase and therefore, no meaningful traffic was generated. Based on the above, the Zhixin Cooperation Agreement with Baidu did not have any material impact to the Company’s consolidated financial statements for the year ended December 31, 2013. The Cooperation Platform was officially launched on January 1, 2014 and the services pursuant to the Zhixin Cooperation Agreement commenced on the same day. The online marketing expense for Baidu Zhixin Cooperation was RMB699,983 (US$112,817) for the year ended December 31, 2014.

 

31


 

QUNAR CAYMAN ISLANDS LIMITED

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED DECEMBER 31, 2012, 2013 AND 2014

(Amounts in thousands of Renminbi (“RMB”) and US dollars (“US$”) except for number of shares)

 

c) On February 27, 2014, Qunar entered into a US$300 million revolving credit facility agreement with Baidu. The three-year credit facility bears no commitment fee. Any drawdown bears interest at a rate of 90% of the benchmark lending rate published by the People’s Bank of China and shall be repaid within three years from the drawdown date. Qunar is allowed to repay its outstanding debt obligation at maturity either by cash or by issuance of Class B shares. The applicable share conversion price will be determined by the prevailing share price at the maturity date.

 

d) The Company had the following related party transactions for the years ended December 31, 2012, 2013 and 2014:

 

 

 

 

 

Years ended December 31,

 

 

 

 

 

2012

 

2013

 

2014

 

 

 

Notes

 

RMB

 

RMB

 

RMB

 

US$

 

Online marketing services from Baidu Netcom

 

(i)

 

74,296

 

91,533

 

165,058

 

26,603

 

Online marketing services from Bo Rui

 

 

 

—

 

202

 

547

 

88

 

Online marketing services from Bo Dong

 

 

 

—

 

1,195

 

4,780

 

770

 

Online marketing services contributed by Baidu, Inc.

 

(ii)

 

6,650

 

5,920

 

3,304

 

533

 

Online marketing services from Baidu Times

 

 

 

—

 

—

 

7,670

 

1,236

 

Online marketing services of Baidu Zhixin Cooperation

 

(b)

 

—

 

—

 

699,983

 

112,817

 

Online marketing services from Baidu, Inc.

 

 

 

—

 

—

 

4,714

 

760

 

Online marketing services from Nuo Mi

 

 

 

—

 

—

 

377

 

61

 

Loan from Baidu Online

 

(iii)

 

100,000

 

150,000

 

—

 

—

 

Loan from Baidu Netcom

 

(iv)

 

50,000

 

—

 

—

 

—

 

Repayment of loan from Baidu Online

 

(iii)

 

100,000

 

150,000

 

—

 

—

 

Repayment of loan from Baidu Netcom

 

(iv)

 

—

 

50,000

 

—

 

—

 

Loan, and extension of loan to Baidu

 

(iii)

 

31,127

 

99,623

 

—

 

—

 

Repayment of loan to Baidu

 

(iii)

 

—

 

98,975

 

—

 

—

 

Imputed interest

 

(iii), (iv)

 

421

 

2,050

 

—

 

—

 

Loan interest

 

(iii)

 

—

 

115

 

—

 

—

 

Consulting services from Frederick Demopoulos

 

 

 

81

 

—

 

—

 

—

 

 

(i)

 

During the year ended December 31, 2013 and 2014, Baidu Netcom provides online marketing services amounting to RMB91,533 and RMB 165,058 (US$26,603) to the Company, respectively. As one of the largest online marketing service providers in the PRC, Baidu Netcom typically requires upfront payments from its customers. As of December 31 2013 and 2014, such payments amounted to RMB10,000 and RMB22,000 (US$3,546), respectively. The related services are expected to be delivered within the next 12 months.

 

 

 

(ii)

 

In connection with the Baidu Transaction, the Company and Baidu, Inc. entered into a business cooperation agreement, whereby Baidu, Inc. provides free online marketing services and directs user traffic to the Company’s website. The Company recorded online marketing expenses based on the Company’s estimate of the expenses that would have been incurred if the Company had operated as an unaffiliated entity with a corresponding credit to additional paid in capital. The term of the business cooperation agreement is for an initial term of three years (the “Initial Term”); provided, however that notwithstanding Baidu, Inc.’s Non-Competition Undertaking to the Company survive until the later of (i) the expiration of the Initial Term and (ii) the date on which Baidu, Inc. and its controlled affiliates hold less than 50% of the voting power attaching to the outstanding shares of the Company (on a fully-diluted basis). The business cooperation agreement expired in July, 2014. Upon its expiration, the Company started to pay Baidu, Inc. for the aforementioned online marketing services provided.

 

32


 

QUNAR CAYMAN ISLANDS LIMITED

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED DECEMBER 31, 2012, 2013 AND 2014

(Amounts in thousands of Renminbi (“RMB”) and US dollars (“US$”) except for number of shares)

 

(iii)

 

On November 1, 2012, the Company granted an interest free loan amounting to US$5,000 to Baidu with a term of six months.

 

 

 

 

 

On November 9, 2012, the Company was granted a loan amounting to RMB100,000 (US$16,117) from Baidu Online. The loan bore an interest at 0.77% with a repayment term of six months. There were no penalties for early repayment. The Company repaid the loan in full on December 11, 2012. The Company recorded imputed interest expense amounting to RMB421 (US$68) relating to this loan based on the market interest rate of 5.6%.

 

 

 

 

 

On April 22, 2013, the Company was granted an interest free loan amounting to RMB100,000 (US$16,117) from Baidu Online with a repayment term of three months to supplement the Company’s RMB working capital needs and to provide RMB funding for establishing a new entity in the PRC. In order to secure such loan, on the same day, the Company also granted an interest free loan amounting to US$11,174 to Baidu with the same three month repayment term, and extended the repayment term of the November 1, 2012 interest free loan amounting to US$5,000 by three months. Both the loans granted by the Company to Baidu were to reciprocate the interest free loan from Baidu Online. On July 22, 2013, the Company repaid the RMB100,000 loan to Baidu in full. The Company recorded imputed interest expense amounting to RMB1,376 (US$222) relating to this loan based on the market interest rate of 5.6%. On August 6, 2013, Baidu also repaid both the US$11,174 and US$5,000 loan, respectively to the Company in full. On September 27, 2013, the Company was granted a loan amounting to RMB50,000 with an annual interest rate of 6% from Baidu Netcom with a repayment term of 15 days to supplement the Company’s RMB working capital needs. On October 12, 2013, the Company repaid the RMB50,000 loan to Baidu in full. The Company recorded interest expense amounting to RMB115 (US$19) relating to this loan.

 

 

 

(iv)

 

On December 28, 2012, the Company was granted an interest free loan amounting to RMB50,000 (US$8,059) from Baidu Netcom with a repayment term of six months. The Company repaid the loan in full on March 27, 2013. The Company recorded imputed interest expense amounting to RMB674 (US$109) for the year ended December 31, 2013 relating to this loan based on the market interest rate of 5.6%.

 

33


 

QUNAR CAYMAN ISLANDS LIMITED

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED DECEMBER 31, 2012, 2013 AND 2014

(Amounts in thousands of Renminbi (“RMB”) and US dollars (“US$”) except for number of shares)

 

e) The Company had the following related party balances outstanding as of December 31 2013, and 2014:

 

 

 

As of December 31

 

 

 

2013

 

2014

 

 

 

RMB

 

RMB

 

US$

 

Current assets

 

 

 

 

 

 

 

Due from related parties:

 

 

 

 

 

 

 

Baidu Times

 

—

 

3,670

 

592

 

Baidu Netcom

 

10,000

 

25,210

 

4,063

 

Nuo Mi

 

—

 

11,071

 

1,784

 

 

 

 

 

 

 

 

 

Total due from related parties

 

10,000

 

39,951

 

6,439

 

 

 

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

 

 

Due to related parties:

 

 

 

 

 

 

 

Baidu Netcom

 

3,452

 

—

 

—

 

Baidu, Inc.

 

—

 

4,714

 

759

 

Nuo Mi

 

—

 

377

 

61

 

Baidu Times

 

—

 

768

 

124

 

Bo Rui

 

203

 

50

 

8

 

Bo Dong

 

837

 

396

 

64

 

 

 

 

 

 

 

 

 

Total due to related parties

 

4,492

 

6,305

 

1,016

 

 

Except as disclosed above, balances with related parties are unsecured, interest-free and repayable upon demand.

 

12.                               Employee defined contribution plan

 

Full time employees of the Company in the PRC participate in a government mandated defined contribution plan, pursuant to which certain pension benefits, medical care, employee housing fund and other welfare benefits are provided to employees. Chinese labor regulations require that the PRC subsidiaries and Affiliated PRC Entities of the Company make contributions to the government for these benefits based on certain percentages of the employees’ salaries. The Company has no legal obligation for the benefits beyond the contributions made. The total amounts for such employee benefits, which were expensed as incurred, were RMB50,246,  RMB87,588 and RMB222,755 (US$35,902) for the years ended December 31, 2012, 2013 and 2014, respectively.

 

13.                               Accumulated other comprehensive (loss) income

 

The movement of accumulated other comprehensive (loss) income is as follows:

 

 

 

Foreign currency
 translation adjustments

 

Balance as of December 31, 2011

 

(11,061

)

Other comprehensive loss

 

(542

)

Balance as of December 31, 2012

 

(11,603

)

Other comprehensive loss

 

(16,873

)

Balance as of December 31, 2013

 

(28,476

)

Other comprehensive income

 

32,639

 

Balance as of December 31, 2014

 

4,163

 

Balance as of December 31, 2014, in US$

 

671

 

 

34


 

QUNAR CAYMAN ISLANDS LIMITED

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED DECEMBER 31, 2012, 2013 AND 2014

(Amounts in thousands of Renminbi (“RMB”) and US dollars (“US$”) except for number of shares)

 

14.                               Ordinary shares

 

On the closing date of the Baidu Transaction, July 20, 2011, the Company amended and restated its memorandum and articles of association to include (i) a redemption clause of the ordinary shares (“Ordinary Share Redemption Request”), which states that any ordinary shareholder at any time may request the Company to redeem all of the ordinary shares held by such holder at the redemption price of US$1.45533 per ordinary share; and (ii) a redemption clause by a shareholder with 80% ownership of the Company’s outstanding shares (“80% Shareholder”), which states that the 80% Shareholder may request in writing that the Company redeem 100% of the Company’s outstanding shares (the “80% Shareholder Redemption Request”). The Ordinary Share Redemption Request will be nullified upon the listing of the Company’s ordinary shares for trading on any major stock exchange. The 80% Shareholder Redemption Request will be nullified upon the earlier of (i) an IPO; or (ii) the redemption of all then outstanding ordinary shares (other than those held by the 80% Shareholder or its affiliates or associates).

