Maria Xin - IR & Strategic Investment General Manager Donald Yu - Co Founder, Chairman, CEO Conor Yang - CFO Alex Yan - Co Founder, President, COO.

Natalie Wu - CICC Amanda Chen - Morgan Stanley Juan Lin - 86Research Alvin Jiang - Deutsche Bank Avy - Macquarie.

Hello. And thank you for standing by for Tuniu's 2016 Fourth Quarter and Full Year Earnings Conference Call. At this time, all participants are in listen-only mode. After today's presentation, there will be an opportunity to ask questions. Today's conference is being recorded.

[Operator Instructions] I would now like to turn the meeting over to your host for today's conference cal, General Manager of Investor Relations and Strategic Investment, Maria..

Thank you and welcome to our 2016 fourth quarter and full year earnings conference call. Joining me on the call today are Donald Yu, Co-Founder, Chairman and Chief Executive Officer, Alex Yan, Co-Founder, President and the Chief Operating Officer, and Conor Yang, Chief Financial Officer.

For today's agenda, management will discuss business updates, operational highlights and the financial performance for the fourth quarter and full year 2016. Before we continue, I refer you to our safe-harbor statement in the earnings press release, which applies to this call, as we will make forward-looking statements.

Also, this call includes discussion of certain non-GAAP financial measures. Please refer to our earnings release which contains a reconciliation of non-GAAP measures to the most directly comparable GAAP measures. Finally, please note that unless otherwise stated, all figures mentioned in this conference call are in RMB.

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

Thank you, Maria. Good day, everyone. Welcome to our 2016 fourth quarter and full year earnings conference call. We had a solid fourth quarter performance with total travel GMV and net revenue growing 38.7% and 11.2% year-over-year respectively. Notably gross profit increased 131% while gross margin improved to 8.7% during the fourth quarter.

Our operation continues to benefit from our position as the number one player in China's online leisure travel market. Our strategy of leveraging our brand is starting to benefit to new pricing power as we expand our positions both horizontally and vertically in the travel supply chain.

With better product variety and improved customer service, GMV for our repeat customers increased 53.4% year-over-year during the quarter. Contribution from repeat customers increased to a historic high of 54.4% our total travel GMV in the fourth quarter, up from 46.6% during the same period last year. In 2016, Tuniu reached many milestones.

Total travel GMV for the year surpassed RMB 20 billion, an increase of 66% year-over-year. During the year, we successfully supplied our product offerings as other revenue grew more than 200% year-over-year.

Due to the increased diversification of offerings and improved procurement capabilities, our gross margins have improved from 4.8% in 2015 to 5.9% in 2016. In order to further skew our product and service, Tuniu continues to expand its coverage of departing cities within China.

During 2016, the number of cities covered by our product increased by additional 50 cities to 290 cities in total. We are also pleased to see strong contribution from lower tier cities as it reflects the coverage and reputation of our brand. GMV from lower tier cities reached more than 51% of our total GMV for 2016.

The balance in contribution between first and lower tier cities reflect the growing demand for travel to out China. Overall, in 2016 we have strengthened our position as the number one player in China's online leisure travel market and better positioned ourselves to capture future demand.

Now I'll like to give an update on our key strategies in greater detail. I'll first start off with an update on our packaged tour business. We were able to strengthen our position in the supply chain, expand our offerings of travel-related products and develop an ecosystem for travel.

Our ecosystem connects our customer with travel product and services from around the world. This gives our customers the ability to create high quality and cost efficiency in Tuniu. To meet the increasingly complex demand of customers and improved efficiency of our operations, we began to offer various tour products that are formed at the destination.

These products are highly stable and allow Tuniu to efficiently gather travelers from various departing cities to form to a group at their chosen destination. We expect these destinations based towards to continuing serving as a driver for growth. Data and the technology continue to be a central part of Tuniu.

With 10 years of experience providing tele services in China, Tuniu has one of the most comprehensive sat out data on Chinese travelers. These data on user preference and behavior has benefited Tuniu.

