CTRIP.COM INTERNATIONAL, LTD.

 

As filed with the Securities and Exchange
Commission on December 4, 2003

Registration No. 333-110455

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549


AMENDMENT NO. 2 TO

FORM F-1

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933


CTRIP.COM INTERNATIONAL, LTD.

(Exact name of registrant as specified in its
charter)

Not Applicable

(Translation of Registrant’s name into
English)

         
Cayman Islands
(State or other jurisdiction of
incorporation or organization)
  7389
(Primary Standard Industrial
Classification Code Number)
  Not Applicable
(I.R.S. Employer
Identification Number)

3F, Building 63-64

No. 421 Hong Cao Road

Shanghai 200233, People’s Republic of
China

(8621) 3406-4880

(Address, including zip code, and telephone
number, including area code, of registrant’s principal
executive offices)


CT Corporation System

111 Eighth Avenue

New York, New York 10011

(212) 664-1666

(Name, address, including zip code, and
telephone number, including area code, of agent for
service)


Copies to:

     
David T. Zhang, Esq.
John A. Otoshi, Esq.
Latham & Watkins LLP
20th Floor, Standard Chartered Bank Building
4 Des Voeux Road
Central, Hong Kong S.A.R., China
(852) 2522-7886
  Chris K. H. Lin, Esq.
Simpson Thacher & Bartlett LLP
7th Floor, Asia Pacific Finance Tower
3 Garden Road
Central, Hong Kong S.A.R., China
(852) 2514-7600


         
Approximate date of commencement of proposed
sale to the public:

         
If any of the securities being registered on this
Form are to be offered on a delayed or continuous basis pursuant
to Rule 415 under the Securities Act of 1933, check the
following
box.    o

         
If this Form is filed to register additional
securities for an offering pursuant to Rule 462(b) under
the Securities Act, please check the following box and list the
Securities Act registration statement number of the earlier
effective registration statement for the same
offering.    o

         
If this Form is a post-effective amendment filed
pursuant to Rule 462(c) under the Securities Act, check the
following box and list the Securities Act registration statement
number of the earlier effective registration statement for the
same
offering.    o

         
If this Form is a post-effective amendment filed
pursuant to Rule 462(d) under the Securities Act, check the
following box and list the Securities Act registration statement
number of the earlier effective registration statement for the
same
offering.    o

         
If delivery of the prospectus is expected to be
made pursuant to Rule 434, check the following
box.    o


CALCULATION OF REGISTRATION FEE

                 


Proposed Maximum Proposed Maximum
Title of Each Class of Amount to be Offering Price Per Aggregate Offering Amount of
Securities to be Registered Registered(1)(2) Ordinary Share(1) Price(1) Registration Fee

Ordinary Shares, par value US$0.01 per share(3)

  9,400,000
  $8.00
  $75,200,000
  $6,084(4)


(1)  Estimated solely for the purpose of determining
the amount of the registration fee in accordance with
Rule 457 under the Securities Act of 1933.
 
(2)  Includes ordinary shares initially offered and
sold outside the United States that may be resold from time to
time in the United States either as part of their distribution
or within 40 days after the later of the effective date of
this registration statement and the date the shares are first
bona fide offered to the public.
 
(3)  American depositary shares issuable upon deposit
of the ordinary shares registered hereby have been registered
under a separate registration statement on Form F-6. Each
American depositary share represents two ordinary shares.
 
(4)  Registrant paid the registration fee in full on
November 12, 2003.

         
The Registrant hereby amends this Registration
Statement on such date or dates as may be necessary to delay its
effective date until the Registrant shall file a further
amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with
Section 8(a) of the Securities Act of 1933, as amended, or
until the Registration Statement shall become effective on such
date as the Commission, acting pursuant to such
Section 8(a), may determine.



 

Prospectus
dated December           ,
2003

PROSPECTUS

4,200,000 American Depositary Shares

(CTRIP LOGO)

Ctrip.com International, Ltd.

Representing 8,400,000 Ordinary
Shares


         
This is Ctrip’s initial public offering.
Ctrip is offering 2,700,000 American Depositary Shares, or ADSs,
and the selling shareholders included in this prospectus are
offering an additional 1,500,000 ADSs. Each ADS represents two
ordinary shares. We and the selling shareholders are offering
2,100,000 ADSs in the United States and 2,100,000 ADSs outside
the United States.

         
We expect the public offering price to be between
US$14.0 and US$16.0 per ADS. Currently, no public market
exists for the ADSs or our ordinary shares. After pricing of the
offering, we expect that the ADSs will be quoted on the Nasdaq
National Market under the symbol “CTRP.”

         
Investing in the ADSs involves risks that are described in
the “Risk Factors” section beginning on page 11
of this prospectus.


                 
Per ADS Total


Public offering price

  US$       US$    

Underwriting discount

  US$       US$    

Proceeds, before expenses, to Ctrip

  US$       US$    

Proceeds, before expenses, to the selling
shareholders

  US$       US$    

         
The U.S. underwriters may also purchase up to an
additional 250,000 ADSs from the selling shareholders at
the public offering price, less the underwriting discount,
within 30 days from the date of this prospectus to cover
overallotments. The international managers may similarly
purchase up to an additional 250,000 ADSs from the selling
shareholders.

         
Neither the Securities and Exchange Commission
nor any state securities regulators has approved or disapproved
these securities or determined if this prospectus is truthful or
complete. Any representation to the contrary is a criminal
offense.

         
The ADSs will be ready for delivery on or
about                     ,
2003.


Merrill Lynch & Co.

U.S. Bancorp Piper Jaffray SoundView Technology Group

The date of this prospectus
is                     ,
2003.


 

(CITRIP IFC GRAPHIC)


 

TABLE OF CONTENTS

         
Page

Prospectus Summary

    1  

Risk Factors

    11  

Special Note Regarding Forward-Looking Statements

    25  

Use of Proceeds

    26  

Dividend Policy

    27  

Capitalization

    28  

Dilution

    29  

Exchange Rate Information

    30  

Enforceability of Civil Liabilities

    31  

Selected Consolidated Financial Data

    33  

Management’s Discussion and Analysis of
Financial Condition and Results of Operations

    35  

Business

    53  

Chinese Government Regulations

    67  

Management

    70  

Principal and Selling Shareholders

    76  

Related Party Transactions

    80  

Description of Share Capital

    85  

Description of American Depositary Shares

    90  

Shares Eligible for Future Sale

    97  

Taxation

    99  

Underwriting

    104  

Legal Matters

    108  

Experts

    108  

Where You Can Find Additional Information

    108  

Index to Consolidated Financial Statements

    F-1  


         
You should rely only on the information contained
in this prospectus. Neither we nor the selling shareholders nor
the underwriters have authorized any person to provide you with
different information. If anyone provides you with different or
inconsistent information, you should not rely on it. Neither we
nor the selling shareholders nor the underwriters are making an
offer to sell these securities in any jurisdiction where the
offer or sale is not permitted. You should assume that the
information appearing in this prospectus is accurate only as of
the date on the front cover of this prospectus. Our business,
financial condition, results of operations and prospects may
have changed since that date.

         
Unless otherwise indicated, (1) the terms
“we,” “us,” “our company,”
“our” and “Ctrip” refer to Ctrip.com
International, Ltd., its predecessor entities and subsidiaries,
and, in the context of describing our operations, also include
our affiliated Chinese entities, (2) “shares” and
“ordinary shares” refer to our ordinary shares,
“preferred shares” refers to our convertible preferred
shares, “ADSs” refers to our American depositary
shares, each of which represents two ordinary shares, and
“ADRs” refers to the American depositary receipts
which evidence our ADSs, (3) “China” and
“PRC” refer to the People’s Republic of China,
excluding Taiwan, Hong Kong and Macau, and (4) all
references to “RMB” are to the legal currency of China
and all references to “U.S. dollars,”
“dollars” and “US$” are to the legal
currency of the United States. Information in this prospectus
assumes that the underwriters do not exercise their
overallotment options to purchase up to 500,000 additional ADSs.
All numbers discussed in this prospectus are approximated to the
closest round number.

i


 

PROSPECTUS SUMMARY

         
This summary highlights key aspects of the
information contained elsewhere in this prospectus. Because it
is a summary, it does not contain all of the information that
you should consider before making an investment decision. You
should read the entire prospectus carefully, including the
“Risk Factors” section and the financial statements
and the accompanying notes to those statements. The statistics
relating to the Chinese travel industry and economy included in
this prospectus are derived from various government and
institute research publications. We have not independently
verified such information and you should not unduly rely upon
it.

Ctrip.com International, Ltd.

Our Company

         
We are a leading consolidator of hotel
accommodations and airline tickets in China. We aggregate
information on hotels and flights and enable our customers to
make informed and cost-effective hotel and flight bookings.
Since commencing operations in 1999, we have become one of the
best-known travel brands in China. We pioneered the development
of a reservation and fulfillment infrastructure that enables our
customers to:

  • choose and reserve hotel rooms in cities
throughout China and selected cities abroad;
 
  • book and purchase airline tickets for domestic
and international flights originating from China; and
 
  • choose and reserve packaged tours that include
transportation, accommodation, and sometimes guided tours as
well.

         
We target our services primarily at business and
leisure travelers in China who do not travel in groups. This
type of travelers, who are referred to in the travel industry as
FITs and whom we refer to as independent travelers in this
prospectus, form a traditionally under-served yet fast-growing
segment of the China travel market. We act as agent in
substantially all of our transactions and generally do not take
any inventory risks with respect to the hotel rooms and airline
tickets booked through us. We derive our hotel reservation,
air-ticketing and packaged-tour revenues through commissions
from our travel suppliers, primarily based on the transaction
value of the rooms, airline tickets and packaged-tour products,
respectively, booked through our services.

         
For the nine months ended September 30,
2003, we derived 85.8% of our revenues from the hotel
reservation business and 10.5% of our revenues from our
air-ticketing business. Our packaged-tour business contributed
1.6% of our revenues for the nine months ended
September 30, 2003.

         
We believe that we are the largest consolidator
of hotel accommodations in China in terms of the number of room
nights booked. In October 2003, we booked approximately
300,000 hotel room nights. As of October 31, 2003, we
had secured room supply relationships with over
1,700 hotels in China and over 450 hotels abroad,
which cover a broad range in terms of price and geographical
location. The quality and depth of our hotel supplier network
enable us to offer our customers a wide selection of hotel
accommodations, often at significant discounts to published
rates. We believe our ability to offer reservations at highly
rated hotels is particularly appealing to our customers.
Revenues from our bookings for three-, four- and five-star
hotels comprised approximately 95.0% of our revenues from our
hotel reservation business for the nine months ended
September 30, 2003.

         
We believe that we are also one of the leading
consolidators of airline tickets in Beijing and Shanghai in
terms of the number of airline tickets booked and sold. We sold
approximately 70,000 tickets nationwide in October 2003.
Our airline ticket suppliers include all major Chinese airlines
and many international airlines that operate flights originating
from China. We also believe we are the only airline ticket
consolidator in China with a centralized reservation system and
ticket fulfillment infrastructure covering all of the
economically prosperous regions of China. Our customers can make
flight reservations on their chosen routes and arrange

1


 

ticket payment and delivery through our ticketing
offices and third-party agencies located in over 25 major cities
in China.

         
We offer our services to customers through an
advanced transaction and service platform consisting of our
centralized toll-free, 24-hour customer service center and
bilingual websites. For the nine months ended September 30,
2003, transactions effected through our customer service center
accounted for approximately 70% of our transaction volume, while
our websites accounted for the balance.

         
We have experienced significant growth since our
inception in June 1999. Beginning in the first half of 2002, we
have achieved and maintained positive net income. Our revenues
have increased from RMB6.9 million in 2000 to
RMB105.3 million (US$12.7 million) in 2002. For the
nine months ended September 30, 2003, we generated revenues
of RMB111.3 million (US$13.4 million) and net income
of RMB29.2 million (US$3.5 million) despite the
outbreak of the Severe Acute Respiratory Syndrome, or SARS,
during the second quarter of 2003.

Our Opportunity

         
The Chinese travel industry is large and growing
rapidly. The following chart contains certain data from CEIC
Data Company Limited concerning the Chinese economy and the
travel industry during the period from 1998 through 2002.

                                 
Number of Number of
Nominal Gross Expenditure on 3-, 4- and 5-Star Civil Aviation
Domestic Product Tourism Hotels in Operation Passenger Kilometers




(in billions of RMB) (in millions of RMB) (in billions)

1998

    7,835       239,118       1,325       80,024  

1999

    8,207       283,192       1,573       85,728  

2000

    8,947       317,554       2,368       97,054  

2001

    9,731       352,237       2,857       109,135  

2002

    10,479       387,836       3,656       126,870  

         
China’s gross domestic product grew at a
compound annual growth rate of 7.5% from 1998 to 2002. The
aggregate expenditure on tourism in China increased at a
compound annual growth rate of 12.8% during this period.
According to China’s tenth five-year plan, the Chinese
government expects an approximately 7% compound annual
growth rate of China’s gross domestic product from 2000 to
2005. We anticipate that demand for travel services in China
will continue to increase substantially in the foreseeable
future as the Chinese economy continues to grow.

         
Even as the rapid growth of the Chinese economy
in the past decade has led to a significant increase in the
demand for travel services, the travel intermediary businesses
are highly fragmented in China, and travel agencies often focus
on tour groups. Thus, independent travelers have limited access
to discounted rates or comprehensive information on hotels and
flights.

         
Travel consolidators like us are able to offer
information aggregated from various hotels and airlines to
independent travelers, enabling them to make informed and
cost-effective hotel and flight bookings through customer
service centers or websites. Call centers or customer service
centers allow travelers to gather and evaluate travel
information, receive recommendations from customer service
representatives and book transactions more efficiently by
contacting customer service centers any time, day or night.
Competitive labor costs in China have allowed customer service
centers to become a cost-effective transaction tool in China.
Furthermore, we believe that the travel industry, which
inherently involves broadly dispersed travelers as well as a
wide selection of travel suppliers in terms of location and
price, is also well-suited to benefit from the increasing
Internet and online commerce adoption in China, as the
Internet’s broadly distributed and easily accessible
environment creates the ideal foundation for new marketplaces.

2


 

Our Strengths and Challenges

         
We bridge the gap between independent travelers
and travel suppliers. Through our transaction and service
platform consisting of our centralized toll-free, 24-hour
customer service center and bilingual websites, we serve
primarily the traditionally under-served yet growing independent
travelers segment in China by helping these travelers plan and
book their trips while helping travel suppliers such as hotels
and airlines improve the efficiency of their marketing and
distribution channel. We have achieved a leading position, in
part, by establishing the following competitive strengths:

  • a leading travel brand in China;
 
  • large supplier network and nationwide coverage;
 
  • scalable platform and flexible cost structure;
 
  • excellent customer service;
 
  • advanced infrastructure and technology; and
 
  • experienced management team.

         
We expect to face challenges in our business
operations, including:

  • our limited operating experience as a travel
consolidator;
 
  • the risk of declines or disruptions in the travel
industry;
 
  • the risk of recurrence of SARS;
 
  • the risk of failure to increase our brand
recognition;
 
  • the risk of damage to or interruption of our
infrastructure; and
 
  • the risk of failure to maintain existing, or
establish similar new, arrangements with travel suppliers.

Our Strategy

         
Our goal is to create long-term shareholder value
by enhancing our position as a leading hotel and airline ticket
consolidator in China. We believe that China’s currently
highly fragmented travel industry and under-served independent
travelers have provided us with tremendous growth opportunities.
We intend to pursue the following strategies to achieve our goal:

  • leverage the Ctrip brand to attract new travel
suppliers and negotiate more favorable contractual terms with
our existing suppliers, and strengthen the Ctrip brand by
continuing to pursue a focused marketing and advertising
campaign;
 
  • expand our hotel supplier network and room
inventory, primarily through focusing the expansion on hotels
with three-, four- and five-star ratings and continuing to
pursue guaranteed allotment arrangements with our hotel
suppliers;
 
  • expand air-ticketing and other travel product
offerings, primarily through establishing airline ticket
issuance and delivery infrastructure in more cities throughout
China and further promoting the packaged-tour products that we
offer;
 
  • enhance transaction and service platform,
primarily through continuing to invest in the training of our
customer service representatives and upgrading of our
information technology systems underlying our customer service
center and websites;
 
  • pursue selective strategic acquisitions and
expand into Hong Kong, Macau and Taiwan, through exploring
acquisitions that would allow us to expand the reach and scope
of our travel products and services as well as our customer base
in China, Hong Kong, Macau and Taiwan; and

3


 
  • expand into the merchant business, through
gradually establishing merchant business relationships with some
of our travel suppliers.

Corporate Information

         
We were incorporated in the Cayman Islands. Since
commencing operations in 1999, we have conducted substantially
all of our operations in China. We maintain our operational
headquarters in Shanghai, and have regional offices in Beijing,
Guangzhou, Shenzhen and Hong Kong. We also maintain a network of
sales offices in about 30 cities in China. The existing
institutional shareholders owning more than 5% of our company
include Carlyle Asia Venture Partners I, L.P., IDG Technology
Venture Investment, Inc., Tiger Technology Private Investment
Partners, L.P. and S.I. Technology Venture Capital Limited.

         
Our principal executive offices are located at
3F, Building 63-64, No. 421 Hong Cao Road,
Shanghai 200233, People’s Republic of China, and our
telephone number is (8621) 3406-4880. Our principal website
address is www.ctrip.com. The information on our websites is not
part of this prospectus.

4


 

Corporate Structure

         
The following diagram illustrates our
company’s organizational structure, and the place of
formation, ownership interest and affiliation of each of our
subsidiaries and affiliated entities.

(CTRIPORG CHART)

5


 

         
We conduct substantially all of our business
through our wholly owned subsidiaries in China, namely, Ctrip
Computer Technology (Shanghai) Co., Ltd., or Ctrip Computer
Technology, and Ctrip Travel Information Technology (Shanghai)
Co., Ltd., or Ctrip Travel Information. Due to the current
restrictions on foreign ownership of the air-ticketing, travel
agency, advertising and Internet content provision businesses in
China, we conduct a small part of our operations in these
businesses through a series of contractual arrangements with our
affiliated Chinese entities. These entities include:

  • Shanghai Ctrip Commerce Co., Ltd., or Ctrip
Commerce, which holds advertising and Internet content provision
licenses;
 
  • Shanghai Huacheng Southwest Travel Agency Co.,
Ltd., or Shanghai Huacheng, which holds domestic travel agency
and air-ticketing licenses;
 
  • Beijing Chenhao Xinye Air-Ticketing Service Co.,
Ltd., or Beijing Chenhao, which holds an air-ticketing license;
 
  • Guangzhou Guangcheng Commercial Service Co.,
Ltd., or Guangzhou Guangcheng, which has recently received an
air-ticketing license; and
 
  • Shanghai Cuiming International Travel Agency Co.,
Ltd., or Shanghai Cuiming, which holds a license to conduct both
cross-border and domestic packaged-tour businesses.

         
Qi Ji, who is a co-founder and director of our
company, Min Fan, who is a co-founder and Executive Vice
President of our company, and Alex Nanyan Zheng, who is a Vice
President of our company, are principal owners of our affiliated
Chinese entities. We have made interest-free loans to Qi Ji, Min
Fan and Alex Nanyan Zheng in the aggregate amounts of
approximately RMB2.6 million (US$0.3 million),
approximately RMB6.1 million (US$0.7 million) and
approximately RMB50,000 (US$6,000), respectively, solely in
connection with the capitalization or acquisition of our
affiliated entities. Each of these loans will mature ten years
after the date of the applicable loan agreement. In the event
that the Chinese government lifts its restrictions on foreign
ownership of the air-ticketing, travel agency, advertising or
Internet content provision business in China, we will exercise
our right to purchase all of the outstanding equity interests of
our affiliated Chinese entities immediately, and the loans will
be cancelled in connection with such purchase. However, it is
uncertain when, if at all, the Chinese government will lift any
or all of these restrictions. For a detailed description of the
terms of these loans, see “Related Party
Transactions — Arrangements with Affiliated Chinese
Entities.”

         
We formed Home Inns & Hotels Management
(Hong Kong) Limited, or Home Inns, in 2001 to expand our
business line to include the hotel management service. Through a
series of subsequent transactions, we reduced our interest in
Home Inns to 31.16%. We spun off our remaining interest in Home
Inns in August 2003 to prepare for the offering to enable us to
focus on our core business of travel consolidation.

6


 

The Offering

 

American Depositary Shares offered:
          By
Ctrip:
                    U.S.
offering
1,350,000 ADSs
                    International
offering
1,350,000 ADSs
                              Total:
2,700,000 ADSs
 
          By
the selling shareholders:
                    U.S.
offering
 750,000 ADSs
                    International
offering
 750,000 ADSs
                              Total:
1,500,000 ADSs
 
The ADSs
Each ADS represents two ordinary shares, par
value US$0.01 per share. The ADSs will be evidenced by American
Depositary Receipts, or ADRs. As an ADR holder, we will not
treat you as one of our shareholders. The depositary will be the
holder of the shares underlying your ADSs. You will have ADR
holder rights as provided in the deposit agreement. Under the
deposit agreement, you may instruct the depositary to vote the
shares underlying your ADSs but only if we ask the depositary to
ask for your instructions. You must pay US$5.00 (or less) per
100 ADSs or less for each issuance or cancellation of an
ADS, a fee for each distribution of securities by the depositary
based on the number of shares deposited for issuance of ADSs,
US$0.02 (or less) per ADS per year for depositary services, fees
for transfer and registration of your shares, and any expenses
incurred by the depositary as necessary. You may turn in your
ADRs at the depositary’s office and the depositary will
deliver the deliverable shares underlying your ADRs to you. If
we offer holders of our ordinary shares any rights to subscribe
for additional shares or any other rights, the depositary may
make these rights available to you. However,
U.S. securities laws may restrict the sale, deposit,
cancellation and transfer of the ADSs issued after exercise of
these rights. To better understand the terms of the ADSs, you
should carefully read the section in this prospectus entitled
“Description of American Depositary Shares.” We also
encourage you to read the deposit agreement, which is an exhibit
to the registration statement that includes this prospectus. We
may amend or terminate the deposit agreement for any reason
without your consent. If an amendment becomes effective, you are
considered, by continuing to hold your ADSs, to agree to be
bound by the deposit agreement as amended.
 
ADSs outstanding after the offering
4,200,000 ADSs.
 

Ordinary shares outstanding after the offering
30,404,894 ordinary shares, excluding
outstanding stock options to purchase an aggregate of 1,391,760
ordinary shares at an exercise price of US$0.7716 per ordinary
share and outstanding stock options to purchase additional
481,660 ordinary shares at an exercise price of US$2.11 per
ordinary share, 50,000 ordinary shares at an exercise price of
US$5.00 per ordinary share, 80,000 ordinary shares at an
exercise price of US$6.00 per ordinary share, 103,980 ordinary
shares at an exercise price equal to 80% of the

7


 
midpoint of the filing range, and 35,000 ordinary
shares at an exercise price equal to 90% of the midpoint of the
filing range.
 
Dividends and other distributions
The depositary agrees to pay to you the cash
dividends or other distributions it receives on shares or other
deposited securities after deducting its fees and expenses. The
depositary will convert any cash dividend or other cash
distribution we pay on the shares into U.S. dollars, if it
can do so on a reasonable basis and can transfer the
U.S. dollars to the United States. The depositary may send
to you anything else we distribute on deposited securities by
means it thinks legal, fair and practical. If it cannot make the
distribution that way, the depositary may decide to sell what we
distributed and distribute the net proceeds in the same as it
does with cash or hold what we distributed.
 

Use of proceeds
We may use the net proceeds from this offering as
follows: (i) approximately US$3.0 million to fund
working capital; (ii) approximately US$5.0 million to
fund capital expenditures, including technology upgrades;
(iii) approximately US$5.0 million to expand our sales
and marketing efforts; and (iv) the balance for general
corporate purposes, including funding possible acquisitions of
complementary businesses, although we are not currently
negotiating any such transactions.

 

We will not receive any of the proceeds from the
sale of ADSs by the selling shareholders.
 
Risk factors
See “Risk Factors” and other
information included in this prospectus for a discussion of
factors you should carefully consider before deciding to invest
in the ADSs.
 

Nasdaq National Market symbol
CTRP.

 
Depositary
The Bank of New York.

8


 

Summary Consolidated Financial Data

         
You should read the following information with
our consolidated financial statements and related notes,
“Selected Consolidated Financial Data” and
“Management’s Discussion and Analysis of Financial
Condition and Results of Operations” included elsewhere in
this prospectus.

         
The summary consolidated statement of
operations data for 2001 and 2002 and the nine months ended
September 30, 2003, and the consolidated balance sheet data
as of December 31, 2001 and 2002 and September 30,
2003, are derived from our audited consolidated financial
statements included elsewhere in this prospectus and should be
read in conjunction with, and are qualified in their entirety by
reference to, these consolidated financial statements and
related notes. These consolidated financial statements have been
audited by PricewaterhouseCoopers and were prepared in
accordance with generally accepted accounting principles in the
United States, or U.S. GAAP. The summary consolidated
statement of operation data for 2000 and the nine months ended
September 30, 2002, and the consolidated balance sheet data
as of December 31, 2000 and September 30, 2002, set
forth below are derived from our unaudited consolidated
financial statements included elsewhere in this prospectus and
should be read in conjunction with, and are qualified in their
entirety by reference to, these unaudited consolidated financial
statements and related notes. We have prepared the unaudited
information on the same basis as the audited consolidated
financial statements, and have included, in our opinion, all
adjustments, consisting only of normal and recurring adjustments
that we consider necessary for a fair presentation of the
financial information set forth in those statements.

                                                             
Year Ended December 31, Nine Months Ended September 30,


2000 2001 2002 2002 2002 2003 2003







RMB RMB RMB US$(2) RMB RMB US$(2)
(unaudited) (unaudited)
(in thousands, except for share and per share data)

Consolidated Statements of Operation
Data:

                                                       
 

Net revenues

    6,453       43,984       100,049       12,087       68,809       105,717       12,772  
 

Costs of services

    (1,950 )     (7,940 )     (13,673 )     (1,652 )     (9,100 )     (14,447 )     (1,745 )
 

Gross profit

    4,503       36,044       86,376       10,435       59,709       91,270       11,027  
 

Operating expenses

    (36,243 )     (55,696 )     (63,106 )     (7,624 )     (45,379 )     (55,384 )     (6,691 )
 

Income (loss) from operations

    (31,740 )     (19,652 )     23,270       2,811       14,330       35,886       4,336  
 

Net income (loss)

    (23,977 )     (15,261 )     14,193       1,715       8,456       29,192       3,527  

Earnings per Share Data:

                                                       
 

Accretion for Series B preferred shares

    (2,196 )     (14,316 )     (16,492 )     (1,993 )     (12,140 )     (12,366 )     (1,494 )
 

Cash dividends to holders of Series A and
Series B preferred shares

    —       —       (16,762 )     (2,025 )     —       —       —  
 

Deemed dividends to holders of Series A and
Series B preferred shares for spin-off of joint venture
companies(3)

    —       —       —       —       —       (2,829 )     (342 )
 

Deemed dividends upon repurchase of Series A
and Series B preferred shares

    —       —       —       —       —       (35,336 )     (4,269 )
 

Net loss attributable to ordinary shareholders

    (26,173 )     (29,578 )     (19,061 )     (2,303 )     (3,684 )     (21,339 )     (2,578 )
 

Loss per share:

                                                       
   

basic and diluted

    (3.03 )     (3.26 )     (2.00 )     (0.24 )     (0.39 )     (2.26 )     (0.27 )
 

Loss per ADS(1):

                                                       
   

basic and diluted

    (6.06 )     (6.52 )     (4.00 )     (0.48 )     (0.78 )     (4.52 )     (0.54 )

9


 

                                                   
As of September 30, 2003

As of December 31,
2002 Actual As adjusted(4)



RMB US$(2) RMB US$(2) RMB US$(2)
(unaudited)
(in thousands)

Consolidated Balance Sheet Data:

                                               
 

Cash

    38,931       4,703       70,353       8,500       369,984       44,700  
 

Total assets

    97,255       11,750       151,999       18,364       451,630       54,564  
 

Series B preferred shares(5)

    124,963       15,097       —       —       —       —  
 

Total shareholders’ equity (deficit)

    (41,629 )     (5,029 )     109,032       13,173       408,663       49,373  


(1)  Each ADS represents two ordinary shares.
 

(2)  Translations from RMB amounts into U.S. dollars
were made at a rate of RMB8.2771 to US$1.00. See “Exchange
Rate Information.”

 
(3)  On August 27, 2003, we resolved to
distribute all of our equity interest in Home Inns to the then
existing holders of our ordinary shares and Series A and
Series B preferred shares on a pro rata as-converted basis
based on the carrying value of the equity interest in the
amounts of RMB1,782,559, RMB808,827 and RMB2,020,237,
respectively.
 
(4)  As adjusted to reflect the conversion of all of
our preferred shares into ordinary shares, which will occur
automatically immediately prior to the closing of this offering,
and the issuance and sale of 2,700,000 ADSs offered hereby
with estimated net proceeds of US$36.2 million, after
deducting underwriting discounts, commissions and estimated
offering expenses.
 
(5)  Prior to the forfeiture of the redemption feature
in September 2003, Series B preferred shares were not
included as part of shareholders’ equity as such shares
were redeemable at the option of the holder. As of
September 30, 2003, Series B preferred shares are
included in total shareholders’ equity (deficit).

10


 

RISK FACTORS

         
Investing in our ADSs involves a high degree
of risk. You should carefully consider the risks described
below, together with the other information contained in this
prospectus before making an investment decision. The risks
described below are not the only ones facing our company.
Additional risks not presently known to us or that we currently
deem immaterial may also impair our business operations. Our
business, financial condition or results of operations could be
materially adversely affected by any of these risks. The trading
price of our ADSs could decline due to any of these risks and
you may lose all or part of your investment.

Risks Related to Our Company

Our limited operating history makes evaluating
our business and prospects difficult.

         
We began our operations in 1999. As a result, we
have a limited operating history for you to evaluate our
business. It is also difficult to evaluate our prospective
business, because we may not have sufficient experience to
address the risks frequently encountered by early stage
companies using new and unproven business models and entering
new and rapidly evolving markets, including markets for online
commerce and frequent independent travelers. These risks include
our potential failure to:

  • obtain new customers at reasonable cost, retain
existing customers, encourage repeat purchases or convert
visitors to our websites into customers;
 
  • increase awareness of the Ctrip brand and
continue to build user loyalty;
 
  • retain existing hotels, airlines and other
suppliers of travel services or expand our service offerings on
satisfactory terms from our travel suppliers;
 
  • adequately and efficiently operate, upgrade and
develop the systems that we use to process customers’
reservations;
 
  • maintain adequate control of our expenses;
 
  • attract and retain qualified personnel;
 
  • respond to technological changes; or
 
  • respond to competitive market conditions.

         
If we are unsuccessful in addressing any of these
risks, our business will be materially adversely affected.

We have sustained losses in the past and may
experience earnings declines or net losses in the
future.

         
We sustained net losses in the periods prior to
2002. We cannot assure you that we can sustain profitability or
avoid net losses in the future. We expect that our operating
expenses will increase and the degree of increase in these
expenses will be largely based on anticipated organizational
growth and revenue trends. As a result, any decrease or delay in
generating additional sales volume and revenue could result in
substantial operating losses.

Declines or disruptions in the travel industry
generally could reduce our revenue.

         
A large part of our business is currently driven
by the trends that occur in the travel industry in China,
including the hotel, airline and packaged-tour industries. As
the travel industry is highly sensitive to business and personal
discretionary spending levels, it tends to decline during
general economic downturns. In addition, other adverse trends or
events that tend to reduce travel and are likely to reduce our
revenues include:

  • a recurrence of SARS or any other serious
contagious diseases;
 
  • increased prices in the hotel, airline, or other
travel-related industries;

11


 
  • increased occurrence of travel-related accidents;
 
  • poor weather conditions; and
 
  • natural disasters.

         
We could be severely affected by changes in the
travel industry and will, in many cases, have little or no
control over those changes.

The recurrence of SARS may materially and
adversely affect our business and operating results.

         
In early 2003, several economies in Asia,
including Hong Kong and China, were affected by the outbreak of
SARS. The travel industry in China, Hong Kong and some other
parts of Asia suffered tremendously as a result of the outbreak
of SARS. Although none of our employees was infected with SARS,
our business and operating results were adversely affected.
Total room nights booked through us decreased from over 131,000
and over 123,000 in May 2002 and June 2002, respectively, to
over 37,000 and over 110,000 in May 2003 and June 2003,
respectively.

         
If there is a recurrence of an outbreak of SARS,
it may adversely affect our business and operating results. For
example, a future SARS outbreak could result in quarantines or
closures to our customer service center in Shanghai if our
employees are infected with SARS. In addition, ongoing concerns
regarding SARS, particularly its effect on travel, could
negatively impact our China-based customers’ desire to
travel. If there is a recurrence of an outbreak of SARS, travel
to and from SARS-affected regions could be curtailed. Continued
or additional restrictions on travel to and from these and other
regions on account of SARS could have a material adverse effect
on our business, results of operations and financial condition.

Our business may be harmed if our
infrastructure and technology are damaged or otherwise fail or
become obsolete.

         
Our customer service center and substantially all
of our computer and communications systems are located at a
single facility in Shanghai and are therefore vulnerable to
damage or interruption from human error, computer viruses, fire,
flood, power loss, telecommunications failure, physical or
electronic break-ins, sabotage, vandalism, natural disasters and
similar events. We currently do not have redundant systems and
do not carry business interruption insurance to compensate us
for losses that may occur.

         
We use an internally developed booking software
system that supports nearly all aspects of our booking
transactions. Our business may be harmed if we are unable to
upgrade our systems and infrastructure fast enough to
accommodate future traffic levels, or to avoid obsolescence, or
successfully integrate any newly developed or purchased
technology with our existing system. Capacity constraints could
cause unanticipated system disruptions, slower response times,
poor customer service, impaired quality and speed of
reservations and confirmations, and delays in reporting accurate
financial and operating information. These factors could cause
us to lose customers and suppliers.

If we are unable to maintain existing, and
establish new, arrangements with hotel suppliers similar to
those we currently have, our business may suffer.

         
If we are unable to maintain satisfactory
relationships with our existing hotel suppliers, or if our hotel
suppliers establish similar or more favorable relationships with
our competitors, our operating results and our business would be
harmed, because we would not have the necessary supply of hotel
rooms or hotel rooms at satisfactory rates to meet the needs of
our customers. Our business depends significantly upon our
ability to contract with hotels in advance for the guaranteed
availability of a specified number of hotel rooms. We rely on
hotel suppliers to provide us with rooms at discounted prices.
However, our contracts with our hotel suppliers are not
exclusive and most of the contracts must be renewed
semi-annually or annually. We cannot assure you that our hotel
suppliers will renew our contracts in the future on terms
similar to those we currently have. Furthermore, in order to
maintain and grow our business, we will need to establish new
arrangements with hotels in our existing markets and in new
markets. We cannot assure you that we will be

12


 

able to identify appropriate hotels or enter into
arrangements with those hotels on favorable terms, if at all.
This failure could harm the growth of our business and,
consequently, the price of our ADSs.