 

Baidu had unconditionally and irrevocably waived its redemption right as part of the Baidu Transaction (note 1).

 

As the ordinary shares held by other shareholders are currently redeemable at the option of such shareholders outside the sole control of the Company, all ordinary shares except those held by Baidu have been reclassified as mezzanine equity. The Company accounted for the reclassification by analogy to ASC 815-40-35-9, whereby the difference between the fair value of the redeemable ordinary shares on the date of the reclassification and the previous carrying value recorded in shareholders’ (deficit) equity was accounted for as an adjustment to additional paid-in capital. The fair value of US$1.58 per share was estimated with the assistance from an independent third-party appraiser. The Company is ultimately responsible for the determination of all amounts recorded in the financial statements. As the fair value exceeded the redemption value of US$1.45533 per share, there was no downward accretion to the redemption value under ASC 480-10-S99-3A.

 

On March 4, 2013, the Company entered into a share purchase agreement with certain investors and Baidu (collectively, the “Investors”). According to the agreement, the Investors subscribed for an aggregate number of 21,662,296 ordinary shares (the “Purchased Shares”) at a per share issue price of US$2.6313 for a total consideration of US$57,000. The Purchased Shares represent 7.14% of total ordinary shares of the Company after the closing of the transaction.

 

The Investors have unconditionally and irrevocably waived their rights to request the Company at any time to redeem all of the ordinary shares held by such holder at the redemption price of US$1.45533 per ordinary share. Furthermore, if the 80% Shareholder Redemption Request is exercised by an Investor (the “Redeeming Investor”), then the Redeeming Investor is required to cause the Company to, within three business days following such 80% Shareholder Redemption Request, reissue to each other Investor such number of shares which represents, as of immediately after such reissuance, the same shareholding percentage that was represented, as of immediately prior to the 80% Shareholder Redemption Request, by the shares held by such Investor and redeemed for an aggregate amount of issuance consideration equal to the redemption consideration actually received by such Investor.

 

On July 3, 2013, the Board of Directors and the shareholders of the Company amended and restated its memorandum and articles of association to redesignate 203,064,412 issued ordinary shares (including the ordinary shares issued to the Investors) and 100,280,392 issued redeemable ordinary shares as Class A ordinary shares; and to redesignate 496,655,196 of the Company’s authorized but unissued ordinary shares as Class B ordinary shares. Holders of Class A ordinary shares and Class B ordinary shares have the same rights except for conversion and voting rights. Each Class A ordinary share is convertible into one Class B ordinary share at any time, while Class B ordinary shares cannot be converted into Class A ordinary shares under any circumstances. Upon any sale, pledge, transfer, assignment or disposition of a Class A ordinary share by its holder to any person who is not already a holder of Class A ordinary shares and is not an affiliate of such holder as defined in the Company’s amended and restated memorandum and articles of association, such Class A ordinary share shall automatically convert into one Class B ordinary share without any actions on the part of the transferor or the transferee. Each Class A ordinary share is entitled to three votes and each Class B ordinary share is entitled to one vote.

 

On November 1, 2013, the Company completed its IPO by issuing 12,612,800 ADSs at the price of US$15.00 per ADS and 1,000,000 Class B ordinary shares at the price of US$5.00 per share. Each ADS represents three Class B ordinary shares. Immediately following the closing of the IPO, the total number of ordinary shares outstanding was 342,183,204, comprised of 302,850,254 Class A ordinary shares and 39,332,950 Class B ordinary shares.

 

Upon the closing of the IPO, the Ordinary Share Redemption Request and the 80% Shareholder Redemption Request were nullified and therefore, the redeemable ordinary shares were reclassified from mezzanine equity into Class A Ordinary Shares in permanent equity.

 

As of December 31, 2014, there were 224,299,179 and 134,376,522 Class A and Class B ordinary shares outstanding, respectively.

 

35

 

QUNAR CAYMAN ISLANDS LIMITED

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED DECEMBER 31, 2012, 2013 AND 2014

(Amounts in thousands of Renminbi (“RMB”) and US dollars (“US$”) except for number of shares)

 

15.          Loss per share

 

Basic and diluted loss per share for each of the years ended December 31, 2012, 2013 and 2014 presented are calculated as follows:

 

 

 

Years ended December 31,

 

 

 

2012

 

2013

 

2014

 

 

 

Ordinary shares

 

Class A

 

Class B

 

Class A

 

Class A

 

Class B

 

Class B

 

 

 

RMB

 

RMB

 

RMB

 

RMB

 

US$

 

RMB

 

US$

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic loss per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Numerator:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

(91,113

)

(183,368

)

(3,921

)

(1,401,672

)

(225,909

)

(445,229

)

(71,758

)

Net loss attributable to ordinary shareholders for computing basic loss per share

 

(91,113

)

(183,368

)

(3,921

)

(1,401,672

)

(225,909

)

(445,229

)

(71,758

)

Denominator:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average ordinary shares outstanding

 

281,682,508

 

299,524,536

 

6,403,973

 

266,696,495

 

266,696,495

 

84,713,813

 

84,713,813

 

Basic loss per share:

 

(0.32

)

(0.61

)

(0.61

)

(5.26

)

(0.85

)

(5.26

)

(0.85

)

Basic loss per ADS*:

 

(0.96

)

 

 

(1.83

)

 

 

 

 

(15.78

)

(2.55

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Diluted loss per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Numerator:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

(91,113

)

(183,368

)

(3,921

)

(1,401,672

)

(225,909

)

(445,229

)

(71,758

)

Reallocation of net loss attributable to ordinary shareholders as a result of conversion of Class A to Class B ordinary shares (note 14)

 

—

 

—

 

(183,368

)

—

 

—

 

(1,401,672

)

(225,909

)

Net loss attributable to ordinary shareholders for computing diluted loss per share

 

(91,113

)

(183,368

)

(187,289

)

(1,401,672

)

(225,909

)

(1,846,901

)

(297,667

)

Denominator:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average ordinary shares outstanding

 

281,682,508

 

299,524,536

 

6,403,973

 

266,696,495

 

266,696,495

 

84,713,813

 

84,713,813

 

Conversion of Class A to Class B ordinary shares (note 14)

 

—

 

—

 

299,524,536

 

—

 

—

 

266,696,495

 

266,696,495

 

Weighted-average number of shares outstanding- diluted

 

281,682,508

 

299,524,536

 

305,928,509

 

266,696,495

 

266,696,495

 

351,410,308

 

351,410,308

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Diluted loss per share:

 

(0.32

)

(0.61

)

(0.61

)

(5.26

)

(0.85

)

(5.26

)

(0.85

)

Diluted loss per ADS*:

 

(0.96

)

 

 

(1.83

)

 

 

 

 

(15.78

)

(2.55

)

 

*The Company was listed on November 1, 2013 with issuance of a total of 12,777,650 ADSs. Each ADS represents three Class B ordinary shares. The net loss per ADS for the years ended December 31, 2012 and 2013 were calculated using the same conversion ratio assuming the ADSs had been in existence throughout these periods.

 

The ordinary shares subject to redemption at the option of the shareholders recorded in mezzanine equity were included in the weighted average number of ordinary shares outstanding because such ordinary shareholders have the same contractual rights and obligations to share in the profits and losses of the Company as ordinary shareholders without redemption rights. As there has been no adjustment to the carrying value of the redeemable ordinary shares, the loss per share is the same for both redeemable and non-redeemable ordinary shares for all periods presented.

 

For the year ended December 31, 2012, the computation of basic loss per share using the two-class method was not applicable because there were no participating securities outstanding. For the year ended December 31, 2013 and 2014, the two-class method is applicable because the Company has two classes of ordinary shares outstanding, Class A and Class B ordinary shares, respectively (notes 2 and 14). Holders of Class A ordinary shares and Class B ordinary shares have the same rights except for conversion and voting rights. Each Class A ordinary share is convertible into one Class B ordinary share at any time, while Class B ordinary shares cannot be converted into Class A ordinary shares under any circumstances. Each Class A ordinary share is entitled to three votes and each Class B ordinary share is entitled to one vote.

 

The effects of all outstanding share options (note 16) have been excluded from the computation of diluted loss per share for the years ended December 31, 2012, 2013 and 2014 as their effects would be anti-dilutive.

 

36

 

QUNAR CAYMAN ISLANDS LIMITED

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED DECEMBER 31, 2012, 2013 AND 2014

(Amounts in thousands of Renminbi (“RMB”) and US dollars (“US$”) except for number of shares)

 

16.          Share-based compensation

 

In November 2007, the Company’s shareholders approved the 2007 Share Incentive Plan (the “2007 Plan”), which is administered by the Board of Directors or any of its committees. Under the Plan, the Board of Directors may grant options to its employees, directors and consultants to purchase an aggregate of no more than 9,600,140 ordinary shares of the Company. These options granted have a contractual term of ten years and generally vest over a four year period, with 25% of the awards vesting one year after the date of grant and 1/16 of the remaining grants vesting on a quarterly basis thereafter. On December 29, 2011, the Board of Directors approved the increase of the number of shares available for issuance under the Plan from 20,724,362 to 26,060,000 shares. On August 10, 2012, the Board of Directors approved that starting from January 1, 2013, the number of shares available for issuance under the Plan would increase annually by 1.5% of the total outstanding ordinary and redeemable ordinary shares as of January 1 of that respective calendar year. On September 22, 2013, the Board of Directors approved an increase in the number of shares available for issuance under the 2007 Share Incentive Plan by 6,066,896 shares. These options granted have a contractual term of ten years and generally vest over a four year period, with 25% of the awards vesting one year after the date of grant and 1/16 of the remaining grants vesting on a quarterly basis thereafter.

 

37


 

QUNAR CAYMAN ISLANDS LIMITED

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED DECEMBER 31, 2012, 2013 AND 2014

(Amounts in thousands of Renminbi (“RMB”) and US dollars (“US$”) except for number of shares)

 

The fair value of each award was estimated on the grant date using the Black-Scholes-Merton option-pricing model by the Company.

 

Under the 2007 Plan, the Company granted 4,765,068, 10,988,106 and 9,993,411 share options to employees during the years ended December 31, 2012, 2013 and 2014, respectively. Among the grants, nil, 1,671,867 and 7,929,555 shares options granted during the years ended December 31, 2012, 2013 and 2014, respectively, have performance condition on their exercisability.