By leveraging historic data along with big data analysis, our dynamic packaging system can use mass recommendations to help travelers respond to various products during the booking process. When customers begin their trip, we are also able to recommend products based on the traveler location and status.

As a result, we've been able to cross-sell our products and to increase our customer conversion rate and technique. In order to increase the efficiency of our business, we continued doing payment new system and technologies that reduce the cost setting time of each product.

We have been able to increase the level of automation for customer service to maximize the utilization rate of our staff. The improvement of our technology and better utilization of big data, are both cater to Tuniu's future.

Transportation ticketing and hotel booking maintain their growth momentum during the fourth quarter as we continue to invest in their growth. GMV from transportation ticketing grew more than 300% during the fourth quarter while hotel booking grew more than 100% in the same period.

We will continue to work closely with both airline companies and the hotel group, improving our ability to procure their product. As we continue to invest and develop their operations in 2017, we expect their growth rate to maintain strong. Now I would like to talk about branding. One note Tuniu's key asset is its brand recognition in China.

We have dedicated years of investment to achieve this and we believe our brand is well known enough to support our growth without significant additional investment. During the fourth quarter, we continued to closely monitor our branding expenses and focus on marketing channels with higher ROI.

This strategy we are continuing to 2017 to further decrease sales and marketing expenses as a percentage of GMV.

Looking ahead to 2017, we'll continue to improve the quality of our product and services to make the evolving demand of our customers by focusing on our core product and services; we expect an improvement to the repurchase rate and the technique to Tuniu platform.

Even though China is already one of the world's largest travel market, key factors such as the favorable visa policies and the higher household disposable income, we have unlocked China's full potential.

We believe Tuniu as the leading player in China's online leisure travel market is well positioned to take advantage of the growing demand for travel in the future. Overall, this quarter our growth model continues to improve while our operating expenses are beginning more strictly controlled. This is a positive step for us.

In 2017, we expect to continue making meaningful improvement to our profitability. New systems and technology will be implemented during the year to increase the efficiency of our company. As we continue to benefit from economies of scale and leverage our previous brand investments, we expect our operational efficiency to improve significantly.

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

Thank you, Donald, and hello, everyone. Before we discuss the financial highlights I would like to bring to your attention that the new revenue standard, ASC 606, Revenue from Contracts and Customers, will be effective beginning January 1, 2018, and adoption as the original effective date of January 1, 2017 is permitted.

We have decided to adopt ASC 606 starting from January 1, 2017, using the full retrospective method.

And also since the beginning of fiscal year 2017, we have implemented a tour products branding strategy which is aimed to help our suppliers to build up their tour product brands by providing more information about the tour on our platform, including the name of the tour operators, product satisfaction rate and product brand satisfaction rate.

Accordingly, our role in the organized tour arrangements has changed from a principal into an agent. As a result of adopting the new accounting standard and the change of the Company's role, revenue from our organized tours will be mainly recognized on a net basis starting from January 1, 2017.

I'll now walk you through our fourth quarter and full year 2016 financial results in the greater detail. Please not that all monetary amounts are in RMB unless otherwise stated. You can find the US dollar equivalent of the numbers in our earnings release.

Starting from the fourth quarter of 2016, the total travel GMV for the fourth quarter increased by 38.7% to RMB4.5 billion. Packaged tour gross bookings increased by 13.6% year-over-year to RMB3 billion including 65.1% from outbound tours. Net revenues were RMB2.1 billion representing 11.2% year-over-year growth.

Revenue from organized tour substantially up which are recognized on growth basis were up 8% year-over-year to RMB1.9 billion for the fourth quarter. The increase was primarily due to the growth in demand for travel to certain international destinations such as Japan, South Korea, Middle East, Africa and North America.

Revenues from self-guided tours, which are recognized on a net basis, were up 8.4% year-over-year to RMB56.6 million. The increase was primarily due to the growth in travel demand in Europe, North America, Middle East, Africa and domestic destinations. Other revenues were up 115.6% you to RMB102 million.