If we are unable to maintain existing
arrangements with our airline ticket suppliers, our business may
be harmed.

         
We derive significant benefits, including
revenues, from our arrangements with major domestic airlines in
China and many international airlines operating flights
originating from China. Our airline ticket suppliers allow us to
book and sell tickets on their behalf and collect commissions on
tickets booked and sold through us. Although we currently have
supply relationships with these airlines, these airlines also
compete with us for ticket bookings and have entered into
similar arrangements with many of our competitors and may
continue to do so in the future. Such arrangements may be on
better terms than we have. We cannot assure you that any of
these airlines will continue to have supplier relationships with
us. The loss of these supplier relationships would impair the
profitability of our business as we would lose a significant
source of our net revenues.

If we fail to increase our brand recognition,
we may face difficulty in obtaining new business partners and
consumers, and our business may be harmed.

         
We believe that establishing, maintaining and
enhancing the Ctrip brand is a critical aspect of our efforts to
grow our customer base and obtain new business partners. Some of
our potential competitors already have well-established brands
in the travel industry, increasing the importance of increasing
and maintaining our brand recognition. The promotion of our
brand will depend largely on our success in maintaining a
sizeable and active customer base, providing high-quality
customer service and organizing effective marketing and
advertising programs. If our current customer base significantly
declines, or the quality of our customer services substantially
deteriorates, or if we fail to cost-effectively promote and
maintain our brand, our business, operating results and
financial condition would be materially adversely affected.

New competitors face low entry barriers to our
industry, and if we do not compete successfully against new and
existing competitors, we may lose our market share, and our
profitability may be adversely affected.

         
We compete primarily with other consolidators of
hotel accommodations and flight reservation services, such as
www.elong.com. We also compete with traditional travel agencies.

         
In the future, we may also face competition from
new players in the hotel consolidation market in China and
abroad, such as expedia.com and hotels.com, that may enter China
in the future. We may face more competition from hotels and
airlines as they enter the discount rate market directly or
through alliances with other travel consolidators. Our industry
is characterized by relatively low fixed costs. In addition,
like all other consolidators, we do not have exclusive
arrangements with our travel suppliers. The combination of these
two factors presents potential entrants to our industry with
relatively low entry barriers.

         
Increased competition could reduce our operating
margins and profitability and result in loss of market share.
Some of our existing and potential competitors may have
competitive advantages, such as significantly greater financial,
marketing or other resources and may be able to mimic and adopt
our business model. We cannot assure you that we will be able to
successfully compete against new or existing competitors.

We may not be able to prevent others from
using our intellectual property, which may harm our business and
expose us to litigation.

         
We regard our domain names, trade names, trade
marks and similar intellectual property as critical to our
success. We try to protect our intellectual property rights by
relying on trade mark protection and confidentiality laws and
contracts. The trade mark and confidentiality protection in
China may not be as effective in the United States. Policing
unauthorized use of proprietary technology is difficult and
expensive.

13


 

The steps we have taken may be inadequate to
prevent the misappropriation of our proprietary technology. Any
misappropriation could have a negative effect on our business
and operating results. Furthermore, we may need to go to court
to enforce our intellectual property rights. Litigation relating
to our intellectual property might result in substantial costs
and diversion of resources and management attention. See
“— Risks Related to Doing Business in
China — Uncertainties with respect to the Chinese
legal system could adversely affect us.”

Our business depends substantially on the
continuing efforts of our key executives, and our business may
be severely disrupted if we lose their services.

         
Our future success heavily depends upon the
continued services of our key executives, particularly James
Jianzhang Liang, Neil Nanpeng Shen and Min Fan, who are the
Chief Executive Officer, Chief Financial Officer and Executive
Vice President, respectively, of our company. We rely on their
expertise in business operations, finance and travel services
and on their relationships with our shareholders, suppliers and
regulators. We do not maintain key-man life insurance for any of
our key executives. If one or more of our key executives are
unable or unwilling to continue in their present positions, we
may not be able to easily replace them or at all. Therefore, our
business may be severely disrupted, our financial conditions and
results of operations may be materially and adversely affected,
and we may incur additional expenses to recruit and train
personnel.

         
In addition, if any of these key executives joins
a competitor or forms a competing company, we may lose customers
and suppliers. Each of our executive officers has entered into
an employment agreement with us, which contains confidentiality
and non-competition provisions. If any disputes arise between
our executive officers and us, we cannot assure you the extent
to which any of these agreements would be enforced in China,
where these executive officers reside and hold most of their
assets, in light of the uncertainties with China’s legal
system. See “— Risks Related to Doing Business in
China — Uncertainties with respect to the Chinese
legal system could adversely affect us.”

Chinese laws and regulations restrict foreign
investment in the air-ticketing, travel agency, advertising and
Internet content provision businesses, and substantial
uncertainties exist with respect to the application and
implementation of Chinese laws and regulations.

         
We are a Cayman Islands corporation and a foreign
person under Chinese laws. Due to the foreign ownership
restrictions in the air-ticketing, travel agency, advertising
and Internet content provision industries, we conduct part of
our business through contractual arrangements with our
affiliated Chinese entities. These entities hold the licenses
and approvals that are essential for our business operations.

         
In the opinion of our Chinese counsel, our
current ownership structures, the ownership structure of our
wholly owned subsidiaries and our affiliated Chinese entities,
the contractual arrangements among us, our wholly owned
subsidiaries, our affiliated Chinese entities and their
shareholders, and our business operations as described in this
prospectus, are in compliance with all existing Chinese laws,
rules and regulations. There are, however, substantial
uncertainties regarding the interpretation and application of
current or future Chinese laws and regulations. Accordingly, we
cannot assure you that Chinese government authorities will not
ultimately take a view contrary to the opinion of our Chinese
legal counsel.

         
If we and our affiliated Chinese entities are
found to be in violation of any existing or future Chinese laws
or regulations, the relevant governmental authorities would 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 Internet content
provision, air-ticketing, travel agency or advertising
businesses.

         
Any of these actions could cause significant
disruption to our business operations and may materially and
adversely affect our business, financial condition and results
of operations.

14


 

If our affiliated Chinese entities violate our
contractual arrangements with them, our business could be
disrupted, our reputation may be harmed and we may have to
resort to litigation to enforce our rights which may be
time-consuming and expensive.

         
As the Chinese government restricts our ownership
of Internet content provision, air-ticketing, travel agency and
advertising businesses in China, we depend on our affiliated
Chinese entities, in which we have no ownership interest, to
conduct part of our non-hotel reservation business activities
through a series of contractual arrangements, which are intended
to provide us with the effective control over these entities.
Although we have been advised by our Chinese counsel that these
contractual arrangements are valid, binding and enforceable
under current Chinese laws, these arrangements may not be as
effective in providing control as direct ownership of these
businesses. For example, our affiliated Chinese entities could
violate our contractual arrangements with them by, among other
things, failing to operate our air-ticketing, packaged-tour or
advertising business in an acceptable manner. In any such event,
we would have to rely on the Chinese legal system to enforce
those agreements. Any legal proceeding could result in the
disruption of our business, damage to our reputation, diversion
of our resources and the incurrence of substantial costs. See
“— Risks Related to Doing Business in
China — Uncertainties with respect to the Chinese
legal system could adversely affect us.”

The principal shareholders of our affiliated
Chinese entities have potential conflicts of interest with us,
which may adversely affect our business.

         
Our director, Qi Ji, and our officers, Min Fan
and Alex Nanyan Zheng, are also the principal shareholders of
our affiliated Chinese entities. Thus, conflicts of interest
between their duties to our company and our affiliated entities
may arise. We cannot assure you that when conflicts of interest
arise, these persons will act completely in our interests or
that conflicts of interests will be resolved in our favor. The
conflicts may result in our loss of corporate opportunities. In
addition, these persons could violate their non-competition or
employment agreements with us or their legal duties by diverting
business opportunities from us to others. In any such event, we
would have to rely on the Chinese legal system to enforce these
agreements. Any legal proceeding could result in the disruption
of our business, diversion of our resources and the incurrence
of substantial costs. See “— Risks Related to
Doing Business in China — Uncertainties with respect
to the Chinese legal system could adversely affect us.”

Our subsidiaries and affiliated entities in
China are subject to restrictions on paying dividends or making
other payments to us.

         
We are a holding company incorporated in the
Cayman Islands. We rely on dividends from our subsidiaries in
China and consulting and other fees paid to us by our affiliated
Chinese entities. Current Chinese regulations permit our
subsidiaries to pay dividends to us only out of their
accumulated profits, if any, determined in accordance with
Chinese accounting standards and regulations. In addition, our
subsidiaries in China are required to set aside at least 10% of
their respective accumulated profits each year, if any, to fund
certain reserve funds. These reserves are not distributable as
cash dividends. Further, if our subsidiaries and affiliated
entities in China incur debt on their own behalf in the future,
the instruments governing the debt may restrict their ability to
pay dividends or make other payments to us.

The air-ticketing, travel agency, advertising
and Internet industries are heavily regulated by the Chinese
government. If we fail to obtain or maintain all pertinent
permits and approvals, our business operations may be adversely
affected.

         
The air-ticketing, travel agency, advertising and
Internet industries are heavily regulated by the Chinese
government. We are required to obtain applicable permits or
approvals from different regulatory authorities in order to
conduct our business, including separate licenses for Internet
content provision, air-ticketing, advertising and travel agency
activities. If we fail to obtain or maintain any of the required
permits or approvals, we may be subject to various penalties,
such as fines or suspension of operations in these regulated
businesses, which could severely disrupt our business
operations. As a result, our financial condition and results of
operations may be adversely affected.

15


 

Our business could suffer if we do not
successfully manage current growth and potential future
growth.

         
Our business has grown very quickly in its few
years of operation. We have rapidly expanded our operations and
anticipate further expansion of our operations and workforce.
Our growth to date has placed, and our anticipated future
operations will continue to place, a significant strain on our
management, systems and resources. In addition to training and
managing our workforce, we will need to continue to improve and
develop our financial and managerial controls and our reporting
systems and procedures. We cannot assure you that we will be
able to efficiently or effectively manage the growth of our
operations, and any failure to do so may limit our future growth
and hamper our business strategy.

Future acquisitions may have an adverse effect
on our ability to manage our business.

         
Selective acquisitions form part of our strategy
to further expand our business. If we are presented with
appropriate opportunities, we may acquire additional
complementary companies, products or technologies. Future
acquisitions and the subsequent integration of new companies
into ours would require significant attention from our
management. The diversion of our management’s attention and
any difficulties encountered in any integration process could
have an adverse effect on our ability to manage our business.
Future acquisitions would expose us to potential risks,
including risks associated with the assimilation of new
operations, technologies and personnel, unforeseen or hidden
liabilities, the diversion of resources from our existing
businesses and technologies, the inability to generate
sufficient revenue to offset the costs and expenses of
acquisitions, and potential loss of, or harm to, relationships
with employees, customers and suppliers as a result of
integration of new businesses.

We may need additional capital and we may not
be able to obtain it.

         
We believe that our current cash and cash
equivalents, cash flow from operations and the proceeds from
this offering will be sufficient to meet our anticipated cash
needs for the foreseeable future. We may, however, require
additional cash resources due to changed business conditions or
other future developments, including any investments or
acquisitions we may decide to pursue. If these resources are
insufficient to satisfy our cash requirements, we may seek to
sell additional equity or debt securities or obtain a credit
facility. The sale of additional equity securities could result
in additional dilution to our shareholders. The incurrence of
indebtedness would result in increased debt service obligations
and could result in operating and financing covenants that would
restrict our operations. We cannot assure you that financing
will be available in amounts or on terms acceptable to us, if at
all.

We rely on services from third parties to
carry out our business and to deliver our products to customers,
and if there is any interruption or deterioration in the quality
of these services, our customers may not continue using our
services.

         
We rely on third-party computer systems to host
our websites, as well as third-party licenses for some of the
software underlying our technology platform. In addition, we
rely on third-party air-ticketing agencies to issue airline
tickets, confirmations and deliveries in some cities in China.
Any interruption in our ability to obtain the products or
services of these or other third parties or deterioration in
their performance could impair the timing and quality of our own
service. If our service providers fail to deliver airline
tickets in a timely manner to our customers, our services will
not meet the expectations of our customers and our reputation
and brand will be damaged. Furthermore, if our arrangements with
any of these third parties are terminated, we may not find an
alternate source of support on a timely basis or on terms as
advantageous to us.

If our hotel suppliers or customers provide us
with untrue information regarding our customers’ stay, our
commission income and revenues may decrease.

         
Currently, a substantial portion of our revenues
is represented by commissions received from hotels for room
nights booked through us. Generally, we do not receive payment
from our customers on behalf of our hotel suppliers, as our
customers pay hotels directly. To confirm whether a customer
adheres to the

16


 

booked itinerary, we make routine inquiries with
the hotel and, occasionally, the customer. We rely on the hotel
and the customer to give us truthful information regarding the
customer’s check-in and check-out dates, which information
forms the basis for calculating the commission we are entitled
to receive from the hotel. If our hotel suppliers or customers
provide us with untrue information with respect to our
customers’ length of stay at the hotels, our hotel revenue
may decrease.

As we begin to expand into the merchant
business, we may suffer losses if we are unable to predict the
amount of inventory we will need to purchase.

         
We plan to gradually establish merchant business
relationships with selected travel service suppliers beginning
in the second or third quarter of 2004. In the merchant business
relationship, we would buy hotel rooms and/or airline tickets in
advance before selling them to our customers and thereby bear
the inventory risk. If we do not correctly predict demand for
hotel rooms and airline tickets that we are committed to
purchase, we would be responsible for covering the cost of the
hotel rooms and airline tickets we are unable to sell.

We may be subject to litigation for
information provided on our websites, which may be
time-consuming to defend.

         
Our websites contain information about hotels,
flights, popular vacation destinations and other travel-related
topics. It is possible that if any information, accessible on
our websites, contains errors or false or misleading
information, third parties could take action against us for
losses incurred in connection with the use of such information.
Any claims, with or without merit, could be time-consuming to
defend, result in litigation and divert management’s
attention and resources.

We could be liable for breaches of security on
our websites and fraudulent transactions by users of our
websites.

         
Currently, a portion of our transactions are
conducted through our websites. In such transactions, secured
transmission of confidential information (such as
customers’ itineraries, hotel and other reservation
information, credit card numbers and expiration dates, personal
information and billing addresses) over public networks is
essential to maintain consumer and supplier confidence. Our
current security measures may not be adequate. Security breaches
could expose us to litigation and possible liability for failing
to secure confidential customer or supplier information and
could harm our reputation and ability to attract customers.

If we are unable to attract, train and retain
key individuals and highly skilled employees, our business may
be adversely affected.

         
If our business continues to expand, we will need
to hire additional employees, including travel supplier
management personnel to maintain and expand our travel supplier
network, information technology and engineering personnel to
maintain and expand our websites, customer service center and
systems, and customer support personnel to serve an increasing
number of customers. If we are unable to identify, attract,
hire, train and retain sufficient employees in these areas,
users of our websites and customer service center may have
negative experiences and turn to our competitors, which could
adversely affect our business and results of operations.

We have limited business insurance coverage in
China.

         
The insurance industry in China is still at an
early stage of development. Insurance companies in China offer
limited business insurance products. As a result, we do not have
any business liability or disruption insurance coverage for our
operations in China. Any business disruption, litigation or
natural disaster might result in substantial costs and diversion
of resources.

17


 

Facts and statistics in this prospectus
relating to the China travel industry and economy may be
inaccurate.

         
Facts and statistics in this prospectus relating
to the Chinese travel industry and economy are derived from
various government and institute research publications. While we
have taken reasonable care to ensure that the facts and
statistics presented are accurately reproduced from such
sources, they have not been independently verified by us. Due to
possibly flawed or ineffective collection methods and other
problems in China, the statistics in this prospectus may be
inaccurate or may not be comparable to statistics produced for
other economies and should not be unduly relied upon. Further,
there can be no assurance that they are stated or compiled on
the same basis or with the same degree of accuracy as may be the
case in the U.S. or elsewhere.

Risks Related to Doing Business in
China

Adverse changes in political and economic
policies of the Chinese government could have a material adverse
effect on the overall economic growth of China, which could
reduce the demand for our services and adversely affect our
competitive position.

         
Substantially all of our operations are conducted
in China and substantially all of our revenues are sourced from
China. Accordingly, our results of operations, financial
condition and prospects are subject to a significant degree to
the economic, political and legal developments of China. Since
the late 1970s, the Chinese government has been reforming the
economic system in China. These reforms have resulted in
significant economic growth. However, any economic reform
policies or measures in China may from time to time be modified
or revised. Any adverse changes in economic conditions in China,
in policies of the Chinese government or in laws and regulations
in China, could have a material adverse effect on the overall
economic growth of China and investment in the travel industry.
Such developments could adversely affect our businesses, lead to
reduction in demand for our services and adversely affect our
competitive position.

Slow-down of the Chinese economy may slow down
our growth and profitability.

         
Our financial results have been, and are expected
to continue to be, affected by the growth in the Chinese economy
and travel industry. Although the Chinese economy has grown
significantly in the past decade, there can be no assurance that
growth of the Chinese economy will continue or that any
slow-down will not have a negative effect on our business. The
overall Chinese economy affects our profitability, since
expenditures for travel may decrease in a slowing economy.

Future movements in exchange rates between the
U.S. dollar and RMB may adversely affect the value of our
ADSs.

         
We are exposed to foreign exchange risk arising
from various currency exposures. Some of our expenses are
denominated in foreign currencies while almost all of our
revenues are denominated in RMB, the legal currency in China. We
have not used any forward contracts or currency borrowings to
hedge our exposure to foreign currency risk. The value of RMB is
subject to changes in the Chinese government’s policies.
Although our exposure to foreign exchange risks is limited, the
value of your investment in our ADSs will be affected by the
foreign exchange rate between the U.S. dollar and RMB, because
the value of our business is effectively denominated in RMB,
while our ADSs will be traded in U.S. dollars.

Restrictions on currency exchange may limit
our ability to receive and use our revenues
effectively.

         
Because substantially all of our revenues are in
the form of 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. The principal regulation governing foreign
currency exchange in China is the Foreign Currency
Administration Rules (1996), as amended. Under the Rules, RMB is
freely convertible for trade and service-related foreign
exchange transactions, but not for direct investment, loan or
investment in securities outside China unless the prior approval
of the State Administration of Foreign

18


 

Exchange of the People’s Republic of China
is obtained. Although the Chinese government regulations now
allow greater convertibility of RMB for current account
transactions, significant restrictions still remain. For
example, foreign exchange transactions under our
subsidiaries’ capital account, including principal payments
in respect of foreign currency-denominated obligations, remain
subject to significant foreign exchange controls and the
approval of the State Administration of Foreign Exchange. These
limitations could affect our ability to obtain foreign exchange
for capital expenditures. We cannot be certain that the Chinese
regulatory authorities will not impose more stringent
restrictions on the convertibility of RMB, especially with
respect to foreign exchange transactions.

Online payment systems in China are at an
early stage of development and may restrict our ability to
expand our online commerce service business.

         
Online payment systems in China are at an early
stage of development. Although major Chinese banks are
instituting online payment systems, these systems are not as
widely available or acceptable to consumers in China as in the
United States and other developed countries. In addition, only a
limited number of consumers in China have credit cards or debit
cards, relative to countries like the United States. The lack of
adequate online payment systems may limit the number of online
commerce transactions that we can service. If online payment
services do not develop, our ability to grow our online commerce
business may be limited.

The Internet market has not been proven as an
effective commercial medium in China.

         
The market for Internet products and services in
China has only recently begun to develop. The Internet
penetration rate in China is lower than those in the United
States and other developed countries. Since the Internet is an
unproven medium for commerce in China, our future operating
results from online services will depend substantially upon the
increased use and acceptance of the Internet for distribution of
products and services and facilitation of commerce in China.

         
The Internet may not become a viable commercial
marketplace in China for various reasons in the foreseeable
future. More salient impediments to Internet development in
China include:

  • consumer dependence on traditional means of
commerce;
 
  • inexperience with the Internet as a sales and
distribution channel;
 
  • inadequate development of the necessary
infrastructure to facilitate online commerce;
 
  • concerns about security, reliability, cost, ease
of deployment, administration and quality of service associated
with conducting business over the Internet;
 
  • inexperience with credit card usage or with other
means of electronic payment; and
 
  • limited use of personal computers.

         
If the Internet is not widely accepted as a
medium for online commerce in China, our ability to grow our
online business would be impeded.

Uncertainties with respect to the Chinese
legal system could adversely affect us.

         
We conduct our business primarily through our
wholly owned subsidiaries incorporated in China. Our
subsidiaries are generally subject to laws and regulations
applicable to foreign investment in China and, in particular,
laws applicable to wholly foreign-owned enterprises. In
addition, we depend on several affiliated entities in China to
honor their service agreements with us. Almost all of these
agreements are governed by Chinese law and disputes arising out
of these agreements are expected to be decided by arbitration in
China. The Chinese legal system is based on written statutes.
Prior court decisions may be cited for reference but have
limited precedential value. Since 1979, Chinese legislation and
regulations have significantly enhanced the protections afforded
to various forms of foreign investments in China. However, since
these laws and regulations are relatively new and the Chinese
legal system is still evolving, the interpretations of many laws,

19


 

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.

We have attempted to comply with the Chinese
government regulations regarding licensing requirements by
entering into a series of agreements with our affiliated Chinese
entities. If the Chinese laws and regulations change, our
business in China may be adversely affected.

         
To comply with the Chinese government regulations
regarding licensing requirements, we have entered into a series
of agreements with our affiliated Chinese entities to exert our
operational control over them and secure consulting fees and
other payments from them. Although we have been advised by our
Chinese counsel that our arrangements with our affiliated
Chinese entities are valid under current Chinese law and
regulations, we cannot assure you that we will not be required
to restructure our organization structure and operations in
China to comply with changing and new Chinese laws and
regulations. Restructuring of our operations may result in
disruption of our business, diversion of management attention
and the incurrence of substantial costs.

We may have to register our encryption
software with Chinese regulatory authorities, and if they
request that we change our encryption software, our business
operations will be disrupted as we develop or license
replacement software.

         
Pursuant to the Regulations for the
Administration of Commercial Encryption promulgated in 1999,
foreign and domestic Chinese companies operating in China are
required to register and disclose to Chinese regulatory
authorities the commercial encryption products they use. Because
these regulations do not specify what constitutes encryption
products, we are unsure whether or how they apply to us and the
encryption software we utilize. We may be required to register
or apply for permits with the relevant Chinese regulatory
authorities for our current or future encryption software. If
Chinese regulatory authorities request that we change our
encryption software, we may have to develop or license
replacement software, which could disrupt our business
operations. In addition, we may be subject to potential
liability for using software that is subsequently deemed to be
illegal by the relevant Chinese regulatory authorities. These
potential liabilities might include fines, product confiscation
and criminal sanctions. We cannot assure you that our business,
financial condition and results of operations will not be
materially and adversely affected by the application of these
regulations.

The continued growth of the Chinese Internet
market depends on the establishment of an adequate
telecommunications infrastructure.

         
Although private sector Internet service
providers currently exist in China, almost all access to the
Internet is maintained through ChinaNet owned by China Telecom
under the administrative control and regulatory supervision of
China’s Ministry of Information Industry. In addition, the
national networks in China connect to the Internet through a
government-controlled international gateway. This international
gateway is the only channel through which a domestic Chinese
user can connect to the international Internet network. We rely
on this infrastructure and China Telecom to provide data
communications capacity primarily through local
telecommunications lines. Although the government has announced
plans to develop aggressively the national information
infrastructure, we cannot assure you that this infrastructure
will be developed. In addition, we will have no access to
alternative networks and services, on a timely basis if at all,
in the event of any infrastructure disruption or failure. The
Internet infrastructure in China may not support the demands
associated with continued growth in Internet usage.

20


 

Risks Related to the Shares and ADSs

There has been no public market for our
ordinary shares or ADSs prior to this offering, and therefore
the price may fall below the public offering price.

         
Prior to this initial public offering, there has
been no public market for our ordinary shares or ADSs. The
initial public offering price for our ADSs will be determined by
negotiations between us and the underwriters and may bear no
relationship to the market price for our ADSs after the initial
public offering. We cannot assure you that an active trading
market will develop or that the market price of our ADSs will
not decline below the initial public offering price.

Your right to participate in any future rights
offerings may be limited, which may cause dilution to your
holdings.

         
We may from time to time distribute rights to our
shareholders, including rights to acquire our securities. Under
the deposit agreement, the depositary bank will not offer you
those rights unless the distribution to ADS holders of both the
rights and any related securities are either registered under
the U.S. Securities Act of 1933, as amended, or the Securities
Act, or exempt from registration under the Securities Act. We
are under no obligation to file a registration statement with
respect to any such rights or securities or to endeavor to cause
such a registration statement to be declared effective.
Moreover, we may not be able to establish an exemption from
registration under the Securities Act. Accordingly, you may be
unable to participate in our rights offerings and may experience
dilution in your holdings.

You will experience immediate and substantial
dilution in the book value of ADSs purchased.

         
The public offering price per ADS will be
substantially higher than the net tangible book value per
ordinary share issued prior to this offering. Purchasers of our
ADSs offered in the offering will therefore incur an immediate
and substantial dilution in the net tangible book value per ADSs
from the initial public offering price. See “Dilution.”

The future sales by our existing shareholders
of a substantial number of our ADSs in the public market could
adversely affect the price of our ADSs.

         
If our shareholders sell substantial amounts of
our ordinary shares or ADSs, including those issued upon the
exercise of outstanding options, in the public market following
this offering, the market price of our ADSs could fall. Such
sales also might make it more difficult for us to sell equity or
equity-related securities in the future at a time and price that
we deem appropriate. The 8,400,000 ordinary shares
represented by 4,200,000 ADSs offered in this offering will
be eligible for immediate resale in the public market without
restrictions, and those held by our existing shareholders may
also be sold in the public market in the future subject to the
restrictions contained in Rule 144 under the Securities Act
and applicable lock-up agreements. If any existing shareholder
or shareholders sell a substantial amount of ordinary shares
after the expiration of the lock-up period, the prevailing
market price for our ADSs could be adversely affected. See
“Underwriting” and “Shares Eligible for Future
Sale” for additional information regarding resale
restrictions.

The market price for our ADSs may be
volatile.

         
The market price for our ADSs is likely to be
highly volatile and subject to wide fluctuations in response to
factors including the following:

  • actual or anticipated fluctuations in our
quarterly operating results;
 
  • announcements of new services by us or our
competitors;
 
  • changes in financial estimates by securities
analysts;
 
  • conditions in the Internet, online commerce or
travel industries;

21


 
  • changes in the economic performance or market
valuations of other Internet, online commerce or travel
companies;
 
  • announcements by us or our competitors of
significant acquisitions, strategic partnerships, joint ventures
or capital commitments;
 
  • additions or departures of key personnel;
 
  • release of lock-up or other transfer restrictions
on our outstanding ADSs or sales of additional ordinary shares
or ADSs; and
 
  • potential litigation.

         
In addition, the securities market have from time
to time experienced significant price and volume fluctuations
that are not related to the operating performance of particular
companies. These market fluctuations may also materially and
adversely affect the market price of our ADSs.

You may not be able to exercise your right to
vote.

         
As a holder of ADSs, you may instruct the
depositary of our ADSs to vote the shares underlying your ADSs
but only if we ask the depositary to ask for your instructions.
Otherwise, you will not be able to exercise your right to vote
unless you withdraw the shares. However, you may not know about
the meeting enough in advance to withdraw the shares. If we ask
for your instructions, the depositary will notify you of the
upcoming vote and arrange to deliver our voting materials to
you. We cannot assure you that you will receive the voting
materials in time to ensure that you can instruct the depositary
to vote your shares. In addition, the depositary and its agents
are not responsible for failing to carry out voting instructions
or for the manner of carrying out voting instructions. This
means that you may not be able to exercise your right to vote
and there may be nothing you can do if the shares underlying
your ADSs are not voted as you requested.

You may not receive distributions on ordinary
shares or any value for them if it is illegal or impractical to
make them available to you.

         
The depositary of our ADSs has agreed to pay to
you the cash dividends or other distributions it or the
custodian receives on ordinary shares or other deposited
securities after deducting its fees and expenses. You will
receive these distributions in proportion to the number of
ordinary shares your ADSs represent. However, the depositary is
not responsible if it decides that it is unlawful or impractical
to make a distribution available to any holders of ADSs. We have
no obligation to register ADSs, ordinary shares, rights or other
securities under U.S. securities laws. We also have no
obligation to take any other action to permit the distribution
of ADSs, ordinary shares, rights or anything else to holders of
ADSs. This means that you may not receive the distribution we
make on our ordinary shares or any value for them if it is
illegal or impractical for us to make them available to you.
These restrictions may have a material adverse effect on the
value of your ADSs.

You may lose some or all of the value of the
distribution by the depositary if the depositary cannot convert
RMB into U.S. dollars on a reasonable basis.

         
The depositary of our ADSs has agreed to pay to
you the cash dividends or other distributions it or the
custodian receives on ordinary shares or other deposited
securities after deducting its fees and expenses. You will
receive these distributions in proportion to the number of
ordinary shares your ADSs represent.

         
The depositary will convert any cash dividend or
other cash distribution we pay on the ordinary shares into
U.S. dollars, if it can do so on a reasonable basis and can
transfer the U.S. dollars to the United States. If that is
not possible or if any approval from any government is needed
and cannot be obtained, the depositary is allowed to distribute
RMB only to those ADS holders to whom it is possible to do so.
It will hold RMB it cannot convert for the account of the ADS
holders who have not been paid. However, it will not invest RMB
and it will not be liable for interest. In addition, if the
exchange rates fluctuate during a time when the

22


 

depositary cannot convert RMB, the ADS holders
who have not been paid may lose some or all of the value of the
distribution.

You may be subject to limitations on transfer
of your ADSs.

         
Your ADSs represented by the ADRs are
transferable on the books of the depositary. However, the
depositary may close its transfer books at any time or from time
to time when it deems expedient in connection with the
performance of its duties. In addition, the depositary may
refuse to deliver, transfer or register transfers of ADSs
generally when our books or the books of the depositary are
closed, or at any time if we or the depositary thinks it
advisable to do so because of any requirement of law or of any
government or governmental body, or under any provision of the
deposit agreement, or for any other reason.

The sale, deposit, cancellation and transfer
of the ADSs issued after exercise of rights may be
restricted.

         
If we offer holders of our ordinary shares any
rights to subscribe for additional shares or any other rights,
the depositary may make these rights available to you. However,
the depositary may allow rights that are not distributed or sold
to lapse. In that case, you will receive no value for them. In
addition, U.S. securities laws may restrict the sale,
deposit, cancellation and transfer of the ADSs issued after
exercise of rights. Under the deposit agreement, the depositary
will not distribute rights to holders of ADSs unless the
distribution and sale of rights and the securities to which
these rights relate are either exempt from registration under
the Securities Act with respect to all holders of ADSs, or are
registered under the provisions of the Securities Act. We can
give no assurance that we can establish an exemption from
registration under the Securities Act, and we are under no
obligation to file a registration statement with respect to
these rights or underlying securities or to endeavor to have a
registration statement declared effective. Accordingly, you may
be unable to participate in our rights offerings and may
experience dilution of your holdings as a result.

If our subsidiaries are restricted from paying
dividends and other distributions to us, our primary internal
source of funds would decrease.

         
We are a holding company with no significant
assets other than our equity interests in our wholly owned
subsidiaries in China and Hong Kong. As a result, we rely on
dividends, consulting and other fees paid to us by our
subsidiaries and affiliated entities in China, including the
funds necessary to service any debt we may incur. If our
subsidiaries incur debts on their own behalf in the future, the
instruments governing the debts may restrict their ability to
pay dividends or make other distributions to us, which in turn
would limit our ability to pay dividends on our ordinary shares.
Chinese regulations permit payment of dividends only out of
accumulated profits as determined in accordance with Chinese
accounting standards and regulations. Our subsidiaries and
affiliated entities in China are also required to set aside a
portion of their after-tax profits according to Chinese
accounting standards and regulations to fund certain reserve
funds that are not distributable as cash dividends.

You may face difficulties in protecting your
interests, and our ability to protect our rights through the
U.S. federal courts may be limited, because we are incorporated
under Cayman Islands law.

         
Our corporate affairs are governed by our
memorandum and articles of association and by the Companies Law
(2003 Revision) and common law of the Cayman Islands. The rights
of our shareholders and the fiduciary responsibilities of our
directors under Cayman Islands law are not as clearly
established as they would be under statutes or judicial
precedents in the United States. In particular, the Cayman
Islands has a less developed body of securities laws as compared
to the United States, and provides significantly less protection
to investors. Therefore, our public shareholders may have more
difficulties in protecting their interests in the face of
actions by our management, directors or controlling shareholders
than would shareholders of a corporation incorporated in a
jurisdiction in the United States. In addition, Cayman Islands
companies may not have standing to initiate a shareholder
derivative action before the federal courts of the United
States. As a result, our ability to protect our interests if we
are harmed in a manner that would otherwise enable us to sue in
a United States federal court may be limited.

23


 

Your ability to bring an action against us or
against our directors and officers, or to enforce a judgment
against us or them, will be limited because we are incorporated
in the Cayman Islands, because we conduct a substantial portion
of our operations in China and because the majority of our
directors and officers reside outside of the United
States.

         
We are incorporated in the Cayman Islands, and we
conduct a substantial portion of our operations in China through
our wholly-owned subsidiaries and several affiliated entities in
China. Most of our directors and officers reside outside of the
United States and substantially all of the assets of those
persons are located outside of the United States. As a result,
it may be difficult or impossible for you to bring an action
against us or against these individuals in the Cayman Islands or
in China in the event that you believe that your rights have
been infringed under the securities laws or otherwise. Even if
you are successful in bringing an action of this kind, the laws
of the Cayman Islands and of China may render you unable to
enforce a judgment against our assets or the assets of our
directors and officers. For more information regarding the
relevant laws of the Cayman Islands and China, see
“Enforceability of Civil Liabilities.”

We have not determined any specific use for a
significant portion of the proceeds from this offering and we
may use the proceeds in ways with which you may not
agree.

         
We have not allocated the majority of the net
proceeds of this offering to any particular purpose. Rather, our
management will have considerable discretion in the application
of the net proceeds received by us. You will not have the
opportunity, as part of your investment decision, to assess
whether proceeds are being used appropriately. You must rely on
the judgment of our management regarding the application of the
net proceeds of this offering. The net proceeds may be used for
corporate purposes that do not improve our efforts to maintain
profitability or increase our share price. The net proceeds from
this offering may be placed in investments that do not produce
income or that lose value.