 

Included in the grants above:

 

1)  On April 1, 2012 and October 1, 2012, the Company granted 278,000 and 11,000 share options under the Plan with immediate vesting to senior management and recognized compensation costs in aggregate amounting to RMB3,620 (US$583) representing the fair value of the share options on the respective grant dates.

 

2)  On March 6, 2012, the Company granted a total of 500,000 options under the Plan with an exercise price of US$0.01 per option to its executive officers. These options granted have a contractual term of ten years. The performance conditions related to the year ended December 31, 2012 were as follows:

 

a)    at least 90% of the total consolidated revenue target of RMB 530,000;

 

b)    at least 90% of the total revenue target from hotels for reservations and sales facilitated through the Company’s website or mobile platform of RMB 150,000; and

 

c)    the Company recorded a consolidated net income.

 

If the performance conditions are met, the options will vest over a four year period, with 25% of the awards vesting on an annual basis starting from January 1, 2013. There was no share-based compensation expense recognized during the year ended December 31, 2012 associated with these options granted above as the performance conditions were not met.

 

On January 25, 2013, the Board of Directors waived the performance conditions in relation to the performance based options granted on March 6, 2012 and approved that 450,000 options, representing 90% of the options previously granted would commence vesting based on the original vesting schedule. In accordance with ASC 718, the Company accounted for the waiver of the performance conditions as a modification. As the original vesting conditions were not satisfied, the grant-date fair value of the original award was ignored and the fair value of the award measured at the modification date is recognized starting from the modification date. The share-based compensation expense recognized for the modified award for the year ended December 31, 2013 was RMB1,627(US$262).

 

3)  On September 22, 2013, the Board of Directors approved to issue two option grants to Chenchao Zhuang, the CEO and director of the Company. The first option grant consisted of 3,033,448 options with an exercise price of US$3.9559. The second option grant consisted of 3,033,448 options with an exercise price of US$6.5932. Both option grants have a contractual term of ten years and will vest over a period from grant date to December 31, 2016, with 25% of the awards vesting on December 31, 2013 and the remaining awards vesting 1/16 on a quarterly basis thereafter. The fair value of the options granted was US$2.69 and US$2.19 for the first and second option grant, respectively. The Company recognized compensation costs amounting to RMB22,540 and RMB22,946 (US$3,698) for the year ended December 31, 2013 and 2014 associated with the two options grants to Chenchao Zhuang.

 

38


 

QUNAR CAYMAN ISLANDS LIMITED

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED DECEMBER 31, 2012, 2013 AND 2014

(Amounts in thousands of Renminbi (“RMB”) and US dollars (“US$”) except for number of shares)

 

Business Unit Incentive Plan

 

On January 13, 2013, the Board of Directors approved a business unit incentive plan (the “Business Unit Incentive Plan”), which is governed under the aforementioned 2007 Share Incentive Plan. Under the Business Unit Incentive Plan, the Board of Directors may grant options to its employees of specific business units to purchase an aggregate of no more than 10,800,000 Class B ordinary shares of the Company. On November 25, 2014, the Company’s Board of Directors approved an extension of the Business Unit incentive plan to cover employees of four new business units. The total number of Class B ordinary shares of the Company to be issued under the Business Unit Incentive Plan was increased to 18,000,000. The options will be granted at an exercise price of US$0.01 if the business units meet their respective certain long-term performance conditions. Upon grant, the options will have a vesting term of three months.

 

There have been no grants under the Business Unit Incentive Plan up to December 31, 2014. Qunar also concluded that there was no service inception preceding the grant date as there has been no authorization from Qunar’s Board of Directors based on the its accounting policies up to December 31, 2014.

 

The following table summarizes the option activity for the years ended December 31, 2014:

 

 

 

Number of
shares

 

Weighted
average
 exercise
price (US$)

 

Weighted
average
remaining
contractual life
(Years)

 

Aggregate
intrinsic
value
(US$ in
thousands)

 

Share options

 

 

 

 

 

 

 

 

 

Outstanding, December 31, 2013

 

25,192,696

 

1.40

 

7.39

 

184,355

 

Granted

 

9,993,411

 

0.01

 

 

 

 

 

Exercised

 

(8,907,408

)

0.27

 

 

 

 

 

Forfeited/Cancelled

 

(1,115,256

)

0.02

 

 

 

 

 

Outstanding, December 31, 2014

 

25,163,443

 

1.30

 

7.89

 

201,417

 

Vested and expected to vest at December 31, 2014

 

21,880,749

 

1.43

 

7.75

 

176,072

 

Exercisable at December 31, 2014

 

9,685,685

 

1.72

 

6.62

 

75,118

 

 

The aggregate intrinsic value in the table above represents the difference between the fair value of Company’s ordinary share as at the balance sheet date and the exercise price. Total intrinsic value of options exercised for the three years ended December 31, 2012, 2013 and 2014 was RMB31.11 million, RMB88.92 million and RMB508.52 million (US$82.02 million), respectively. The total fair value of the equity awards vested during the years ended December 31, 2012, 2013 and 2014 were RMB23.78 million, RMB88.87 million and RMB220.80 million (US$35.61 million), respectively.

 

39


 

QUNAR CAYMAN ISLANDS LIMITED

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED DECEMBER 31, 2012, 2013 AND 2014

(Amounts in thousands of Renminbi (“RMB”) and US dollars (“US$”) except for number of shares)

 

As of December 31, 2014, there were RMB448.16 million (US$72.28 million) of unrecognized share-based compensation costs, net of estimated forfeitures, related to equity awards that are expected to be recognized over a weighted-average vesting period of 2.71 years. Total unrecognized compensation costs may be adjusted for future changes in estimated forfeitures.

 

The fair value of each option award was estimated on the grant date using the Black-Scholes-Merton option-pricing model. The risk-free interest rate for periods within the contractual life of the share option is based on the U.S. Treasury yield curve in effect at the time of grant for a term consistent with the expected term of the awards. The expected term of stock options granted is developed giving consideration to the vesting period and contractual term. Qunar did not expect to declare any dividends on its ordinary shares on the respective grant dates. Expected volatility is estimated based on the historical volatility ordinary shares of several comparable companies in the same industry.

 

The following table presents the assumptions used to estimate the fair values of the share options granted in the years presented:

 

 

 

2012

 

2013

 

2014

 

 

 

 

 

 

 

 

 

Risk-free interest rate

 

1.70%~2.28%

 

1.91%~2.71%

 

1.91%~2.07%

 

Dividend yield

 

—

 

—

 

—

 

Expected volatility range

 

48.03%~49.84%

 

46.68%~47.66%

 

45.78%~46.58%

 

Expected life (in years)

 

10

 

10

 

6.11

 

 

The total weighted average grant-date fair value of the equity awards granted during the years ended December 31, 2012, 2013 and 2014 were RMB12.54, RMB16.59 and RMB58.59 (US$9.45) per option, respectively.

 

The following table summarizes total compensation cost recognized:

 

 

 

Years ended December 31,

 

 

 

2012

 

2013

 

2014

 

 

 

RMB

 

RMB

 

RMB

 

US$

 

Product developments

 

15,241

 

20,784

 

59,884

 

9,652

 

Product sourcing

 

1,330

 

2,117

 

2,958

 

477

 

Sales and marketing

 

5,243

 

5,417

 

12,565

 

2,025

 

General and administrative

 

5,392

 

35,389

 

190,963

 

30,778

 

 

 

 

 

 

 

 

 

 

 

 

 

27,206

 

63,707

 

266,370

 

42,932

 

 

17.          Restricted net assets

 

The Company’s ability to pay dividends may depend on the Company receiving distributions of funds from its PRC subsidiaries and Affiliated PRC Entities. Relevant PRC statutory laws and regulations permit payments of dividends by the Company’s PRC subsidiaries only out of its retained earnings, if any, as determined in accordance with PRC accounting standards and regulations. The results of operations reflected in the consolidated financial statements prepared in accordance with U.S. GAAP differ from those reflected in the statutory financial statements of the Company’s PRC subsidiaries and Affiliated PRC Entities.

 

In accordance with the PRC Regulations on Enterprises with Foreign Investment and its articles of association, a foreign invested enterprise established in the PRC is required to provide certain statutory reserves, namely general reserve fund the enterprise expansion fund and staff welfare and bonus fund which are appropriated from net profit as reported in the enterprise’s PRC statutory accounts. A foreign invested enterprise is required to allocate at least 10% of its annual after-tax profit to the general reserve until such reserve has reached 50% of its respective registered capital based on the enterprise’s PRC statutory accounts. Appropriation to the enterprise expansion fund and staff welfare and bonus fund are at the discretion of the Board of Directors for all foreign invested enterprises. The aforementioned reserves can only be used for specific purposes and are not distributable as cash dividends. The Company’s PRC subsidiaries were established as foreign invested enterprises and therefore, is subject to the above mandated restrictions on distributable profits.

 

40

 

QUNAR CAYMAN ISLANDS LIMITED

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED DECEMBER 31, 2012, 2013 AND 2014

(Amounts in thousands of Renminbi (“RMB”) and US dollars (“US$”) except for number of shares)

 

Additionally, in accordance with the company law of the PRC, a domestic enterprise is required to provide statutory reserves of at least 10% of its annual after-tax profit until such reserve has reached 50% of its respective registered capital based on the enterprise’s PRC statutory accounts. A domestic enterprise is also required to provide discretionary surplus reserve, at the discretion of the Board of Directors, from the profits determined in accordance with the enterprise’s PRC statutory accounts. The aforementioned reserves can only be used for specific purposes and are not distributable as cash dividends. The Affiliated PRC Entities were established as domestic invested enterprises and therefore are subject to the above mentioned restrictions on distributable profits.

 

During the years ended December 31, 2012, 2013 and 2014, appropriations to statutory reserves amounted to RMB36, RMB1,136 and nil, respectively.

 

As a result of these PRC laws and regulations subject to the limit discussed above that require annual appropriations of 10% of after-tax income to be set aside, prior to payment of dividends as general reserve fund, the Company’s PRC subsidiaries and the Affiliated PRC Entities are restricted in their ability to transfer a portion of their net assets to the Company.

 

Foreign exchange and other regulation in the PRC may further restrict the Company’s PRC subsidiaries and the Affiliated PRC Entities from transferring funds to the Company in the form of dividends, loans and advances. As of December 31, 2013 and 2014, amounts restricted are the net assets of the Company’s PRC subsidiaries and the Affiliated PRC Entities, which amounted to RMB11,296 and RMB10,522(US$1,695), respectively.