The increase was primarily due to a rise in revenue generated from financial services, and commission fees received from other travel-related products such as transportation ticketing and accommodation reservations. Gross margin for the fourth quarter 2016 was 8.7%, compared to 4.2% in the same period in 2015.

The increase in gross margin was primarily due to the decline in procurement cost as a percentage of net revenues resulting from economies of scale optimization of our supply chain management and the increased contribution from other revenues as the result of category expansion. Operating expenses were RMB765.4 million, up 19.4% year-over-year.

Research and product development expenses were RMB170.1 million, up 60.5% year-over-year. The increase was primarily due to the investments for implementation of additional product categories, such as transportation ticketing, accommodation reservation and financial services.

Sales and marketing expenses were RMB400.8 million representing the year-over-year increase of 1.5% and a quarter-over-quarter decrease of 19.8%. The quarter-over-quarter decrease was primarily due to the decline in brand promotions and preference for marketing channels with higher ROI.

General and administrative expenses were RMB205.5 million, up 40.2% year-over-year. The increase was primarily due to an increase in the headcount as a result of our product category expansion and expenses associated with our regional centers. Net loss attributable to ordinary shareholders was RMB554.4 million in the fourth quarter of 2016.

As of December 31, 2016, the Company has cash and cash equivalent, restricted cash and short-term investments of RMB4.8 billion. In the fourth quarter, excluding the impact of the pre-payment to HNA Tourism, cash conversion cycle was negative 29 days compared to negative 31 days in the corresponding period last year.

Capital expenditures for the fourth quarter of this year were RMB12.8 million. Now moving to our full year 2016 results. Total travel GMV for 2016 increased by 66% to RMB20 billion. Packaged tour gross booking 2016 increased by 38.4% year-over-year to RMB14.7 billion including 53.8% from outbound tour.

In 2016, net revenues were RMB10.5 billion representing 38% year-over-year growth. Revenues from organized tours, substantially all of which are recognized on a gross basis, were up 34.9% year-over-year to RMB9.9 billion and accounted for 94.1% of our total net revenue in 2016.

The increase was primarily due to the growth in demand for travel to certain international destinations, such as Japan, South Korea, Middle East, Africa, North America and certain vacation islands.

Revenues from self-guided tours, which are recognized on a net basis, were up 30.5% year-over-year to RMB253.3 million and accounted for 2.4% of our total net revenue. The increase was primarily due to the growth in travel to Japan, South Korea, Southeast Asia, Middle East, Africa, North America and domestic destinations.

Other revenues were up 201.9% to RMB385.6 million, and accounting for 3.7% of the total net revenue. The increase was primarily due to a rise in service fees received from insurance companies, revenue generated from financial services and commission fees received from other travel-related products.

Gross margin was 5.9% in 2016 compared to 4.8% in 2015. The increase in gross margin was primarily due to the decline in procurement cost as percentage of net revenues resulting from economies of scale, and optimization of our supply chain management, and the increased contribution from other revenues as a result of category expansion.

Operating expenses were RMB3.1 billion in 2016, up 72.3% year-over-year. Research and product development expenses were RMB601.4 million in 2016, up 101.7% year-over-year.

The increase was primarily due to investments for the implementation of additional product categories, improvement of online technology, and the rise in technology and product development personnel related expenses. Sales and marketing expenses were RMB1.9 billion in 2016, representing a year-over-year increase of 65.4%.

The year-over-year increase was primarily due to advertisements for our mobile channels, expansion of our VIP customer service team, and amortization of acquired intangible assets from the previously announced transaction with JD.com. General and administrative expenses were RMB658.8 million, in 2016, up 70.9% year-over-year.

The increase was primarily due to an increase in headcount as a result of our product category expansion and expenses associated with our regional centers. Net loss attributable to ordinary shareholders was RMB2.4 billion in 2016.

In 2016, excluding the impact of prepayment to HNA Tourism, cash conversion cycle was negative 26 days compared to negative 30 days in last year. Capital expenditures for 2016 were RMB116.2 million. First quarter 2017 outlook. Now let me provide revenue guidance for the first quarter of 2017.