24


 

SPECIAL NOTE REGARDING FORWARD-LOOKING
STATEMENTS

         
Many statements made in this prospectus contain
forward-looking statements that reflect our current expectations
and views of future events. These forward-looking statements can
be identified by words or phrases such as “may,”
“will,” “expect,” “anticipate,”
“aim,” “estimate,” “intend,”
“plan,” “believe,” “is/are likely
to” or other similar expressions. We have based these
forward-looking statements largely on our current expectations
and projections about future events and financial trends that we
believe may affect our financial condition, results of
operations, business strategy and financial needs. These
forward-looking statements include, among other things:

  • our anticipated growth strategies;
 
  • our future business development, results of
operations and financial condition;
 
  • our ability to continue to control costs and
maintain quality; and
 
  • the expected growth of and change in the travel
and online commerce industries in China.

         
The forward-looking statements included in the
prospectus are subject to risks, uncertainties and assumptions
about our company. Our company’s actual results of
operations may differ materially from the forward-looking
statements as a result of risk factors described under
“Risk Factors” and elsewhere in this prospectus,
including, among other things:

  • our continuing ability to retain our customer
base, build user loyalty and increase recognition of the Ctrip
brand;
 
  • the maintenance and expansion of our supplier
relationships;
 
  • risks inherent in the travel services businesses;
 
  • our reliance on our technological platform; and
 
  • risks associated with our holding company
structure and the regulatory environment in China.

         
These risks are not exhaustive. Other sections of
this prospectus include additional factors that could adversely
impact our business and financial performance. Moreover, we
operate in an emerging and evolving environment. New risk
factors emerge from time to time, and it is not possible for our
management to predict all risk factors, nor can we assess the
impact of all factors on our business or the extent to which any
factor, or combination of factors, may cause actual results to
differ materially from those contained in any forward-looking
statements.

         
You should not rely upon forward-looking
statements as predictions of future events. We undertake no
obligation to update or revise any forward-looking statements,
whether as a result of new information, future events or
otherwise.

25


 

USE OF PROCEEDS

         
We estimate that the net proceeds to us from this
offering, after deducting underwriting discounts and the
estimated offering expenses payable by us, will be approximately
US$36.2 million, assuming the initial offering price of
US$15.0 per ADS. We will not receive any of the proceeds from
the sale of ADSs by the selling shareholders.

         
The principal purposes of this offering are to
(i) create a public market for our ordinary shares for the
benefits of all shareholders, (ii) retain talented
employees by providing them with equity incentives, and
(iii) facilitate possible acquisitions of complementary
businesses. We believe that, based on current levels of
operations and anticipated growth, our cash from operations,
together with cash currently available, without giving effect to
the net proceeds of this offering, will be sufficient to fund
our operations for the foreseeable future.

         
We may use the net proceeds from this offering as
follows:

  • approximately US$3.0 million to fund working
capital;

 

  • approximately US$5.0 million to fund capital
expenditures, including technology upgrades;

 

  • approximately US$5.0 million to expand our
sales and marketing efforts; and

 
  • the balance for general corporate purposes,
including funding possible acquisitions of complementary
businesses, such as travel consolidators and travel agencies in
Greater China, particularly in China, although we are not
currently negotiating any such transactions.

         
As of the date of this prospectus, we cannot
specify with certainty the particular uses for the net proceeds
we will receive upon the completion of this offering.
Accordingly, our management will have significant flexibility in
applying the net proceeds of the offering.

         
Pending use of the net proceeds, we intend to
hold our net proceeds in short-term bank deposits or invest them
in interest-bearing, investment grade securities.

26


 

DIVIDEND POLICY

         
We do not have a present plan to pay any cash
dividends on our ordinary shares, or indirectly on our ADSs,
with respect to 2003. We currently intend to recommend to our
shareholders, beginning in 2004, an annual dividend of not less
than 25% of our net income (after elimination of our accumulated
deficits), if any, subject to our results of operations and as
our board of directors deems appropriate. We intend to retain
the remainder of our available funds and any future earnings for
use in the operation and expansion of our business.

         
We rely on dividends, consulting and other fees
paid to us by our subsidiaries and affiliated entities in China.
In accordance with current Chinese laws and regulations, our
subsidiaries and affiliated entities in China are required to
allocate to their general reserves at least 10% of their
respective after-tax profits for the year determined in
accordance with Chinese accounting standards and regulations.
Each of our subsidiaries and affiliated entities in China may
stop allocations to its general reserve if such reserve has
reached 50% of its registered capital. In addition, Ctrip
Computer Technology and Ctrip Travel Information are required to
allocate portions of their respective after-tax profits to their
enterprise expansion funds and staff welfare and bonus funds at
the discretion of their boards of directors. Our affiliated
entities in China are required to allocate at least 5% of their
respective after-tax profits to their respective statutory
welfare funds. Allocations to these statutory reserves and funds
can only be used for specific purposes and are not transferable
to us in forms of loans, advances, or cash dividends.

         
Our board of directors has complete discretion as
to whether we will distribute dividends in the future, subject
to the approval of our shareholders. Even if our board of
directors determines to distribute dividends, the form,
frequency and amount of our dividends will depend upon our
future operations and earnings, capital requirements and
surplus, general financial condition, contractual restrictions
and other factors as the board of directors may deem relevant.
Any dividend we declare will be paid to the holders of ADSs,
subject to the terms of the deposit agreement, to the same
extent as holders of our ordinary shares, less the fees and
expenses payable under the deposit agreement. Any dividend we
declare will be distributed by the depositary bank to the
holders of our ADSs. Cash dividends on our ordinary shares,
including those represented by the ADSs, if any, will be paid in
U.S. dollars. See “Description of American Depositary
Shares.”

         
In December 2002, we declared and paid out of our
reserves cash dividends totaling RMB27.3 million
(US$3.3 million), which represented a return of capital, to
holders of our ordinary and preferred shares. Separately, as
part of our restructuring in connection with this offering, we
spun off Home Inns in August 2003 and distributed our Home Inns
shares to our shareholders in the form of dividends on a
pro rata as-converted basis.

27


 

CAPITALIZATION

         
The following table sets forth our cash and
capitalization, as of October 31, 2003:

  • on an actual basis;
 
  • on an as adjusted basis to reflect the conversion
of all of our preferred shares into ordinary shares, which will
occur automatically immediately prior to the closing of this
offering, and the issuance and sale of the 2,700,000 ADSs
offered hereby with estimated net proceeds of
US$36.2 million, after deducting underwriting discounts,
commissions and estimated offering expenses.

         
You should read this table together with our
consolidated financial statements and the related notes included
elsewhere in this prospectus and the information under
“Selected Consolidated Financial Data” and
“Management’s Discussion and Analysis of Financial
Condition and Results of Operations.”

                             
As of October 31, 2003

Actual As Adjusted


RMB RMB US$(1)
(unaudited) (unaudited) (unaudited)
(in thousands, except for share numbers)

Cash

    67,049       366,680       44,301  
     
     
     
 

Shareholders’ equity:

                       
 

Ordinary shares,

                       
   

US$0.01 par value; 49,157,064 shares authorized;
8,677,760 shares issued and outstanding;

    719       2,487       301  
 

Series A preferred shares,

                       
   

US$0.01 par value; 3,937,518 shares authorized,
issued and outstanding;

    326       —       —  
 

Series B preferred shares,

                       
   

US$0.01 par value; 6,556,573 shares
authorized, issued and outstanding;

    543       —       —  
 

Series C preferred shares,

                       
   

US$0.01 par value; 2,180,755 shares authorized,
issued and outstanding;

    181       —       —  

Additional paid-in capital

    141,254       440,167       53,179  

Deferred share-based compensation

    (4,441 )     (4,441 )     (537 )

Cumulative translation adjustments

    235       235       28  

Accumulated deficit

    (26,564 )     (26,564 )     (3,209 )
     
     
     
 
 

Total shareholders’ equity

    112,253       411,884       49,762  
     
     
     
 
   

Total capitalization

    112,253       411,884       49,762  
     
     
     
 

(1)  Translations of RMB amounts into
U.S. dollars were made at a rate of RMB8.2771 to US$1.00.
See “Exchange Rate Information.”

28


 

DILUTION

         
Our net tangible book value as of
September 30, 2003 was RMB11.38, or US$1.38 per ordinary
share, and US$2.76 per ADS. Net tangible book value per ordinary
share represents the amount of total tangible assets, minus the
amount of total liabilities, divided by the total number of
ordinary shares outstanding. Dilution is determined by
subtracting net tangible book value per ordinary share from the
assumed public offering price per ordinary share.

         
Without taking into account any other changes in
such net tangible book value after September 30, 2003,
other than to give effect to (i) the conversion of all of
our preferred shares into ordinary shares, which will occur
immediately prior to the closing of this offering, and
(ii) our sale of the 2,700,000 ADSs offered in this
offering, at an estimated price of US$15.00 per ADS with
estimated net proceeds of US$36.2 million after deduction
of underwriting discounts and commissions and estimated offering
expenses, our as adjusted net tangible book value at
September 30, 2003 would have been US$1.60 per outstanding
ordinary share, including ordinary shares underlying our
outstanding ADSs, and US$3.20 per ADS. This represents an
immediate increase in net tangible book value of US$0.22 per
ordinary share, or US$0.44 per ADS, to existing shareholders and
an immediate dilution in net tangible book value of US$5.90 per
ordinary share, or US$11.80 per ADS, to purchasers of ADSs in
this offering.

         
The following table illustrates the dilution on a
per ordinary share basis assuming that the initial public
offering price per ordinary share is US$7.50 and all ADSs are
exchanged for ordinary shares:

         

Assumed initial public offering price per
ordinary share

  US$ 7.50  

Net tangible book value per ordinary share

  US$ 1.38  
     
 

Amount of dilution in net tangible book value per
ordinary share to new investors in the offering

  US$ 5.90  
     
 

Amount of dilution in net tangible book value per
ADS to new investors in the offering

  US$ 11.80  
     
 

         
The following table summarizes on a pro forma
basis the differences as of September 30, 2003 between our
shareholders at September 30, 2003 and the new investors
with respect to the number of ordinary shares purchased from us,
the total consideration paid and the average price per ordinary
share paid.

                                                   
Ordinary Shares
Purchased Total Consideration Average Price Average


Per Ordinary Price Per
Number Percent Amount Percent Share ADS






US$ US$ US$

Shareholders as of September 30, 2003

    24,630,894       82.0 %     16,727,672       29.2 %     0.68       1.36  

New investors

    5,400,000       18.0       40,500,000       70.8       7.50       15.00  
     
     
     
     
     
     
 
 

Total

    30,030,894       100.0 %     57,227,672       100.0 %     8.18       16.36  
     
     
     
     
     
     
 

         
The discussion and tables above are based on the
number of ordinary shares and preferred shares outstanding as of
September 30, 2003, excluding (a) 2,247,420 ordinary
shares underlying options granted under our stock option plans
and outstanding as of September 30, 2003, and
(b) 668,090 ordinary shares available for issuance upon the
exercise of future grants under our stock option plans.

         
To the extent that any of the outstanding options
are exercised, there will be further dilution to new investors.

29


 

EXCHANGE RATE INFORMATION

         
Our business is primarily conducted in China and
denominated in RMB. However, periodic reports made to
shareholders will be expressed in U.S. dollars using the then
current exchange rates. For your convenience, this prospectus
contains translations of RMB amounts into U.S. dollars at
specific rates solely for the convenience of the reader. The
conversion of RMB into U.S. dollars in this prospectus is based
on the 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. Unless otherwise noted, all
translations from RMB to U.S. dollars and from
U.S. dollars to RMB in this prospectus were made at a rate
of RMB8.2771 to US$1.00, the noon buying rate in effect as of
September 30, 2003. The prevailing rate as of
December 2, 2003 was RMB8.2772 to US$1.00. We make no
representation that any RMB or U.S. dollar amounts could
have been, or could be, converted into U.S. dollars or RMB,
as the case may be, at any particular rate, the rates stated
below, or at all. The Chinese government imposes control over
its foreign currency reserves in part through direct regulation
of the conversion of RMB into foreign exchange and through
restrictions on foreign trade. The exchange rate from the
U.S. dollar to RMB has fluctuated between a range of
US$l.00 to RMB8.2272 and US$l.00 to RMB8.2772 between
January 1, 1998 and December 2, 2003.

         
The following table sets forth information
concerning exchange rates between RMB and U.S. dollar for
the periods indicated. These rates are provided solely for your
convenience and are not necessarily the exchange rates that we
used in this prospectus or will use in the preparation of our
periodic reports or any other information to be provided to you.
The source of these rates is the Federal Reserve Bank of New
York.

                                     
Noon Buying Rate

Period
Period End Average(1) Low High





(RMB per US$1.00)

1998

    8.2789       8.3006       8.3180       8.2774  

1999

    8.2795       8.2783       8.2800       8.2770  

2000

    8.2774       8.2784       8.2799       8.2768  

2001

    8.2766       8.2770       8.2786       8.2676  

2002

    8.2800       8.2770       8.2800       8.2669  

2003

                               
 

First Quarter

    8.2774       8.2776       8.2800       8.2766  
   

April

    8.2771       8.2772       8.2775       8.2768  
   

May

    8.2768       8.2769       8.2771       8.2768  
   

June

    8.2776       8.2771       8.2776       8.2768  
   

July

    8.2774       8.2773       8.2776       8.2768  
   

August

    8.2772       8.2747       8.2775       8.2272  
   

September

    8.2771       8.2772       8.2775       8.2768  
   

October

    8.2766       8.2768       8.2776       8.2765  
   

November

    8.2770       8.2769       8.2772       8.2766  
   

December (through December 2)

    8.2772       8.2772       8.2772       8.2772  


(1)  Annual averages are calculated from month-end
rates. Monthly averages are calculated using the average of the
daily rates during the relevant period.

30


 

ENFORCEABILITY OF CIVIL LIABILITIES

         
We are incorporated in the Cayman Islands because
of the following benefits found there:

  • political and economic stability;
 
  • an effective judicial system;
 
  • a favorable tax system;
 
  • the absence of exchange control or currency
restrictions; and
 
  • the availability of professional and support
services.

         
However, certain disadvantages accompany
incorporation in the Cayman Islands. These disadvantages include:

           
(1) the Cayman Islands has a less developed
body of securities laws as compared to the United States and
these securities laws provide significantly less protection to
investors; and
 
           
(2) Cayman Islands companies may not have
standing to sue before the federal courts of the United States.

         
Our constituent documents do not contain
provisions requiring that disputes, including those arising
under the securities laws of the United States, between us, our
officers, directors and shareholders, be arbitrated.

         
A substantial portion of our current operations
is conducted in China, and substantially all of our assets are
located in China. We also conduct part of our operations in Hong
Kong. We have appointed CT Corporation System, 111 Eighth
Avenue, New York, NY 10011, as our agent upon whom process may
be served in any action brought against us under the securities
laws of the United States. A majority of our directors and
officers are nationals or residents of jurisdictions other than
the United States and a substantial portion of their assets are
located outside the United States. As a result, it may be
difficult for a shareholder to effect service of process within
the United States upon these persons, or to enforce against us
or them judgments obtained in United States courts, including
judgments predicated upon the civil liability provisions of the
securities laws of the United States or any state in the United
States.

         
Maples and Calder Asia, our counsel as to Cayman
Islands law, Commerce & Finance Law Offices, our
counsel as to Chinese law, and Boughton Peterson Yang Anderson,
our counsel as to Hong Kong law, have advised us, respectively,
that there is uncertainty as to whether the courts of the Cayman
Islands, China and Hong Kong, respectively, would:

           
(1) recognize or enforce judgments of United
States courts obtained against us or our directors or officers
predicated upon the civil liability provisions of the securities
laws of the United States or any state in the United States; or
 
           
(2) entertain original actions brought in
each respective jurisdiction against us or our directors or
officers predicated upon the securities laws of the United
States or any state in the United States.

         
Maples and Calder Asia has further advised us
that a final and conclusive judgment in the federal or state
courts of the United States under which a sum of money is
payable, other than a sum payable in respect of taxes, fines,
penalties or similar charges, may be subject to enforcement
proceedings as a debt in the courts of the Cayman Islands under
the common law doctrine of obligation.

         
Commerce & Finance Law Offices has advised us
further that the recognition and enforcement of foreign
judgments are provided for under Chinese Civil Procedures Law.
Chinese courts may recognize and enforce foreign judgments in
accordance with the requirements of Chinese Civil Procedures Law
based either on treaties between China and the country where the
judgment is made or on reciprocity between jurisdictions.

31


 

         
Boughton Peterson Yang Anderson, in association
with Squire, Sanders and Dempsey, has further advised us that
enforcement of a foreign judgment in Hong Kong is subject to the
Foreign Judgments (Reciprocal Enforcement) Ordinance
(Cap. 319) of the laws of Hong Kong, or the Ordinance,
which provides that a final and conclusive judgment of a court
specified in an order under the Ordinance against a Hong Kong
company for a fixed sum of money and which is enforceable by
execution in the specified jurisdiction (other than a sum
payable in respect of taxes or like charges, fines or penalties,
in respect of any legal proceedings) may be registered in Hong
Kong in accordance with the Rules of the High Court of Hong Kong
and the provisions of the Ordinance and upon registration would
be enforceable in Hong Kong provided it is not subsequently set
aside by the courts of Hong Kong. The United States is not a
country specified in the orders passed under the Ordinance and
therefore any judgment granted by a United States court would be
enforceable in Hong Kong only if it is made the subject of a
Hong Kong judgment. A final judgment from a court in the United
States may be treated and sued upon in the courts of Hong Kong
as a liquidated sum.

32


 

SELECTED CONSOLIDATED FINANCIAL DATA

         
You should read the following information with
our consolidated financial statements and related notes, and
“Management’s Discussion and Analysis of Financial
Condition and Results of Operations” included elsewhere in
this prospectus.

         
The selected consolidated statement of operations
data for the years ended December 31, 2001 and 2002 and the
nine months ended September 30, 2003, and the consolidated
balance sheet data as of December 31, 2001 and 2002 and
September 30, 2003, are derived from our audited
consolidated financial statements included elsewhere in this
prospectus and should be read in conjunction with, and are
qualified in their entirety by reference to, these financial
statements and related notes. These consolidated financial
statements have been audited by PricewaterhouseCoopers and were
prepared in accordance with U.S. GAAP. The selected
consolidated statement of operations data for the year ended
December 31, 2000 and the nine months ended
September 30, 2002, and the selected consolidated balance
sheet data as of December 31, 2000 and September 30,
2002, are derived from our unaudited consolidated financial
statements included elsewhere in this prospectus and should be
read in conjunction with, and are qualified in their entirety by
reference to, these unaudited consolidated financial statements
and related notes. We have prepared the unaudited information on
the basis as the audited consolidated financial statements, and
have included, in our opinion, all adjustments, consisting only
of normal and recurring adjustments that we consider necessary
for a fair presentation of the financial information set forth
in those statements. Although we commenced operations in
June 1999, we have not included financial information for
the six-month period ended December 31, 1999, as such
information is not available on a comparative basis with the
audited financial information included in this prospectus.

                                                           
Year Ended December 31, Nine Months Ended September 30,


2000 2001 2002 2002 2002 2003 2003







RMB RMB RMB US$(1) RMB RMB US$(1)
(unaudited) (unaudited)
(in thousands, except for share and per share data)

Selected Consolidated Statements of Operation
Data:

                                                       

Net revenues

    6,453       43,984       100,049       12,087       68,809       105,717       12,772  

Costs of services

    (1,950 )     (7,940 )     (13,673 )     (1,652 )     (9,100 )     (14,447 )     (1,745 )
     
     
     
     
     
     
     
 

Gross profit

    4,503       36,044       86,376       10,435       59,709       91,270       11,027  

Operating expenses:

                                                       
 

Product development

    (6,817 )     (7,759 )     (13,365 )     (1,615 )     (9,170 )     (13,254 )     (1,601 )
 

Sales and marketing

    (17,378 )     (30,360 )     (32,309 )     (3,902 )     (23,520 )     (28,401 )     (3,431 )
 

General and administrative

    (11,677 )     (14,814 )     (15,702 )     (1,897 )     (11,173 )     (12,433 )     (1,502 )
 

Share-based compensation(2)

    —       (22 )     (462 )     (56 )     (336 )     (1,031 )     (125 )
 

Amortization of goodwill and other intangible
assets

    (371 )     (1,807 )     (353 )     (43 )     (265 )     (265 )     (32 )
 

Other expenses incurred for joint venture
companies

    —       (934 )     (915 )     (111 )     (915 )     —       —  
     
     
     
     
     
     
     
 

Total operating expenses

    (36,243 )     (55,696 )     (63,106 )     (7,624 )     (45,379 )     (55,384 )     (6,691 )
     
     
     
     
     
     
     
 

Income (loss) from operations

    (31,740 )     (19,652 )     23,270       2,811       14,330       35,886       4,336  

Interest income and other

    675       2,049       1,293       156       438       3,717       449  

Income (loss) before income tax benefit
(expense), minority interests and share of income (loss) of
joint venture companies

    (31,065 )     (17,603 )     24,563       2,967       14,768       39,603       4,785  

Income tax benefit (expense)

    7,088       2,342       (10,043 )     (1,213 )     (6,156 )     (10,966 )     (1,325 )

Minority interests

    —       —       71       9       32       (18 )     (2 )

Share of income (loss) of joint venture companies

    —       —       (398 )     (48 )     (188 )     573       69  
     
     
     
     
     
     
     
 

Net income (loss) for the year

    (23,977 )     (15,261 )     14,193       1,715       8,456       29,192       3,527  

Earnings per Share Data:

                                                       

Accretion for Series B preferred shares

    (2,196 )     (14,316 )     (16,492 )     (1,993 )     (12,140 )     (12,366 )     (1,494 )

Dividends to holders of preferred shares

    —       —       (16,762 )     (2,025 )     —       —       —  

Dividends to holders of Series A and
Series B preferred shares for spin-off of joint venture
companies

    —       —       —       —       —       (2,829 )     (342 )

Deemed dividends upon repurchase of preferred
shares

    —       —       —       —       —       (35,336 )     (4,269 )

Net loss attributable to ordinary shareholders

    (26,173 )     (29,577 )     (19,061 )     (2,303 )     (3,684 )     (21,339 )     (2,578 )

Loss per share, basic and diluted

    (3.03 )     (3.26 )     (2.00 )     (0.24 )     (0.39 )     (2.26 )     (0.27 )

Loss per ADS(3), basic and diluted

    (6.06 )     (6.52 )     (4.00 )     (0.48 )     (0.78 )     (4.52 )     (0.54 )

Cash dividends per share(4)

    —       —       1.11       0.14       —       —       —  

33


 

                                                           
As of December 31, As of September 30,


2000 2001 2002 2002 2002 2003 2003







RMB RMB RMB US$(1) RMB RMB US$(1)
(unaudited) (unaudited)
(in thousands, except for share and per share data)

Consolidated Balance Sheet Data:

                                                       
 

Cash

    88,908       42,464       38,931       4,703       61,488       70,353       8,500  
 

Other current assets

    3,343       45,932       20,580       2,487       25,907       34,877       4,214  
 

Non-current assets

    25,639       20,529       37,744       4,560       30,275       46,769       5,650  
 

Total assets

    117,890       108,925       97,255       11,750       117,670       151,999       18,364  
 

Current liabilities

    9,736       12,962       13,093       1,582       12,363       42,910       5,184  
 

Minority interests

    —       —       828       100       512       57       7  
 

Series B preferred shares(5)

    94,154       108,470       124,963       15,097       120,610       —       —  
 

Total shareholders’ equity (deficit)

    14,000       (12,507 )     (41,629 )     (5,029 )     (15,815 )     109,032       13,173  


(1)  Translations of RMB amounts into
U.S. dollars were made at a rate of RMB8.2771 to US$1.00.
See “Exchange Rate Information.”

 
(2)  Share based compensation was related to the
associated operating expense categories as follows:

                                                         
Year Ended December 31, Nine Months Ended September 30,


2000 2001 2002 2002 2002 2003 2003







RMB RMB RMB US$(1) RMB RMB US$(1)
(unaudited) (unaudited)
(in thousands, except for share and per share data)

Product and development

    —       5       131       16       95       254       31  

Sales and marketing

    —       1       27       3       22       82       10  

General administration

    —       16       304       37       219       695       84  
     
     
     
     
     
     
     
 
              22       462       56       336       1,031       125  
     
     
     
     
     
     
     
 

(3)  Each ADS represents two ordinary shares.
 
(4)  The dividends recognized represent dividends
totaling RMB27.3 million distributed out of our reserves in
December 2002 to holders of ordinary shares, Series A
preferred shares and Series B preferred shares on a pro
rata as-converted basis. Dividends per share were calculated on
the basis of 24,630,894 ordinary shares on an as-converted basis.
 
(5)  Prior to the forfeiture of the redemption feature
in September 2003, Series B preferred shares were not
included as part of shareholders’ equity as such shares
were redeemable at the option of the holder. As of
September 30, 2003, Series B preferred shares are
included in total shareholders’ equity (deficit).

34


 

MANAGEMENT’S DISCUSSION AND
ANALYSIS

OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS

         
You should read the following discussion and
analysis of our financial condition and results of operations in
conjunction with our consolidated financial statements and the
related notes included in this prospectus.

Overview

         
We are a leading consolidator of hotel
accommodations and airline tickets in China. We aggregate
information on hotels and flights and enable our customers to
make informed and cost-effective hotel and flight bookings. We
also offer packaged-tour products and other travel-related
products and services. For the nine months ended
September 30, 2003, revenues from our hotel reservation,
air-ticketing and other businesses accounted for 85.8%, 10.5%
and 3.7%, respectively, of our revenues.

         
The major factors affecting our results of
operations and financial condition include:

  • growth in the Chinese economy and the travel
industry;
 
  • revenue composition and sources of revenue growth;
 
  • costs of services;
 
  • operating expenses;
 
  • income taxes and tax rebates;
 
  • accretion for our Series B preferred shares;
and
 
  • seasonality in the travel industry.

Each of these factors is discussed below.

         
Growth in the Chinese Economy and the
Travel Industry.
Our financial
results have been, and are expected to continue to be, affected
by the growth in the Chinese economy and travel industry. The
Chinese economy has grown significantly in recent years, with
its gross domestic product increasing from RMB7,835 billion
in 1998 to RMB10,479 billion in 2002, representing a
compound annual growth rate of 7.5%. This growth has led to a
substantial increase in industrial and commercial activity and,
in combination with an increase in personal disposable income
and changes in consumption pattern, resulted in significant
increase in the demand for travel services. The aggregate
expenditure on tourism in China increased from
RMB239.1 billion in 1998 to RMB387.8 billion in 2002,
representing a compound annual growth rate of 12.8%. According
to China’s tenth five-year plan, the Chinese government
expects an approximately 7% compound annual growth rate of
China’s gross domestic product from 2000 to 2005. We
anticipate that demand for travel services in China will
continue to increase substantially in the foreseeable future as
the Chinese economy continues to grow.

         
Revenue Composition and Sources of Revenue
Growth.
We have experienced
significant revenue growth since we commenced operations in
1999. Our revenues grew from RMB6.9 million in 2000 to
RMB46.4 million in 2001 and to RMB105.3 million in
2002. Our revenues for the nine months ended
September 30, 2003 were RMB111.3 million.

         
We generate our revenues primarily from the hotel
reservation and air-ticketing businesses. The table below sets
forth the revenues from our principal lines of business as a
percentage of our revenues for the periods indicated.

35


 

                                           
Nine Months Ended
Year Ended December 31, September 30,


2000 2001 2002 2002 2003





(unaudited) (unaudited)

Revenues:

                                       
 

Hotel reservation

    77.3 %     93.5 %     91.9 %     92.8 %     85.8 %
 

Air-ticketing

    12.2       4.0       5.3       4.6       10.5  
 

Packaged-tour

    4.5       1.3       0.4       0.5       1.6  
 

Others

    6.0       1.2       2.4       2.1       2.1  
     
     
     
     
     
 

Total revenues

    100.0 %     100.0 %     100.0 %     100.0 %     100.0 %
     
     
     
     
     
 

         
As we generally do not take ownership of the
products and services being sold and act as 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 based on
commissions earned rather than transaction value.

         
Because current Chinese laws and regulations
impose substantial restrictions on foreign ownership of the
air-ticketing, travel agency, advertising and Internet content
provision businesses in China, we conduct part of our
air-ticketing and packaged-tour businesses through our
affiliated Chinese entities. Historically, we generated less
than 5% of our revenues from fees charged to these entities. See
“— Affiliated Chinese Entities” for a
description of our relationship with such entities.

         
Hotel Reservation.
Revenues from our hotel reservation business have been our
primary source of revenue since our inception. In 2000, 2001,
2002 and the nine months ended September 30, 2003, revenues
from our hotel reservation business accounted for
RMB5.3 million, RMB43.4 million, RMB96.8 million
(US$11.7 million) and RMB95.5 million
(US$11.5 million), respectively, or 77.3%, 93.5%, 91.9% and
85.8%, respectively, of our revenues.

         
We derive our hotel reservation revenues through
commissions from hotels, primarily based on the room rates paid
by our customers. We recognize revenue when we receive
confirmation from a hotel that a customer who booked the hotel
through us has checked into 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. We believe that absent extraordinary events such as SARS,
revenue from our hotel reservation business will continue to
experience substantial growth on an annual basis.

         
Air-Ticketing. Since
early 2002, the air-ticketing business has been our
fastest-growing source of revenues. In 2000, 2001, 2002 and the
nine months ended September 30, 2003, revenues from the
air-ticketing business accounted for RMB0.8 million,
RMB1.8 million, RMB5.6 million (US$0.7 million)
and RMB11.6 million (US$1.4 million), respectively, or
12.2%, 4.0%, 5.3% and 10.5%, respectively, of our revenues.

         
We conduct our air-ticketing business through
Beijing Chenhao and Shanghai Huacheng, both of which are our
affiliated entities, as well as a network of independent
air-ticketing service companies. Currently, we recognize revenue
when a ticket is issued and delivered by Beijing Chenhao and
Shanghai Huacheng. Prior to July 1, 2003, when we charged
Beijing Chenhao or Shanghai Huacheng in accordance with our
contractual arrangements with them, we recognized the amount of
such charge as revenue from our air-ticketing business. We
receive a higher commission per ticket from some airlines if the
volume of tickets we sell for such airline reaches certain
performance targets. In addition, since the commission rate per
ticket for international flights is generally higher than that
for domestic flights in China, we intend to sell more tickets
for international flights.

         
Packaged-tour.
Currently, we conduct our
packaged-tour business mainly through Shanghai Huacheng.
Currently, we generally recognize revenue when a customer
completes the packaged tour. Prior to

36


 

July 1, 2003, however, when we charged
Shanghai Huacheng in accordance with our contractual
arrangements with it, we recognized the amount of such charge as
revenue from our packaged-tour business. We expect that our
revenues from the packaged-tour business will grow as a result
of our increased promotion of packaged-tour products and our
acquisition of Shanghai Cuiming.

         
Other Businesses.
Our other business lines comprise advertising services and sales
of our VIP membership cards. We place our customers’
advertisements on our websites and in our introductory
brochures. We sell VIP membership cards that allow cardholders
to receive discounts from some restaurants, clubs and bars and
certain priority in receiving our services. We currently conduct
the advertising business through Ctrip Commerce, and we
recognize revenue when Ctrip Commerce renders advertising
services. Prior to July 1, 2003, however, we recognized our
advertising revenue when we charged Ctrip Commerce in accordance
with our contractual arrangements with it. We recognize revenue
from sales of our VIP membership cards when they are sold to
customers. We expect that revenues from these other businesses
will continue to contribute an insignificant percentage of our
revenues in the near future.

         
Costs of Services.
Costs of services are costs
directly attributable to rendering our revenues, which consist
primarily of payroll compensation, telecommunication expenses
and other direct expenses incurred in connection with our
transaction and service platform. Payroll compensation accounted
for 33.6%, 43.1%, 57.0% and 59.5% of our costs of services in
2000, 2001, 2002 and the nine months ended September 30,
2003, respectively. Telecommunication expenses accounted for
31.9%, 42.3%, 30.5% and 27.1% of our costs of services in 2000,
2001, 2002 and the nine months ended September 30, 2003,
respectively.

         
Costs of services accounted for 30.2%, 18.1%,
13.7% and 13.7% of our net revenues in 2000, 2001, 2002 and the
nine months ended September 30, 2003, respectively. We
believe our relatively low ratio of costs of services to
revenues is primarily due to competitive labor costs in China
and relatively high efficiency of our customer service system.
The average compensation of our customer service representatives
at our toll-free, 24-hour transaction and service center in
October 2003 was RMB2,791 (US$337), consisting of an average
fixed pay of RMB1,551 (US$187) plus commissions based on the
number of transactions completed during the month. In
October 2003, each of our customer service representatives
received approximately 2,425 calls on average. Therefore,
the average labor cost per call in October 2003 was
approximately RMB1.15 (US$0.14). Our cost efficiency was further
enhanced by our website operations, which require significantly
fewer service staff to operate and maintain. We believe our
costs of services will continue to account for a relatively
small percentage of our net revenues for the foreseeable future.

         
Operating
Expenses.

Operating expenses consist primarily
of product development expenses, sales and marketing expenses,
general and administration expenses and share-based compensation.

         
Product development expenses primarily include
expenses we incur to develop our travel suppliers network and
electronic confirmation system, as well as expenses we incur to
develop, maintain and monitor our transaction and service
platform, including our travel booking system. In the past, we
incurred relatively high product development costs as a
percentage of net revenues to develop the supplier network and
infrastructure necessary to support our business. As we have
established the platform that we believe can keep up with the
expected growth in our transaction volume without substantial
incremental costs for redesign, we do not expect that our
product development expenses will increase significantly as a
percentage of net revenues for the foreseeable future.

         
Sales and marketing expenses primarily comprise
payroll compensation and benefits for our sales and marketing
personnel, advertising expenses, commissions for our marketing
partners for referring customers to us, production costs of
marketing materials and membership cards and expenses associated
with our membership reward program. Our sales and marketing
expenses as a percentage of net revenues have declined due to
our more effective and focused marketing efforts. As we continue
to pursue our targeted marketing strategy, we expect that our
sales and marketing expenses will remain relatively steady as a
percentage of net revenues for the foreseeable future.

         
General and administrative expenses consist
primarily of payroll compensation, benefits and travel expenses
for our administrative staff, as well as administrative office
expenses. General and administrative

37


 

expenses as a percentage of net revenues have
remained largely unchanged. We expect that our general and
administrative expenses will increase after the closing of this
offering due to the various additional legal, accounting and
other requirements applicable to a public company listed in the
United States. However, given our expected increased
revenues, we do not expect our general and administrative
expenses to increase substantially as a percentage of our net
revenues.