 

18.          Other non-current assets

 

On August 1, 2013, the Company launched an RMB20,000 employee interest-free housing loan program. In 2014, the Company expanded the housing loan pool to RMB40,000. Employees other than executive officers and senior management personnel who meet certain requirements may apply for such loans subject to approval by the Company. Each loan to each employee has a cap of RMB500 and is repayable within three to five years. The Company accounts for employee interest-free loans in accordance with ASC subtopic 835-30, Imputation of Interest, whereby the effective interest rate is applied and the difference between the present value of the loan receivables and the cash loaned to the employees is regarded as employee compensation. Over the term of the loans, the loan receivables are accreted to its face value with interest income recognized in the same amount. As of December 31, 2013 and 2014, the Company has granted loans amounting to RMB12,772 and RMB26,911 (US$4,337) with terms of five years, respectively, of which RMB10,218 and RMB15,288(US$2,464) were non-current, respectively.

 

Management evaluated the collectability of the loans granted and concluded that the risk of default was remote. Therefore, no allowance was provided as of December 31, 2013 and 2014, respectively. The remaining balances included in other non-current assets are comprised mainly of long-term rental deposits of RMB9,319 and RMB29,034(US$4,679) as of December 31, 2013 and 2014, respectively, and prepayments to purchase equipment with an amount of RMB3,065 and RMB11,595(US$1,869) as of December 31, 2013 and 2014, respectively.

 

19.          FAIR VALUE MEASUREMENT

 

ASC topic 820 (“ASC 820”), Fair Value Measurements and Disclosures, establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value as follows:

 

Level 1 - Observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets

Level 2 - Include other inputs that are directly or indirectly observable in the marketplace

Level 3 - Unobservable inputs which are supported by little or no market activity

 

ASC 820 describes three main approaches to measuring the fair value of assets and liabilities: (1) market approach; (2) income approach and (3) cost approach. The market approach uses prices and other relevant information generated from market transactions involving identical or comparable assets or liabilities. The income approach uses valuation techniques to convert future amounts to a single present value amount. The measurement is based on the value indicated by current market expectations about those future amounts. The cost approach is based on the amount that would currently be required to replace an asset.

 

In accordance with ASC 820, the Company measures the Baidu Warrants at fair value on a recurring basis. Baidu Warrants are classified as Level 2 by using the binomial-tree model with exogenous credit risk developed by Tsiveriotis and Fernandes(1998) based on inputs that are directly and indirectly observable in the market.

 

41


 

QUNAR CAYMAN ISLANDS LIMITED

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED DECEMBER 31, 2012, 2013 AND 2014

(Amounts in thousands of Renminbi (“RMB”) and US dollars (“US$”) except for number of shares)

 

Assets and liabilities measured or disclosed at fair value as of December 31, 2013 are summarized as below:

 

 

 

Fair Value Measurement or Disclosure at December 31, 2013 Using

 

 

 

Quoted Prices in
Active Market for
Identical Assets

 

Significant Other 
Observable Inputs

 

Unobservable inputs

 

 

 

(Level 1)

 

(Level 2)

 

(Level 3)

 

 

 

RMB

 

RMB

 

RMB

 

Fair value disclosure (note 2)

 

 

 

 

 

 

 

Cash and Cash equivalents

 

 

 

 

 

 

 

Time deposits

 

—

 

757,550

 

—

 

Short-term investments

 

 

 

 

 

 

 

Time deposits

 

—

 

485,945

 

—

 

Other current assets

 

 

 

 

 

 

 

Employee interest free loan

 

—

 

2,554

 

—

 

Other non-current assets

 

 

 

 

 

 

 

Employee interest free loan

 

—

 

10,218

 

—

 

 

Assets and liabilities measured or disclosed at fair value as of December 31, 2014 are summarized as below:

 

 

 

Fair Value Measurement or Disclosure at December 31, 2014 Using

 

 

 

Quoted Prices in Active
Market for Identical Assets

 

Significant
Other
Observable
Inputs

 

Unobservable
inputs

 

 

 

(Level 1)

 

(Level 2)

 

(Level 3)

 

 

 

RMB

 

RMB

 

RMB

 

Fair value disclosure (note 2)

 

 

 

 

 

 

 

Cash and Cash equivalents

 

 

 

 

 

 

 

Time deposits

 

—

 

254,222

 

—

 

Other current assets

 

 

 

 

 

 

 

Employee interest free loan

 

—

 

4,306

 

—

 

Other non-current assets

 

 

 

 

 

 

 

Employee interest free loan

 

—

 

15,288

 

—

 

 

 

 

 

 

 

 

 

Fair value measurement

 

 

 

 

 

 

 

Recurring

 

 

 

 

 

 

 

Warrant liability(note 11)

 

—

 

701,776

 

—

 

Total liability measured at fair value

 

—

 

701,776

 

—

 

 

The Company has no assets or liabilities measured or disclosed at fair value on a recurring basis using significant unobservable inputs (Level 3) for the years ended December 31, 2013 and 2014.

 

20.          Commitments and contingencies

 

Operating lease commitments

 

The Company leases office facilities and server racks under non-cancelable operating leases expiring on different dates. Payments under operating leases are expensed on a straight-line basis over the periods of their respective leases, and the terms of the leases do not contain rent escalation, contingent rent, renewal, or purchase options. There are no restrictions placed upon the Company by entering into these leases. Total expenses under these operating leases were RMB34,363, RMB51,262 and RMB163,067 (US$26,282) for the years ended December 31, 2012, 2013 and 2014, respectively.

 

42


 

QUNAR CAYMAN ISLANDS LIMITED

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED DECEMBER 31, 2012, 2013 AND 2014

(Amounts in thousands of Renminbi (“RMB”) and US dollars (“US$”) except for number of shares)

 

Future minimum payments under non-cancelable operating leases consist of the following as of December 31, 2014:

 

Years ended December 31,

 

RMB

 

US$

 

2015

 

137,295

 

22,128

 

2016

 

35,231

 

5,678

 

2017 and thereafter

 

6,545

 

1,055

 

 

 

179,071

 

28,861

 

 

Capital Commitments

 

The Company’s capital commitments relate primarily to commitments in connection with the expansion and improvement of its network infrastructure and renovation of its offices. Total capital commitments contracted but not yet reflected in the consolidated financial statements amounted to nil and RMB29,786 (US$4,801) as of December 31, 2013 and 2014. All of the commitments relating to the network infrastructure and renovation on the offices are to be fulfilled within the next year.

 

In addition, as of December 31, 2014, the Company has contractual commitments to make additional investments contingent on the achievement of certain conditions by three existing cost-method investees and other long-term investments in several travel operators in the PRC with a total maximum amount of RMB315,593(US$50,864).

 

Loss contingencies

 

With respect to display advertising services, the Company, as an industry practice in the PRC, regularly provides such services at a discount to its standard rates. These discounts are in the form of free advertising elements, of which the duration and other terms of services are specified as part of the revenue contract. The value-added tax pilot program replaced the business tax rules for advertising services in Beijing effective from September 1, 2012. There are uncertainties under the current value-added tax rules as to whether these free elements should constitute deemed services in addition to the chargeable elements rather than discounts to the overall revenue arrangements for tax purposes and thus be subject to value-added tax at the standard rates of services. The Company currently considers that such free elements do not give rise to deemed services for value-added tax purposes and the value-add tax for a revenue contract is calculated based on the total consideration for the overall arrangements. The rules related to the value-added tax pilot program are still evolving and the timing of the promulgation of the final tax rules or related interpretation is uncertain. The maximum estimated amount for this reasonably possible contingency up to December 31, 2014 was RMB7,197 (US$1,160).

 

Legal contingency

 

On September 6, 2013, the Company early terminated an agreement (“Distribution Agreement”) with one of its travel service providers (“TSP”) due to the TSP’s failure to make its international hotel inventories available on the Company’s platform within the agreed time period. The original term of an agreement with a travel service provider (“TSP”) was from May 13, 2013 to June 30, 2016 and the Company agreed to provide for a minimum of 450,000 quarterly room bookings from both domestic and international hotel inventories from July 2013, subject to an annual adjustment effective from 2014 in exchange for commission fees on a cost-per-sale basis. The agreement also required the Company, in the event of its failure to achieve the contracted minimum quarterly room bookings, to compensate the TSP at a rate of RMB0.027 per room night.

 

On August 26, 2013, the Company requested that the TSP rectify its failure to make its international hotel inventories available on the Company’s platform within ten days. On September 6, 2013, the Company early terminated the agreement with the TSP as it believed that the TSP had failed to rectify such failure within the agreed time period.

 

On November 5, 2013, the Company received a summons from an intermediary court in Beijing for a civil suit against the Company filed by the TSP on October 17, 2013 in connection with the aforementioned agreement. In its complaint, the TSP alleged breach of contract by the Company and sought (i) a declaration that the notice to terminate the aforementioned agreement was null and void and (ii) damages in the amount of approximately RMB140,700 to compensate for alleged losses suffered by the TSP in connection with the Company’s early termination of the aforementioned agreement.

 

On December 9, 2013, the Company filed a counterclaim against the TSP for RMB8,127 of commission fees due to the Company for services it provided to the TSP from July 2013 to September 6, 2013 under the aforementioned agreement. Based on the advice from the Company’s legal counsel, the Company believes it has the right and legal basis to request that the TSP pay the commission fees due and such right should be unaffected by the results of the lawsuit the TSP filed against the Company.

 

On January 10, 2014, the TSP sought additional damages amounting to RMB11,200, to compensate for its alleged losses of upfront costs it incurred in connection with the aforementioned agreement. As of April 14, 2014, the intermediary court in Beijing has completed the oral hearing of the aforementioned lawsuits but has not yet rendered the judgment.

 

On January 1, 2015, the Company received the judgment of the intermediary court with respect to the Distribution Agreement (“the Judgment”) dispute. In the Judgment, the Court held that (i) the TSP shall pay the Company a commission of RMB8,127 (US$1,310) due under the Distribution Agreement; (ii) the Company shall prospectively credit to the TSP’s advertisement account opened at the Company in the amount of RMB52,335 (US$8,435) corresponding to the period from September 6, 2013 through September 30, 2014; and (iii) the Distribution Agreement shall continue to be performed by both parties. Either or both parties may appeal the Judgment to the Beijing Municipal High Court within 15 days from the date of receipt of the Judgment. The above Judgment is not binding prior to the conclusion of any such appeal. On January 16, 2015, the Company has appealed to the Beijing Municipal High Court reiterating its legal basis for its early termination of the Distribution Agreement.