The guidance for the first quarter 2017 will become active non-GAAP revenue of their corresponding period in 2016 which are adjusted mainly to reflect the revenue on net basis in order to provide meaningful comparable information.

For first quarter of 2017, Tuniu expects to generate RMB440.6 million to RMB454.8 million of net revenues, which represents 55% to 60% growth year-over-year. Please not that this forecast reflects Tuniu's current and preliminary view on the industry and its operations, which is subject to change. Thank you for listening.

We are now ready for your questions.

Operator?.

[Operator Instructions] The first question comes from Natalie Wu of CICC. Please go ahead. .

Hi, good evening, Donald, Alex, Conor and Maria. Thanks for taking my questions. Couple of questions here. First is a housekeeping question. Can we get an update about the top destination in first quarter that contributes to the GMV? Also GMV contribution respectively and also regarding the recent Japan and Korea incidence that happened since January.

So what kind of impact are you expecting from these kind of events in the first quarter? And lastly about your headcount plan this year. So can management give us an update about the headcount in the first quarter and also the target of 2017? Is there any target regarding operational loss cost this year? Thank you..

Thank you, Natalie.

Let me give it -- and your first question that regarding to the top destination contribution to GMV, right, the top destination still that in terms of the percentage were still like Korea, Japan, Europe about the same, for European region, year-over-year actually first quarter last year was decreasing from previous year but still occupy -- compose about 10%-11% of our total GMV, 11% and then Korea, Japan about 10%.

Southeast Asia about 10% and followed by many others Maldives about 5% right. These are the top destinations. And the reason ex incident in Korea and Japan, for Korea actually has certain impact in kind of end of last year; they are mostly impact beginning of this year. Occasionally, we have seen that kind of slow recovering from Korea.

So and the current President was kind of in a mood of being replaced. So if no other incident happens in Korea we expect Korea might recover slowly. And this event happened in Japan regarding to the radiation, so it has certain impact but at this point of time the impact truly meant to be sufficient.

Yes, still under resurrecting, we are still watching the changes. So and Europe actually for this quarter, I mean talking about fourth quarter last year was kind of decreasing for us in 2015, but the current trend in Europe actually very promising.

We have seen a good recovery from European region and we expect for full year 2017 Europe should do better. In terms of the total headcount, we have decrease from about 9,200 in third quarter to current about 8,200 people by end of 2016. And we continue to decrease the number of staff.

As of now the total number of our people has further decreased to about slightly above 7,000. Yes, so we should see pretty substantial efficiency improvement in terms of the operation. Thank you. .

The next question comes from Amanda Chen of Morgan Stanley. Please go ahead. .

Hi, good evening. Thanks management for taking my question. I have three year. So first one is regarding the repeating customer number.

I think it's quite impressive but just wondering among all your hotel and air booking customers how much of them are your repeating customers who at least about one packaged tour product on your platform in less than 12 months? This is my first question. Thank you. .

We had seen that repeating customers as percentage of ratio is continue to increase to the current historic level high over 50 something percent and we have seen that data for exchanging to hotel and air ticketing actually has helped in a great deal that to our customers to come back to our platform to consume.

And we expect as we continue to improve the services and data mining on a big data continue doing better and greater expansion these customers will repeated coming back to Tuniu to buy product. And we are expecting the repeating customer ratio contribution will continue to increase over to 2017. .

Got it. Thank you. [Foreign Language].

I mean asking the customer acquisition cost from our hotel booking and air ticketing and company actually so far we take as a whole group and divided by total marketing expenses as spend. So at this moment we don't have separate number for consumer acquisition cost for air ticketing and hotel booking.

But overall that's hotel and air ticketing are growing very fast. So about 60% to 70% of the customer for air ticketing and hotel booking new customer to us. Thank you. .

Got it. Thank you. Very helpful. The second one is regarding sales and marketing budget for 2017. Could you please share the breakdown of online ad spending, traffic acquisition or all the app pre installation if any? Thank you..