         
Share-based compensation is the difference, if
any, between the estimated fair value of our ordinary shares and
the amount an employee is required to pay to acquire the shares,
as determined on the date the share option is granted. We
amortize share-based compensation and charge it to expense over
the three-year vesting period of the underlying options.
Subsequent to September 30, 2003, we granted 268,980
options to certain directors, senior executives and employees.
See “Management — Employees’ Stock Option
Plans.” We do not believe that future compensation expense
related to these options will have a material impact on our
consolidated financial statements.

         
Income Taxes.
Companies in China are generally
subject to a 30% state enterprise income tax and a 3% local
income tax. One of our subsidiaries in China, Ctrip Computer
Technology, obtained approval from the Chinese government
authorities to be entitled to a reduced 15% state enterprise
income tax rate in November 2003 because it is classified as a
“new high-technology enterprise.” Another Chinese
subsidiary, Ctrip Travel Information, is entitled to a reduced
15% state enterprise income tax rate because it was incorporated
in Pudong New District, Shanghai.

         
Financial Subsidies.
In 2002 and the nine months ended
September 30, 2003, our subsidiaries in China received
business tax rebates in the form of financial subsidies from the
government authorities in Shanghai in the amount of RMB783,900
(US$94,707) and RMB2,431,500 (US$293,762), respectively, which
we recorded as other income. We cannot assure you, however, that
our subsidiaries will continue to receive such business tax
rebates or other financial subsidies in the future.

         
Accretion for Series B Preferred
Shares.
Prior to September 4,
2003, holders of our Series B mandatorily redeemable
convertible preferred shares, or Series B preferred shares,
had the right to request that we redeem all of their
Series B preferred shares at US$3.13334 per share plus any
declared but unpaid dividends commencing November 2005.
Accordingly, the Series B preferred shares have been
accreted to the estimated redemption value through periodic
charges to accumulated deficit or additional paid-in-capital, as
appropriate. Charges with respect to our Series B preferred
shares totaled RMB2.2 million, RMB14.3 million,
RMB16.5 million (US$2.0 million) and
RMB12.4 million (US$1.5 million) for 2000, 2001, 2002
and the nine months ended September 30, 2003, respectively.

         
Holders of our Series B preferred shares
have agreed to extinguish their redemption right effective as of
September 4, 2003 in connection with the issuance and sale
of our Series C convertible preferred shares. Therefore, we
have not incurred any additional accretion for Series B
preferred shares since September 4, 2003.

         
Seasonality in the Travel Industry.
The travel industry is generally
characterized by seasonal fluctuations. However, as we are still
in the high growth phase, the rate of our revenue growth has
offset any impact caused by the seasonal nature of the travel
industry. The third quarter of each year generally contributes
the highest portion of our annual net revenues, mainly because
it coincides with the peak business and leisure travel season.
The first quarter of each year generally contributes the lowest
portion of our annual net revenues primarily due to less
business activity and the Chinese new year holiday.

         
Individual travelers tend to curtail travel due
to trends or events that include the outbreak of serious
contagious diseases such as SARS, increased occurrence of
travel-related accidents, bad weather or natural disasters,
general economic downturns and increased prices in the hotel,
airline or other travel-related industries. During the period
from March 2003 through June 2003, several economies in Asia,
including Hong Kong and China, were severely affected by the
outbreak of SARS. Although none of our employees was infected
with SARS, our business and operating results were adversely
affected. Total room nights booked through us decreased from
over 131,000 and over 122,000 in May and June 2002,
respectively, to over 36,000 and over 109,000 in May and June
2003, respectively.

38


 

         
Except for the SARS period, we have not
experienced any decline in our quarterly revenues. If the growth
of our business slows down in the future, our revenue may vary
from quarter to quarter in line with the seasonality of the
travel industry.

Quarterly Results of Operations

         
The following table presents our unaudited
quarterly results of operations for the nine quarters in the
period ended September 30, 2003. You should read the
following table in conjunction with the consolidated financial
statements and related notes contained elsewhere in this
prospectus. We have prepared the unaudited information on the
same basis as our audited consolidated financial statements.
This information includes all adjustments, consisting only of
normal recurring adjustments, that we consider necessary for
fair presentation of our financial position and operating
results for the quarters presented. Operating results for any
quarter are not necessarily indicative of results for any future
quarters or for a full year.

                                                                           
Three Months Ended (unaudited)

September 30, December 31, March 31, June 30, September 30, December 31, March 31, June 30, September 30,
2001 2001 2002 2002 2002 2002 2003 2003 2003









(in RMB thousands, except percentages and non-financial data)

Revenues:

                                                                       
 

Hotel reservation

    13,502       15,809       16,834       23,147       27,240       29,541       30,250       16,571       48,707  
 

Air-ticketing

    504       518       697       976       1,670       2,257       2,413       2,393       6,842  
 

Packaged-tour

    75       115       152       127       111       42       140       —       1,595  
 

Others

    68       184       279       499       706       1,034       814       639       962  
     
     
     
     
     
     
     
     
     
 

Total revenues

    14,149       16,626       17,962       24,749       29,727       32,874       33,617       19,603       58,106  
     
     
     
     
     
     
     
     
     
 

Less: business tax and related surcharges

    (714 )     (841 )     (915 )     (1,233 )     (1,481 )     (1,635 )     (1,667 )     (973 )     (2,969 )
     
     
     
     
     
     
     
     
     
 

Net revenues

    13,435       15,785       17,047       23,516       28,246       31,239       31,950       18,630       55,137  
     
     
     
     
     
     
     
     
     
 

Cost of services

    (2,306 )     (2,516 )     (2,608 )     (3,226 )     (3,267 )     (4,572 )     (4,210 )     (3,754 )     (6,483 )
     
     
     
     
     
     
     
     
     
 

Gross profit

    11,129       13,269       14,439       20,290       24,979       26,667       27,740       14,876       48,654  
     
     
     
     
     
     
     
     
     
 

Gross margin

    83%       84%       85%       86%       88%       85%       87%       80%       88%  

Operating Expenses:

                                                                       
 

Product development

    (1,994 )     (1,821 )     (2,619 )     (3,173 )     (3,380 )     (4,194 )     (4,436 )     (3,807 )     (5,011 )
 

Sales and marketing

    (9,601 )     (8,579 )     (6,478 )     (8,181 )     (8,861 )     (8,788 )     (8,794 )     (7,725 )     (11,882 )
 

General administrative

    (3,706 )     (3,664 )     (3,666 )     (3,889 )     (3,618 )     (4,529 )     (4,225 )     (3,712 )     (4,496 )
 

Share-based compensation

    (9 )     (10 )     (115 )     (131 )     (89 )     (127 )     (219 )     (399 )     (414 )
 

Amortization of goodwill and other intangible
assets

    (485 )     (352 )     (88 )     (88 )     (88 )     (88 )     (88 )     (88 )     (88 )
 

Other expenses incurred for joint venture
companies (Home Inns)

    (341 )     (594 )     (634 )     (281 )     —       —       —       —       —  
     
     
     
     
     
     
     
     
     
 

Total operating expenses

    (16,136 )     (15,020 )     (13,600 )     (15,743 )     (16,036 )     (17,726 )     (17,762 )     (15,731 )     (21,891 )
     
     
     
     
     
     
     
     
     
 

Income (loss) from operations

    (5,007 )     (1,751 )     839       4,547       8,943       8,941       9,978       (855 )     26,763  
     
     
     
     
     
     
     
     
     
 

Operating margin

    —       —       5%       19%       32%       29%       31%       —       49%  
 

Number of room nights booked (in thousands)

    234.3       262.1       273.8       374.4       438.8       467.7       486.0       280.5       747.8  
 

Number of airline tickets booked
(in thousands)

    — *     — *     — *     — *     — *     79.3       111.7       74.4       183.1  

* Meaningful information concerning the number of
airline tickets booked during these periods is not available.

39


 

         
Our quarterly net revenues have experienced
continued growth since the third quarter of 2001, except for the
second quarter of 2003 during which our revenues were materially
adversely affected by the SARS outbreak. The growth was in line
with the increase in the number of room nights and airline
tickets booked during the quarterly periods presented. It was
primarily attributable to the continued increase in revenues
from our hotel reservation and air-ticketing businesses. Our
gross margin has remained at or above 80% throughout the past
nine quarters, primarily due to competitive labor costs in China
and relatively high efficiency of our customer service system.
The growth in our quarterly operating income has generally
offset any negative impact caused by the seasonality of the
travel industry, except for the SARS period. During the second
quarter of 2003, we received financial subsidies of RMB2,431,500
(US$293,762) from the government authorities in Shanghai. As a
result, our quarterly operating loss for the second quarter of
2003 due to the SARS outbreak was offset by these financial
subsidies.

         
Our gross profit and income from operations for
the quarter ended September 30, 2003 have increased
substantially compared to each of the preceding quarters. This
increase is principally attributable to (i) the prompt and
sharp rebound of the travel industry in China following a
three-month travel downturn during the SARS period,
(ii) the broader recognition of our Ctrip brand name, and
(iii) the efficiency of our established transaction and
service platform.

Affiliated Chinese Entities

         
Due to the current restrictions on foreign
ownership of the air-ticketing, travel agency, advertising and
Internet content provision businesses in China, we conduct part
of our non-hotel reservation businesses through our affiliated
Chinese entities. We have entered into consulting and service
agreements with each of these entities whereby we provide
technical support and other services to them in exchange for
service fees from them. In addition, we have also entered into
other agreements with them designed to give us control over
their operations and secure payment of service fees from them,
including share pledge agreements, powers of attorney and
operating agreements. Pursuant to the share pledge agreements,
Qi Ji, Min Fan and Alex Nanyan Zheng pledge their respective
equity interests in our affiliated entities as a guarantee for
the payment by these entities of service fees to us. As a
result, in the event that any of our affiliated entities
breaches any of its obligations under the service agreement with
us, we are entitled to (i) sell the equity interests held
by Qi Ji, Min Fan and/or Alex Nanyan Zheng, as the case may be,
and retain the proceeds from such sale, or (ii) require any
of them to transfer his equity interest without consideration to
the Chinese citizen(s) designated by us. In addition, Qi Ji, Min
Fan and Alex Nanyan Zheng have each executed an irrevocable
power of attorney to appoint our President and Chief Financial
Officer, Neil Nanpeng Shen, as attorney-in-fact to vote on all
matters on which shareholders of our affiliated entities are
entitled to vote, including matters relating to the appointment
of the chief executive officers of our affiliated entities.
Furthermore, pursuant to the operating agreements, our
affiliated entities and their shareholders have agreed not to
enter into any transaction that would affect the assets,
obligations, rights or operations of such entities without our
prior written consent. They also agree to accept our guidance
with respect to their day-to-day operations, financial
management systems and the appointment and dismissal of key
employees. Through these arrangements, we have been able to
effectively control the management and operations of our
affiliated entities.

         
We hold no ownership interest in any of our
affiliated entities. The ultimate principal shareholders of
Beijing Chenhao, Shanghai Huacheng and Guangzhou Guangcheng are
Qi Ji, who is our co-founder and director, Min Fan, who is our
co-founder and Executive Vice President, and Alex Nanyan Zheng,
who is our Vice President. Qi Ji and Min Fan own 80% and 20%,
respectively, of Beijing Chenhao. Qi Ji and Min Fan own 51% and
49%, respectively, of Ctrip Commerce, and Ctrip Commerce owns
90% of Shanghai Huacheng. Min Fan and Alex Nanyan Zheng own 90%
and 10%, respectively, of Guangzhou Guangcheng. We have made
loans to Qi Ji, Min Fan and Alex Nanyan Zheng solely in
connection with the capitalization or acquisition of our
affiliated entities. See “Related Party
Transactions — Arrangements with Affiliated Chinese
Entities.”

         
Prior to July 1, 2003, we did not
consolidate the financial results of our affiliated Chinese
entities. Instead, according to the service agreements then in
effect, we earned part of our air-ticketing and packaged-

40


 

tour revenues from Beijing Chenhao and Shanghai
Huacheng by charging fees for services we rendered to them,
including consulting, technology, administrative, marketing and
other services. We issued invoices to Beijing Chenhao and
Shanghai Huacheng on a monthly basis based on the amount of
service fees determined in our sole discretion. We recognized
our air-ticketing or packaged-tour revenue when we performed the
services to the applicable entity. Historically, we generated
less than 5% of our revenues from service fees charged to our
affiliated entities. Since July 1, 2003, as required by
Statement of Financial Accounting Standards Interpretation
No. 46, a new accounting standard, we began to consolidate
the financial results of our affiliated Chinese entities. See
“— Recent Accounting Pronouncements.” As a
result of this change in accounting policy, our results of
operations attributable to our affiliated entities are not
reflected in our results of operations for the nine months ended
September 30, 2003 on the same basis as our results of
operations for the same period in 2002. We believe, however,
that the application of this change in accounting policy is not
material to our financial statements.

Acquisition of Shanghai Cuiming

         
In order to expand our cross-border packaged-tour
business, we recently acquired an effective controlling stake in
Shanghai Cuiming, which holds a license to conduct both
cross-border and domestic packaged-tour businesses. As part of
our acquisition, Min Fan, our co-founder and Executive Vice
President, entered into a share purchase agreement with the
shareholders of Shanghai Cuiming in August 2003, pursuant to
which Min Fan agreed to pay RMB2.0 million
(US$0.2 million) to acquire a 66% ownership interest in
Shanghai Cuiming. We made an interest-free loan to Min Fan in a
principal amount of RMB4.3 million (US$0.5 million) in
connection with the acquisition and expected increase in the
capital of Shanghai Cuiming. We have entered into contractual
arrangements with Shanghai Cuiming and Min Fan that contain
substantially similar terms as our arrangements with our other
affiliated Chinese entities. See “Related Party
Transactions — Arrangements with Affiliated Chinese
Entities.” The acquisition of Shanghai Cuiming does not
have a material effect on our consolidated financial condition
and results of operations.

Critical Accounting Policies

         
We prepare financial statements in conformity
with U.S. GAAP, which require us to make estimates and
assumptions that affect the reported amounts of assets and
liabilities, disclosure of contingent assets and liabilities on
the date of the financial statements and the reported amounts of
revenues and expenses during the financial reporting period. We
continually evaluate these estimates and assumptions based on
the most recently available information, our own historical
experience and on various other assumptions that are believed to
be reasonable under the circumstances, the results of which form
the basis for making judgments about the carrying values of
assets and liabilities that are not readily apparent from other
sources. Since the use of estimates is an integral component of
the financial reporting process, actual results could differ
from those estimates. Some of our accounting policies require
higher degrees of judgment than others in their application. We
consider the policies discussed below to be critical to an
understanding of our financial statements as their application
places the most significant demands on management’s
judgment.

         
Revenue Recognition.
We describe our revenue
recognition policies in Note 2 to our consolidated
financial statements included elsewhere in this prospectus. In
considering Staff Accounting Bulletin No. 101,
“Revenue Recognition in Financial Statements” and
Emerging Issues Task Force 99-19 “Reporting Revenue
Gross as a Principal versus Net as an Agent,” we believe
that our policies for revenue recognition and presentation of
statement of operations are appropriate. The factors we have
considered include whether we are able to achieve the
pre-determined specific performance targets by travel suppliers
for recognition of the incentive commissions in addition to the
fixed-rate and our risk of loss due to obligations for cancelled
hotel and airline ticket reservations. As we operate primarily
as agent to the travel suppliers and our risk of loss due to
obligations for cancelled hotel and airline ticket reservations
is minimum, we recognize commissions on a net basis.

         
Goodwill, Intangible Assets and Long-Lived
Assets.
In addition to the
original cost of goodwill, intangible assets and long-lived
assets, the recorded value of these assets is impacted by a
number of policy elections, including estimated useful lives,
residual values and impairment charges. Statement of Financial

41


 

Accounting Standards No. 142 provides that
intangible assets that have indefinite useful lives and goodwill
will not be amortized but rather will be tested at least
annually for impairment. Statement of Financial Accounting
Standards No. 144, “Accounting for the Impairment or
Disposal of Long-lived Assets” requires that long-lived
assets be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may
not be recoverable from its undiscounted future cash flow. For
each of 2000, 2001, 2002 and the nine months ended
September 30, 2003, we did not recognize any impairment
charges for goodwill, intangible assets or long-lived assets. If
different judgments or estimates had been utilized, material
differences could have resulted in the amount and timing of the
impairment charge.

         
Customer Reward
Program.
We have a customer reward
program as described in Note 2 to our consolidated
financial statements included elsewhere in this prospectus.
Provisions of the customer reward program allow customers to
receive travel awards and other gifts based on accumulated
membership points that vary depending on the products and
services purchased by the customers. Because we have an
obligation to provide such travel awards and other gifts, we
recognize a liability and corresponding expense for the related
future obligations. As of December 31, 2000, 2001 and 2002
and September 30, 2003, our provisions for the customer
reward program were RMB109,762, RMB911,526, RMB2,297,403
(US$277,561) and RMB3,470,457 (US$419,284), respectively. We
estimate our liabilities under our customer reward program based
on accumulated membership points and our estimate of probability
of redemption. If actual redemption differs significantly from
our estimate, it will result in an adjustment to our liability
and the corresponding expense. If our estimate of the
probability of redemption increases by 10%, the obligation
related to our customer reward program would increase by
approximately RMB347,000 (US$41,923).

         
Share-Based
Compensation.
We have share option
plans to grant stock options to officers, directors, and
employees of our company. We account for these plans under
Accounting Principles Board Opinion No. 25, the intrinsic
value approach, with the required disclosures under the related
accounting guidance described in Note 2 to our consolidated
financial statements included elsewhere in this prospectus. For
2001, 2002 and the nine months ended September 30,
2003, we recognized share-based compensation under the share
option plans in the amounts of RMB21,950, RMB462,140 (US$55,834)
and RMB1.03 million (US$124,541), respectively. While we
believe that the share-based compensation we recognized for the
plans under Accounting Principles Board Opinion No. 25 is
appropriate, changes in our assumptions, including estimated
fair value of our ordinary shares, will result in an adjustment
to our deferred share-based compensation and the corresponding
share-based compensation.

         
Loans to a Director and
Officers.
We make certain
long-term loans to a director and two senior executives of our
company for the purpose of establishing and/or acquiring several
affiliated Chinese entities, which are used to facilitate our
air-ticketing, packaged-tour, Internet content provision and
advertising services, where foreign ownership is restricted. To
the extent losses are incurred by these affiliated entities, we
accrue for such losses by recording valuation allowances against
the long-term loans to the director and senior executives. For
2000, 2001, 2002 and the nine months ended September 30,
2003, we did not record any valuation allowances for losses
incurred by our affiliated Chinese entities. To the extent that
the Chinese regulations change or the business conditions of
these affiliated entities deteriorate, valuation allowances may
be required. For more information about these loans, see
“Related Party Transactions — Arrangements with
Affiliated Chinese Entities.”

         
Deferred Tax Valuation
Allowances.
We have not recorded
any valuation allowances to reduce our deferred tax assets, as
we believe that our deferred tax asset amounts are more than
likely to be realized based on our estimate of future taxable
income and prudent and feasible tax planning strategies. As of
December 31, 2000, 2001 and 2002 and September 30,
2003, we recorded deferred tax assets of RMB7,496,080,
RMB9,837,979, RMB593,143 (US$71,661) and RMB684,155 (US$82,656),
respectively. In 2002, we utilized deferred tax assets of
RMB9,244,836 (US$1,116,917) accumulated from our operations
during prior years, primarily relating to net operating losses
carry-forwards. If, however, unexpected events occur in the
future that would prevent us from realizing all or a portion of
our net deferred tax assets, an adjustment would result in a
charge to income in the period in which such determination was
made.

42


 

Results of Operations

         
The following table sets forth a summary of our
consolidated statements of operations as a percentage of net
revenues for the periods indicated.

                                           
Nine Months Ended
Year Ended December 31, September 30,


2000 2001 2002 2002 2003





(unaudited) (unaudited)

Revenues:

                                       
 

Hotel reservation

    82.7 %     98.6 %     96.7 %     97.7 %     90.4 %
 

Airline ticketing

    13.1 %     4.2 %     5.6 %     4.9 %     11.0 %
 

Packaged tour

    4.8 %     1.4 %     0.4 %     0.6 %     1.6 %
 

Others

    6.4 %     1.3 %     2.5 %     2.1 %     2.3 %

Less: Business tax and related surcharges

    (7.0 )%     (5.5 )%     (5.2 )%     (5.3 )%     (5.3 )%
     
     
     
     
     
 

Net revenues

    100.0 %     100.0 %     100.0 %     100.0 %     100.0 %
     
     
     
     
     
 

Cost of services

    (30.2 )%     (18.1 )%     (13.7 )%     (13.2 )%     (13.7 )%
     
     
     
     
     
 

Gross profit

    69.8 %     81.9 %     86.3 %     86.8 %     86.3 %

Operating expenses:

                                       
 

Product development

    (105.6 )%     (17.6 )%     (13.4 )%     (13.3 )%     (12.5 )%
 

Sales and marketing

    (269.3 )%     (69.0 )%     (32.2 )%     (34.2 )%     (26.9 )%
 

General and administrative

    (181.1 )%     (33.7 )%     (15.7 )%     (16.2 )%     (11.8 )%
 

Share-based compensation

    —       (0.1 )%     (0.5 )%     (0.5 )%     (1.0 )%
 

Amortization of goodwill and other intangible
assets

    (5.7 )%     (4.1 )%     (0.3 )%     (0.4 )%     (0.2 )%
 

Other expenses incurred for joint venture
companies

    —       (2.1 )%     (0.9 )%     (1.3 )%     —  
     
     
     
     
     
 

Total operating expenses

    (561.7 )%     (126.6 )%     (63.0 )%     (65.9 )%     (52.4 )%
     
     
     
     
     
 

Income (Loss) from operations

    (491.9 )%     (44.7 )%     23.3 %     20.8 %     33.9 %
     
     
     
     
     
 

Interest income

    11.4 %     5.0 %     0.3 %     0.3 %     0.2 %

Interest expense on short-term bank loan

    —       (0.1 )%     0.0 %     0.0 %     —  

Other income (expense)

    (0.9 )%     (0.2 )%     1.0 %     0.4 %     3.4 %
     
     
     
     
     
 

Income (Loss) before income tax benefit
(expense), minority interests and share of loss in joint venture
companies

    (481.4 )%     (40.0 )%     24.6 %     21.5 %     37.5 %
     
     
     
     
     
 

Income tax benefit (expense)

    109.8 %     5.3 %     (10.0 )%     (8.9 )%     (10.4 )%

Minority interests

    —       —       0.0 %     0.0 %     0.0 %

Share of income (loss) of joint venture companies

    —       —       (0.4 )%     (0.3 )%     0.5 %
     
     
     
     
     
 

Net income (loss) for the period

    (371.6 )%     (34.7 )%     14.2 %     12.3 %     27.6 %
     
     
     
     
     
 

Nine Months Ended September 30, 2003
Compared to Nine Months Ended September 30, 2002

         
Revenues. We
generated revenues of RMB111.3 million
(US$13.5 million) in the nine months ended
September 30, 2003, an increase of 53.7% from
RMB72.4 million in the same period in 2002. Although we
were adversely affected by the outbreak of SARS in the second
quarter of 2003, we were able to achieve increased revenues in
the nine months ended September 30, 2003 due to increases
in revenues from our hotel reservation and air-ticketing
businesses.

43


 

         
Hotel Reservation.
For the nine months ended September 30, 2003, revenues from
our hotel reservation business increased by 42.1% to
RMB95.5 million (US$11.5 million) from
RMB67.2 million in the same period in 2002, primarily
because of our growing customer base and increased booking of
hotel rooms. Although revenue growth in our hotel reservation
business in the nine months ended September 30, 2003 was
adversely affected by the outbreak of SARS in the second quarter
in 2003, our hotel room sales volume increased substantially in
the third quarter of 2003, after the SARS outbreak ended.

         
Air-ticketing. For
the nine months ended September 30, 2003, revenues
generated from our air-ticketing business increased
substantially to RMB11.6 million (US$1.4 million) from
RMB3.3 million in the same period in 2002, due to our
increased efforts to expand our air-ticketing business and
establish relationships with more air-ticketing service
companies, offset in part by the impact of SARS.

         
Packaged-tour.
Packaged-tour revenues for the nine months ended September 30,
2003 increased substantially to RMB1.7 million
(US$0.2 million) from RMB390,215 in the same period in
2002. This increase was due to our increased efforts to expand
our packaged-tour business by leveraging our existing customer
base and offering more packaged-tour products.

         
Other Businesses.
For the nine months ended September 30, 2003, revenues from
our other businesses increased by 62.8% to RMB2.4 million
(US$0.3 million) from RMB1.5 million in the same
period in 2002, due to the increased sales of our advertising
services and VIP membership cards.

         
Net
Revenues.
Our net revenues
are derived by subtracting business tax and related surcharges
from our revenues. Our net revenues increased by 53.6% from
RMB68.8 million in the nine months ended September 30,
2002 to RMB105.7 million (US$12.8 million) in the nine
months ended September 30, 2003, as a result of our
increased revenues, partially offset by the resulting increase
in business tax and related surcharges over the same periods.

         
Costs of
Services.
Costs of services
for the nine months ended September 30, 2003 increased by 58.8%
to RMB14.4 million (US$1.7 million) from
RMB9.1 million for the same period in 2002. The increase in
costs of services was primarily due to increased salary and
benefits largely resulting from the hiring of additional
customer service center representatives as well as increased
telecommunication expenses resulting from the higher utilization
rate of our customer service center.

         
Our costs of services increased at a higher
percentage rate than our net revenues, principally due to the
outbreak of SARS. Since we viewed SARS as an event of limited
long-term significance, we maintained substantially the same
level of staff. To mitigate the impact of SARS, however, we
adopted measures to reduce our costs, including unpaid leave for
our employees. At the same time, our significantly lower
transaction volume reduced our telecommunication expenses, due
to lower incoming and outgoing calls, and our salary and
benefits, since the compensation of our customer service agents
is linked to the number of completed transactions.
Notwithstanding these cost-reduction efforts, our costs of
services did not decline enough to offset the impact of SARS on
our net revenues.

         
Operating
Expenses.
Operating expenses in
the nine months ended September 30, 2003 increased to
RMB55.4 million (US$6.7 million), or 22.0% from
RMB45.4 million for the same period in 2002, primarily due
to increased product development and sales and marketing
expenses. Operating expenses as a percentage of net revenues
decreased to 52.4% in the nine months ended September 30,
2003 from 65.9% for the same period in 2002.

         
Product Development.
Product development expenses increased by 44.5% to
RMB13.3 million (US$1.6 million) in the nine months
ended September 30, 2003 from RMB9.2 million for the
same period in 2002, primarily due to the hiring of additional
personnel to expand our travel suppliers network.

         
Sales and Marketing.
Sales and marketing expenses increased by 20.8% to
RMB28.4 million (US$3.4 million) in the nine months
ended September 30, 2003 from RMB23.5 million for the
same period in 2002, primarily because of increased expenses
incurred in connection with our customer reward program,
increased salary and benefit expenses for sales and marketing
staff, production of marketing materials and membership cards,
as well as increased commissions to our marketing partners for
referring customers to us.

44


 

         
General and
Administrative.
General and
administrative expenses increased by 11.3% to RMB12.4 million
(US$1.5 million) in the nine months ended
September 30, 2003 from RMB11.2 million for the same
period in 2002.

         
Share-Based
Compensation.
Share-based compensation
increased substantially to RMB1.0 million
(US$0.1 million) in the nine months ended
September 30, 2003 compared to RMB336,127 for the same
period in 2002, due to the issuance of additional share options
under our 2000 and 2003 stock option plans in the nine months
ended September 30, 2003.

         
Amortization of Goodwill and Other Intangible
Assets.
Amortization expenses remained
stable at RMB264,931 (US$32,008) in the nine months ended
September 30, 2003, primarily representing the continuing
amortization of a customer list arising from our acquisition of
Beijing Modern Express.

         
Other Expenses Incurred for Joint Venture
Companies.
We incurred no expenses for
joint venture companies in the nine months ended
September 30, 2003, but incurred expenses of RMB915,056
over the same period in 2002, because Home Inns and Hotels
Management (Beijing) Limited, or Home Inns Beijing, a joint
venture subsidiary of Home Inns, began to bear its own expenses
after its establishment in the second half of 2002.

         
Interest Income and
Expenses.
Interest income
increased to RMB242,577 (US$29,307) in the nine months ended
September 30, 2003 from RMB216,972 in the same period in
2002 because of the increase in our bank deposits. Interest
expense decreased to zero in the nine months ended
September 30, 2003 from RMB41,261 (US$4,985) for the same
period in 2002, because we repaid our bank loan in early 2002.

         
Other Income.
Other income increased substantially to RMB3.5 million
(US$0.4 million) in the nine months ended
September 30, 2003 from RMB263,044 in the same period in
2002, because we received financial subsidies totaling
RMB3,354,450 (US$405,269), RMB922,950 (US$111,506) of which were
granted for entities impacted by SARS from the government
authorities in Shanghai in 2003.

         
Income Tax
Expense.
Income tax expense for
the nine months ended September 30, 2003 increased by 78.2%
to RMB11.0 million (US$1.3 million) from
RMB6.2 million for the nine months ended September 30,
2002, primarily because of the increase of our taxable income.

         
Net Income.
Net income increased by 245.2% to RMB29.2 million
(US$3.5 million) in the nine months ended
September 30, 2003 from RMB8.5 million for the same
period in 2002, primarily due to an increase in income from
operations, offset in part by the negative impact of the
outbreak of SARS.

2002 Compared to 2001

         
Revenues. We
had revenues of RMB105.3 million (US$12.7 million) in
2002, an increase of 127.1% over RMB46.4 million in 2001.
This revenue growth was principally the result of the expansion
of our hotel reservation business, supplemented by the growth in
our air-ticketing business.

         
Hotel Reservation.
Revenues from our hotel reservation business increased
substantially by 123.1% to RMB96.8 million
(US$11.7 million) in 2002 from RMB43.4 million in
2001, primarily as a result of the continued rapid increase in
our hotel room sales volume and the “ratchet system”
commission arrangement with many of our hotel suppliers.

         
Air-ticketing.
Revenues from our air-ticketing
business increased substantially by 205.7% to
RMB5.6 million (US$0.7 million) in 2002 from
RMB1.8 million in 2001, primarily due to our efforts to
expand the customer base for our air-ticketing business in 2002,
including the enhancement of our fulfillment channel under
various service agreements with third parties and Beijing
Chenhao, and the acquisition of the air-ticketing business of
Beijing Hai’an Air-ticketing Service Company Ltd.

         
Packaged-tour.
Packaged-tour revenues decreased by 27.3% to RMB432,295
(US$52,228) in 2002 compared to RMB594,802 in 2001, primarily
because of our decision to reduce the amount of consulting fees
that we charged to Shanghai Huacheng to enable Shanghai Huacheng
to fund its operating requirements.

45


 

         
Other Businesses.
Revenues from our other businesses increased substantially to
RMB2,517,316 (US$304,130) in 2002 from RMB576,075 in 2001,
primarily due to the increased sales of our advertising services
and VIP membership cards in 2002.

         
Net Revenues.
Our net revenues increased from RMB44.0 million in 2001 to
RMB100.0 million (US$12.1 million) in 2002 as a result
of our increased revenues, partially offset by the resulting
increase in business tax and related surcharges over the same
periods.

         
Costs of
Services.
Costs of services in
2002 increased by 72.2% to RMB13.7 million
(US$1.7 million) from RMB7.9 million in 2001. The
increase in our costs of services was primarily attributable to
the hiring of additional customer service representatives as
well as increased telecommunication expenses resulting from the
overall expansion of our hotel reservation and air-ticketing
businesses.

         
Operating
Expenses.
Operating expenses in
2002 increased to RMB63.1 million (US$7.6 million), or
13.3% over RMB55.7 million in 2001, primarily due to a
significant increase in product development expenses and a
slight increase in sales and marketing expenses, partially
offset by amortization of goodwill and other intangible assets.
Operating expenses as a percentage of net revenues decreased to
63.0% in 2002 from 126.6% in 2001, because our revenues
increased substantially while our established transaction and
service platform was able to keep up with the increased
transaction volume without the need to incur expenses at a rate
similar to our revenue growth.

         
Product Development.
Product development expenses increased by 72.2% to
RMB13.4 million (US$1.6 million) in 2002 from
RMB7.8 million in 2001, primarily due to the hiring of
additional staff to expand our travel supplier network and
additional technical support staff and the related increase in
office expenses.

         
Sales and Marketing.
Sales and marketing expenses increased by 6.4% to
RMB32.3 million (US$3.9 million) in 2002 from
RMB30.4 million in 2001, primarily due to increased
commission payments to our marketing partners that referred
customers to us, increased expenses in connection with our
customer reward program and the installation of additional
marketing counters at airports. The increase was offset in part
by a decrease in compensation to sales and marketing personnel
resulting from changes in our compensation structure.

         
General and
Administrative.
General and
administrative expenses increased by 6.0% to
RMB15.7 million (US$1.9 million) in 2002 from
RMB14.8 million in 2001.

         
Share-Based
Compensation.
Share-based compensation
expenses increased substantially to RMB462,140 (US$55,834) in
2002 from RMB21,950 in 2001, due to the issuance of additional
share options under our 2000 stock option plan.

         
Amortization of Goodwill and Other Intangible
Assets.
Amortization expenses
decreased by 80.4% from RMB1.8 million in 2001 to
RMB353,241 (US$42,677) in 2002, because we did not recognize in
2002 any further amortization expenses on goodwill arising from
the 2000 acquisition of Beijing Modern Express, following the
adoption in 2002 of a new accounting policy, and because the
marketing agreement that we acquired from Beijing Modern Express
was fully amortized in 2001.

         
Other Expenses Incurred for Joint Venture
Companies.
Other expenses, mainly
consisting of payroll compensation and related expenses incurred
for joint venture companies, remained stable at RMB915,056
(US$110,553) in 2002.

         
Interest Income and Expenses.
Interest income decreased by 85.4%
from RMB2.2 million in 2001 to RMB319,230 (US$38,568) in
2002, primarily due to a significant reduction in the interest
rate for our bank deposits. Interest expenses decreased to
RMB41,261 (US$4,985) in 2002 from RMB62,058 in 2001, because we
repaid our short-term RMB bank loan in early 2002.

         
Other Income
(Expense).

Other income increased substantially
to RMB1.0 million (US$0.1 million) in 2002 from other
expenses of RMB79,858 in 2001, principally because we received
financial subsidies of RMB783,900 (US$94,707) from a government
authority in Shanghai in 2002.

46


 

         
Income Tax Benefit (Expense).
Income tax expense substantially
increased to RMB10.0 million (US$1.2 million) in 2002
compared to income tax benefit of RMB2.3 million in 2001,
primarily because we started to generate taxable income in 2002.

         
Net Income
(Loss).
Net income increased to
RMB14.2 million (US$1.7 million) in 2002 compared to a
net loss of RMB15.3 million in 2001, as a result of the
cumulative effect of the above factors.