 

43


 

QUNAR CAYMAN ISLANDS LIMITED

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED DECEMBER 31, 2012, 2013 AND 2014

(Amounts in thousands of Renminbi (“RMB”) and US dollars (“US$”) except for number of shares)

 

Based on the advice from the Company’s legal counsel, the Company estimated that the probable loss contingency to be recorded is within a range of RMB64,485 to RMB137,385, and no amount within the range represents a better estimate than any other amount. According to ASC 450-20-30-1, when no amount within the range is a better estimate than any other amount, the minimum amount in the range shall be accrued. Therefore, a contract termination loss provision of RMB64,485 was accrued with a charge to expense as of December 31, 2014. The TSP has been continuously using the Company’s pay-for-performance services charged on a cost-per-click basis under a separate contract and has not disputed that contract with the Company.

 

21.          Subsequent events

 

On January 22, 2015, the first installment payment of RMB135,000 was made for a long-term investment in Travelling Bestone, a package tour operator in the PRC.

 

On February 12, 2015, the Company’s shareholders approved an amendment of the 2007 Plan at the annual general meeting. Pursuant to the amendment, the maximum number of shares that may be issued under the 2007 Plan shall increase on January 1 of each of 2015, 2016 and 2017 by 2.65% of the then outstanding shares, and on January 1, 2018 for remainder of the term of the 2007 Plan by 1.5% of the then outstanding shares.

 

On March 12, 2015, Qunar drew down RMB507 million pursuant to the revolving credit facility agreement with Baidu (note 11c).

 

In March 2015, the Company signed a purchase agreement to acquire a 55% equity interest in a company engaged in the attraction ticketing business in the PRC, and paid a portion of the purchase consideration amounting to RMB 20,000 in April 2015.

 

44


 

 QUNAR CAYMAN ISLANDS LIMITED

Additional Information—Financial Statement Schedule I

Condensed Financial Information of Parent Company

BALANCE SHEETS

(Amounts in thousands of Renminbi (“RMB”) and US dollars (“US$”))

 

 

 

As of December 31,

 

 

 

2013

 

2014

 

2014

 

 

 

RMB

 

RMB

 

US$

 

ASSETS

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

Cash and cash equivalents

 

781,784

 

291,794

 

47,029

 

Short-term investments

 

485,410

 

—

 

—

 

Account receivable, net

 

109

 

—

 

—

 

Prepayments and other assets

 

3,070

 

5,680

 

915

 

Total current assets

 

1,270,373

 

297,474

 

47,944

 

Non-current assets

 

 

 

 

 

 

 

Amount due from subsidiaries

 

85,584

 

229,981

 

37,066

 

Investments in subsidiaries

 

11,296

 

10,522

 

1,696

 

Total non-current assets

 

96,880

 

240,503

 

38,762

 

 

 

 

 

 

 

 

 

TOTAL ASSETS

 

1,367,253

 

537,977

 

86,706

 

 

 

 

 

 

 

 

 

LIABILITIES AND SHAREHOLDERS’ EQUITY (DEFICIT)

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

Accrued expenses and other current liabilities

 

4,414

 

6,375

 

1,027

 

Warrant liability

 

—

 

701,776

 

113,106

 

Total current liabilities

 

4,414

 

708,151

 

114,133

 

Non-current liabilities:

 

 

 

 

 

 

 

Non-current liabilities

 

412

 

412

 

66

 

Total non-current liabilities

 

412

 

412

 

66

 

Total liabilities

 

4,826

 

708,563

 

114,199

 

 

 

 

 

 

 

 

 

Shareholders’ equity (deficit):

 

 

 

 

 

 

 

Class A ordinary shares (par value of US$0.001 per share; 303,344,804 shares authorized as at December 31, 2013 and 2014, respectively; 302,850,254 and 224,299,179 shares issued and outstanding as at December 31, 2013 and 2014, respectively)

 

1,914

 

1,426

 

230

 

Class B ordinary shares (par value of US$0.001 per share; 496,655,196 shares authorized as at December 31, 2013 and 2014, respectively; 39,332,950 and 134,376,522 shares issued and outstanding as at December 31, 2013 and 2014, respectively)

 

240

 

831

 

134

 

Additional paid-in capital

 

1,788,167

 

2,069,313

 

333,513

 

Accumulated other comprehensive (loss) income

 

(28,476

)

4,163

 

671

 

Accumulated deficit

 

(399,418

)

(2,246,319

)

(362,041

)

Total shareholders’ equity (deficit)

 

1,362,427

 

(170,586

)

(27,493

)

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY (DEFICIT)

 

1,367,253

 

537,977

 

86,706

 

 

45


 

QUNAR CAYMAN ISLANDS LIMITED

Additional Information—Financial Statement Schedule I

Condensed Financial Information of Parent Company

STATEMENTS OF COMPREHENSIVE LOSS

 (Amounts in thousands of Renminbi (“RMB”) and US dollars (“US$”))

 

 

 

Year ended December 31,

 

 

 

2012

 

2013

 

2014

 

2014

 

 

 

RMB

 

RMB

 

RMB

 

US$

 

Revenues

 

 

 

 

 

 

 

 

 

Display advertising service

 

5,388

 

810

 

—

 

—

 

Total revenues

 

5,388

 

810

 

—

 

—

 

Cost of revenues

 

(774

)

—

 

—

 

—

 

 

 

 

 

 

 

 

 

 

 

Gross Profit

 

4,614

 

810

 

—

 

—

 

Operating expenses

 

 

 

 

 

 

 

 

 

General and administrative expenses

 

(2,051

)

(2,057

)

(6,482

)

(1,046

)

 

 

 

 

 

 

 

 

 

 

Operating income (loss)

 

2,563

 

(1,247

)

(6,482

)

(1,046

)

Equity in loss of subsidiaries

 

(93,998

)

(190,214

)

(1, 867,810

)

(301,036

)

Interest income, net

 

549

 

4,172

 

27,391

 

4,415

 

 

 

 

 

 

 

 

 

 

 

Loss before income taxes

 

(90,886

)

(187,289

)

(1, 846,901

)

(297,667

)

Income tax expense

 

(227

)

—

 

—

 

—

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

(91,113

)

(187,289

)

(1, 846,901

)

(297,667

)

 

 

 

 

 

 

 

 

 

 

Net loss attributable to ordinary shareholders

 

(91,113

)

(187,289

)

(1,846,901

)

(297,667

)

 

 

 

 

 

 

 

 

 

 

Other comprehensive (loss) income, net of tax of nil

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustment

 

(542

)

(16,873

)

32,639

 

5,260

 

Comprehensive loss attributable to ordinary shareholders

 

(91,655

)

(204,162

)

(1,814,262

)

(292,407

)

 

46


 

QUNAR CAYMAN ISLANDS LIMITED

Additional Information—Financial Statement Schedule I

Condensed Financial Information of Parent Company

STATEMENTS OF CASH FLOWS

 (Amounts in thousands of Renminbi (“RMB”) and US dollars (“US$”))

 

 

 

Year ended December 31,

 

 

 

2012

 

2013

 

2014

 

2014

 

 

 

RMB

 

RMB

 

RMB

 

US$

 

Net cash used for operating activities:

 

(141,738

)

(814

)

(7,022

)

(1,132

)

Net cash provided by (used for) investing activities

 

122,694

 

(650,801

)

(520,695

)

(83,922

)

Net cash (used for) provided by financing activities

 

(54,874

)

1,432,081

 

15,001

 

2,418

 

Effect of exchange rate changes on cash and cash equivalents

 

(5,265

)

(15,806

)

22,726

 

3,664

 

Net (decrease) increase in cash and cash equivalents

 

(79,183

)

764,660

 

(489,990

)

(78,972

)

Cash and cash equivalents at beginning of the year

 

96,307

 

17,124

 

781,784

 

126,001

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents at end of the year

 

17,124

 

781,784

 

291,794

 

47,029

 

 

47


 

QUNAR CAYMAN ISLANDS LIMITED

Additional Information—Financial Statement Schedule I

Condensed Financial Information of Parent Company

 (Amounts in thousands of Renminbi (“RMB”) and US dollars (“US$”))

 

Basis of presentation and commitments

 

For the parent company only condensed financial information, the Company records its investments in subsidiaries and VIE under the equity method of accounting as prescribed in ASC 323, Investments — Equity Method and Joint Ventures. Such investments are presented on the balance sheet as “Investments in subsidiaries” and the investees’ profit or loss as “Equity in profit and loss of subsidiaries” on the statement of comprehensive loss. The equity in loss of the Company’s subsidiaries in excess of the Company’s “Investments in subsidiaries” have been offset against the balances in “Amounts due from subsidiaries”. The parent company only condensed financial information should be read in conjunction with the Company’s consolidated financial statements.

 

The subsidiaries did not pay any dividends to the Company for the periods presented.

 

The Company does not have significant commitments or long-term obligations as of as of any of the years presented.

 

48



Exhibit 99.6

 

UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION

 

Ctrip.com International, Ltd. (“Ctrip” or the “Company”) currently owns ordinary shares of Qunar Cayman Islands Limited (“Qunar”) representing approximately 45% of Qunar’s aggregate voting interest, after completing the share exchange transaction with Baidu, Inc. as announced on October 26, 2015. After the contemplated share exchange transactions with certain management and directors of Qunar, Ctrip will be viewed as a beneficial owner of ordinary shares of Qunar representing majority voting interest for purposes of U.S. GAAP, and Ctrip’s acquisition of Qunar’s shares will be treated as an acquisition to be accounted for as a business combination. The accompanying unaudited pro forma condensed combined financial statements (the “Pro Forma Statements”) give effect to the acquisition of Qunar by Ctrip and accounts for it as a business combination. The unaudited pro forma balance sheets contained in the Pro Forma Statements is based on the individual balance sheets of both the Company and Qunar incorporated by reference or appearing elsewhere in other the exhibits to this current report on Form 6-K and have been prepared to reflect the acquisition of Qunar as if it had occurred on September 30, 2015. The unaudited pro forma statements of income in the Pro Forma Statements are based on the individual statement of income of both the Company and Qunar incorporated by reference or appearing in the other exhibits to this current report on Form 6-K, and combine the results of operations of the Company and Qunar for the year ended December 31, 2014 and the nine months ended September 30, 2015, and include pro forma adjustments to give effect to the acquisition as if it had occurred on January 1, 2014 for both pro forma statements of income. These Pro Forma Statements should be read in conjunction with the historical financial statements and notes thereto of the Company and Qunar incorporated by reference or included elsewhere in the other exhibits to this current report on Form 6-K. The accompanying notes are an integral part of these unaudited pro forma condensed combined financial statements.