Total marketing spending in 2017 we are expecting will be a lot lower than 2016. We want to leverage our brand investment for the last two year. And we are quite happy about their current development that we are cutting marketing budget while in the meantime we see that the growth is still quite robust.

In terms of the [aerocation], we spend mostly online and then trim down the offline advertising. And online portion about 70% plus that will be spent on the mobile related marketing channel, remaining 30% spend on the PC side. Thank you. .

Thank you. Sorry if I may have some housekeeping questions as well. So first is the quarterly take rate of different segment in 2016 and also how do you see trending in 2017? And regarding the other revenue, could you please give us the mix I mean for the breakdown of the other revenue items? Thank you..

Yes. As we demonstrated our gross profit has increased in triple digit in fourth quarter last year and the fourth quarter 2016 that take rate has increased quite substantially organized tour to about 7% to 8% and self-guided tour to 6% to 7% respectively. These are increased more than 1.5% from the previous quarter and even more year-over-year.

So we expect that margin will continually spent in 2017. And for other revenue invested, the largest component coming out from like insurance commission and then followed by some financial products commission as well as air-ticketing, hotel booking and tour attraction ticket and others. .

The next question comes from Juan Lin of 86Research. Please go ahead..

Hi. Good evening, Donald, Alex, Conor and Maria. Thank you for taking my questions. I have two questions. The first one is on your business strategy.

I am wondering what our strategy is for 2017 in terms of destination focus, departure city selection, improvement plan, and product mix and as already talked about marketing plan? Also I would like to elaborate a little bit on the total number of [Technical Difficulty] and what is the plan or targeted number of service centers for 2017? This is a first question.

And the second question is that kind of aggressively I am wondering which department you are mainly focusing on headcount cut? And which business lines will see the most top line impact from headcount reduction and which destination will be impacted most in terms of GMV growth? Thank you..

The two major strategies for this year that we want to continue expand our two networks.

One is our sales network that we have extensive sales network and we will continue -- we have a big data, we want to use more like technology for more accurate targeted marketing and data mining on big data and then better service overall to enhance the conversion ratio.

For example right now our home traffic to order the ratio has increased, previous year about 3% to currently about 6% to 7%. And the other strategy to continue to enhance the repeated ratio of old customers.

And the other network is our supply chain network that we again do on economy scale that we have extensive network on the supply chain and we will continue to as we demonstrated in the fourth quarter that we are able to low down our procurement cost to enhance the take rate especially we were strengthened our destination procurement capability to enhance more variety of our product offering and through our dynamic packaging that once we procure destination, we can -- we'll be able to sell to customers nationwide.

So through this strengthen of the sales network and supply chain network, hopefully we can continue to be more efficient even though we have kind of headcount decrease, the headcount decrease so far we don't really feel that it has any significant impact.

On the other side we also we feel that through this streamline of operation that it will further increase enhance our operational efficiency. And right. .

Thank you, Donald. May I ask follow up question? There are procurement and the inventory risk. You mentioned about procurement at a destination and I am wondering whether our long-term direct procurement target to remain at 50% above for the total business and how do you plan to manage and control inventory risks going forward? Thank you. .

When I mentioned about the procurement from the destination a level but it doesn't mean will increase the inventory risk. We strengthened our procurement capability in the destination places mostly that doesn't really involve high level of inventory risk, mostly are kind of inventory risk, very low inventory risk.

In terms of the re-procurement, we feel that will gradually increase; our target has been like 2000 -- like two year time reaching about 50%. Current ratio about 30 something percent from the re-procurement. Thank you. .

The next question comes from Alvin Jiang of Deutsche Bank. Please go ahead..

Hi. Thank you management for taking my question. My first question regarding our revenue growth trajectory. We see clear slow downing as far as -- in the fourth quarter revenue growth and strong rebound according to our guidance in the first quarter.

So just wondered what drive this trend, the strong up and down trend? And my second question is regarding our reporting revenue basis. What lead as to decide to change we've already from gross to net basis. Thank you. .