2001 Compared to 2000

         
Revenues. We
had revenues of RMB46.4 million in 2001, an increase of
571.4% over RMB6.9 million in 2000. This revenue growth was
mostly driven by our increased revenues from the hotel
reservation business.

         
Hotel Reservation.
Revenues from our hotel reservation business increased
substantially by 712.5% to RMB43.4 million in 2001 from
RMB5.3 million in 2000, primarily due to our acquisition of
an increasing number of hotel suppliers and customers, and also
due to our acquisition of Beijing Modern Express in October 2000.

         
Air-ticketing.
Revenues from our air-ticketing business increased substantially
by 116.6% to RMB1.8 million in 2001 from RMB845,776 in
2000, primarily due to our expanded customer base and related
transaction volume.

         
Packaged-tour.
Packaged-tour revenues increased by 91.4% to RMB594,802 in 2001
from RMB310,750 in 2000, primarily due to our expanded customer
base and the resulting increased sales of our packaged-tour
products.

         
Other Businesses.
Revenues from our other lines of business increased by 39.5% to
RMB576,075 in 2001 compared to RMB412,940 in 2000, primarily
because we began to sell our VIP membership cards in 2001. This
increase was partially offset by a decrease in our online
advertising revenue due to reduced demand.

         
Net Revenues.
Our net revenues increased from RMB6.5 million in 2000 to
RMB44.0 million in 2001 as a result of our increased
revenues, partially offset by the resulting increase in business
tax and related surcharges over the same periods.

         
Costs of
Services.
Costs of services in
2001 substantially increased to RMB7.9 million from
RMB1.9 million in 2000. The increase in costs of services
was primarily attributable to increased staff costs and
increased telecommunication expenses in our customer service
center as a result of the overall expansion of our business.

         
Operating
Expenses.
Operating expenses in
2001 increased by 53.7% to RMB55.7 million from
RMB36.2 million in 2000, primarily due to increases in
sales and marketing and general and administrative expenses and
amortization of goodwill and other intangible assets.

         
Product Development.
Product development expenses increased by 13.8% to
RMB7.8 million in 2001 from RMB6.8 million in 2000,
primarily due to hiring more personnel in hotel relationship
management and technology support and development, as well as
increases in office expenses and telecommunication expenses
necessary to enhance our transaction and service platform.

         
Sales and Marketing.
Sales and marketing expenses increased by 74.7% to
RMB30.4 million in 2001 from RMB17.4 million in 2000,
primarily because we committed significant resources to
exploring additional sales and marketing channels.

         
General and
Administrative.
General and
administrative expenses increased by 26.9% to
RMB14.8 million in 2001 from RMB11.7 million in 2000,
primarily due to increases in staff costs and travel expenses in
connection with the overall expansion of our hotel reservation
business.

         
Share-Based
Compensation.
We incurred RMB21,950
share-based compensation in 2001 for the amortization of
deferred share-based compensation related to share options
granted during that period.

47


 

         
Amortization of Goodwill and Other Intangible
Assets.
Amortization expenses
increased substantially from RMB370,822 in 2000 to
RMB1.8 million in 2001, because we recorded the full-year
amortization expenses of goodwill and intangible assets,
including customer list and marketing agreements, with respect
to our acquisition of Beijing Modern Express, which we acquired
in October 2000.

         
Other Expenses Incurred for Joint Venture
Companies.
We incurred other expenses,
mainly consisting of payroll compensation and related expenses
for joint venture companies, in the amount of RMB934,572 in
2001, but we did not incur such expenses in 2000. These expenses
were incurred in relation to the development of hotel management
business prior to the establishment of Home Inns.

         
Interest Income and
Expenses.
Interest income
increased by 198.0% to RMB2.2 million in 2001 from
RMB735,178 in 2000, because we raised a substantial amount of
funds near the end of 2000, a portion of which were invested in
time deposits. We incurred interest expenses of RMB62,058 in
2001, and none in 2000, because we obtained a short-term RMB
bank loan to meet the RMB expense requirements in 2001.

         
Other
Expenses.
Other expenses increased
marginally to RMB79,858 in 2001.

         
Income Tax Benefit.
Income tax benefit in 2001
decreased by 67.0% to RMB2.3 million from
RMB7.1 million in 2000, primarily due to the decrease in
losses incurred to RMB17.6 million in 2001 from
RMB31.0 million in 2000. The decrease in income tax benefit
in 2002 was a result of an increase in non-deductible expenses.

         
Net Loss. Our
net loss decreased by 36.3% to RMB15.3 million in 2001 from
RMB24.0 million in 2000, primarily because our revenues
increased significantly while our established transaction and
service platform was able to keep up with the increased
transaction volume without the need to incur expenses at a rate
similar to our revenue increase rate.

Liquidity and Capital Resources

         
Liquidity.
The following table sets forth the summary of our cash flows for
the periods indicated:

                                                         
Year Ended December 31, Nine Months Ended September 30,


2000 2001 2002 2002 2002 2003 2003







(unaudited) (unaudited)
RMB RMB RMB US$ RMB RMB US$
(in thousands)

Net cash provided by (used in) operating
activities

    (28,584 )     (19,891 )     23,427       2,830       10,815       37,604       4,543  

Net cash provided by (used in) investing
activities

    (13,648 )     (30,593 )     3,427       414       11,626       (11,858 )     (1,433 )

Net cash provided by (used in) financing
activities

    128,187       4,000       (30,425 )     (3,676 )     (3,456 )     5,589       675  

Net increase (decrease) in cash and cash
equivalents

    85,977       (46,444 )     (3,532 )     (427 )     19,025       31,422       3,796  

Cash at beginning of period

    2,931       88,908       42,464       5,130       42,464       38,931       4,703  

Cash at end of period

    88,908       42,464       38,931       4,703       61,488       70,353       8,500  

         
Net cash provided by operating activities was
RMB37.6 million (US$4.5 million) for the nine months
ended September 30, 2003, compared to RMB10.8 million
for the same period in 2002. Net cash provided by operating
activities was RMB23.4 million (US$2.8 million) in
2002 compared to net cash used in operating activities of
RMB19.9 million in 2001. We began to have positive
operating cash flow in the second quarter of 2002. The increase
in our net revenue resulting from our increased transaction
volume, coupled with the low-cost structure of our operations
and high utilization rate of our transaction and service
platform, primarily contributed to our positive net cash
position.

         
Net cash used in investing activities amounted to
RMB11.9 million (US$1.4 million) for the nine months
ended September 30, 2003, compared to net cash provided by
investing activities of RMB11.6 million for the nine months
ended September 30, 2002. This change was mainly due to the

48


 

withdrawal of our short-term time deposit in the
nine months ended September 30, 2002. Net cash provided by
investing activities amounted to RMB3.4 million
(US$0.4 million) in 2002, compared to net cash used in
investing activities of RMB30.6 million in 2001,
principally due to our purchase of a short-term time deposit in
2001 and the subsequent withdrawal in 2002, the purchase of the
air-ticketing business of Beijing Hai’an Air-ticketing
Service Company Ltd. of RMB2.6 million
(US$0.3 million) and our premises in Shanghai of
RMB7.2 million (US$0.9 million) as well as the
investment of RMB5.5 million (US$0.7 million) in Home
Inns Beijing in 2002. Net cash used in investment activities
amounted to RMB13.6 million in 2000, mainly consisting of
the cash consideration of RMB8.0 million paid for the
purchase of Beijing Modern Express, and the loans of
RMB2.0 million extended to related parties for the
acquisition or establishment of certain affiliated entities.

         
Net cash provided by financing activities
amounted to RMB5.6 million (US$0.7 million) for the nine
months ended September 30, 2003, compared to net cash used
in financing activities of RMB3.5 million for the nine
months ended September 30, 2002, because we agreed to use
the entire proceeds from the issuance of Series C preferred
shares to redeem some of our outstanding shares held by our
existing shareholders and pay for professional services related
to the issuance of Series C preferred shares, but we did
not receive payment instructions from some of our shareholders
in September 2003. We have recently paid off all of the
remaining shareholders in connection with redemption of some of
their shares. Net cash used in financing activities was
RMB30.4 million (US$3.7 million) in 2002, compared to
net cash provided by financing activities of RMB4.0 million
in 2001. This change was due to our payment of cash dividends in
the amount RMB27.3 million (US$3.3 million) in 2002
and entering into our RMB4.0 million short-term bank loan
in 2001. Net cash provided by financing activities of
RMB128.2 million in 2000 represented the net proceeds from
issuance of Series A preferred shares and Series B
preferred shares.

         
Capital
Resources.
We have historically
financed our capital expenditure requirements with cash flows
from operations, as well as through the sale of our
Series A preferred shares and Series B preferred
shares.

         
We made capital expenditures of
RMB4.6 million, RMB5.8 million, RMB13.2 million
(US$1.6 million) and RMB8.1 million
(US$1.0 million) in 2000, 2001, 2002 and the nine months
ended September 30, 2003, respectively, and expect to make
additional capital expenditures totaling approximately
RMB5.0 million (US$0.6 million) for the rest of 2003
and approximately RMB16.0 million (US$1.9 million) for
2004. The capital expenditures in the past principally consisted
of purchases of servers, workstations, computers, computer
software, and other items related to our network infrastructure.
In addition, we spent RMB7.2 million (US$0.9 million)
in 2002 to purchase most of our premises in Shanghai. We expect
our capital expenditures in 2003 to primarily consist of
purchases of additional information technology-related
equipment. In addition, we expect that our capital expenditures
will increase in the future as we make technological
improvements to our transaction and service platform.

         
As of September 30, 2003, our primary source
of liquidity was RMB70.4 million (US$8.5 million) of
cash. In 2001, we borrowed a RMB4.0 million short-term bank
loan with an annual interest rate of 6.138%. We repaid this loan
in its entirety in early 2002. We have no outstanding bank loans
or financial guarantees or similar commitments to guarantee the
payment obligations of third parties.

         
We believe that our current cash and cash
equivalents, cash flow from operations and the proceeds from
this offering will be sufficient to meet our anticipated cash
needs, including our cash needs for working capital and capital
expenditures, for the foreseeable future. We may, however,
require additional cash resources due to changing business
conditions or other future developments, including any
investments or acquisitions we may decide to pursue.

49


 

Contractual Cash Obligations

         
We have entered into leasing arrangements
relating to office premises, equipment and others that are
classified as operating leases. The following sets forth our
commitments under operating leases as of September 30, 2003:

                         
Office Equipment and
Premises Others Total



(in thousands of RMB)

Less than 1 year

    2,432,119       3,984,660       6,416,779  

1-3 years

    623,704       536,985       1,160,689  

3-5 years

    —       —       —  

More than 5 years

    —       —       —  

         
Other than the leasing obligations set forth
above, we do not have any long-term commitments.

Off-Balance Sheet Arrangements

         
We do not have any outstanding derivative
financial instruments, off-balance sheet guarantees, interest
rate swap transactions or foreign currency forward contracts. We
do not engage in trading activities involving non-exchange
traded contracts.

Principal Accountant Fees and
Services

         
The following table sets forth the aggregate fees
by categories specified below in connection with certain
professional services rendered by PricewaterhouseCoopers, our
principal external auditors, for the periods indicated. We did
not pay any tax related or other fees to our auditors during the
periods indicated below.

                         
For the Year Ended December 31,

2001(1) 2002


Audit fees(2)

    RMB304,620       RMB424,375     US$ 51,253  

Audit-related fees(3)

    —       23,167       2,798  


(1)  Audit fees paid to external auditors in 2001
represent fees billed by Arthur
Andersen •Hua Qiang Certified Public Accountants,
our then principal external auditors.
 
(2)  “Audit fees” means the aggregate fees
billed in each of the fiscal years listed for professional
services rendered by our principal auditors for the audit of our
annual financial statements.
 
(3)  “Audit-related fees” means the
aggregate fees billed in each of the fiscal years listed for
assurance and related services by our principal auditors that
are reasonably related to the performance of the audit or review
of our financial statements and are not reported under
“Audit fees.” Services comprising the fees disclosed
under the category of “Audit-related fees” involve
principally the performance of certain agreed upon procedures.

Inflation

         
Inflation in China has not had a material impact
on our results of operations in recent years. According to the
National Bureau of Statistics of China, the change in Consumer
Price Index in China was 0.4%, 0.7%, (0.8%) and 0.6% in 2000,
2001, 2002 and the six months ended June 30, 2003,
respectively.

Quantitative and Qualitative Disclosures about
Market Risk

         
Interest Rate
Risk.
Our exposure to interest
rate risk for changes in interest rates relates primarily to the
interest income generated by excess cash deposited in banks. We
have not used any derivative financial instruments to hedge
interest rate risk. We have not been exposed nor do we
anticipate being exposed to

50


 

material risks due to changes in interest rates.
Our future interest income may fluctuate in line with changes in
interest rates. However, the risk associated with fluctuating
interest rates is principally confined to our cash deposits in
banks, and, therefore, our exposure to interest rate risk is
minimal and immaterial.

         
Foreign Exchange
Risk.
We are exposed to foreign
exchange risk arising from various currency exposures. Some of
our expenses, including rent for our Hong Kong office and
salaries of employees located in Hong Kong, is denominated in
foreign currencies while almost all of our revenue is
denominated in RMB. We have not used any forward contracts or
currency borrowings to hedge our exposure to foreign currency
risk. Therefore, our exposure to foreign exchange risks is
minimal and immaterial.

Recent Accounting Pronouncements

         
In June 2001, the Financial Accounting Standards
Board issued Statement of Financial Accounting Standards
No. 143, “Accounting for Asset Retirement
Obligations,” which addresses accounting and reporting for
obligations associated with the retirement of tangible
long-lived assets and the associated asset retirement costs.
This statement requires that an entity recognize an asset
retirement obligation in the period in which it is incurred, and
the entity shall capitalize the asset retirement cost by
increasing the carrying amount of the related asset by the same
amount as the liability and subsequently allocate that
retirement cost to expense over the asset’s useful life.
This statement is effective for fiscal years beginning after
June 15, 2002. We do not expect that the adoption of this
statement will have a material effect on our financial position
or results of operations.

         
In April 2002, the Financial Accounting Standards
Board issued Statement of Financial Accounting Standards
No. 145, “Rescission of FASB Statements No. 4, 44
and 64, Amendment of FASB Statement No. 13, and Technical
Corrections.” Statement of Financial Accounting Standards
No. 145 requires gains and losses on extinguishments of
debt to be classified as income or loss from continuing
operations, rather than as extraordinary items, as previously
required under Statement of Financial Accounting Standards Board
No. 4, “Reporting Gains and Losses from Extinguishment
of Debt, an amendment of APB Opinion No. 30.”
Extraordinary treatment will be required for certain
extinguishments, as provided in APB Opinion No. 30,
“Reporting the Results of Operations — Reporting
the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and
Transactions.” The statement also amends Statement of
Financial Accounting Standards No. 13 “Accounting for
Leases” for certain sale-leaseback transactions and
sublease accounting. This statement is effective since
January 1, 2003. The adoption of this statement did not
have a material effect on our financial position or results of
operations.

         
In December 2002, the Financial Accounting
Standards Board issued Statement of Financial Accounting
Standards No. 148, “Accounting for Stock-Based
Compensation — Transition and Disclosure.” This
statement amends Statement of Financial Accounting Standards
No. 123, “Accounting for Stock-Based
Compensation,” to provide alternative methods of transition
for companies that voluntarily change to a fair value-based
method of accounting for share-based employee compensation. This
statement also amends the disclosure provisions of Statement of
Financial Accounting Standards No. 123. The provisions of
Statement of Financial Accounting Standards No. 148 are
effective for fiscal years ending after December 15, 2002.
We have elected to continue to account for share-based
compensation under the provisions of APB 25 and have
followed the disclosure requirements under Statement of
Financial Accounting Standards No. 148.

         
In June 2002, the Financial Accounting Standards
Board issued Statement of Financial Accounting Standards
No. 146, “Accounting for Costs Associated with Exit or
Disposal Activities.” Statement of Financial Accounting
Standards No. 146 nullifies Emerging Issues Task Force
Issue No. 94-3, “Liability Recognition for Certain
Employee Termination Benefits and Other Costs to Exit an
Activity,” under which a liability for an exit cost was
recognized at the date of an entity’s commitment to an exit
plan. This statement requires that a liability for a cost
associated with an exit or disposal activity be recognized at
fair value when the liability is incurred. The provisions of
this statement are effective for exit or disposal activities
that are initiated after December 31, 2002. We do not
believe that this announcement will have a significant impact on
our financial statements.

51


 

         
In November 2002, the Financial Accounting
Standards Board issued Financial Accounting Standards
Interpretation No. 45, “Guarantor’s Accounting
and Disclosure Requirements for Guarantees, including Indirect
Guarantees of Indebtedness of Others.” Statement of
Financial Accounting Standards Interpretation No. 45
requires the recognition of a liability for certain guarantee
obligations issued or modified after December 31, 2002.
This statement also clarifies disclosure requirements to be made
by a guarantor for certain guarantees. The disclosure provisions
of Statement of Financial Accounting Standards Interpretation
No. 45 are effective for interim periods and fiscal years
ending after December 15, 2002. The adoption of this
statement did not have a material effect on our financial
position or results of operations.

         
In January 2003, the Financial Accounting
Standards Board issued Statement of Financial Accounting
Standards Interpretation No. 46, “Consolidation of
Variable Interest Entities, an Interpretation of ARB
No. 51.” This statement requires certain variable
interest entities to be consolidated by the primary beneficiary
of the entity if the equity investors in the entity do not have
the characteristics of a controlling financial interest or do
not have sufficient equity at risk for the entity to finance its
activities without additional subordinated financial support
from other parties. Statement of Financial Accounting Standards
Interpretation No. 46 is effective for all new variable
interest entities created or acquired after January 31,
2003. For variable interest entities created or acquired prior
to February 1, 2003, this statement must be adopted for the
first interim or annual period beginning after June 15,
2003. The financial statements of Guangzhou Guangcheng, an
affiliated Chinese entity established on April 28, 2003,
were consolidated into our financial statements on the date of
establishment, while the financial statements of Ctrip Commerce,
Shanghai Huacheng and Beijing Chenhao, all of which were
established prior to January 31, 2003, was consolidated
into our financial statements starting the third quarter of
2003. The adoption of Statement of Financial Accounting
Standards Interpretation No. 46 did not have a significant
impact on the presentation of our historical financial
statements as of December 31, 2000, 2001 and 2002 and
September 30, 2003 and for the years and the nine months
then ended.

         
In June 2003, the Financial Accounting Standards
Board issued Statement of Financial Accounting Standards
No. 149, “Amendment of Statement 133 on
Derivative Instruments and Hedging Activities.” This
statement amends and clarifies financial accounting and
reporting for derivative instruments, including certain
derivative instruments embedded in other contracts and for
hedging activities under Statement of Financial Accounting
Standards No. 133, “Accounting for Derivative
Instruments and Hedging Activities.” It is effective for
contracts entered into or modified after June 30, 2003 and
for hedging relationships designated after June 30, 2003.
All provisions of Statement of Financial Accounting Standards
No. 149 should be applied prospectively. The adoption of
this statement did not have a material effect on our financial
position or results of operations.

         
In June 2003, the Financial Accounting Standards
Board issued Statement of Financial Accounting Standards
No. 150, “Accounting for Certain Financial Instruments
with Characteristics of both Liabilities and Equity.” This
statement establishes standards for how an issuer classifies and
measures certain financial instruments with characteristics of
both liabilities and equity. It requires that an issuer classify
a financial instrument that is within its scope as a liability
(or as an asset in some circumstances). It is effective for
financial instruments entered into or modified after
May 31, 2003, and otherwise is effective at the beginning
of the first interim period beginning after June 15, 2003.
It is to be implemented by reporting the cumulative effect of a
change in an accounting principle for financial instruments
created before the issuance date of this statement and still
existing at the beginning of the interim period of adoption.
Restatement is not permitted. The adoption of this statement did
not have a material effect on our financial position or results
of operations.

52


 

BUSINESS

Overview

         
We are a leading consolidator of hotel
accommodations and airline tickets in China. We aggregate
information on hotels and flights and enable our customers to
make informed and cost-effective hotel and flight bookings.
Since commencing operations in 1999, we have become one of the
best-known travel brands in China. We pioneered the development
of a reservation and fulfillment infrastructure that enables our
customers to:

  • choose and reserve hotel rooms in cities
throughout China and selected cities abroad;
 
  • book and purchase airline tickets for domestic
and international flights originating from China; and
 
  • choose and reserve packaged tours that include
transportation, accommodation, and sometimes guided tours as
well.

         
We target our services primarily at business and
leisure travelers in China who do not travel in groups. This
type of travelers, who are referred to in the travel industry as
FITs and whom we refer to as independent travelers in this
prospectus, form a traditionally under-served yet fast-growing
segment of the China travel market. We act as agent in
substantially all of our transactions and generally do not take
any inventory risks with respect to the hotel rooms and airline
tickets booked through us. We derive our hotel reservation,
air-ticketing and packaged-tour revenues through commissions
from our travel suppliers, primarily based on the transaction
value of the rooms, airline tickets and packaged-tour products,
respectively, booked through our services.

         
For the nine months ended September 30,
2003, we derived 85.8% of our revenues from the hotel
reservation business and 10.5% of our revenues from our
air-ticketing business. Our packaged-tour business contributed
3.7% of our revenues for the nine months ended
September 30, 2003.

         
We believe that we are the largest consolidator
of hotel accommodations in China in terms of the number of room
nights booked. In October 2003, we booked approximately
300,000 hotel room nights. As of October 31, 2003, we
had secured room supply relationships with over
1,700 hotels in China and over 450 hotels abroad,
which cover a broad range in terms of price and geographical
location. The quality and depth of our hotel supplier network
enable us to offer our customers a wide selection of hotel
accommodations, often at significant discounts to published
rates. We believe our ability to offer reservations at highly
rated hotels is particularly appealing to our customers.
Revenues from our bookings for three-, four- and five-star
hotels comprised approximately 95.0% of our revenues from our
hotel reservation business for the nine months ended
September 30, 2003.

         
We believe that we are also one of the leading
consolidators of airline tickets in Beijing and Shanghai in
terms of the number of airline tickets booked and sold. We sold
approximately 70,000 tickets nationwide in October 2003.
Our airline ticket suppliers include all major Chinese airlines
and many international airlines that operate flights originating
from China. We also believe we are the only airline ticket
consolidator in China with a centralized reservation system and
ticket fulfillment infrastructure covering all of the
economically prosperous regions of China. Our customers can make
flight reservations on their chosen routes and arrange ticket
payment and delivery through our ticketing offices and
third-party agencies located in over 25 major cities in
China.

         
We offer our services to customers through an
advanced transaction and service platform consisting of our
centralized toll-free, 24-hour customer service center and
bilingual websites. For the nine months ended September 30,
2003, transactions effected through our customer service center
accounted for approximately 70% of our transaction volume, while
our websites accounted for the balance.

         
We have experienced significant growth since our
inception in June 1999. Beginning in the first half of 2002, we
have achieved and maintained positive net income. Our revenues
have increased from RMB6.9 million in 2000 to
RMB105.3 million (US$12.7 million) in 2002. For the
nine months ended

53


 

September 30, 2003, we generated revenues of
RMB111.3 million (US$13.4 million) and net income of
RMB29.2 million (US$3.5 million) despite the outbreak
of SARS during the second quarter of 2003.

         
Our business was commenced in June 1999. In March
2000, we established a new holding company, Ctrip.com
International, Ltd., in the Cayman Islands, and soon thereafter,
all of the shareholders of Ctrip.com (Hong Kong) Limited, our
now directly wholly owned subsidiary, transferred their shares
to the holding company in exchange for shares of the holding
company. Since we commenced our operation, we have conducted
substantially all of our operations in China. We operate as a
foreign investment enterprise in China through our subsidiaries,
Ctrip Computer Technology and Ctrip Travel Information, as well
as our affiliated Chinese entities, including

  • Ctrip Commerce, which holds advertising and
Internet content provision licenses;
 
  • Shanghai Huacheng, which holds domestic travel
agency and air-ticketing licenses;
 
  • Beijing Chenhao, which holds an air-ticketing
license;
 
  • Guangzhou Guangcheng, which has recently received
an air-ticketing license; and
 
  • Shanghai Cuiming, which holds a license to
conduct both cross-border and domestic packaged-tour businesses.

         
We hold no ownership interest in any of our
affiliated Chinese entities. Qi Ji, a co-founder and director of
our company, Min Fan, a co-founder and Executive Vice President
of our company, and Alex Nanyan Zheng, a Vice President of our
company, are the principal shareholders of our affiliated
Chinese entities. See “Prospectus Summary — Corporate
Structure” for the place of formation, ownership interest
and affiliation of each of our subsidiaries and affiliated
entities. We have made interest-free loans to Qi Ji, Min Fan and
Alex Nanyan Zheng in the aggregate amounts of approximately
RMB2.6 million (US$0.3 million), approximately RMB6.1 million
(US$0.7 million) and approximately RMB50,000 (US$6,000),
respectively, solely in connection with the capitalization or
acquisition of our affiliated entities. Each of these loans will
mature ten years after the date of the applicable loan
agreement. In the event that the Chinese government lifts its
restrictions on foreign ownership of the air-ticketing, travel
agency, advertising or Internet content provision business in
China, we will exercise our right to purchase all of the
outstanding equity interests of our affiliated Chinese entities
immediately, and the loans will be cancelled in connection with
such purchase. However, it is uncertain when, if at all, the
Chinese government will lift any or all of these restrictions.
For a detailed description of the terms of these loans, see
“Related Party Transactions — Arrangements with
Affiliated Chinese Entities.”

         
We formed Home Inns in 2001 to expand our
business line to include the hotel management service. Through a
series of subsequent transactions, we reduced our interest in
Home Inns to 31.16%. We spun off our remaining interest in Home
Inns in August 2003 to prepare for the offering to enable us to
focus on our core business of travel consolidation.

         
Our principal executive offices are located at
3F, Building 63-64, No. 421 Hong Cao Road,
Shanghai 200233, People’s Republic of China, and our
telephone number is (8621) 3406-4880. We have appointed
CT Corporation System, 111 Eighth Avenue,
New York, NY 10011, as our agent for service of
process in the United States.

54


 

Industry Background

         
Growth of the Chinese Travel Industry.
The Chinese travel industry is
large and growing rapidly. The following chart contains certain
data from CEIC Data Company Limited concerning the Chinese
economy and the travel industry during the period from 1998
through 2002.

                                 
Number of Number of
Nominal Gross Expenditure on 3-, 4- and 5-Star Civil Aviation
Domestic Product Tourism Hotels in Operation Passenger Kilometers




(in billions of RMB) (in millions of RMB) (in billions)

1998

    7,835       239,118       1,325       80,024  

1999

    8,207       283,192       1,573       85,728  

2000

    8,947       317,554       2,368       97,054  

2001

    9,731       352,237       2,857       109,135  

2002

    10,479       387,836       3,656       126,870  

         
China’s gross domestic product grew from
RMB7,835 billion in 1998 to RMB10,479 billion
(US$1,266 billion) in 2002, representing a compound annual
growth rate of 7.5% during this period. The aggregate
expenditure on tourism in China increased from
RMB239.1 billion in 1998 to RMB387.8 billion
(US$46.9 billion) in 2002, representing a compound annual
growth rate of 12.8% during this period. According to
China’s tenth five-year plan, the Chinese government
expects an approximately 7% compound annual growth rate of
China’s gross domestic product from 2000 to 2005. We
anticipate that demand for travel services in China will
continue to increase substantially in the foreseeable future as
the Chinese economy continues to grow.

         
The statistics included in this prospectus
relating to the Chinese travel industry and economy are derived
from various government and institute research publications. We
have not independently verified such information, and you should
not unduly rely upon it.

         
Fragmented Hotel and Air-ticketing
Industries.
The travel
intermediary industries are highly fragmented in China.
According to CEIC Data Company Limited, as of December 31,
2002, there were 3,656 three-, four- and five-star hotels in
China. The biggest hotel chain in China, the Jin Jiang Group,
manages approximately 70 hotels. Furthermore, China does not
have any nationwide hotel distribution system among travel
intermediaries. As a result, travelers traditionally do not have
access to comprehensive information on hotels. In the
air-ticketing sector, the Civil Aviation Administration of
China, or CAAC, requires an air-ticketing agency to obtain a
separate license from CAAC’s regional branch in order to
conduct business in any city. This requirement has hindered the
ability of local air-ticketing agencies to expand nationwide.

         
Growing but Under-served Independent
Travelers in China.
The rapid
growth of the Chinese economy in the past decade has led to a
substantial increase in business activity and personal
disposable income, as well as changes in consumption patterns.
As a result, there has been a significant increase in the demand
for travel services in China. However, as travel agencies in
China often focus on tour groups and devote limited resources to
serving independent travelers, independent travelers have
limited access to discounted rates or comprehensive information
on hotels and flights.

         
Functions of Travel
Consolidators.
Travel
consolidators like us are able to offer information aggregated
from various hotels and airlines to independent travelers,
enabling them to make informed and cost-effective hotel and
flight bookings through customer service centers or websites. To
both the hotel and airline industries, travel consolidators
offer an efficient distribution platform that improves occupancy
levels and helps increase overall revenues. To independent
travelers, travel consolidators are a new and more reliable
source offering access to the generally wider selection of
inventory and lower rates than those otherwise available.

         
Usage of Customer Service Centers in the
Travel Industry.
Call centers or
customer service centers are a relatively new concept in China
but provide an effective channel to distribute travel products
and services. Travelers can gather and evaluate travel
information, receive recommendations from customer service
representatives and book transactions more efficiently by
contacting customer service centers any time,

55


 

day or night, instead of visiting travel agents
who generally offer services only during daytime business hours,
tend to focus on group tours and typically require in-person
visits. In addition, the increasing number of mobile phone users
in China, with approximately 250.0 million mobile phone
users as of September 30, 2003 according to CEIC Data
Company Limited, is expected to enhance the popularity of using
customer service centers, since travelers can now call to change
their travel plans after they have already begun their trip,
when public telephones are often unavailable. In addition,
competitive labor costs in China have allowed customer service
centers to become a cost-effective transaction tool in China.

         
Growth of the Internet and Online
Commerce.
According to the China
Internet Network Information Center, China now ranks second in
the world in terms of number of Internet subscribers. The
Internet’s broadly distributed and easily accessible
environment creates the ideal foundation for new marketplaces,
which provide increased search efficiency, comprehensive
information and competitive pricing. The Internet brings
efficiencies to markets characterized by the presence of large
number of geographically dispersed buyers and sellers and
purchase decisions involving large amounts of information from
multiple sources. We believe that the travel industry, which
inherently involves broadly dispersed travelers as well as a
wide selection of travel suppliers in terms of location and
price, is especially well-suited to benefit from increased
Internet and online commerce adoption.

Our Strengths

         
We bridge the gap between independent travelers
and travel suppliers. Through our sophisticated transaction and
service platform consisting of our centralized toll-free,
24-hour customer service center and bilingual websites, we serve
primarily the traditionally under-served yet fast growing
independent travelers segment in China by helping them plan and
book their trips while helping travel suppliers improve the
efficiency of their marketing and distribution. We have achieved
a leading position, in part, by establishing the competitive
strengths described below.

         
A Leading Travel Brand in
China.
We have invested
significant resources in developing and promoting our brand
since our inception. The China Travel Journal ranked our Ctrip
brand among the top travel brands in China in 2002. The broad
recognition of our Ctrip brand has enhanced our ability to
quickly attract new travel customers, especially frequent
independent travelers, as evidenced by the rapid growth of our
customer base and transaction volume.

         
Our reputation and market position have also
provided us with easier and more effective access to hotels and
airlines nationwide. We are able to obtain guaranteed allotment
arrangements from over 500 of our hotel suppliers. These
arrangements enable us to offer a specified number of hotel
rooms during any given month to our customers without taking any
inventory risk and to confirm the room reservations instantly.

         
Large Supplier Network and Nationwide
Coverage.
We have established
supplier relationships with over 1,700 hotels across all
major geographic regions in China and over 450 hotels
abroad, as of October 31, 2003. We have also cultivated
supplier relationships with all major domestic Chinese airlines
and many international airlines that operate flights originating
from China. We believe we are the only airline ticket
consolidator in China with a centralized 24-hour information and
reservation center and a settlement and delivery infrastructure
covering all of the most economically prosperous regions of
China. Our broad supplier network has enabled us to offer a
broad range of travel product and service offerings, including
packaged tours, for our independent traveler customers. We
believe that our established and extensive supplier relationship
positions us well to compete with existing and potentially new
competitors.

         
Scalable Platform and Flexible Cost
Structure.
We have created a
cost-effective transaction and service platform consisting of
our customer service center and websites. Our business is highly
scalable because of the low costs associated with our
transaction and service platform. We can hire and train new
representatives for our customer service center quickly and
cost-effectively to cope with the expected increase in
transaction volume, because of the relatively low labor cost in
China, as well as our ability to efficiently train new staff to
serve customers. Our technology platform offers further
scalability advantages as we can upgrade our existing
infrastructure with limited additional investment. Therefore, we
believe that we can keep up with the expected pace of increase
in our transaction volume without incurring substantial
incremental

56


 

costs. In addition, the compensation of our
customer service representatives, which forms a significant
portion of our costs of services, is linked to the number of
transactions successfully completed by them. In part because of
our relatively flexible cost structure, we were able to maintain
positive net income in the second quarter of 2003 despite the
significant negative impact of the SARS outbreak.

         
Excellent Customer
Service.
We place significant
emphasis on technology, personnel and training to facilitate
superior customer service. We operate our centralized toll-free
customer service center 24 hours a day and seven days a week to
provide comprehensive and real-time assistance to our customers.
Our customer service representatives are equipped to review a
comprehensive list of the hotels in individual markets, together
with the related price, amenities and availability information,
and real-time flight information, while simultaneously booking
hotels, airline tickets and packaged tours for customers. Our
customer service representatives are also trained to provide
travel advisory services at our customers’ request.
Moreover, our user-friendly websites allow customers to quickly
review hotel and flight information and book hotel
accommodations and airline tickets and, in some instances,
receive instant confirmation.

         
In addition, we maintain a customer database
containing information on the transaction history and
preferences of each customer who has booked a travel product
through us. We also have a post-transaction customer service
division responsible for addressing any issues or concerns
raised by our customers. We believe our excellent customer
service has contributed to our large number of repeat customers.

         
Advanced Infrastructure and Technology.
We have developed an advanced
infrastructure and technology platform with a high level of
reliability, security and scalability. At the front end, our
system allows us to ensure service quality by promptly
processing customer inquiries and requests and by monitoring the
performance of our customer service representatives on an
around-the-clock basis. As a result, we maintain an extremely
high service ratio with very limited aborted calls due to
unacceptably long waiting time. Our websites are custom-built
in-house to exacting specifications to ensure the best user
experience. Our websites, www.ctrip.com and www.gotochina.com,
have user-friendly designs with well laid-out information. We
work closely with our web host to ensure that our customers can
obtain the desired information and complete transactions with us
quickly and securely.