 

The Pro Forma Statements were prepared using the acquisition method of accounting under U.S GAAP. Accordingly, the purchase consideration to be paid in the acquisition has been preliminarily allocated to the assets acquired and liabilities assumed of Qunar based upon their estimated fair values as of September 30, 2015. Any amount of the purchase consideration that is in excess of the estimated fair values of the tangible and identifiable intangible assets acquired and liabilities assumed will be recorded as goodwill in Ctrip’s balance sheet after the completion of the acquisition. As of the date of this current report on Form 6-K, Ctrip has not completed the detailed valuation work necessary to arrive at the definitive estimates of the fair values of the Qunar assets to be acquired and the liabilities to be assumed and the related allocation of purchase price, nor has it completed its assessment to conform Qunar’s accounting policies to Ctrip’s accounting policies. A third party valuation firm has assisted Ctrip management in assessing the fair values of certain identifiable intangible assets of Qunar. A final determination of the fair value of Qunar’s assets and liabilities will be based on the actual net tangible and intangible assets and liabilities of Qunar that exist as of the date of completion of the acquisition and, therefore, cannot be made prior to that date. Additionally, the purchase consideration to be paid by Ctrip to complete the acquisition will be determined based on the trading price of Ctrip ADSs at the time of the completion of the acquisition. Accordingly, the accompanying unaudited pro forma purchase price allocation is preliminary and is subject to further adjustments as additional information becomes available and as additional analyses are performed. The preliminary unaudited pro forma purchase price allocation has been made solely for the purpose of preparing the Pro Forma Statements presented below. Ctrip estimated the fair value of Qunar’s assets and liabilities based on discussions with Qunar’s management, due diligence review in connection with the acquisition, preliminary valuation work and information available to Ctrip in the public filings. Until the acquisition is completed, both companies are limited to their ability to share information with each other. Upon completion of the acquisition, additional valuation work will be performed. Increases or decreases in the fair values of relevant balance sheet amounts will result in adjustments to the balance sheet and/or statements of income till the purchase price allocation is finalized. There can be no assurance that such finalization will not result in material changes from the preliminary purchase price allocation included in the Pro Forma Statements. Any differences from those presented in the Pro Forma Statements could be material.

 

1


 

The Pro Forma Statements do not reflect any future costs of any integration activities or benefits that may result from realization of future cost savings from operating efficiencies, or any revenue, tax, or other synergies expected to result from the acquisition. The Pro Forma Statements are presented for illustrative purposes only and is not necessarily indicative of the financial condition or results of operations of future periods or the financial condition or results of operations that actually would have been realized, had the transaction taken effect prior to these periods. The Pro Forma Statements are based upon currently available information and estimates and assumptions that Ctrip’s management believes are reasonable as of the date of this current report on Form 6-K. Any of the factors underlying these estimates and assumptions may change or prove to be materially different, and the estimates and assumptions may not be representative of facts existing at the closing date of the acquisition.

 

2


 

Unaudited Pro Forma Condensed Combined Statements of Income

 

 

 

For the Nine Months Ended September 30, 2015

 

 

 

Historical
Ctrip
(Unaudited)
RMB

 

Historical
Qunar
(Unaudited)
RMB

 

Pro Forma
Adjustments
(Unaudited)
RMB

 

Pro Forma
Combined
(Unaudited)
RMB

 

Pro Forma
Combined
(Unaudited)
US$(1)

 

 

 

(in thousands, except share and per share amounts)

 

Net revenues

 

8,023,513

 

2,877,175

 

(190,131

)(a)

10,710,557

 

1,705,477

 

Cost of revenues

 

(2,280,204

)

(925,813

)

136,327

(b)

(3,069,690

)

(488,796

)

 

 

 

 

 

 

 

 

 

 

 

 

Gross profit/ (loss)

 

5,743,309

 

1,951,362

 

(53,804

)

7,640,867

 

1,216,681

 

Product development expenses

 

(2,436,251

)

(1,046,755

)

(525,581

)(c)

(4,008,587

)

(638,300

)

Product sourcing expenses

 

 

 

(445,963

)

445,963

(c)

 

 

 

 

Sales and marketing expenses

 

(2,239,316

)

(1,836,012

)

833

(d)

(4,074,495

)

(648,795

)

General and administrative expenses

 

(781,892

)

(390,047

)

—

 

(1,171,939

)

(186,612

)

 

 

 

 

 

 

 

 

 

 

 

 

Income/(loss) from operations

 

285,850

 

(1,767,415

)

(132,589

)

(1,614,154

)

(257,026

)

Interest income

 

320,845

 

17,854

 

—

 

338,699

 

53,932

 

Interest expense

 

(207,257

)

(72,163

)

—

 

(279,420

)

(44,493

)

Others, net

 

2,390,126

 

(421,468

)

—

 

1,968,658

 

313,476

 

 

 

 

 

 

 

 

 

 

 

 

 

Income/(loss) before income tax expense and equity in income

 

2,789,564

 

(2,243,192

)

(132,589

)

413,783

 

65,889

 

Income taxes

 

(398,706

)

(11,237

)

33,355

(e)

(376,588

)

(59,965

)

Equity in income of affiliates

 

(41,211

)

(2,121

)

—

 

(43,332

)

(6,900

)

 

 

 

 

 

 

 

 

 

 

 

 

Net income/(loss)

 

2,349,647

 

(2,256,550

)

(99,234

)

(6,137

)

(976

)

 

 

 

 

 

 

 

 

 

 

 

 

Net loss attributable to noncontrolling interests

 

82,281

 

4,809

 

920,825

 

1,007,915

 

160,493

 

Net income/(loss) attributable to shareholders

 

2,431,928

 

(2,251,741

)

821,591

 

80,953

 

159,517

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings/(loss) per share

 

 

 

 

 

 

 

 

 

 

 

- Basic

 

68.58

 

(6.03

)

 

 

19.67

 

3.13

 

- Diluted

 

57.11

 

(6.03

)

 

 

16.53

 

2.63

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average ordinary shares

 

 

 

 

 

 

 

 

 

 

 

- Basic

 

35,460,682

 

373,544,600

 

15,468,815

 

50,929,497

 

50,929,497

 

- Diluted

 

45,126,192

 

373,544,600

 

15,468,815

 

60,595,007

 

60,595,007

 

 

3


 

 

(1)

The conversions from RMB to US$ in the above Pro Forma Statements of Income are made at a rate of RMB6.2801 to US$1.00, which is calculated using the average of the effective noon buying rate in the City of New York for cable transfers of RMB as certified for customs purposes by the Federal Reserve Bank of New York on the last day of each month during the period. No representation is made that the RMB amounts could have been, or could be, converted into US$ at such rate.

 

4


 

Unaudited Pro Forma Condensed Combined Statements of Income

 

 

 

For the Year Ended December 31, 2014

 

 

 

Historical
Ctrip
(Unaudited)
RMB

 

Historical
Qunar
(Unaudited)
RMB

 

Pro Forma
Adjustments
(Unaudited)
RMB

 

Pro Forma
Combined
(Unaudited)
RMB

 

Pro Forma
Combined
(Unaudited)
US$(1)

 

 

 

(in thousands, except share and per share amounts)

 

Net revenues

 

7,346,918

 

1,756,755

 

(186,394

)(a)

8,917,279

 

1,445,171

 

Cost of revenues

 

(2,100,606

)

(454,902

)

94,409

(b)

(2,461,099

)

(398,855

)

 

 

 

 

 

 

 

 

 

 

 

 

Gross profit/ (loss)

 

5,246,312

 

1,301,853

 

(91,985

)

6,456,180

 

1,046,316

 

Product development expenses

 

(2,321,349

)

(774,511

)

(421,206

)(c)

(3,517,066

)

(569,990

)

Product sourcing expenses

 

—

 

(316,903

)

316,903

(c)

—

 

—

 

Sales and marketing expenses

 

(2,214,210

)

(1,590,844

)

21,500

(d)

(3,783,554

)

(613,178

)

General and administrative expenses

 

(861,551

)

(464,399

)

—

 

(1,325,950

)

(214,889

)

 

 

 

 

 

 

 

 

 

 

 

 

Income/(loss) from operations

 

(150,798

)

(1,844,804

)

(174,788

)

(2,170,390

)

(351,741

)

Interest income

 

304,584

 

31,347

 

—

 

335,931

 

54,442

 

Interest expense

 

(162,355

)

(18

)

—

 

(162,373

)

(26,315

)

Others, net

 

144,006

 

(15,866

)

—

 

128,140

 

20,767

 

 

 

 

 

 

 

 

 

 

 

 

 

Income/(loss) before income tax expense and equity in income

 

135,437

 

(1,829,341

)

(174,788

)

(1,868,692

)

(302,847

)

Income taxes

 

(130,821

)

(17,560

)

43,697

(e)

(104,684

)

(16,966

)

Equity in income of affiliates

 

87,006

 

—

 

—

 

87,006

 

14,101

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income/(loss)

 

91,622

 

(1,846,901

)

(131,091

)

(1,886,370

)

(305,712

)

 

 

 

 

 

 

 

 

 

 

 

 

Net loss attributable to noncontrolling interests

 

151,117

 

—

 

753,939

 

905,056

 

146,677

 

Net income/(loss) attributable to shareholders

 

242,739

 

(1,846,901

)

622,848

 

(981,314

)

(159,035

)

 

 

 

 

 

 

 

 

 

 

 

 

Earnings/(loss) per share

 

 

 

 

 

 

 

 

 

 

 

- Basic

 

7.08

 

(5.26

)

 

 

(19.72

)

(3.20

)

- Diluted

 

6.35

 

(5.26

)

 

 

(18.28

)

(2.96

)

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average ordinary shares

 

 

 

 

 

 

 

 

 

 

 

- Basic

 

34,289,170

 

351,410,308

 

15,468,815

 

49,757,985

 

49,757,985

 

- Diluted

 

38,207,858

 

351,410,308

 

15,468,815

 

53,676,673

 

53,676,673

 

 

5


 

 

(2)

The conversions from RMB to US$ in the above Pro Forma Statements of Income are made at a rate of RMB6.1704 to US$1.00, which is calculated using the average of the effective noon buying rate in the City of New York for cable transfers of RMB as certified for customs purposes by the Federal Reserve Bank of New York on the last day of each month during the year. No representation is made that the RMB amounts could have been, or could be, converted into US$ at such rate.