Alvin, in fourth quarter last year again even though reported net revenue is only 11% plus but the total GMV is close to 40%.

As we mentioned in previous several times that in 2016, before 2017 the US GAAP reported revenue mainly representing organized tour growth rate as we've seen that our gross rate coming out from organized tour and other more dynamic type of packaged tour that closed higher than organized tour.

So in 2016 and previous reporting method doesn't really reflect company's real gross momentum. And as we explained and written in the earnings release in 2018 there will be a new GAAP ASC 606 that regarding to revenue recognition and early adoption is permitted.

So and also that we have the need as Donald mentioned earlier to we have launched a product branding strategy that will enable our supplier to demonstrate their name in our product. And that would actually give more responsibility and pressure to our supplier to provide a better product and services to our customers.

In our product demonstration, right now if you club into any of our products we will show the suppliers name or like local tour operators name that and including will also show the level of satisfaction rate, level of our product satisfaction rate. So therefore customers will have more transparency and better understanding about the product.

So by doing that the company’s role in past was like principal role now changed into from this year, beginning of this year to an agency role. Therefore to corporate the new GAAP and as well as the branding, part of branding strategy we will starting to using order net basis substantially net basis for the organized tour.

And so therefore that going forward revenue reporting number will be more in line with OTATS and for investors will have more clear view of our revenue, about or expenses as a percentage of revenues ratio that will be kind of in the same format and apple-to-apple compared to our peers. .

[Operator Instructions] The next question comes from Wendy Huang of Macquarie. Please go ahead..

Hi. This is Ivy asking on behalf of Wendy. So I have several questions here. One is regarding our GMV gross; I am wondering if management can give us guidance with forward target GMV gross for 2016? And especially in the longer term and refer to next three years. And my second question is regarding our margin and profitability.

So are we still targeting to reach breakeven like non-GAAP breakeven by 2018? And, if so, what's our margin target for 2017? And I also have a housekeeping question regarding the gap between the revenue generated for offline tours and the number of trip.

So the year-over-year growth and the gap between the number of trip and the revenue actually widened a bit seemed in fourth quarter. So I am wondering if that's because there are more trips coming from the lower ASP destination or is there any other reasons for this gap. That's my questions. Thank you. .

Thank you, Wendy. On the GMV our gross rate, our expectation is we will continue to grow faster than among our peers; we will grow faster than the industry average. In the meantime have a greater improved operational efficiency. We have demonstrating we have growing substantially on our gross margin.

And in term of the take rate that in fourth quarter we have as I mentioned earlier we have improved quite substantially in fourth quarter last year and we expect it will continue to improve for this year.

There are several reasons that -- first we have a better management sorry better inventory control and management system and also we are using our technology that we have a differentiating pricing system with a different product, different client profile, we have a different pricing strategy compared to in a past like universal pricing markup strategy.

So we'll more sophisticated system to manage better using different pricing to ends up a better result and better margin. And, yes, you are right we are still target for non GAAP breakeven in 2018 and we are working towards it.

We should see the great improvement on the P&L side this year, currently we have gave guidance first quarter growth rate 55% to 60% and in the meantime we should see quite substantial loss shrinking in first quarter this year. And the first quarter you are right that the on organized tour ASP has decreased more compared to the previous year.

One of the major reason is as I mentioned that first quarter in the European region still have a pretty big impact therefore European business have year-over-year decrease, that has a very substantial impact as you know that the Europe has one of the highest fee.

So instead of going to Europe many other people go to like low ASP region such as Asia and others. That's the reason for the ASP drop but again that we've seen, very happy to see the positive recovery from European business so far this year. Thank you. .

Thank you. Very helpful. I just have a quick question. So what's the outbound percentage that we mentioned in our prepared remarks? Outbound percentage. .

Fourth quarter about 65% of our GMV coming out from outbound..

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

Once again thank you for joining us today. Please do not hesitate to contact us if you have any further questions. Thank you for your continued support and we look forward to speaking with you in a coming month. Bye-bye. .

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