         
At the back end, our proprietary booking software
allows us to update hotel room and airline ticket availability
and pricing information. The real-time nature of our software
system allows us to recommend our preferred hotels to customers
when they request a recommendation. Our booking software is
integrated with our websites and customer service center
operations. In addition, we have developed an electronic
confirmation system that enables us to transmit a
customer’s booking information to those hotels that are
linked to this system and to receive confirmation from these
hotels. We believe that our advanced transaction and service
platform is capable of handling increasing traffic without
substantial incremental costs.

         
Experienced Management
Team.
Our senior managers have on
average more than eight years of experience in their relevant
fields of information technology, finance and travel management.
Key members of our management team include James Jianzhang
Liang, our Chief Executive Officer, Neil Nanpeng Shen, our Chief
Financial Officer, and Min Fan, our Executive Vice President,
all of whom are founders of our company. Prior to joining us,
Mr. Liang had worked in the information technology field in
Silicon Valley and China for over eight years, Mr. Shen had
worked at leading global investment banks in New York and Hong
Kong for over eight years, and Mr. Fan had been the Chief
Executive Officer for one of the leading domestic travel
agencies in Shanghai for over three years. Under our management
team’s leadership, we have experienced substantial growth
in our transaction volume and customer base and have
successfully integrated the businesses we acquired into our
operation. Our senior managers have indicated their intent to
continue to manage the company after this offering.

Our Strategy

         
Our goal is to create long-term shareholder value
by enhancing our position as a leading hotel and air-ticket
consolidator in China. We believe that China’s highly
fragmented travel industry and under-served

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frequent independent traveler market provide us
with significant growth opportunities. We intend to pursue the
following strategies to achieve our goal:

         
Leverage and Strengthen the Ctrip
Brand.
To hotel and airline ticket
suppliers, the Ctrip brand represents a sizable and increasingly
important source of customers. We intend to leverage this
reputation to attract new suppliers, and negotiate more
favorable contractual terms with our existing suppliers. To our
marketing partners, Ctrip is regarded as a partner that enhances
their product offerings. We aim to deepen our existing
relationships with our marketing partners and establish new
relationships with other potential marketing partners, allowing
us to further promote our brand, cross-sell our products and
acquire customers in a more cost-effective manner.

         
In addition, we intend to further strengthen
Ctrip as a dominant consumer travel brand. We plan to continue
to pursue a focused marketing and advertising campaign through
various targeted promotions to acquire new customers and
encourage our existing customers to transact more frequently.
For example, we distribute membership cards through in-flight
magazines to attract new customers, and we maintain a membership
reward program that offers rewards to frequent customers to
encourage repeat transactions.

         
Expand Our Hotel Supplier Network and
Room Inventory.
Although we
believe that we are the largest hotel consolidator in China in
terms of gross bookings, there are significant opportunities to
further expand our hotel reservation service. We plan to focus
the expansion of our hotel reservation business on hotels with
three-, four- and five-star ratings, which offer us higher
profit margins per transaction. We intend to build upon our
already extensive hotel supplier relationships in China’s
major cities such as Beijing and Shanghai. In addition, we
intend to enhance our presence in selected regional centers and
medium-sized cities that offer significant growth opportunities
driven by China’s robust economy and rising disposable
income per capita.

         
We plan to capitalize on our substantial and
growing customer base and transaction volume by continuing to
negotiate with hotel suppliers to increase rooms to be allocated
to us on the guaranteed allotment basis. We have guaranteed
allotment arrangements with over 500 hotels in China as of
October 31, 2003, and will try to increase the number of
rooms allotted to us from these hotels. In addition, we intend
to pursue guaranteed allotment arrangements with our hotel
suppliers that currently do not have such arrangements with us.

         
Expand Air-ticketing and Other Travel
Product Offerings.
Our
air-ticketing business contributed less than 11% of our revenues
in 2002 and the nine months ended September 30, 2003, but
has demonstrated substantial growth potential. We intend to
establish airline ticket issuance and delivery infrastructure in
more cities throughout China. We also intend to continue to
expand our air-ticketing business by selling more tickets for
international flights, as the commissions per ticket for
international flights are generally higher than those for
domestic flights. To further diversify our revenue sources and
in response to the increasing sophistication of Chinese
travelers’ tastes, we intend to further promote the
packaged-tour products that offer our customers the flexibility
to choose desired flight and hotel combinations. We believe that
our packaged-tour products will attract increasing interest
among our existing users as well as new customers.

         
Enhance Transaction and Service
Platform.
We intend to enhance the
features of our transaction and service platform to keep up with
the expected rapid increase in our transaction volume while
maintaining the high quality of our customer service. With
respect to our customer service center, we intend to continue to
invest in training our customer service representatives and
upgrading our information technology systems underlying the
customer service center to ensure consistently high-quality
customer service. With respect to our websites, we plan to
continually update new software features and editorial content
and improve the accessibility of our websites through various
Internet access channels such as wireless devices.

         
We believe the Internet as an information
distribution and transaction platform presents further cost
efficiencies and scalability opportunities. To exploit the
additional cost savings and scalability benefits, we intend to
promote the migration of customers to our websites. We have set
up various promotion programs such as offering our customers up
to twice the reward points on transactions effected online as
compared to our customer service center.

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In addition, we plan to continue to enhance our
customer database management tools to identify our
customers’ travel preferences and transaction patterns in
order to offer them more focused services. We also intend to
further promote our electronic confirmation system with our
existing hotel suppliers. Currently, more than 160 hotels are
using our electronic confirmation system to interface with us,
and we plan to promote the electronic confirmation system with
our other hotel suppliers. We believe that this system will
boost our transaction efficiency significantly.

         
Pursue Selective Strategic Acquisitions and
Expand into Hong Kong, Macau and Taiwan.
We have become a leading
consolidator of hotel accommodations and airline tickets in
China in part through the acquisition of the largest offline
hotel reservation center in China, Beijing Modern Express, in
October 2000, and the air-ticketing business of Beijing
Hai’an Air-ticketing Service Company Ltd. in February 2002.
We have successfully integrated these acquired businesses into
our business operations. We intend to explore additional
acquisitions that would allow us to expand the reach and scope
of our travel products and services as well as our customer base
in the domestic markets in China.

         
We also aim to enter Hong Kong, Macau and Taiwan.
The closer economic ties between China and other parts of
Greater China, together with the recent liberalization of
restrictions formerly imposed on mainland Chinese traveling to
Hong Kong, are expected to increase the cross-border traffic
between China and Hong Kong significantly. Given the
similarities in language, culture and consumption behavior
between residents of mainland China and Hong Kong, Macau and
Taiwan, we foresee substantial growth opportunities in entering
these markets, which can be executed at a relatively low cost
and with limited risk.

         
Expand into the Merchant Business.
Currently, we act as agent in
substantially all of our transactions, passing our
customers’ reservations to travel suppliers without
assuming any risks for customers’ cancellations or
no-shows. While we intend to continue to use the agency model as
our primary business model, we plan to gradually establish a
merchant business relationship with our most popular travel
service suppliers beginning in the second or third quarter of
2004. In the merchant business relationship, we would buy hotel
rooms and/or airline tickets in advance before selling them to
our customers and thereby bear the inventory risk. However, if
our hotel room and airline ticket inventory were sold
successfully, we would expect to realize substantially higher
profits per room or airline ticket than we do under our current
agency model. We believe that our growing customer base
constitutes a solid foundation for our merchant business and
would help to minimize any potential inventory risk.

Products and Services

         
We began offering hotel reservation and
air-ticketing services in October 1999. For the nine months
ended September 30, 2003, we derived 85.8% of our revenues
from the hotel reservation business and 10.5% of our revenues
from the air-ticketing business. In addition, we offer other
travel-related products and services including packaged tours
that are either bundled by us and include transportation and
hotel, or by third party travel agencies and include
transportation, hotel and, in most cases, a guided tour.

         
Hotel Reservations.
Our hotel booking volume has
increased substantially since our inception. The following table
shows the total room nights we sold for the periods indicated.

                                                                         
For Quarters Ended

September 30, December 31, March 31, June 30, September 30, December 31, March 31, June 30, September 30,
2001 2001 2002 2002 2002 2002 2003 2003 2003









(in thousands)

Room Nights

    234.3       262.1       273.8       374.4       438.8       467.7       486.0       280.5*       747.8  


Decrease primarily due to the SARS outbreak from
March 2003 through June 2003.

         
As of October 31, 2003, we had room supplier
relationships with over 1,700 hotels in China and over
450 hotels abroad, which cover a broad range of hotels in
terms of price and geographical location. The majority of our
hotel suppliers fall into the three-, four- and five-star
categories. Revenues from our bookings for three-, four- and
five-star hotels comprised approximately 95% of our revenues
from our hotel reservation

59


 

business for the nine months ended
September 30, 2003. The average room rate booked through us
was approximately RMB488 (US$59) per night in October 2003. The
following table shows the number of our hotel suppliers in each
of the major cities indicated as of October 31, 2003:

                                             

Shanghai

    250     Beijing     243     Hangzhou     68     Guangzhou     60  

Shenzhen

    59     Hong Kong     47     Nanjing     42     Wuhan     38  

         
We act as agent in substantially all of our
hotel-related transactions. Our customers receive confirmed
bookings and generally pay the hotels directly upon completion
of their stays, and in general, we pay no penalty to the hotels
if our customers do not check in. For some of our hotel
suppliers, we earn pre-negotiated fixed commissions on hotel
rooms we sell. For other hotels, we have commission arrangements
that we refer to as the “ratchet system,” whereby our
commission rate per room night increases as the volume of room
nights we sell for such hotel during such month increases.

         
We contract with hotels for rooms under two
agency models: the “guaranteed allotment” model and
the “on-request” model. Under either agency model, we
enter into agreements with our hotel suppliers containing most
if not all of the following provisions:

  • Pricing. The hotel
is required to offer us room prices that are lower than its
published prices. If the hotel has promotional sales, it is
required to notify us in advance so we can lower our prices
proportionately.
 
  • Room Supplies.
The hotel is required to notify us in
advance if it anticipates a shortage of rooms.
 
  • Customer Accommodation.
If the reserved room is not available
when our customer checks in to the hotel due to reasons caused
by the hotel, such as over-booking, the hotel is required to
upgrade the customer free-of-charge or arrange for accommodation
in another hotel with the same or higher rating and price.
 
  • Extension of Stay.
If our customer requests an extension
of stay, the hotel is required to notify us immediately, and we
book the extended stay and earn the resulting commissions.
 
  • Confirmation of Customer’s Stay.
We confirm a customer’s actual
length of stay by contacting the hotel to verify the
customer’s check-in and check-out dates. With the hotels
that have implemented our electronic confirmation system, we
receive confirmation through such system.
 
  • Commission Payments.
The hotel will pay us commissions each
month based on the number of room nights we sell.

         
In addition to the agreements that we enter into
with all of our hotel suppliers, we enter into a supplemental
agreement with each of the hotel suppliers with which we have a
guaranteed allotment arrangement. Pursuant to this agreement, a
hotel gives us a specified number of guaranteed available rooms
every day, allowing us to provide instant confirmations on such
rooms to our customers before notifying the hotel. The hotel is
required to notify us in advance if it will not be able to make
the guaranteed rooms available to our customers due to reasons
beyond its control.

         
We have contracted with over 500 hotels in
China for guaranteed room allotments, allowing us to sell rooms
to our customers even during peak seasons and provide instant
confirmation. Rooms booked in hotels with which we have a
guaranteed allotment arrangement currently account for
approximately 50% of our total hotel room transaction volume.
With the remaining hotel suppliers, we book rooms on an
“on-request” basis, meaning our ability to secure
hotel rooms for our customers is subject to room availability at
the time of booking.

         
Our typical hotel reservation transaction
involves the following major steps:

  • Initiating an
Inquiry.
Our customer either conducts
a search on our website, or calls our customer service center to
learn more about hotels at a destination. Upon our
customer’s inquiry,

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  our customer service representative are trained,
and our website is programmed, to recommend hotels to the
customer.
 
  • Making a
Reservation.
At this stage, we reserve
a hotel room for the customer based on the customer’s
choice given to us either through the telephone or our website.
 
  • Confirmation. For
hotels with which we have a guaranteed allotment arrangement, we
give instant confirmation, and we notify the hotel afterwards.
For hotels with which we have an on-request arrangement, we pass
our customer’s reservation request to the hotel. Once we
receive confirmation from the hotel, our customer service
representative will contact the customer to confirm the
reservation.
 
  • Following Up. We
follow up with the hotel regarding the customer’s length of
stay and our commission, in accordance with our agreement with
the hotel.

         
Some hotels require our customers to use their
credit cards to guarantee the bookings. We have entered into
arrangements with a number of financial institutions to allow
our customer service center and websites to accept credit card
guarantees to enable our customers to complete their
reservations.

         
Air-ticketing.
We believe that we are the only
provider of air-ticketing services in China with a
multi-province airline ticket sales and issuance infrastructure.
We have experienced a significant growth in our air-ticketing
business since early 2002. We believe that we are currently
among the top three air-ticketing agencies in Beijing and
Shanghai in terms of sales volume. The following chart shows the
airline tickets we sold for the periods indicated.

                                 
For Quarters Ended

December 31, March 31, June 30, September 30,
2002* 2003 2003 2003




(in thousands)

Number of airline tickets sold

    79.3       111.7       74.4 **     183.1  


* Meaningful information concerning the number of
airline tickets booked during the prior periods is not available.
**  Decrease principally due to the SARS outbreak
from March 2003 through June 2003.

         
We sell airline tickets for all major domestic
Chinese airlines, including Air China, China Eastern Airlines,
China Southern Airlines and Shanghai Airlines, and many
international airlines operating flights that originate from
cities in China, such as Northwest Airlines, Air Canada, All
Nippon Airways, Dragon Air and Lufthansa.

         
In every air-ticketing transaction, our customer
receives a confirmed seat and pays the ticket delivery agent
upon delivery of the ticket. Generally, the customer pays a
penalty to the airline if he or she cancels the ticket for the
flight.

         
The airline industry, including airline ticket
pricing, is heavily regulated by CAAC. Therefore, we have no
discretion in offering discounts on the airline tickets we sell.
We generally earn standard commissions paid to air-ticketing
service entities similar to us. In addition, we have an
arrangement with some of our airline ticket suppliers, whereby
our commission per ticket may increase as the volume of our
ticket sales for an airline reaches a specified performance
target set by the airline.

         
Our typical air-ticketing transaction involves
the following major steps:

  • Initiating an
Inquiry.
Our customer either conducts
a search on our website or contacts our customer service center
to learn more about flights to a destination. The customer
learns either through our website or from our customer service
representative whether any seats are available.

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  • Making a
Reservation.
At this stage, we make a
confirmed booking of a seat on the customer’s chosen flight.
 
  • Ticket Issuance and
Delivery.
In Beijing and Shanghai, we
issue airline tickets through our local ticketing offices. In
other cities, we issue airline tickets through local ticketing
agencies with whom we have contractual relationships. We have
the capability to issue airline tickets in most major cities in
China.
 
  • Ticket and Commission
Settlement.
Payment for airline
tickets we sell is settled by either of the following methods:
  (1) In Beijing or Shanghai, the customer pays us
simultaneously with the delivery of the ticket. We then deduct
our commission and deposit the remaining amount into the billing
and settlement plan clearinghouse system, or the BSP system. The
airline deducts the fare owed to it from our accounts within the
BSP system on a regular basis.
 
  (2) In other cities, where we contract with local
agents for ticket fulfillment services, the local agents collect
their commissions from airlines, and we, in turn, collect our
commissions from them on a regular basis.

         
A customer has the option of picking up a ticket
at the ticketing office or requesting a personal delivery. The
expected adoption of electronic tickets in lieu of paper tickets
by airlines in China may further increase our customer service
efficiency and reduce our operating expenses.

         
Other Products and Services.
We also offer the following
products and services:

  • packaged tours;
 
  • advertising sales; and
 
  • VIP membership cards.

         
We bundle transportation and hotels in our
packaged tours. We sell packaged tours bundled by third-party
travel agencies that also include, in most cases, a guided tour.
We offer travel-related businesses and other third parties the
opportunity to advertise on our websites and in our introductory
brochures. Although we sell our VIP membership cards, our
regular customers can get free VIP membership cards once they
accumulate enough points from the travel products they purchase
through us. Our VIP membership cards allow the cardholders to
receive discounts from many restaurants, clubs and bars in major
cities in China and enjoy certain priority in obtaining our
services.

         
These products and services accounted for less
than 4.0% of our total revenue for the nine months ended
September 30, 2003. We view sales of our VIP membership
cards as primarily brand-promoting rather than
revenue-generating.

Transaction and Service Platform

         
Our customers can reach us for their
travel-related needs through either our toll-free customer
service center or our bilingual websites located at
www.ctrip.com and www.gotochina.com. For the nine months ended
September 30, 2003, transactions executed through our
customer service center and website account for approximately
70.0% and 30.0%, respectively, of our total transactions. We
believe that the ratio of online transactions to our total
transactions will increase as the Internet penetration rate in
China grows, and more customers become accustomed to using the
Internet as an effective medium for commerce.

         
Customer Service Center.
Our centralized toll-free customer
service center is located in Shanghai, China and is operated
24 hours a day and seven days a week. Customers can call
our nationwide toll free number to consult with our customer
service representatives, receive comprehensive, real-time hotel
and flight information and make travel bookings.

         
Due to the low-cost nature of operating call
centers in China, we are able to realize substantial gross
profits. The average compensation of our customer service
representatives was RMB2,791 (US$337) per

62


 

month in October 2003, consisting of a base
salary and fringe benefits of approximately RMB1,551 (US$187)
plus commissions based on the number of transactions completed
during the month. In October 2003, each customer service
representative received approximately 2,425 calls on
average. Accordingly, the average labor cost per call was
approximately RMB1.15 (US$0.14) in October 2003.

         
Our customer service center has 30 telephone
lines, each of which is connected to eight extensions. As a
result, our customer service center has the capacity to receive
240 incoming calls at once. At our technically advanced
facility, we have implemented comprehensive performance measures
to monitor our calls to ensure that our customers will receive
quality service. We are able to take substantially all of the
incoming calls with limited number of aborted calls due to
unacceptably long waiting time. We have sufficient capacity to
meet further increases in call volume without the need to
undertake system redesign to our existing systems. Nevertheless,
if we exceed this capacity, we believe we can add, within a
reasonable time and at a reasonable cost, additional phone lines
and computer systems to handle increasing call volumes.

         
We currently employ over 500 customer
service representatives, all of whom participated in a formal
training program before commencing work. These representatives
efficiently access our information systems on behalf of
customers to review a comprehensive list of the hotels and
prices in individual markets, the flights to specified
destinations and the related price information, while
simultaneously advising our customers and making reservations
for them. Unlike some companies in the United States that
outsource their customer service to third-party call centers,
our customer service representatives are in-house travel
specialists. We continually review staffing needs and train
representatives to handle increased call volumes to ensure the
long-term sustainability of our business.

         
Internet
Websites.
We have a
Chinese-language website located at www.ctrip.com and an
English-language website located at www.gotochina.com. Our
proprietary booking software is integrated with our websites,
allowing a customer to complete a booking within minutes.

         
Through our user-friendly Chinese language
website, our customers can:

  • quickly review pricing and availability of hotels
and flights;
 
  • book hotel accommodations and airline tickets; and
 
  • search and book our packaged tours.

         
In addition, our customers can use our editorial
content for researching destinations and travel tips. Some
examples of the content on www.ctrip.com include:

  • Destination Guide.
We feature extensive editorial content
covering over 100 popular destinations in China and over
25 popular destinations abroad, and provide
destination-related information such as local attractions,
transportation, dining, lodging, entertainment, shopping and
climate.
 
  • Customer-Generated
Content.
We publish articles,
travelogues and pictures by our customers about specific
destinations.
 
  • Travel News. We
provide regularly updated information on fare sales, changing
travel conditions and weather advisories.
 
  • Links to Other
Websites.
We offer our customers a
selection of links to useful travel-related and websites.
 
  • Other Useful
Information.
Other travel-related
information we provide includes train schedule, currency
converter, travel tips and health tips.

         
We have also created an online travel community
on www.ctrip.com. Some features of our online community include:

  • Chat Rooms. Our
website visitors can communicate directly with one another in
our online chat rooms.

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  • Bulletin Boards.
Travelers looking for travel companions and advice from fellow
travelers can post their questions and answers on bulletin
boards.
 
  • Travelers’
Tips.
Our website also contains
travelers’ feedback on major domestic and international
destinations.

         
Our English-language website, www.gotochina.com,
features editorial content similar to www.ctrip.com.

Marketing and Brand Awareness

         
Through on-site promotions, strategic alliances,
online marketing, advertising, media promotions, telemarketing
and our customer reward program, we have created a strong Ctrip
brand that is commonly associated in China with value travel
products and services and superior customer service. We will
continue to use our focused marketing strategy to further
enhance our Ctrip brand and acquire new customers.

         
On-Site Promotions.
We have over 300 on-site
promotion staff located in about 30 major cities in China. All
of our on-site promotions staff have participated in a formal
training program to learn how to market our products and
services and promote our brand in an appropriate and effective
way. Our staff distribute membership cards and introductory
brochures at various locations including airports and train and
bus stations. To date, our on-site promotions have proven to be
an effective marketing channel for us.

         
Cross-Marketing.
We have entered into cross-marketing relationships with major
Chinese domestic airlines including Air China, China Southern
Airlines, China Eastern Airlines, Shanghai Airlines, Hainan
Airlines, Shenzhen Airlines and Shandong Airlines, wireless
service providers including China Mobile and China Unicom, and
banks including Bank of China, China Merchant Bank, Hang Seng
Bank and Bank of Communications.

         
Our airline partners recommend our products and
services to their mileage program members, and allow their
members to accrue miles by staying at hotels booked through us.
Our wireless service provider partners direct their subscribers
requesting travel information to our customer service center
through automatic call forwarding, or to our websites through an
Internet link on their websites. In addition, our bank partners
recommend our products and services to their debit or credit
card holders, and we allow their debit or credit card holders to
use their cards to settle their payments for travel products
purchased from us.

         
Online
Marketing.
Our Chinese language
website, www.ctrip.com, is among the most accessed and used
online travel website in China. We pay many of the leading
Internet search engines and portals in China to prominently
feature our websites.

         
Advertising.
We advertise in in-flight videos and magazines of several
domestic airlines in China. Based on our experience, such
advertising is one of the most effective advertising methods for
increasing brand awareness and attracting new customers.

         
Media
Promotion.
We cultivate
relationships with a variety of media outlets, including
newspapers, magazines and television. Our company and our
services have been featured by such media outlets as CCTV, the
Chinese Entrepreneurs and the China Travel Journal.

         
Telemarketing.
We have over 40 in-house telemarketing staff who call on
prospective customers to introduce our products and services,
and our infrequent customers to update them on our developments
and encourage them to use our services more often.

         
Customer Reward
Program.
To secure our
customers’ loyalty and further promote our Ctrip brand, we
provide our customers with a customer reward program. This
program allows our customers to accumulate membership points
calculated according to the services purchased by the customers.
Our customers may then redeem these points for travel awards and
other gifts.

64


 

Supplier Relationship Management

         
We cultivate and maintain strong relationships
with our travel suppliers. We have over 70 employees
dedicated to enhancing our existing travel supply arrangements
and developing relationships with prospective travel suppliers.
We prominently feature some of our hotel suppliers with which we
have favorable arrangements on our Chinese language websites as
“specially recommended hotels.” Furthermore, we have
developed an electronic confirmation system that enables
participating hotel suppliers to receive our customer’s
reservation information instantly and confirm such reservation
through our online interface with the hotel supplier. We believe
that the electronic confirmation system is a cost-effective and
convenient way for hotels to interface with us, and we intend to
promote the system with more hotel suppliers.

         
Since our inception, we have not had any material
disputes with our travel suppliers with respect to the amount of
commissions to which we were entitled. We generally renew supply
agreements with almost all of our travel suppliers once the
initial term of such agreements expires.

Technology and Infrastructure

         
We believe that the quality of our technology
differentiates us from our competitors in China. Our goal has
been to build a reliable, scalable, updated and secure
infrastructure to fully support our customer service center and
website operations.

         
Since inception, we have supported substantial
growth in our offline and online traffic and transactions with
our present architecture. Our proprietary booking software is
integrated with our websites and customer service center
operations. Our hardware platform for the Internet consists of
Hewlett-Packard and Dell servers. We have contracted with
Avaya Inc., Hewlett-Packard Company and Dell Inc. for
warranty services for our hardware platform. We maintain our
database on HP DL740 G2, HP LXR8500, HP LH6000
and Dell PowerEdge 6500 and conduct daily backup functions
for off-site storage. We access the Internet backbone via a
100 megabit ethernet line. Our customer service center
operations are managed by an Avaya G3Si switch. We maintain all
of our servers at our premises in Shanghai. As of
October 31, 2003, we employed 27 technical support
staff to maintain our current technology infrastructure and
develop new software features to further enhance the
functionality of our transaction and service platform.

Competition

         
We compete primarily with other consolidators of
hotel accommodations and flight reservation services, such as
www.elong.com. We also compete with traditional travel agencies.
We believe that the hotel room booking volume of our main
competitor, www.elong.com, is significantly lower than ours.
However, as the travel business in China continues to grow, we
may face competition from new players in the hotel consolidation
market in China and foreign travel consolidators that may enter
the China market, such as expedia.com and hotels.com.

         
We believe that among air-ticketing
intermediaries in China, we have a unique multi-province airline
ticket sales and fulfillment infrastructure. While we have local
competitors in various markets, so far we have no national
competitor in our air-ticketing business. In the markets where
we face local competition, our competitors generally conduct
ticketing transactions in person, and not over the Internet or
through customer service centers. Many local air-ticketing
agencies are primarily involved in the wholesale business that
sell airline tickets to businesses rather than individual
travelers, who are our targeted customers. However, as the
airline ticket distribution business continues to grow in China,
we believe that the companies already involved in the travel
services industry may increase their efforts to develop their
services that compete with our air-ticketing business.

Intellectual Property

         
Our intellectual property rights include trade
marks and domain names associated with the name
“Ctrip” and copyright and other rights associated with
our websites, technology platform, booking software and other
aspects of our business. We regard our intellectual property as
a factor contributing to our success,

65


 

although we are not dependent on any patents,
intellectual property related contracts or licenses other than
some commercial software licenses available to the general
public. We rely on trade mark and copyright law, trade secret
protection, non-competition and confidentiality agreements with
our employees to protect our intellectual property rights. We
require our employees to enter into agreements to keep
confidential all information relating to our customers, methods,
business and trade secrets during and after their employment
with us. Our employees are required to acknowledge and recognize
that all inventions, trade secrets, works of authorship,
developments and other processes made by them during their
employment are our property.

         
We have registered our domain names www.ctrip.com
and www.gotochina.com with www.register.com and www.opensrs.net,
respectively, and the domain name www.ctrip.com.cn with China
Internet Network Information Center, a domain name registration
service in China, and have full legal rights over these domain
names. We conduct our business under the Ctrip brand name and
logo. We have registered the trade marks “Ctrip” and
“ (CHINESE CHARACTER) ” with the Trade Mark Office of
the People’s Republic of China State General Administration
for Industry and Commerce. We have also registered the trade
mark “ (CHINESE CHARACTER) ” with the Registrar of
Trade Marks in Hong Kong.

Employees

         
As of October 31, 2003, we had 1,420
employees, including 124 in management and administration, 554
in our customer service center, 354 in sales and marketing, and
388 in product development including supplier management
personnel and technical support personnel. None of our employees
is represented by a labor union. We consider our relations with
our employees to be good.

Facilities

         
Our customer service center, principal sales,
marketing and development facilities and administrative offices
are located on premises comprising approximately 3,737 square
meters in an industry park in Shanghai, China. We own 2,514
square meters of our premises and lease the remaining area of
our premises from a company controlled by the spouse of our
Chief Executive Officer, James Jianzhang Liang. We have branch
offices in Hong Kong, Beijing, Guangzhou and Shenzhen. We also
maintain a network of sales offices in about 30 cities in China.
We believe that we will be able to obtain adequate facilities,
principally through the leasing of appropriate properties, to
accommodate our future expansion plans.

Legal Proceedings

         
We are not a party to any litigation and are not
aware of any pending or threatened litigation.

66


 

CHINESE GOVERNMENT REGULATIONS

         
Current Chinese laws and regulations impose
substantial restrictions on foreign ownership of the
air-ticketing, travel agency, advertising and Internet content
provision businesses in China. As a result, we conduct these
businesses in China through contractual arrangements with our
affiliated Chinese entities as well as certain independent
air-ticketing agencies and travel agencies. Our director, Qi Ji,
and our officers, Min Fan and Alex Nanyan Zheng, all of whom are
Chinese citizens, own all or substantially of the equity in our
affiliated entities.

         
In the opinion of our Chinese counsel, Commerce
& Finance Law Offices, the ownership structures, businesses
and operations of our subsidiaries and affiliated entities in
China comply with all existing Chinese laws, rules and
regulations. In addition, no consent, approval or license other
than those already obtained is required under the existing
Chinese laws, rules and regulations for such ownership
structures, businesses and operations or this offering.

Restrictions on Foreign Ownership

         
Air-ticketing.
The principal regulation governing foreign ownership of
air-ticketing businesses in China is the Foreign Investment
Industrial Guidance Catalogue (2002). Under this regulation, a
foreign investor cannot own more than 50% of an air-ticketing
agency in China.

         
Travel
Agency.
The principal regulation
governing foreign ownership of travel agencies in China is the
Establishment of Foreign-controlled and Wholly Foreign-owned
Travel Agencies Tentative Provisions (2003). Recently, qualified
foreign investors have been permitted to establish or own a
travel agency in Beijing, Shanghai, Guangzhou, Shenzhen or Xian,
upon the approval of the Chinese government, subject to
considerable restrictions as to its scope of business. For
example, foreign travel agencies cannot arrange for the travel
of persons from mainland China to Hong Kong, Macau, Taiwan or
any other country. In addition, foreign travel agencies cannot
establish branches.

         
Advertising.
The principal regulation governing foreign ownership of
advertising agencies in China is the Foreign Investment
Industrial Guidance Catalogue (2002). Under these regulations,
foreign investors cannot own more than 49% of an advertising
agency in China.

         
Internet Content
Provision.
The principal
regulations governing foreign ownership of the Internet content
provision business in China include:

  • Administrative Rules for Foreign Investments in
Telecommunications Enterprises (2001); and
 
  • Foreign Investment Industrial Guidance Catalogue
(2002).

         
Under these regulations, a foreign entity is
prohibited from owning more than 50.0% of a Chinese entity that
provides value-added telecommunications services, which includes
Internet content provision services.

General Regulation of Businesses

         
Air-ticketing.
The air-ticketing business is subject to the supervision of CAAC
and its regional branches. The principal regulation governing
air-ticketing in China is the Administration on Civil Aviation
Transporting Marketing Agency Business Regulations (1993).

         
Under these regulations, an air-ticketing agency
must obtain a permit from CAAC or its regional branch in every
city in which the agency proposes to conduct the air-ticketing
business. There are two types of air-ticketing permits in China:
permits for selling tickets for international flights and
flights to Hong Kong, Macau and Taiwan, and permits for selling
tickets for domestic flights in China.

67


 

         
Travel
Agency.
The travel industry is
subject to the supervision of the China National Tourism
Administration and local tourism administrations. The principal
regulations governing travel agencies in China include:

  • Administration of Travel Agencies
Regulations (1996), as amended; and
 
  • Administration of Travel Agencies Regulations
Implementing Rules (2001).

         
Under these regulations, a travel agency must
obtain a license from the China National Tourism Administration
in order to conduct the cross-border travel business, and a
license from the provincial-level tourism administration in
order to conduct the domestic travel agency business.

         
Advertising.
The State General Administration of Industry and Commerce is
responsible for regulating advertising activities in China. The
principal regulations governing advertising (including online
advertising) in China include:

  • Advertising Law (1994); and
 
  • Administration of Advertising
Regulations (1987).

         
Under these regulations, any entity conducting
advertising activities must obtain an advertising permit from
the local Administration of Industry and Commerce.

         
Internet Content Provision Service and
Online Commerce.
Our provision of
travel-related content on our websites is subject to Chinese
laws and regulations relating to the telecommunications industry
and Internet, and regulated by various government authorities,
including the Ministry of Information Industry and the State
General Administration of Industry and Commerce. The principal
regulations governing the telecommunications industry and
Internet include:

  • Telecommunications Regulations (2000);
 
  • The Administrative Measures for
Telecommunications Business Operating Licenses (2001); and
 
  • The Internet Information Services Administrative
Measures (2000).

         
Under these regulations, Internet content
provision services are classified as value-added
telecommunications businesses, and a commercial operator of such
services must obtain an Internet content provision license from
the appropriate telecommunications authorities in order to carry
on any commercial Internet content provision operations in China.

         
With respect to online commerce, there are no
specific Chinese laws at the national level governing online
commerce or defining online commerce activities, and no
government authority has been designated to regulate online
commerce. There are existing regulations governing retail
business that require companies to obtain licenses in order to
engage in the business. However, it is unclear whether these
existing regulations will be applied to online commerce.

Regulation of Foreign Currency Exchange and
Dividend Distribution

         
Foreign Currency Exchange.
The principal regulation governing
foreign currency exchange in China is the Foreign Currency
Administration Rules (1996), as amended. Under the Rules, RMB is
freely convertible for trade and service-related foreign
exchange transactions, but not for direct investment, loan or
investment in securities outside China unless the prior approval
of the State Administration for Foreign Exchange of the
People’s Republic of China is obtained.

         
Pursuant to the Foreign Currency Administration
Rules, foreign investment enterprises in China may purchase
foreign exchange without the approval of the State
Administration for Foreign Exchange of the People’s
Republic of China for trade and service-related foreign exchange
transactions by providing commercial documents evidencing these
transactions. They may also retain foreign exchange (subject to
a cap approved by the State Administration for Foreign Exchange
of the People’s Republic of China) to satisfy

68


 

foreign exchange liabilities or to pay dividends.
In addition, if and when they acquire companies in China, such
acquired companies will also become foreign investment
enterprises. However, the relevant Chinese government
authorities may limit or eliminate the ability of foreign
investment enterprises to purchase and retain foreign currencies
in the future. In addition, foreign exchange transactions for
direct investment, loan and investment in securities outside
China are still subject to limitations and require approvals
from the State Administration for Foreign Exchange of the
People’s Republic of China.

         
Dividend Distribution.
The principal regulations
governing distribution of dividends of foreign holding companies
include:

  • The Foreign Investment Enterprise Law (1986), as
amended; and
 
  • Administrative Rules under the Foreign Investment
Enterprise Law (2001).