 

6

 

Unaudited Pro Forma Condensed Combined Statements of Balance sheet

 

 

 

September 30, 2015

 

 

 

Historical
Ctrip
(Unaudited)
RMB

 

Historical
Qunar
(Unaudited)
RMB

 

Pro Forma
Adjustments
(Unaudited)
RMB

 

Pro Forma
Combined
(Unaudited)
RMB

 

Pro Forma
Combined
(Unaudited)
US$(1)

 

 

 

(in thousands)

 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

8,946,006

 

4,056,784

 

—

 

13,002,790

 

2,045,879

 

Restricted cash

 

1,076,346

 

1,851,184

 

—

 

2,927,530

 

460,622

 

Short-term investments

 

7,231,623

 

255,121

 

—

 

7,486,744

 

1,177,976

 

Accounts receivable, net

 

3,179,848

 

360,707

 

—

 

3,540,555

 

557,076

 

Due from related parties

 

283,262

 

143,484

 

—

 

426,746

 

67,145

 

Prepayments and other current assets

 

4,737,707

 

1,575,799

 

(1,694

)(f)

6,311,812

 

993,111

 

Deferred tax assets, current

 

295,666

 

28,044

 

—

 

323,710

 

50,933

 

 

 

 

 

 

 

 

 

 

 

 

 

Total current assets

 

25,750,458

 

8,271,123

 

(1,694

)

34,019,887

 

5,352,742

 

Non-current assets:

 

 

 

 

 

 

 

 

 

 

 

Long-term deposits and prepayments

 

1,729,009

 

—

 

—

 

1,729,009

 

272,045

 

Long-term loan receivable

 

204,928

 

—

 

—

 

204,928

 

32,244

 

Long-term receivables due from related parties

 

531,795

 

—

 

—

 

531,795

 

83,673

 

Land use rights

 

103,024

 

—

 

—

 

103,024

 

16,210

 

Property, equipment and software

 

5,314,659

 

208,919

 

—

 

5,523,578

 

869,088

 

Investment

 

11,855,647

 

610,605

 

—

 

12,466,252

 

1,961,460

 

Goodwill

 

2,719,037

 

10,755

 

40,311,190

(g)

43,040,982

 

6,772,135

 

Intangible assets

 

1,042,418

 

12,936

 

8,209,939

(h)

9,265,293

 

1,457,816

 

Other non-current assets

 

—

 

100,565

 

—

 

100,565

 

15,823

 

TOTAL ASSETS

 

49,250,975

 

9,214,903

 

48,519,435

 

106,985,313

 

16,833,236

 

 

 

 

 

 

 

 

 

 

 

 

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

 

 

 

Short-term Debt

 

5,819,378

 

643,500

 

—

 

6,462,878

 

1,016,879

 

Accounts payable

 

4,143,375

 

42,083

 

—

 

4,185,458

 

658,546

 

Due to related parties

 

160,637

 

1,240,317

 

—

 

1,400,954

 

220,428

 

Salary and welfare payable

 

769,617

 

420,600

 

—

 

1,190,217

 

187,271

 

Taxes payable

 

549,258

 

27,557

 

—

 

576,815

 

90,757

 

Advances from customers

 

5,360,571

 

340,852

 

(1,694

)(i)

5,699,729

 

896,804

 

Accrued liability for customer reward program

 

575,420

 

—

 

—

 

575,420

 

90,537

 

Other payables and accruals

 

1,495,523

 

2,300,703

 

—

 

3,796,226

 

597,305

 

 

 

 

 

 

 

 

 

 

 

 

 

Total current liabilities

 

18,873,779

 

5,015,612

 

(1,694

)

23,887,697

 

3,758,527

 

Deferred tax liability

 

649,662

 

1,363

 

2,055,719

(j)

2,706,744

 

425,883

 

Long-term debt

 

16,842,340

 

2,576,913

 

—

 

19,419,253

 

3,055,456

 

Other non-current liabilities

 

—

 

80,849

 

—

 

80,849

 

12,721

 

 

 

 

 

 

 

 

 

 

 

 

 

Total liabilities

 

36,365,781

 

7,674,737

 

2,054,025

 

46,094,543

 

7,252,587

 

 

 

 

 

 

 

 

 

 

 

 

 

SHAREHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

 

 

 

Share capital

 

3,126

 

2,485

 

(1,502

)(k)

4,109

 

647

 

Additional paid-in capital

 

5,161,312

 

5,942,987

 

26,782,704

(k)

37,887,003

 

5,961,200

 

Statutory reserves

 

134,099

 

—

 

—

 

134,099

 

21,099

 

Accumulated other comprehensive income

 

781,672

 

85,206

 

(85,206

)(k)

781,672

 

122,989

 

Retained Earnings/(Accumulated deficits)

 

8,157,953

 

(4,498,060

)

4,498,060

(k)

8,157,953

 

1,283,585

 

Treasury stock

 

(2,416,274

)

—

 

—

 

(2,416,274

)

(380,180

)

Total Ctrip/Qunar’s shareholders’ equity

 

11,821,888

 

1,532,618

 

31,194,056

 

44,548,562

 

7,009,340

 

Non-controlling interests

 

1,063,306

 

7,548

 

15,271,354

(k)

16,342,208

 

2,571,309

 

Total shareholders’ equity

 

12,885,194

 

1,540,166

 

46,465,410

(k)

60,890,770

 

9,580,649

 

 

 

 

 

 

 

 

 

 

 

 

 

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY

 

49,250,975

 

9,214,903

 

48,519,435

 

106,985,313

 

16,833,236

 

 

7


 

 

(1)

The reporting currency of Ctrip is Renminbi, but for the convenience of the readers, certain amounts presented throughout the Statements are in US dollars. Unless otherwise noted, all conversions from RMB to US$ are made at a rate of RMB6.3556 to US$1.00, the effective noon buying rate as of September 30, 2015 in the City of New York for cable transfers of RMB as certified for customs purposes by the Federal Reserve Bank of New York. No representation is made that the RMB amounts could have been, or could be, converted into US$ at such rate.

 

8


 

Notes To Unaudited Pro Forma Condensed Combined Financial Statements

 

Note 1. Description of The Transaction

 

In October 2015, the Company completed a share exchange transaction with Baidu, pursuant to which Baidu exchanged 178,702,519 Class A ordinary shares and 11,450,000 Class B ordinary shares of Qunar beneficially owned by Baidu in exchange for 11,488,381 newly-issued ordinary shares of Ctrip.  As a result of the transaction, Baidu owns ordinary shares of Ctrip representing approximately 25% of Ctrip’s aggregate voting interest, and the Company owns ordinary shares of Qunar representing approximately 45% of Qunar’s aggregate voting interest.

 

In connection with the transaction with Baidu, the Company has agreed to issue 5 million ordinary shares to certain special purpose vehicles holding these shares solely for the benefit of Qunar employees.  The issuance of such Ctrip shares to Qunar employees shall be conditional upon the surrender or forfeiture by such employees of any Qunar securities held by or granted to them. Such exchange also includes issuing approximately 4 million ordinary shares of the Company in exchange for approximately 66 million Class B ordinary shares of Qunar beneficially owned by certain management and directors prior to such issuance.

 

As a result of the aforementioned transactions, the Company will be deemed to be a beneficial owner of ordinary shares of Qunar representing approximately 56% voting interest and approximately 59% equity interest and will account for the transactions as business combination under U.S GAAP.

 

Note 2. Basis of Pro Forma Presentation

 

The Statements have been derived from the audited historical consolidated financial statements of Ctrip and Qunar. Additionally, based on Ctrip’s review of Qunar’s publicly disclosed summary of significant accounting policies and preliminary discussions with Qunar management, the nature and amount of any adjustments to the historical financial statements of Qunar to conform its accounting policies to those of Ctrip are not expected to be material. Prior to and following the completion of the acquisition, further review of Qunar’s accounting policies and financial statements may result in revisions to Qunar’s policies and classifications to conform to those of Ctrip, which could have a material impact on Ctrip’s actual future financial condition and results of income as compared to the Pro Forma Statement included in this current report on Form 6-K.

 

The acquisition is reflected in the Pro Forma Statements as a business combination of Qunar by Ctrip using the acquisition method of accounting in accordance with business combination accounting guidance under U.S. GAAP. Under these accounting standards, the total estimated purchase price will be calculated as described in Note 3 to the Pro Forma Statements, and the assets acquired and the liabilities assumed will be measured at estimated fair value. For the purpose of measuring the estimated fair value of the assets acquired and liabilities assumed, Ctrip has applied the accounting guidance under U.S. GAAP for fair value measurements. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants as of the measurement date. The fair value measurements utilize estimates based on key assumptions in connection with the acquisition, including historical and current market data. The unaudited pro forma purchase price allocation included in this current report on Form 6-K are preliminary and will be revised at the effective time of the acquisition when additional information becomes available and when the acquisition valuation work is completed. The final purchase price allocation may differ materially from those presented in this Pro Forma Statements.

 

9


 

Note 3. Estimate of Consideration Expected To Be Transferred

 

Based on the Ctrip ADS price of US$74.34, the closing price of the Ctrip ADSs on the NYSE on October 23, 2015, and the number of ordinary shares Ctrip newly-issued for the share exchange transaction with Baidu, and the Ctrip ADS price of US$108.85, the closing price of the Ctrip ADSs on the NYSE on December 1, 2015 (the most recent practicable date before the issuance of the Pro Forma Statements), and the number of ordinary shares Ctrip will newly-issued for the share exchange transaction with certain management and directors of Qunar, the total dollar value of the purchase consideration to be delivered to Qunar selling shareholders and ADS holders in the acquisition would have been approximately RMB 33 billion (US$ 5 billion).

 

The following is a preliminary estimate of the total dollar value of the acquisition consideration to be delivered to Qunar selling shareholders and ADS holders in the acquisition:

 

 

 

RMB

 

US$

 

 

 

(In thousands)

 

To Baidu*

 

21,711,905

 

3,416,185

 

To certain management and directors of Qunar**

 

11,014,769

 

1,733,081

 

Purchase consideration

 

32,726,674

 

5,149,266

 

 

*The estimated fair value of Ctrip shares issued to Baidu is based on the closing price of US$74.34 of Ctrip ADS on the NYSE on October 23, 2015.

** The estimated fair value of Ctrip shares issued to certain management and directors of Qunar is based on the closing price of US$108.85 of Ctrip ADS on the NYSE on December 1, 2015 (the most recent practicable date before the issuance of the Pro Forma Statements)..

 

The above estimate does not purport to represent the actual value of the total purchase consideration that will be received by certain management and directors of Qunar when the acquisition is completed. In accordance with the U.S. GAAP, the fair value of equity securities issued as part of the acquisition consideration will be measured on the acquisition date of the acquisition at the then fair value.

 

This requirement will likely result in a difference from the purchase consideration assumed in the Pro Forma Statements and that difference may be material. For example, an increase or decrease of 10% in the price of Ctrip ADS on the effective date of the acquisition from the price of Ctrip ADSs assumed in the Pro Forma Statements would increase or decrease the value of the purchase consideration by approximately RMB1.1 billion (US$0.2 billion), which would be reflected in the Pro Forma Statements as an equivalent increase or decrease to goodwill.