         
Under these regulations, foreign investment
enterprises in China may pay dividends only out of their
accumulated profits, if any, determined in accordance with
Chinese accounting standards and regulations. In addition,
foreign investment enterprises in China are required to set
aside at least 10% of their respective accumulated profits each
year, if any, to fund certain reserve funds. These reserves are
not distributable as cash dividends.

69


 

MANAGEMENT

Directors and Executive Officers

         
The following table sets forth information
regarding our directors and executive officers as of
December 1, 2003.

             
Directors and Executive Officers Age Position/Title



James Jianzhang Liang

    33     Co-founder; Chairman of the Board; Chief
Executive Officer

Neil Nanpeng Shen

    35     Co-founder; President; Chief Financial Officer;
Director

Gabriel Li(1)(2)

    35     Deputy Chairman of the Board

JP Gan(1)(3)

    31     Director

Suyang Zhang(2)(5)

    44     Director

Yufei Hu(2)(4)(7)

    33     Director

Junichi Goto(1)(6)(7)

    49     Director

Qi Ji

    37     Co-founder; Director

Robert Stein(1)(2)

    42     Director

Min Fan

    38     Co-founder; Executive Vice President

Victor Shengli Wang

    48     Vice President

Alex Nanyan Zheng

    34     Vice President

Han Ding

    35     Vice President

Jianmin Zhu

    34     Vice President

(1)  Member of Audit Committee.
(2)  Member of Compensation Committee.

(3)  Appointed by Carlyle Asia Venture
Partners I, L.P. and CIPA Co-Investment, L.P., collectively.

(4)  Appointed by S.I. Technology Venture Capital
Limited.

(5)  Appointed by IDG Technology Venture Investment,
Inc. and IDG Technology Venture Investments, LP.

(6)  Appointed by China Enterprise Investments
No. 11 Limited.

(7)  Will resign from our board of directors and all
committees of our board immediately after the closing of this
offering.

         
James Jianzhang Liang
is one of the co-founders of our
company. Mr. Liang has served as Chief Executive Officer
since 2000 and a member of our board of directors since our
inception. He has been Chairman of our board since
August 2003. Prior to founding Ctrip, Mr. Liang held a
number of technical and managerial positions with Oracle
Corporation from 1991 to 1999 in the United States and China,
including the head of the ERP consulting division of Oracle
China from 1997 to 1999. Mr. Liang currently serves on the
board of Home Inns Beijing. Mr. Liang received his
Master’s and Bachelor’s degrees from Georgia Institute
of Technology. He also attended an undergraduate program at
Fudan University.

         
Neil Nanpeng Shen is
one of the co-founders of our company. Mr. Shen has served
as Chief Financial Officer since 2000 and executive director
since our inception. He became President of our company in
August 2003. Prior to founding Ctrip, Mr. Shen had worked
for more than eight years in the investment banking industry in
New York and Hong Kong. He was a director at Deutsche Bank Hong
Kong where he worked from 1996 to 1999. Prior to 1996, he had
worked at Chemical Bank, Lehman Brothers and Citibank in various
investment banking areas. Mr. Shen is currently Deputy
Chairman of Home Inns. Mr. Shen received his Master’s
degree from the School of Management at Yale University and his
Bachelor’s degree from Shanghai Jiao Tong University.

70


 

         
Gabriel Li has
served at different times on our board of directors since 2000.
Mr. Li has been Deputy Chairman of our board since August
2003. Mr. Li is a managing director of Orchid Asia
Management Co., LLC. Mr. Li was a managing director of The
Carlyle Group from December 2002 to October 2003. Prior to
rejoining The Carlyle Group, he was a managing director of
Robertson Stephens Private Equity Growth in San Francisco in
2002. Prior to that, Mr. Li had worked as a director at The
Carlyle Group from 2000 to 2002, a partner at Orchid Asia
Holdings, LLC from 1997 to 2000 and an associate at McKinsey
& Co. in Hong Kong and Los Angeles from 1994 to 1997.
Mr. Li graduated summa cum laude from the University
of California at Berkeley and received his Masters of Science
from the Massachusetts Institute of Technology and Masters of
Business Administration from the Stanford Business School.

         
JP Gan has served as
our director since 2002. Mr. Gan is a Vice President of The
Carlyle Group responsible for venture investment activities in
the Greater China region. Prior to joining The Carlyle Group in
2000, Mr. Gan worked at the investment banking division at
Merrill Lynch, in Hong Kong from 1999 to 2000 and the then Price
Waterhouse in the United States from 1994 to 1997. Mr. Gan
obtained his Masters of Business Administration from the
University of Chicago Graduate School of Business and his
Bachelor of Business Administration from the University of Iowa.
He is a Certified Public Accountant in the United States.

         
Suyang Zhang has
served as our director since December 1999. Mr. Zhang is
currently a Vice President of IDG Technology Venture Investment
Inc., where he has worked since 1996, and General Manager of
Shanghai Pacific Technology Venture Fund Co., Ltd., where he has
worked since 1994. Mr. Zhang has led his firms’
investments in a number of high-tech projects in the areas of
electronics, telecommunications and software in recent years. He
previously served as a Division Manager of Shanghai Bell, Deputy
Director of Shanghai Telephone Equipment Manufacturing Company,
and General Manager of Shanghai Vantone Industrial Co. Ltd. He
currently serves on the boards of several companies, including
Home Inns and Baud Data Communications Co., Ltd. Mr. Zhang
holds a Bachelor of Electronics Engineering from Shanghai
University, an Executive Masters of Business Administration from
China European International Business School.

         
Yufei Hu has served
as our director since 2002. Mr. Hu has been a partner at
Shanghai Synergy Venture Capital Management Co., Ltd. since
1999. From 1996 to 1999, he was a Manager in the investment
department of S.I. Capital Ltd. Mr. Hu worked at Daqing
Oilfield Administration Bureau from 1991 to 1994. Mr. Hu
received his Master’s degree in Business Administration
from the School of Management, Fudan University and his
Bachelor’s degree from Heilongjiang University.

         
Junichi Goto has
served as our director since 2000 and has more than
23 years of experience in direct investment and investment
banking. Mr. Goto is also the Chairman and Chief Executive
Officer of Go-To-Asia Investment Limited. Between June 1999 and
June 2001, he served as a Director of Softbank China Venture
Investments Limited, the venture investment arm of SOFTBANK
CORP., and between March 2000 and April 2001, he was
the President and Executive Director of Softbank Investment
International (Strategic) Limited, a Hong Kong listed company.
Mr. Goto also served as a director of Softech Investment
Management Company Limited, the fund manager of the Hong Kong
Government Applied Research Fund. Prior to joining SOFTBANK
CORP., Mr. Goto had been with the Nomura Group and headed
various divisions in investment banking and private equities. He
holds a Bachelor’s degree in economics from the University
of Tokyo.

         
Qi Ji is one of the
co-founders of our company. He has served as our director since
our inception. Mr. Ji has been the Chief Executive Officer
of Home Inns since early 2002. He was the President of our
company from 1999 to early 2002. Prior to founding Ctrip, he
served as Chief Executive Officer of Shanghai Sunflower
High-Tech Group which he founded in 1997. He headed the East
China Division of Beijing Zhonghua Yinghua Intelligence System
Co., Ltd. from 1995 to 1997. He received both his Master’s
and Bachelor’s degrees from Shanghai Jiao Tong University.

         
Robert Stein is the
Chief Executive Officer and Chairman of Adelphi Capital
Partners. Prior to establishing Adelphi, Mr. Stein was the
Chief Executive Officer of Deutsche Bank Group Asia Pacific. He
served on Deutsche Bank’s Global Institution Board from
1999 to 2000 and the Global Wealth Management

71


 

Board from 2000 to 2002. Prior to joining
Deutsche Bank, Mr. Stein worked for Merrill Lynch from 1985
to 1995, including as Head of Capital Markets, Asia and member
of Merrill Lynch’s Global Debt and Equity Management
Committee. Currently, Mr. Stein is a member of the
Singapore Government’s Economic Review Committee as Chair
of the Financial Services Working Group. Until October 2003, he
was a director of the Singapore Stock Exchange. Mr. Stein
holds a Bachelor’s degree in Philosophy and Biochemistry
from Dartmouth College and a Master’s degree in
International and Development Economics from University College,
Oxford University.

         
Min Fan is one of
the co-founders of our company. He has served as our Executive
Vice President since 2000. Mr. Fan has more than
13 years of experience in travel-related industries. From
1997 to 2000, he was the Chief Executive Officer of Shanghai
Travel Service Company, a leading domestic travel agency in
China. From 1990 to 1997, he served as the Deputy General
Manager and in a number of other senior positions at Shanghai
New Asia Hotel Management Company, which was one of the leading
hotel management companies in China. Mr. Fan obtained his
Master’s and Bachelor’s degrees from Shanghai Jiao
Tong University. He also studied at the Lausanne Hotel
Management School of Switzerland in 1995.

         
Victor Shengli Wang
has served as our Vice President and
the General Manager of our Beijing branch since 2000. In 1997,
Mr. Wang co-founded Beijing Modern Express Co. Ltd., which
we acquired in October 2000. From 1991 to 1997, Mr. Wang
was the head of the General Plan Division of China Lantian
Industrial Company. He holds a Bachelor’s degree from Xian
Electronics Science & Technology Institute.

         
Alex Nanyan Zheng
has served as our Vice President since
2000 and currently is also our General Manager in charge of
Southern and Southwestern China operations. From 1993 to 2000,
Mr. Zheng was co-founder and Deputy General Manager of
Guangzhou Wanxun (Armitage) Computer Software Limited, a hotel
management information system provider in China. Previously,
Mr. Zheng worked at the computer center of Guangdong
Provincial Economic and Trade Commission. He obtained his
Bachelor’s degree from Zhongshan University in China.

         
Han Ding has served
as our Vice President in charge of our air-ticketing business
since March 2002. Prior to joining us, Mr. Ding was Chief
Executive Officer of Beijing Hai’an Air-ticketing Service
Company, Ltd. which he founded in 1995. Previously, he was
Secretary and director of the Hai’an Industry Group of
Companies. Mr. Ding obtained his Master’s degree in
Business Administration from the Huazhong University of Science
and Technology in China and his Bachelor’s degree from
Anhui Institute of Finance and Trade in China.

         
Jianmin Zhu has
served as our Vice President and Head of Business Operations
since 2003. Prior to joining us, he worked with several software
and system integration companies, including Compaq and RPTI
International Ltd. He was a Senior Consultant at Compaq from
1999 to 2000 and Technical Director of RPTI International Ltd.
from 1995 to 1998. Mr. Zhu received his Bachelor’s
degree from Shanghai Jiao Tong University.

Board of Directors

         
Our board of directors currently consists of nine
directors. Currently, our preferred shareholders have the right
to appoint five non-independent directors (as indicated in the
table above). The founding shareholders have the right to elect
the remaining non-independent directors. Our articles of
association allow for two independent directors to be appointed
to our board by the holders of a majority of our outstanding
ordinary shares on an as-converted basis.

Committees of the Board of Directors

         
Audit Committee. Our
audit committee reports to the board regarding the appointment
of our independent public accountants, the scope and results of
our annual audits, compliance with our accounting and financial
policies and management’s procedures and policies
relatively to the adequacy of our internal accounting controls.

72


 

         
Compensation Committee.
Our compensation committee reviews and
makes recommendations to the board regarding our compensation
policies and all forms of compensation to be provided to our
executive officers and directors. In addition, the compensation
committee reviews bonus and stock compensation arrangements for
all of our other employees.

         
We intend to comply with the requirements of the
Sarbanes-Oxley Act of 2002 and Nasdaq’s recently proposed
corporate governance rules with respect to audit committees and
independent directors on or prior to the closing of this
offering. We are considering amending the charters of the
committees of our board of directors to comply with the
Sarbanes-Oxley Act and Nasdaq requirements.

Duties of Directors

         
Under Cayman Islands law, our directors have a
statutory duty of loyalty to act honestly in good faith with a
view to our best interests. Our directors also have a duty to
exercise the skill they actually possess and such care and
diligence that a reasonably prudent person would exercise in
comparable circumstances. In fulfilling their duty of care to
us, our directors must ensure compliance with our memorandum and
articles of association. A shareholder has the right to seek
damages if a duty owed by our directors is breached.

Terms of Directors and Officers

         
All directors hold office until their successors
have been duly elected and qualified. A director may only be
removed by the shareholders who nominated and elected such
director. Officers are elected by and serve at the discretion of
the board of directors.

Compensation of Directors and Executive
Officers

         
For the year ended December 31, 2002, the
aggregate cash compensation to our current senior executive
officers, James Jianzhang Liang, Neil Nanpeng Shen and Min Fan,
was approximately US$402,262, and we did not pay any cash
compensation to our non-executive directors. We did not grant
any options to acquire our ordinary shares to our directors and
executives officers in 2002.

         
We have not paid any cash compensation to our
non-executive directors in 2003. For the nine months ended
September 30, 2003, the aggregate cash compensation to our
senior executive officers named above was approximately
RMB2,350,000 (US$283,916). We granted options to acquire an
aggregate of 470,000 ordinary shares to our executive officers
as a group over the same period, but did not grant any options
to our non-executive directors for the nine months ended
September 30, 2003.

Employee’s Stock Option Plans

         
Our board of directors has adopted two stock
option plans, namely, the 2003 Employee’s Option Plan, or
the 2003 Plan, and 2000 Employee’s Stock Option Plan, or
the 2000 Plan. The terms of the 2003 Plan and the 2000 Plan are
substantially similar. The purpose of the Plans is to attract
and retain the best available personnel for positions of
substantial responsibility, to provide additional incentive to
employees, directors and consultants and to promote the success
of our business. Our board of directors believes that our
company’s long term success is dependent upon our ability
to attract and retain superior individuals who, by virtue of
their ability and qualifications, make important contributions
to our business.

         
We have granted options to purchase our ordinary
shares under the 2000 Plan to our employees, of which 1,391,760
options are outstanding. We will not issue any additional
options under the 2000 Plan to our employees. The following
table summarizes, as of December 1, 2003, the outstanding
options granted under

73


 

our 2000 Plan to several of our current senior
executive officers named below and Qi Ji, a former senior
executive officer, and to our other employees as a group since
our board of directors adopted the 2000 Plan.

                         
Ordinary Shares
Underlying Options Date of
Granted Exercise Price Date of Grant Expiration




(US$/Share)

Neil Nanpeng Shen

    144,000       0.7716     April 15, 2000
  April 15, 2005

Min Fan

    172,800       0.7716     April 15, 2000
  April 15, 2005

Qi Ji

    129,600       0.7716     April 15, 2000
  April 15, 2005

Other employees as a group

    945,360       0.7716     April 15, 2000 to
January 1, 2003
  April 15, 2005 to
January 1, 2010

Total

    1,391,760                  

         
We have reserved an aggregate of 1,187,510 of our
ordinary shares for issuance under the 2003 Plan, of which
750,640 options are issued and outstanding. The following table
summarizes, as of December 1, 2003, the outstanding options
granted under our 2003 Plan to several of our directors and
senior executive officers named below, and to our other
employees since our board of directors adopted the 2003 Plan.
The value of the options granted in October and November 2003,
based on the midpoint of the filing range set forth on the front
cover of this prospectus, is US$427,220.

                         
Ordinary Shares
Underlying Options Date of
Granted Exercise Price Date of Grant Expiration




(US$/Share)

Neil Nanpeng Shen

    120,000     2.11
  April 15, 2003
    April 15, 2008  

Min Fan

    120,000     2.11
  April 15, 2003
    April 15, 2008  

Gabriel Li

    30,000     6.00
  October 27, 2003
    October 27, 2008  

Robert Stein

    30,000     6.00
  October 27, 2003
    October 27, 2008  

Other employees

    241,660     2.11
  April 15, 2003
    April 15, 2008  
      50,000     5.00
  October 3, 2003
    October 3, 2008  
      20,000     6.00
  October 27, 2003
    October 27, 2008  
      103,980     80% of the
midpoint of the
filing range
  October 30, 2003
    October 30, 2008  
      35,000     90% of the
midpoint of the
filing range
  November 14, 2003
    November 14, 2008  

Total

    750,640                  

         
Termination of
Options.
Where the option agreement
permits the exercise or purchase of the options granted for a
certain period of time following the recipient’s
termination of service with us, or the recipient’s
disability or death, the options will terminate to the extent
not exercised or purchased on the last day of the specified
period or the last day of the original term of the options,
whichever occurs first.

         
Administration. Our
stock option plans are administered by our board of directors or
a committee designated by our board of directors constituted to
comply with applicable laws. In each case, our board of
directors or the committee it designates will determine the
provisions, terms and conditions of each option grant,
including, but not limited to, the option vesting schedule,
repurchase provisions, rights of first refusal, forfeiture
provisions, form of payment upon settlement of the award,
payment contingencies and satisfaction of any performance
criteria.

         
Vesting Schedule.
One-third of the options granted under our stock option plans
vest 12 months after a specified vesting commencement date;
an additional one-third vest 24 months after the specified

74


 

commencement date and the remaining one-third
vest 36 months after the specified commencement date,
subject to the optionee continuing to be a service provider on
each of such dates.

         
Option Agreement.
Options granted under our stock option plans are evidenced by an
option agreement that contains, among other things, provisions
concerning exercisability and forfeiture upon termination of
employment or consulting arrangement (by reason of death,
disability or otherwise), as determined by our board. In
addition, the option agreement also provides that options
granted under each Plan are subject to a 180-day lock-up period
following the effective date of a registration statement filed
by us under the Securities Act, if so requested by us or any
representative of the underwriters in connection with any
registration of the offering of any of our securities.

         
Transfer
Restrictions.
Incentive stock options
for the ordinary shares to be issued upon exercise of and right
to purchase ordinary shares may not be transferred in any manner
by the optionee other than by will or the laws of succession and
are exercisable during the lifetime of the optionee only by the
optionee.

         
Option Exercise. The
term of options granted under the 2000 Plan may not exceed ten
years from the date of grant. The term of options granted under
the 2003 Plan may not exceed five years from the date of grant.
The consideration to be paid for our ordinary shares upon
exercise of an option or purchase of shares underlying the
option will be determined by the stock option plan administrator
and may include cash, check, ordinary shares, a promissory note,
consideration received by us under a cashless exercise program
implemented by us in connection with our stock option plans, or
any combination of the foregoing methods of payment.

         
Third-Party
Acquisition.
If a third party acquires
us through the purchase of all or substantially all of our
assets, a merger or other business combination, all outstanding
options or share purchase rights will be assumed or equivalent
options or rights substituted by the successor corporation or
parent or subsidiary of successor corporation. In the event that
the successor corporation refuses to assume or substitute for
the options or share purchase rights, all options or share
purchase rights will become fully vested and exercisable
immediately prior to such transaction and all unexercised awards
will terminate unless, in either case, the awards are assumed by
the successor corporation or its parent.

         
Termination of
Plans.
Unless terminated earlier, the
2003 Plan will terminate automatically in 2008 and the 2000 Plan
will terminate automatically in 2010. Our board of directors has
the authority to amend or terminate our stock option plans
subject to shareholder approval to the extent necessary to
comply with applicable law. However, no such action may
(i) impair the rights of any optionee unless agreed by the
optionee and the stock option plan administrator, or
(ii) affect the stock option plan administrator’s
ability to exercise the powers granted to it under our stock
option plans.

75


 

PRINCIPAL AND SELLING SHAREHOLDERS

         
The following table sets forth information with
respect to the beneficial ownership of our ordinary shares, on a
fully diluted basis assuming conversion of all of our preferred
shares and taking into account the aggregate number of ordinary
shares underlying our outstanding options, as of
December 1, 2003, by:

           
(1) each of our directors and senior
executive officers;
 
           
(2) each person known to us to own
beneficially more than 5.0% of our ordinary shares; and
 
           
(3) each other selling shareholder.

                                                 
Ordinary Shares Shares Beneficially
Beneficially Owned Shares Being Sold in Owned After This
Prior to This Offering This Offering Offering



Name Number(1) %(2) Number % Number(1) %







Directors and Senior Executive
Officers:

                                               

Neil Nanpeng Shen(3)

    2,854,924       10.52 %     380,261       12.68%       2,474,663       7.60%  

James Jianzhang Liang(4)

    2,317,238       8.54 %     285,202       9.51%       2,032,036       6.24%  

Qi Ji(5)

    2,072,838       7.64 %     285,202       9.51%       1,787,036       5.49%  

Victor Shengli Wang(6)

    745,907       2.75 %     82,469       2.75%       663,438       2.04%  

Min Fan(7)

    706,057       2.60 %     60,652       2.02%       645,405       1.98%  

Gabriel Li(8)

    64,104       0.24 %     —       —       64,104       0.20%  

Robert Stein(9)

    30,000       0.11 %     —       —       30,000       0.09%  

All directors and executive officers as a group
of 7 persons(10)

    8,791,068       32.38 %     1,093,786       36.46%       7,697,282       23.65%  

Principal Shareholders:

                                               

Carlyle Offshore Partners II, Limited(11)

    6,981,267       25.72 %     1,024,614       34.15%       5,956,653       18.30%  

Tiger Technology Private Investment Partners,
L.P.(12)

    2,180,755       8.03 %     —       —       2,180,755       6.70%  

IDG Technology Venture Investment, Inc.(13)

    1,989,110       7.33 %     291,934       9.73%       1,697,176       5.21%  

S.I. Technology Venture Capital Limited(14)

    1,571,958       5.79 %     230,710       7.69%       1,341,248       4.12%  

Other Selling Shareholders:

                                               

China Enterprise Investments No. 11
Limited(15)

    1,312,506       4.83 %     192,631       6.42%       1,119,875       3.44%  

Ecity Investment Limited(16)

    875,004       3.22 %     128,421       4.28%       746,583       2.29%  

Jing Dong Li(17)

    128,435       0.47 %     18,850       0.63%       109,585       0.34%  

Xiao Tan(18)

    56,191       0.21 %     8,247       0.27%       47,944       0.15%  

Ze Sheng Wang(19)

    24,082       0.09 %     3,534       0.12%       20,548       0.06%  

Openventure Company Limited(20)

    17,452       0.06 %     2,561       0.09%       14,891       0.05%  

Xi Yuan Fang(21)

    16,055       0.06 %     2,356       0.08%       13,699       0.04%  

Yu Sun(22)

    16,055       0.06 %     2,356       0.08%       13,699       0.04%  

(1)  Beneficial ownership is determined in accordance
with the rules of the Securities and Exchange Commission, or the
SEC, and includes voting or investment power with respect to the
securities.

76


 

(2)  The number of ordinary shares outstanding used in
calculating the percentage for each listed person includes the
ordinary shares of underlying options held by such persons.
Percentage of beneficial ownership is based on 27,147,294
ordinary shares outstanding as of December 1, 2003 on a
fully diluted basis, including 1,391,760 options
outstanding under the 2000 Plan and 750,640 options
outstanding under the 2003 Plan.

 
(3)  Includes 2,590,924 ordinary shares held by
Mr. Shen and 264,000 ordinary shares issuable upon exercise
of options held by Mr. Shen. The address for Mr. Shen
is Unit 2001, The Centrium, 60 Wyndham St., Central,
Hong Kong.
 

(4)  Includes 2,317,238 ordinary shares held by
Mr. Liang, 230,000 of which are subject to our right to
repurchase over the three year period after
Mr. Liang’s acquisition of such shares. The address
for Mr. Liang is 3rd Floor, Block 63, No. 421 Hong Cao
Road, Shanghai, PRC.

 
(5)  Includes 1,943,238 ordinary shares held by
Mr. Ji and 129,600 ordinary shares issuable upon exercise
of options held by Mr. Ji. The address for Mr. Ji is
3rd Floor, Block 63, No. 421 Hong Cao Road, Shanghai,
PRC.
 
(6)  Includes 561,907 ordinary shares held by
Mr. Wang and 184,000 ordinary shares issuable upon exercise
of options held by Mr. Wang. The address for Mr. Wang
is 6F-G, Block A, Dong Huan Plaza Office Building, No. 9,
Dong Zhong Road, Beijing, PRC.
 
(7)  Includes 413,257 ordinary shares held by
Mr. Fan and 292,800 ordinary shares issuable upon exercise
of options held by Mr. Fan. The address for Mr. Fan is
3rd Floor, Block 63, No. 421 Hong Cao Road, Shanghai,
PRC.
 
(8)  Includes 26,250 ordinary shares issuable upon
conversion of Series A preferred shares, 7,854 ordinary
shares issuable upon conversion of Series B preferred
shares, and 30,000 ordinary shares issued upon exercise of
options held by Mr. Li. The address for Mr. Li is
Suite 5180, 555 California Street, San Francisco,
CA 94104.
 
(9)  Includes 30,000 ordinary shares issuable upon
exercise of options held by Mr. Stein. The address for
Mr. Stein is Level 34 Centennial Tower, 3 Temasek
Ave., Singapore 039190.

(10)  Shares owned by all of our directors and
executive officers as a group include shares beneficially owned
by James Jianzhang Liang, Neil Nanpeng Shen, Min Fan, Qi Ji,
Gabriel Li, Robert Stein and Victor Shengli Wang. Shares
beneficially owned by our directors and executive officers prior
to this offering includes additional options to acquire 930,400
ordinary shares. Shares beneficially owned by all of our
directors and executive officers after this offering includes
options to acquire 614,400 ordinary shares that are exercisable
within 60 days of December 1, 2003, all of which will
become exercisable upon completion of this offering.

 
(11)  Includes 6,581,682 ordinary shares issuable upon
conversion of Series B preferred shares held by Carlyle
Asia Venture Partners I, L.P., or Asia Ventures, and
399,585 ordinary shares issuable upon conversion of
Series B preferred shares held by CIPA Co-Investment, L.P.,
or CIPA. Asia Ventures and CIPA are investment partnerships. The
general partner of each of Asia Ventures and CIPA is CIPA
General Partner, L.P. The general partner of CIPA General
Partner, L.P., is CIPA Ltd., a Cayman Islands limited company
which is wholly-owned by TC Group Cayman, L.P. The general
partner of TC Group Cayman, L.P. is TCG Holdings Cayman,
L.P. The general partner of TCG Holdings Cayman, L.P. is Carlyle
Offshore Partners II, Limited, a Cayman Islands limited company.
Carlyle Offshore Partners II, Limited, has ultimate voting and
dispositive control over the shares held by Asia Ventures and
CIPA through its control of TCG Holdings Cayman, L.P. Carlyle
Offshore Partners II, Limited is managed by a board of six
directors. The directors are William E. Conway, Jr.,
Daniel A. D’Aniello, David M. Rubenstein,
Allan M. Holt, Jerome H. Powell and Bruce E.
Rosenblum, each of whom disclaims beneficial ownership of the
shares held by Asia Ventures and CIPA. The address for Carlyle
Asia Venture Partners I, L.P. and CIPA is Suite 2801,
28th Floor, 2 Pacific Place, 88 Queensway, Hong
Kong.
 
(12)  Includes 2,173,122 ordinary shares issuable upon
conversion of Series C preferred shares held by Tiger
Technology Private Investment Partners, L.P. and 7,633 ordinary
shares issuable upon conversion of

77


 
Series C preferred shares held by Tiger
Technology II, L.P. Tiger Technology PIP Performance,
L.L.C., or Tiger PIP, is the sole general partner of Tiger
Technology Private Investment Partners, L.P. Charles P.
Coleman III, a citizen of the United States of
America, is the sole managing member of Tiger PIP. Tiger
Technology Performance, L.L.C., or Tiger Performance, is the
sole general partner of Tiger Technology II, L.P. Charles
P. Coleman III is the sole managing member of Tiger
Performance. The address for Tiger Technology Private Investment
Partners, L.P. and Tiger Technology II, L.P. is 101 Park
Avenue, 48th Floor, New York 10178.

(13)  Includes (a) 984,380 ordinary shares;
(b) 437,502 ordinary shares issuable upon conversion of
Series A preferred shares held by IDG Technology Venture
Investment, Inc.; and (c) 567,228 ordinary shares issuable
upon conversion of Series B preferred shares held by IDG
Technology Venture Investments, LP. IDG Technology Venture
Investment, Inc. is wholly owned by International Data Group,
Inc., a Massachusetts corporation, which in turn is majority
owned and controlled by Patrick J. McGovern, the chairman and
founder of International Data Group, Inc. The address for IDG
Technology Venture Investment, Inc. is 15th Floor, One Exeter
Plaza, Boston, MA 02116.

 

(14)  Includes 437,502 ordinary shares issuable upon
conversion of Series A preferred shares and 1,134,456
ordinary shares issuable upon conversion of Series B
preferred shares held by S.I. Technology Venture Capital
Limited. S.I. Technology Venture Capital Limited is 100% owned
by Shanghai Industrial Holdings Limited, a Hong Kong company,
which in turn is 58% owned by Shanghai Industrial Investment
(Holdings) Co., Ltd., or SIIC, a private limited company
incorporated in Hong Kong. SIIC is controlled by the Shanghai
municipal government. The address for S.I. Technology Venture
Capital Limited is P.O. Box 957, Offshore Incorporation
Centre, Road Town, Tortola, British Virgin Islands.

 
(15)  Includes 1,312,506 ordinary shares issuable upon
conversion of Series A Preferred Shares held by China
Enterprise Investments No. 11 Limited. China Enterprise
Investments No. 11 Limited is 100% owned by China Enterprise
Fund, a Cayman Islands company also known as Global Fund Trust
Company. Go-To-Asia Investment Limited, a company incorporated
in Hong Kong, is the investment manager of Global Fund Trust
Company. Go-To-Asia Investment Limited is directly controlled by
its directors, Junichi Goto and Masaaki Miyagawa. The address
for China Enterprise Investments No. 11 Limited is
Unit 1902B, 60 Wyndham Street, Central, Hong Kong.
 

(16)  Includes 875,004 ordinary shares issuable upon
conversion of Series A preferred shares. Ecity Investment
Limited, a British Virgin Islands corporation, is wholly owned
by Morningside CyberVentures Holdings Limited, a British Virgin
Islands corporation, which is in turn wholly owned by The NTX-II
Trust, an Isle of Man Trust, the trustee of which is Verrall
Limited, an Isle of Man corporation. Verrall Limited controls
indirectly, through The NTX-II Trust, a 100% interest in Ecity
Investment Limited, and as a result has the sole power to vote
and dispose of the shares of Ctrip.com International, Ltd. held
by Ecity Investment Limited. Verrall Limited is controlled by
its Board of Directors, consisting of Ho Tuen Yee, Peter
S.A. Edwards, Richard F.G. Pease and Charles S. Stewart, all of
whom expressly disclaim beneficial ownership of the shares held
by Ecity Investment Limited. The address for Ecity Investment
Limited is 2nd Floor, Le Prince de Galles, 3-5 Avenue
des Citronniers, MC 98000 Monaco.

 
(17)  Includes 128,435 ordinary shares. The address for
Jing Dong Li is 6F-G, Block A, Dong Huan Plaza Office Building,
No. 9, Dong Zhong Road, Beijing, PRC.
 
(18)  Includes 56,191 ordinary shares. The address for
Xiao Tan is 6F-G, Block A, Dong Huan Plaza Office Building, No.
9, Dong Zhong Road, Beijing, PRC.
 
(19)  Includes 24,082 ordinary shares. The address for
Ze Sheng Wang is 6F-G, Block A, Dong Huan Plaza Office
Building, No. 9, Dong Zhong Road, Beijing, PRC.
 
(20)  Includes 17,452 ordinary shares issuable upon
conversion of Series B preferred shares. Openventure
Company Limited is 100% owned by its director, Louise Leung. The
address for Openventure Company Limited is 4B, 11 Boyce
Road, Hong Kong.
 
(21)  Includes 16,055 ordinary shares. The address for
Xi Yuan Fang is 6F-G, Block A, Dong Huan Plaza Office Building,
No. 9, Dong Zhong Road, Beijing, PRC.

78


 
(22)  Includes 16,055 ordinary shares. The address for
Yu Sun is 6F-G, Block A, Dong Huan Plaza Office Building,
No. 9, Dong Zhong Road, Beijing, PRC.

         
Prior to the issuance of our Series B
preferred shares in November 2000, Neil Nanpeng Shen, James
Jianzhang Liang, Qi Ji, IDG Technology Venture
Investment, Inc., and S.I. Technology Venture Capital
Limited, owned 21.93%, 16.45%, 16.45%, 12.04% and 3.70%,
respectively, of the outstanding shares of our company. Their
ownership interests were reduced to 11.97%, 8.98%, 8.98%, 9.19%
and 7.26%, respectively, after the issuance of Series B
preferred shares, as Carlyle Asia Venture Partners I, L.P. and
its affiliate, CIPA Co-Investment, L.P., collectively acquired
an ownership interest of 32.25%. The ownership interests of Neil
Nanpeng Shen, James Jianzhang Liang, Qi Ji, Carlyle Asia Venture
Partners I, L.P. (including the ownership interest held by
CIPA Co-Investment, L.P.), S.I. Technology Venture Capital
Limited and IDG Technology Venture Investment, Inc. were
reduced to 10.52%, 7.89%, 7.89%, 28.34%, 6.38% and 8.08%,
respectively, after the issuance of our Series C preferred
shares to Tiger Technology Private Investment Partners, L.P. and
its affiliate, who together acquired an ownership interest of
8.85%, and partial redemption of our outstanding shares in
September 2003. All of the calculations in this paragraph
exclude shares underlying outstanding options.

         
As of the date of this prospectus, approximately
11.3%, 33.3%, 8.4% and 100% of our outstanding ordinary shares,
Series A preferred shares, Series B preferred shares
and Series C preferred shares, respectively, are held by
one, seven, seven and two record holders in the United States,
respectively.

         
Our shareholders are entitled to vote together as
a single class on all matters submitted to shareholders vote. No
shareholder has different voting rights from other shareholders.

         
Two of our selling shareholders, namely, Carlyle
Asia Venture Partners I, L.P. and CIPA Co-Investment, L.P.,
have represented to us that they are affiliated with a
registered broker-dealer. Based on such shareholders’
representations, we believe that at the time of the purchase of
the shares to be offered by them in this offering, each such
shareholder had no agreements or understandings, directly or
indirectly, with any person to distribute them. Before Carlyle
Asia Venture and CIPA Co-Investment purchased our Series B
preferred shares in November 2000, they were not affiliated or
otherwise related to us. Neither Carlyle Asia Venture nor CIPA
Co-Investment is in the business of underwriting securities.

         
We are not aware of any arrangement that may, at
a subsequent date, result in a change of control of our company.