 

10

 

The allocation of the preliminary purchase price to the fair values of assets to be acquired and liabilities to be assumed in the acquisition includes unaudited pro forma purchase price allocations to reflect the expected fair values of Qunar’s assets and liabilities as of September 30, 2015. The fair valuation non-controlling interest is measured based on the purchase price of the equity interest acquired, taking into account of certain non-controlling interest discount. The allocation of the preliminary purchase price is as follows:

 

 

 

RMB

 

US$

 

 

 

(In thousands)

 

Total tangible assets acquired

 

9,191,212

 

1,446,160

 

Intangible assets acquired

 

8,222,875

 

1,293,800

 

Goodwill

 

40,321,945

 

6,344,318

 

Total liabilities assumed

 

(7,674,737

)

(1,207,555

)

Deferred tax liabilities

 

(2,055,719

)

(323,451

)

Non-controlling interests

 

(15,278,902

)

(2,404,006

)

 

 

 

 

 

 

Total estimated purchase consideration

 

32,726,674

 

5,149,266

 

 

No assurances can be provided as to the actual purchase price to be paid by Ctrip, the fair value of the assets to be acquired or the liabilities to be assumed in the acquisition, or as to the final allocations of the purchase price. Any differences from those presented in the Statements could be material.

 

Note 4. Adjustments To Unaudited Pro Forma Condensed Combined Financial Statements

 

Adjustments to Unaudited Pro Forma Condensed Combined Statement of Income

 

(a)                                 Net revenues

 

Adjustments to net revenues for the nine months ended September 30, 2015:

 

 

 

RMB

 

US$

 

 

 

(In thousands)

 

To reclassified Qunar’s business tax and related surcharges from cost of revenues to corresponding financial statement line item included in the Company’s historical presentation

 

(190,131

)

(30,275

)

 

 

 

 

 

 

 

 

(190,131

)

(30,275

)

 

Adjustments to net revenues for the year ended December 31, 2014:

 

 

 

RMB

 

US$

 

 

 

(In thousands)

 

To eliminate the transaction between Ctrip and Qunar where Qunar provided pay-for-performance services to Ctrip

 

(21,500

)

(3,484

)

To reclassified Qunar’s business tax and related surcharges from cost of revenues to corresponding financial statement line item included in the Company’s historical presentation

 

(164,894

)

(26,723

)

 

 

 

 

 

 

 

 

(186,394

)

(30,207

)

 

11


 

(b)               Cost of revenues

 

Adjustments to cost of revenues for the nine months ended September 30, 2015:

 

 

 

RMB

 

US$

 

 

 

(In thousands)

 

To adjust amortization expense for newly identified intangible assets

 

(53,804

)

(8,567

)

To reclassified Qunar’s business tax and related surcharges from cost of revenues to corresponding financial statement line item included in the Company’s historical presentation

 

190,131

 

30,275

 

 

 

 

 

 

 

 

 

136,327

 

21,708

 

 

Adjustments to cost of revenues for the year ended December 31, 2014:

 

 

 

RMB

 

US$

 

 

 

(In thousands)

 

To adjust amortization expense for newly identified intangible assets

 

(70,485

)

(11,423

)

To reclassified Qunar’s business tax and related surcharges from cost of revenues to corresponding financial statement line item included in the Company’s historical presentation

 

164,894

 

26,723

 

 

 

 

 

 

 

 

 

94,409

 

15,300

 

 

(c)                Product development and Product sourcing expenses

 

Qunar presents product sourcing expenses for the expenses incurred to develop and maintain the network of its travel service providers, and Qunar presents product developments expenses for the expenses incurred for developing, improving as well as maintaining its website and mobile platform. These two items have been condensed as “Product Development expenses” to conform to corresponding financial statement line item included in the Company’s historical presentation.

 

Adjustments to product development expenses for the nine months ended September 30, 2015:

 

12


 

 

 

RMB

 

US$

 

 

 

(In thousands)

 

Amortization expense for newly identified intangible assets

 

(79,618

)

(12,678

)

To corresponding financial statement line item included in the Company’s historical presentation

 

(445,963

)

(71,012

)

 

 

 

 

 

 

 

 

(525,581

)

(83,690

)

 

Adjustments to product development expenses for the year ended December 31, 2014:

 

 

 

RMB

 

US$

 

 

 

(In thousands)

 

Amortization expense for newly identified intangible assets

 

(104,303

)

(16,904

)

To corresponding financial statement line item included in the Company’s historical presentation

 

(316,903

)

(51,359

)

 

 

 

 

 

 

 

 

(421,206

)

(68,263

)

 

(d)             Sales and marketing expense

 

Adjustments to sales and marketing expense for the nine months ended September 30, 2015::

 

 

 

RMB

 

US$

 

 

 

(In thousands)

 

To reverse the amortization expense for pre-existing intangible assets of Qunar before the acquisition

 

833

 

133

 

 

 

 

 

 

 

 

 

833

 

133

 

 

Adjustments to sales and marketing expense for the year ended December 31, 2014:

 

 

 

RMB

 

US$

 

 

 

(In thousands)

 

To eliminate the transaction between Ctrip and Qunar where Qunar provided pay-for-performance services to Ctrip

 

21,500

 

3,484

 

 

 

 

 

 

 

 

 

21,500

 

3,484

 

 

13


 

(e)              Income tax expense

 

The unaudited pro forma adjustment reflects the change in income tax expense arising from amortization for the deferred tax liabilities in relation to the newly identified intangible assets from the acquisition.

 

(f)               Prepayments and other current assets

 

Adjustments to prepayments and other current assets as of September 30, 2015:

 

 

 

RMB

 

US$

 

 

 

(In thousands)

 

To eliminate the balances from the transaction between Ctrip and Qunar where Qunar provided pay-for-performance services to Ctrip

 

(1,694

)

(273

)

 

 

 

 

 

 

 

 

(1,694

)

(273

)

 

(g)              Goodwill

 

Goodwill reflects the preliminary estimate of the excess of the purchase price to be paid by Ctrip over the fair values of Qunar’s identifiable tangible and intangible assets to be acquired and liabilities to be assumed in the acquisition (Note 3).

 

Adjustments to goodwill as of September 30, 2015:

 

 

 

RMB

 

US$

 

 

 

(In thousands)

 

To eliminate the pre-existing goodwill of Qunar

 

(10,755

)

(1,692

)

To recognize the goodwill in relation to the acquisition based on the preliminary purchase price allocation

 

40,321,945

 

6,344,318

 

 

 

40,311,190

 

6,342,626

 

 

(h)             Intangible assets

 

The unaudited pro forma adjustment amount represents RMB8.2 billion (US$1.3 billion) to recognize the newly identified identifiable intangible assets of Qunar based on the preliminary estimated fair value as of September 30, 2015. The newly identified intangible assets primarily consist of trademark and domain name of RMB7.3 billion (US$1.1 billion), technology of RMB378 million (US$59.4 million), supplier network for new products of RMB559 million (US$87.9 million). The trademark and domain name are expected to be indefinite-lived intangible assets. The estimated fair value of the amortizable intangible assets (technology and supplier network for new products) is expected to be amortized on a straight-line basis over estimated useful lives of 5.2 years, subject to the finalization of the purchase price allocation.

 

14


 

(i)                 Advances from customers

 

Adjustments to advances from customers as of September 30, 2015:

 

 

 

RMB

 

US$

 

 

 

(In thousands)

 

To eliminate the balances from the transaction between Ctrip and Qunar where Qunar provided pay-for-performance services to Ctrip

 

(1,694

)

(273

)

 

 

 

 

 

 

 

 

(1,694

)

(273

)

 

(j)                Deferred income tax liabilities

 

The unaudited pro forma adjustment reflects the change in net deferred income taxes arising from fair value adjustments to Qunar’s assets to be acquired and liabilities to be assumed by Ctrip in the acquisition. Deferred income taxes arising from the estimated fair value adjustments related to Qunar ‘s identifiable intangible assets have been calculated based on Qunar ‘ statutory tax rate of 25%.

 

(k)             Shareholders’ equity

 

The unaudited pro forma adjustment reflects the expected issuance of Ctrip ordinary shares at the effective time of the acquisition (based upon the number of outstanding shares of Qunar as of September 30, 2015).

 

 

 

RMB

 

US$

 

 

 

(In thousands)

 

Elimination of Qunar’s shareholder’s’ equity prior to the acquisition

 

 

 

 

 

Share capital

 

(2,485

)

(391

)

Additional paid-in capital

 

(5,942,987

)

(935,079

)

Accumulated other comprehensive income

 

(85,206

)

(13,406

)

Accumulated deficits

 

4,498,060

 

707,731

 

Sub-total

 

(1,532,618

)

(241,145

)

 

 

 

 

 

 

Give effect of issuance of new share

 

 

 

 

 

Share capital

 

983

 

155

 

Additional paid-in capital

 

32,725,691

 

5,149,111

 

Sub-total

 

32,726,674

 

5,149,266

 

 

 

 

 

 

 

Recognition of Non-controlling interests

 

 

 

 

 

De recognition of Non-controlling interests of Qunar prior to the acquisition

 

(7,548

)

(1,188

)

Recognition of Non-controlling interests for the acquisition based on the preliminary estimation of its fair value

 

15,286,450

 

2,405,194

 

Sub-total

 

15,278,902

 

2,404,006

 

 

15



Exhibit 99.7

 

 

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

We hereby consent to the incorporation by reference in the Registration Statements on Form S-8 (No.333-116567, No.333-136264, and No.333-146761) of Ctrip.com International, Ltd. of our report dated April 27, 2015, except with respect to our opinion on the consolidated financial statements insofar as it relates to the effect of the change in the ratio of American depositary shares to ordinary shares as described in Note 22 to the consolidated financial statements, as to which the date is December 1, 2015 relating to the financial statements and the effectiveness of internal control over financial reporting of Ctrip.com International, Ltd., which appears in this Form 6-K.

 

/s/ PricewaterhouseCoopers Zhong Tian LLP

Shanghai, the People’s Republic of China

December 9, 2015

 

普华永道中天会计师事务所(特殊普通合伙)

PricewaterhouseCoopers Zhong Tian LLP, 11/F PricewaterhouseCoopers Center

2 Corporate Avenue, 202 Hu Bin Road, Huangpu District, Shanghai 200021, PRC

T: +86 (21) 2323 8888, F: +86 (21) 2323 8800, www.pwccn.com