79


 

RELATED PARTY TRANSACTIONS

Arrangements with Affiliated Chinese
Entities

         
Current Chinese laws and regulations impose
substantial restrictions on foreign ownership of the
air-ticketing, travel agency, advertising and Internet content
provision businesses in China. Therefore, we conduct part of our
operations in our non-hotel reservation businesses through a
series of agreements with our affiliated Chinese entities, which
hold the licenses and approvals for conducting the
air-ticketing, travel agency, advertising and Internet content
provision businesses in China. We do not hold any ownership
interest in our affiliated Chinese entities. Qi Ji, who is a
co-founder, shareholder and director of our company, Min Fan,
who is a co-founder, shareholder and Executive Vice President of
our company, and Alex Nanyan Zheng, who is a Vice President
of our company, are the principal owners of most of the equity
in each of our affiliated Chinese entities. Qi Ji and Min Fan
own 80% and 20%, respectively, of Beijing Chenhao. Qi Ji and Min
Fan own 51% and 49%, respectively, of Ctrip Commerce, which owns
90% of Shanghai Huacheng. Min Fan and Alex Nanyan Zheng own 90%
and 10%, respectively, of Guangzhou Guangcheng. Min Fan owns 66%
of Shanghai Cuiming.

         
We believe that the terms of these agreements are
no less favorable than the terms that we could obtain from
disinterested third parties. The terms of the agreements with
the same title between the company and its respective affiliated
entities are identical except for the amount of the loans to the
shareholders of each entity and the amount of service fees paid
by each entity. We believe that Qi Ji, Min Fan and Alex Nanyan
Zheng will not receive any personal benefits from these
agreements except as shareholders of Ctrip. According to our
Chinese counsel, Commerce & Finance Law Offices, these
agreements are valid, binding and enforceable under the current
laws and regulations of China. The principal terms of these
agreements are described below.

         
Powers of
Attorney.
Each of Qi Ji,
Min Fan and Alex Nanyan Zheng has irrevocably appointed our
President and Chief Financial Officer, Neil Nanpeng Shen,
as attorney-in-fact to vote on their behalf on all matters they
are entitled to vote on, including matters relating to the
transfer of any or all of their respective equity interests in
our affiliated Chinese entities and the appointment of the chief
executive officer of our affiliated Chinese entities. The
appointment of Mr. Shen as the attorney-in-fact will
terminate if he is no longer employed by one of our subsidiaries
in China. The term of each of the powers of attorney is ten
years.

         
Exclusive Technical Consulting and Services
Agreements.
We provide our
affiliated Chinese entities with technical consulting and
related services and staff training and information services. We
also maintain their network platforms. We are the exclusive
provider of these services. The initial term of these agreements
is ten years. In consideration for our services, our affiliated
entities agree to pay our service fees as follows: Ctrip
Commerce pays us a quarterly fee of RMB240,000 (US$28,996);
Beijing Chenhao pays us a monthly fee based on the number of
airline tickets sold in the month, at the rate of RMB18.0
(US$2.2) per ticket; Shanghai Huacheng pays us a monthly fee
based on the number of packaged-tour products and the number of
airline tickets sold in the month, at the rates of RMB60.0
(US$7.3) per tour and RMB20.0 (US$2.4) per ticket; Guangzhou
Guangcheng pays us a monthly fee based on the number of airline
tickets sold in the month, at the rate of RMB18.0 (US$2.2) per
ticket; and Shanghai Cuiming pays us a monthly service fee based
on the number of packaged-tour products sold in the month, at
the rate of RMB60.0 (US$7.3) per tour. The service fees are
subject to quarterly adjustment based on the actual operating
results of our affiliated entities.

         
Share Pledge
Agreements.
Qi Ji,
Min Fan and Alex Nanyan Zheng pledge their respective
equity interests in our affiliated Chinese entities as a
guarantee for the payment by our affiliated Chinese entities of
technical and consulting services fees to us under the exclusive
technical consulting and services agreements described above. In
the event any of our affiliated entity breaches any of its
obligations under the service agreement with us, we are entitled
to sell the equity interests held by Qi Ji, Min Fan and/or Alex
Nanyan Zheng, as the case may be, and retain the proceeds from
such sale or require any of them to transfer his equity interest
without consideration to the Chinese citizen(s) designated by
us. We will endeavor to enforce our rights in full under the
share pledge agreement in the event that any affiliated entity
breaches its obligations under the exclusive technical
consulting and services agreement with us.

80


 

         
Trademark License
Agreements.
We grant our
affiliated Chinese entities licenses to use our registered
trademarks on their websites for a license fee of RMB3,000
(US$362) per year. The terms of these agreements are
ten years and may be extended by us for one year.

         
Software License Agreements.
We grant our affiliated Chinese
entities the right to use our software for a royalty fee of
RMB3,000 (US$362) per year. The terms of these agreements are
one year and may be extended by us for one year.

         
Loan
Agreements.
Due to government
restrictions on foreign ownership of air-ticketing, travel
agencies, Internet content provision and advertising businesses
in China, we have made loans to Qi Ji, Min Fan and
Alex Nanyan Zheng, with the sole and exclusive purpose of
providing funds necessary for the capitalization or acquisition
of our affiliated entities. In the event that the Chinese
government lifts its substantial restrictions on foreign
ownership of the air-ticketing, travel agency, advertising or
Internet content provision 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 loans will be
cancelled in connection with such purchase. However, it is
uncertain when, if at all, the Chinese government will lift any
or all of these restrictions. The following table sets forth the
amount of each loan, the date the loan agreement was entered
into, the principal, interest, maturity date and outstanding
balance of the loan, the borrower and the affiliated Chinese
entity.

                                                             
Affiliated
Date of Loan Agreement Borrower Entity Principal Interest Maturity Date Outstanding Balance







(in thousands (in thousands (in thousands (in thousands
of RMB) of US$) of RMB) of US$)

September 10, 2003

    Min Fan     Beijing
Chenhao
    387.4       46.8       None       September 10, 2013       387.4       46.8  

September 10, 2003

    Qi Ji     Beijing
Chenhao
    1,549.5       187.2       None       September 10, 2013       1,549.5       187.2  

September 10, 2003

    Min Fan     Ctrip
Commerce
    980.0       118.4       None       September 10, 2013       980.0       118.4  

September 10, 2003

    Qi Ji     Ctrip
Commerce
    1,020.0       123.2       None       September 10, 2013       1,020.0       123.2  

September 10, 2003

    Alex Nanyan Zheng     Guangzhou
Guangcheng
    50.0       6.0       None       September 10, 2013       50.0       6.0  

September 10, 2003

    Min Fan     Guangzhou
Guangcheng
    450.0       54.4       None       September 10, 2013       450.0       54.4  

October 30, 2003

    Min Fan     Shanghai Cuiming
    4,290.0       518.3       None       October 30, 2013       4,290.0       518.3  

         
Exclusive Option
Agreements.
As consideration for
our entering into the loan agreements described above, each of
Qi Ji, Min Fan and Alex Nanyan Zheng has granted us an
exclusive, irrevocable option to purchase all of their equity
interests in our affiliated Chinese entities at any time we
desire, subject to compliance with the applicable Chinese laws
and regulations. If we exercise these options, we will cancel
the outstanding loans we extended to Qi Ji, Min Fan and Alex
Nanyan Zheng to fund our affiliated Chinese entities.

         
Operating
Agreements.
We guarantee the
performance by our affiliated Chinese entities of contracts,
agreements or transactions with third parties relating to the
business operations of our affiliated Chinese entities. As
consideration for our entering into these performance
guarantees, our affiliated Chinese entities pledge their
accounts receivable and all of their assets for our benefit. In
addition, our affiliated Chinese entities and their shareholders
agree not to enter into any transaction that would affect the
assets, obligations, rights or operations of our affiliated
Chinese entities without our prior written consent. They also
agree to accept our guidance with respect to day-to-day
operations, financial management systems and the appointment and
dismissal of key employees.

         
All of the agreements described above were
entered into in September 2003. Prior to September 2003, we had
services agreements with Beijing Chenhao, Shanghai Huacheng and
Ctrip Commerce, whereby we rendered consulting, technology,
administrative, marketing and other services to them, and issued
invoices to them on a monthly basis based on the amount of
service fees determined at our sole discretion. These

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service agreements have been terminated and
replaced with the currently effective exclusive technical
consulting and services agreements.

Stock Option Grants

         
We have granted options to purchase our ordinary
shares under the 2000 Plan to our employees, of which
1,391,760 options are outstanding. We will not issue any
additional options under the 2000 Plan to our employees. The
following table summarizes, as of December 1, 2003, the
outstanding options granted under our 2000 Plan to several of
our current senior executive officers named below and
Qi Ji, a former executive officer, and to our other
employees as a group since our board of directors adopted the
2000 Plan.

                         
Ordinary Shares
Underlying Options Date of
Granted Exercise Price Date of Grant Expiration




(US$/Share)

Neil Nanpeng Shen

    144,000       0.7716     April 15, 2000
  April 15, 2005

Min Fan

    172,800       0.7716     April 15, 2000
  April 15, 2005

Qi Ji

    129,600       0.7716     April 15, 2000
  April 15, 2005

Other employees as a group

    945,360       0.7716     April 15, 2000 to
January 1, 2003
  April 15, 2005 to
January 1, 2010

Total

    1,391,760                  

         
We have reserved an aggregate of 1,187,510 of our
ordinary shares for issuance under the 2003 Plan, of which
750,640 options are issued and outstanding. The following table
summarizes, as of December 1, 2003, the outstanding options
granted under our 2003 Plan to several of our directors and
senior executive officers named below, and to our other
employees since our board of directors adopted the 2003 Plan.
The value of the options granted in October and November 2003,
based on the midpoint of the filing range set forth on the front
cover of this prospectus, is US$427,220.

                             
Ordinary Shares
Underlying Options Date of
Granted Exercise Price Date of Grant Expiration




(US$/Share)

Neil Nanpeng Shen

    120,000     2.11
    April 15, 2003       April 15, 2008  

Min Fan

    120,000     2.11
    April 15, 2003       April 15, 2008  

Gabriel Li

    30,000     6.00
    October 27, 2003       October 27, 2008  

Robert Stein

    30,000     6.00
    October 27, 2003       October 27, 2008  

Other employees

    241,660     2.11
    April 15, 2003       April 15, 2008  
      50,000     5.00
    October 3, 2003       October 3, 2008  
      20,000     6.00
    October 27, 2003       October 27, 2008  
      103,980     80% of the midpoint of the filing range
    October 30, 2003       October 30, 2008  
      35,000     90% of the midpoint of the filing range
    November 14, 2003       November 14, 2008  

Total

    750,640                      

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Private Placements

         
In March 2000, we sold a total of 4,320,000
shares of Series A preferred shares in a private placement
at a price of US$1.0417 per share, including 921,600 shares to
Orchid Asia II, L.P., 1,440,000 shares to China Enterprise
Investments No. 11 Limited (formerly known as Softbank
China Venture Investments No. 11 Limited),
960,000 shares to Ecity Investment Limited, 480,000 IDG
Technology Venture Investment, Inc. (formerly known as
PTV-China Inc.), 480,000 shares to S.I. Technology
Venture Capital Limited and certain individual shareholders. The
holders of Series A preferred shares are entitled to vote
on an “as-converted” basis together with the holders
of our ordinary shares. Each Series A preferred share will
automatically convert into one ordinary share upon the closing
of this offering. Except for IDG Technology Venture Investment,
Inc., which was also a holder of our ordinary shares, each of
the purchasers of our Series A preferred shares was an
unrelated third party prior to the issuance and sale of our
Series A preferred shares. The value of the Series A
preferred shares was determined based on arm’s-length
negotiations between us and the purchasers and approved by our
board of directors. The purpose of the issuance of our
Series A preferred shares was to fund our working capital.

         
In November 2000, we sold a total of 7,193,464
shares of Series B preferred shares in a private placement
at a price of US$1.5667 per share, including 4,814,008 shares to
Carlyle Asia Venture Partners I, L.P., 292,266 shares
to CIPA Co-Investment, L.P., 638,285 shares to Softbank
Asia Net-Trans (No. 4) Limited, 414,885 shares to IDG
Technology Venture Investments, LP, 829,770 shares to S.I.
Technology Venture Capital Limited, 12,765 shares to
Openventure Company Limited, 183,826 shares to Orchid Asia
II, L.P. and certain individuals. Holders of the Series B
preferred shares are entitled to vote on an
“as-converted” basis together with holders of our
ordinary shares and have the right to convert their
Series B preferred shares into ordinary shares at a
1 to 1.5 conversion ratio. Each Series B preferred
share will automatically convert into 1.5 ordinary shares upon
the closing of this offering. Each of the purchasers of our
Series B preferred shares, except for those who also held
our ordinary shares and Series A preferred shares, was an
unrelated third party prior to the issuance and sale of our
Series B preferred shares. The value of the Series B
preferred shares was determined based on arm’s-length
negotiations between us and the purchasers and approved by our
board of directors. The purpose of the issuance of our
Series B preferred shares was to fund our working capital.

         
In September 2003, we sold 2,180,755 shares of
Series C preferred shares in a private placement at a price
of US$4.5856 per share to Tiger Technology Private Investment
Partners, L.P. and Tiger Technology II, L.P. A holder of
Series C preferred shares is entitled to vote on an
“as-converted” basis together with holders of our
ordinary shares and has the right to convert shares of
Series C preferred share into ordinary shares at a
1 to 1 conversion ratio. Each Series C preferred share
will automatically convert into one ordinary share upon the
closing of this offering. Each of the purchasers of our
Series C preferred shares was an unrelated third party
prior to the issuance and sale of our Series C preferred
shares. The value of the Series C preferred shares was
determined based on arm’s-length negotiations between us
and the purchasers and approved by our board of directors.

         
The purposes of the issuance and sale of our
Series C preferred shares were to introduce new and
well-known investors to facilitate our potential future fund
raising efforts and reward our existing shareholders.
Immediately after the closing of the sale of our Series C
preferred shares, we used the proceeds from such sale to redeem
some of our outstanding shares, including 842,938, 382,482 and
636,891 shares of ordinary shares, Series A preferred
shares and Series B preferred shares, respectively, at
redemption prices of US$4.5282, US$4.5282 and US$6.7924 per
share, respectively, after taking into consideration the legal
and professional service expenses incurred in connection with
the issuance of Series C preferred shares. Each of our then
existing shareholders, including our affiliates Carlyle Asia
Venture Partners I, L.P., IDG Technology Venture
Investment, Inc., S.I. Technology Venture Capital Limited,
Neil Nanpeng Shen, James Jianzhang Liang, Min Fan and Qi Ji,
participated in our partial redemption of outstanding shares
based on the pro rata ownership interest held by such
shareholder prior to the issuance and sale of our Series C
preferred shares. None of our related parties received any
payment for professional services expenses incurred in
connection with our issuance and sale of Series C preferred
shares.

83


 

Shareholders Agreement

         
We and our existing shareholders entered into a
shareholders agreement in September 2003. Pursuant to the
shareholders agreement, our board of directors may consist of up
to ten members, including two members nominated collectively by
Carlyle Asia Venture Partners I, L.P., or Carlyle, and CIPA
Co-Investments, L.P., three members nominated by each of the
three largest holders of our Series A preferred shares,
Series B preferred shares and ordinary shares excluding
Carlyle and our founders, respectively, three members nominated
by our founders, and two independent directors nominated by
holders of a majority of our outstanding shares calculated on an
as-converted basis. In addition, holders of our preferred shares
are entitled to certain registration rights with respect to any
public offering of our ordinary shares, as described in
“Description of Share Capital — Registration
Rights,” and they have waived such rights in connection
with this offering. Holders of our preferred shares also have
rights of first refusal to purchase their respective pro rata
portion of any new securities issued by us, except in the case
of our initial public offering and share issuances under our
stock option plans. This right will terminate upon the closing
of this offering. We and our shareholders intend to amend the
shareholders agreement immediately after the consummation of
this offering.

Certain Leased Property in Shanghai

         
We lease approximately 1,223 square meters of our
premises in Shanghai from a company controlled by the spouse of
our Chief Executive Officer, James Jianzhang Liang. Our lease
term commenced on May 1, 2003 and will expire on
February 1, 2005. The annual rent for this lease is
RMB500,000 (US$60,408).

84


 

DESCRIPTION OF SHARE CAPITAL

         
As of the date of this prospectus, our authorized
share capital consists of 49,157,064 ordinary shares, par value
US$0.01 each; 3,937,518 Series A preferred shares, par
value US$0.01 each; 6,556,573 Series B preferred shares,
par value US$0.01 each; and 2,180,755 Series C preferred
shares, par value US$0.01 each. As of the date of this
prospectus, there are 9,051,760 ordinary shares issued and
outstanding; 3,937,518 Series A preferred shares issued and
outstanding; 6,556,573 Series B preferred shares issued and
outstanding; and 2,180,755 Series C preferred shares issued
and outstanding. All of our issued and outstanding
Series A, Series B and Series C preferred shares
will automatically be converted into our ordinary shares on a
basis of one ordinary share to 1, 1.5 and 1 preference share(s),
respectively, upon the closing of this offering.

         
Between March 2000 and September 2003, we issued
and sold shares of our Series A preferred shares,
Series B preferred shares and Series C preferred
shares in reliance upon Section 4(2) of the Securities Act,
and Regulation D and Regulation S promulgated
thereunder. Immediately after our issuance and sale of
Series C preferred shares, we used the proceeds from such
sale to redeem some of our outstanding shares held by our
existing shareholders. See “Related Party
Transactions — Private Placements.”

         
We are a Cayman Islands company and our affairs
are governed by our memorandum and articles of association and
the Companies Law (2003 Revision) of the Cayman Islands, which
is referred to as the Companies Law below. Upon the closing of
this offering, we will adopt an amended and restated memorandum
and articles of association. The following are summaries of
(i) material provisions of our proposed amended and
restated memorandum and articles of association that we expect
will become effective upon the closing of this offering and
(ii) the Companies Law, insofar as they relate to the
material terms of our ordinary shares.

Ordinary Shares

         
General. All
of our outstanding ordinary shares are fully paid and
non-assessable. Certificates representing the ordinary shares
are issued in registered form. Our shareholders who are
nonresidents of the Cayman Islands may freely hold and vote
their shares.

         
Dividends.
The holders of our ordinary shares
are entitled to such dividends as may be declared by our board
of directors subject to the Companies Law.

         
Voting Rights.
Each ordinary share is entitled to
one vote on all matters upon which the ordinary shares are
entitled to vote. Voting at any meeting of shareholders is by
show of hands unless a poll is demanded. A poll may be demanded
by the chairman of our board of directors or any other
shareholder present in person or by proxy and holding at least
ten percent of the shares giving a right to vote at the meeting.

         
A quorum required for a meeting of shareholders
consists of at least two shareholders present or by proxy or, if
a corporation or other non-natural person, by its duly
authorized representative. Shareholders’ meetings are held
annually and may be convened by our board of directors on its
own initiative or upon a request to the directors by
shareholders holding in the aggregate 10.0% or more of our
voting share capital. Advance notice of at least seven days is
required for the convening of our annual general
shareholders’ meeting and other shareholders meetings.

         
An ordinary resolution to be passed by the
shareholders requires the affirmative vote of a simple majority
of the votes attaching to the ordinary shares cast in a general
meeting, while a special resolution requires the affirmative
vote of no less than two-thirds of the votes cast attaching to
the ordinary shares. A special resolution is required for
matters such as a change of name or amending the memorandum and
articles of association. Holders of the ordinary shares may by
ordinary resolution, among other things, make changes in the
amount of our authorized share capital and consolidate and
divide all or any of our share capital into shares of larger
amount than our existing share capital and cancel any shares.

         
Liquidation.
On a return of capital on winding
up or otherwise (other than on conversion, redemption or
purchase of shares), assets available for distribution among the
holders of ordinary shares shall

85


 

be distributed among the holders of our ordinary
shares on a pro rata basis. If our assets available for
distribution are insufficient to repay all of the paid-up
capital, the assets will be distributed so that the losses are
borne by our shareholders proportionately.

         
Calls on Shares and Forfeiture of Shares.
Our board of directors may from
time to time make calls upon shareholders for any amounts unpaid
on their shares in a notice served to such shareholders at least
14 days prior to the specified time and place of payment.
The shares that have been called upon and remain unpaid are
subject to forfeiture.

         
Redemption of Shares.
Subject to the provisions of the
Companies Law, we may issue shares on the terms that they are,
or at our option or at the option of the holders are, subject to
redemption on such terms and in such manner as may be determined
by special resolution.

         
Variations of Rights of Shares.
All or any of the special rights
attached to any class of shares may, subject to the provisions
of the Companies Law, be varied either with the consent in
writing of the holders of three-fourths of the issued shares of
that class or with the sanction of a special resolution passed
at a general meeting of the holders of the shares of that class.

Differences in Corporate Law

         
The Companies Law is modeled after that of the
United Kingdom but does not follow recent United Kingdom
statutory enactments. In addition, the Companies Law differs
from laws applicable to United States corporations and their
shareholders. Set forth below is a summary of the significant
differences between the provisions of the Companies Law
applicable to us and the laws applicable to companies
incorporated in the United States and their shareholders.

         
Mergers and Similar Arrangements.
Cayman Islands law does not
provide for mergers as that expression is understood under
United States corporate law. However, there are statutory
provisions that facilitate the reconstruction and amalgamation
of companies, provided that the arrangement in question is
approved by a majority in number of each class of shareholders
and creditors with whom the arrangement is to be made, and who
must in addition represent three-fourths in value of each such
class of shareholders or creditors, as the case may be, that are
present and voting either in person or by proxy at a meeting, or
meetings convened for that purpose. The convening of the
meetings and subsequently the arrangement must be sanctioned by
the Grand Court of the Cayman Islands. While a dissenting
shareholder would have the right to express to the court the
view that the transaction should not be approved, the court can
be expected to approve the arrangement if it satisfies itself
that:

  • the statutory provisions as to majority vote have
been complied with;
 
  • the shareholders have been fairly represented at
the meeting in question;
 
  • the arrangement is such as a businessman would
reasonably approve; and
 
  • the arrangement is not one that would more
properly be sanctioned under some other provision of the
Companies Law.

         
When a take-over offer is made and accepted by
holders of 90.0% of the shares within four months, the offerer
may, within a two-month period, require the holders of the
remaining shares to transfer such shares on the terms of the
offer. An objection may be made to the Grand Court of the Cayman
Islands but is unlikely to succeed unless there is evidence of
fraud, bad faith or collusion.

         
If the arrangement and reconstruction are thus
approved, any dissenting shareholders would have no rights
comparable to appraisal rights, which would otherwise ordinarily
be available to dissenting shareholders of United States
corporations, providing rights to receive payment in cash for
the judicially determined value of the shares.

         
Shareholders’ Suits.
We are not aware of any reported
class action or derivative action having been brought in a
Cayman Islands court. In principle, we will normally be the
proper plaintiff and a derivative action may not be brought by a
minority shareholder. However, based on English authorities,
which would in

86


 

all likelihood be of persuasive authority in the
Cayman Islands, exceptions to the foregoing principle apply in
circumstances in which:

  • a company is acting or proposing to act illegally
or beyond the scope of its authority;
 
  • the act complained of, although not beyond the
scope of its authority, could be effected duly if authorized by
more than a simple majority vote which has not been obtained; and
 
  • those who control the company are perpetrating a
“fraud on the minority.”

Indemnification

         
Cayman Islands law does not limit the extent to
which a company’s articles of association may provide for
indemnification of officers and directors, except to the extent
any such provision may be held by the Cayman Islands courts to
be contrary to public policy, such as to provide indemnification
against civil fraud or the consequences or committing a crime.
Our articles of association provide for indemnification of
officers and directors for losses, damages, costs and expenses
incurred in their capacities as such, except through their own
willful neglect or default.

         
Insofar as indemnification for liabilities
arising under the Securities Act may be permitted to directors,
officers or persons controlling us pursuant to the foregoing
provisions, we have been advised that in the opinion of the SEC
such indemnification is against public policy as expressed in
the Securities Act and therefore is unenforceable.

Registration Rights

         
Under the terms of our shareholders agreements
with certain of our shareholders, at any time after the closing
of the first firm commitment underwritten public offering of our
ordinary shares where the shares are subsequently primarily
traded on the Nasdaq National Market or the New York Stock
Exchange or other comparable exchange or market place approved
by our board of directors, any shareholder(s) holding of record
at least 50.0% of registrable shares then outstanding or any
permitted assignee of record of such registrable shares may, on
three occasions only, require us to effect the registration
under the Securities Act of all of the registrable shares that
such shareholder(s) request to be registered. Registrable shares
consist of (i) ordinary shares issued or to be issued
pursuant to conversion of any preferred shares, (ii) any
ordinary shares issued as (or issuable upon the conversion or
exercise of any warrant, right or other security which is issued
as) a dividend or other distribution with respect to, or in
exchange for or in replacement of, any preferred shares and
(iii) any other ordinary shares owned or acquired by any
holder of preferred shares. To effect such registration, the
registrable shares requested by all holders of registrable
shares to be registered must be at least 15.0% of all
registrable shares then outstanding. We are not, however,
obligated to effect any such registration if we have, within the
six-month period preceding the date of any request, already
effected a registration under the Securities Act pursuant to
(a) a request to exercise another registration right,
(b) a request by holders of registrable shares of
registration of registrable shares they hold on Form F-3 or
(c) the “piggyback” registration right as
described below, other than a registration from which the
registrable shares of the holders of registrable shares have
been excluded (with respect to all or any portion of the
registrable shares the holders of registrable shares requested
be included in such registration).

         
Further, any time after the first anniversary of
the date of the shareholders agreement, any holder or holders of
a majority of all registrable shares then outstanding or any
permitted assignees of record of registrable shares may require
us to effect a registration on Form F-3 (or any equivalent
registration in a jurisdiction outside of the United States) for
public sale of all or any portion of the registrable shares held
by such holder or holders. We are not, however, obligated to
effect any such registration on Form F-3:

           
(i) if Form F-3 is not available for
such offering by the holders of registrable shares or any
permitted assignees of record of registrable shares;
 
           
(ii) if the holders of registrable shares or
any permitted assignees of record of registrable shares,
together with the holders of any of our other securities
entitled to inclusion in such

87


 
  registration, propose to sell registrable shares
and such other securities (if any) at an aggregate price to the
public of less than US$5,000,000;
 

           
(iii) if we furnish to the holders of
registrable shares or any permitted assignees of record of
registrable shares a certificate signed by our President or
Chief Executive Officer stating that in the good faith judgment
of our board of directors, it would be materially detrimental to
us and our shareholders for such Form F-3 Registration (or
equivalent registration in a jurisdiction outside of the United
States) to be effected at such time, in which event we have the
right to defer the filing of the Form F-3 registration
statement (or equivalent registration statement in a
jurisdiction outside of the United States) no more than
once during any 12-month period for a period of not more than
90 days after receipt of the request of the holder or
holders of registrable share or any permitted assignees of
record of registrable shares;

 
           
(iv) if we have, within the six-month period
preceding the date of such request, already effected a
registration under the Securities Act other than a registration
from which the registrable shares of holders of registrable
shares or any permitted assignees of record of registrable
shares have been excluded (with respect to all or any portion of
the registration shares the holders of registrable shares
requested to be included in such registration) pursuant to the
“piggyback” registration right described below; or
 
           
(v) in any particular jurisdiction in which
we would be required to qualify to do business or to execute a
general consent to service of process in effecting such
registration, qualification or compliance.

         
In addition, holders of registrable shares who
are parties to the shareholders agreement have
“piggyback” registration rights which may require us
to register all or any part of the registrable shares then held
by such holders when we file any registration statement under
the Securities Act other than a registration statement relating
to any employee benefit plan or corporate reorganization.

         
The foregoing registration rights are subject to
certain conditions and limitations, including:

  • the right of the underwriters in any underwritten
offering to limit the number of ordinary shares to be registered
for public sale by shareholders; and
 
  • our right to delay for up to 90 days during
any 12-month period the filing of a registration statement if
our board of directors determines that the registration would be
seriously materially adverse to us and our shareholders at that
time.

         
We are generally required to bear all of the
expenses of all registrations, except underwriting discounts and
commissions. Registration of any of the ordinary shares held by
shareholders with registration rights would result in those
shares becoming freely tradeable without restriction under the
Securities Act immediately after the effectiveness of the
registration. We have agreed to indemnify the holders of
registration rights in connection with demand, Form F-3 and
“piggyback” registrations in certain circumstances.
Our obligations to register ordinary shares terminate seven
years after the consummation of an initial public offering, or,
with respect to any holder of registrable shares, such earlier
time after the initial public offering at which such holder can
sell all registrable shares held by it pursuant to
Rule 144(k) of the Securities Act or holds one percent or
less of the outstanding ordinary shares, and all registrable
shares held by such holder can be sold in any three-month period
without registration in compliance with Rule 144 of the
Securities Act.

         
We and our shareholders intend to amend our
shareholders agreement immediately after this offering, but the
terms relating to the registration rights described in this
prospectus are not expected to be changed in connection with
such amendment.

88


 

Inspection of Books and Records

         
Holders of our ordinary shares will have no
general right under Cayman Islands law to inspect or obtain
copies of our list of shareholders or our corporate records.
However, we will provide our shareholders with annual audited
financial statements. See “Where You Can Find Additional
Information.”

89


 

DESCRIPTION OF AMERICAN DEPOSITARY
SHARES

         
The Bank of New York will execute and deliver the
American Depositary Receipts representing Ordinary Shares of the
Par Value of US$0.01 per share of Ctrip.com International,
Ltd. (Incorporated under the Laws of Cayman Islands), also
referred to as ADRs. Each ADR is a certificate evidencing a
specific number of American Depositary Shares, also referred to
as ADSs. Each ADS will represent two ordinary shares (or a right
to receive two ordinary shares) deposited with the Hong Kong
office of The Hongkong and Shanghai Banking Corporation Limited,
as custodian. Each ADR will also represent securities, cash or
other property deposited with The Bank of New York but not
distributed to ADR holders. The depositary’s corporate
trust office at which the ADRs will be administered is located
at 101 Barclay Street, New York, New York 10286.

         
You may hold ADSs either directly (by having an
ADR registered in your name) or indirectly through your broker
or other financial institution. If you hold ADSs directly, you
are an ADR holder. This description assumes you hold your ADSs
directly. If you hold the ADSs indirectly, you must rely on the
procedures of your broker or other financial institution to
assert the rights of ADR holders described in this section. You
should consult with your broker or financial institution to find
out what those procedures are.

         
As an ADR holder, we will not treat you as one of
our shareholders and you will not have shareholder rights. The
depositary will be the holder of the shares underlying your
ADSs. As a holder of ADRs, you will have ADR holder rights. A
deposit agreement among us, the depositary and you, as an ADR
holder, and the beneficial owners of ADRs set out ADR holder
rights as well as the rights and obligations of the depositary.
New York law governs the deposit agreement and the ADRs.

         
We are providing you with a summary of the
deposit agreement. You should read this summary together with
the deposit agreement and the ADR. You can inspect a copy of the
deposit agreement at the corporate trust office of the
depositary, currently located at 101 Barclay Street, New
York, New York 10286, and at the principal offices of the
custodian, which will act as agent of depositary, currently
located at 1 Queen’s Road, Central, Hong Kong. We urge
you to review the deposit agreement in its entirety as well as
the form of ADR attached to the deposit agreement.

Dividends and Other Distributions

         
The Bank of New York has agreed to pay to you the
cash dividends or other distributions it or the custodian
receives on shares or other deposited securities after deducting
its fees and expenses. You will receive these distributions in
proportion to the number of shares your ADSs represent.

  • Cash. The
Bank of New York will convert any cash dividend or other cash
distribution we pay on the shares into U.S. dollars, if it
can do so on a reasonable basis and can transfer the
U.S. dollars to the United States. If that is not possible
or if any approval from any government is needed and cannot be
obtained without excessively burdensome or otherwise
unreasonable efforts, or there are foreign exchange controls in
place that prohibit such transfer, the deposit agreement allows
The Bank of New York to distribute RMB only to those ADR holders
to whom it is possible to do so. It will hold RMB it cannot
convert for the account of the ADR holders who have not been
paid. It will not invest RMB and it will not be liable for
interest.
                  Before making a distribution, any withholding
taxes that must be paid will be deducted. See
“Taxation — United States Federal Income
Taxation — U.S. Holders — Taxation of
Dividends and Other Distributions on the ADSs or Ordinary
Shares”. The Bank of New York will distribute only whole
U.S. dollars and cents and will round fractional cents to
the nearest whole cent. If the exchange rates fluctuate
during a time when The Bank of New York cannot convert RMB, you
may lose some or all of the value of the distribution.

  • Shares. The
Bank of New York may distribute additional ADRs representing any
shares we may distribute as a dividend or free distribution, if
we furnish it promptly with satisfactory evidence that it is
legal to do so. The Bank of New York will only distribute whole
ADSs. It will sell shares which would require it to issue a
fractional ADS and distribute the net proceeds in

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  the same way as it does with cash. If The Bank of
New York does not distribute additional ADRs, each ADS will also
represent the new shares.
 
  • Rights to Purchase Additional Shares.
If we offer holders of our
ordinary shares any rights to subscribe for additional shares or
any other rights, The Bank of New York may make these rights
available to you. We must first instruct The Bank of New York to
do so and furnish it with satisfactory evidence that it is legal
to do so. If we do not furnish this evidence and/or give these
instructions, and The Bank of New York decides it is practical
to sell the rights, The Bank of New York will sell the rights
and distribute the proceeds, in the same way as it does with
cash. The Bank of New York may allow rights that are not
distributed or sold to lapse. In that case, you will receive no
value for them.
 
  If The Bank of New York makes rights available to
you, it will exercise the rights and purchase the shares on your
behalf. The depositary will then deposit the shares and deliver
the ADSs to you. It will only exercise rights if you pay it the
exercise price and any other charges the rights require you to
pay.
 

     U.S. securities laws may restrict the sale,
deposit, cancellation and transfer of the ADSs issued after
exercise of rights. Under the deposit agreement, The Bank of New
York will not distribute rights to holders of ADSs unless the
distribution and sale of rights and the securities to which
these rights relate are either exempt from registration under
the Securities Act with respect to all holders of ADSs, or are
registered under the provisions of the Securities Act. We can
give no assurance that we can establish an exemption from
registration under the Securities Act, and we are under no
obligation to file a registration statement with respect to
these rights or underlying securities or to endeavor to have a
registration statement declared effective. In this case, The
Bank of New York may issue the ADSs under a separate restricted
deposit agreement which will contain the same provisions as the
agreement, except for changes needed to put the restrictions in
place.

 
  • Other Distributions.
The Bank of New York will send to
you anything else we distribute on deposited securities by means
it thinks are legal, fair and practical. If it cannot make the
distribution in that way, The Bank of New York has a choice. It
may decide to sell what we distributed and distribute the net
proceeds in the same way as it does with cash or it may decide
to hold what we distributed, in which case ADSs will also
represent the newly distributed property.

         
The Bank of New York is not responsible if it
decides that it is unlawful or impractical to make a
distribution available to any ADR holders. We have no obligation
to register ADSs, shares, rights or other securities under the
Securities Act. We also have no obligation to take any other
action to permit the distribution of ADRs, shares, rights or
anything else to ADR holders. This means that you may not
receive the distribution we make on our shares or any value for
them if it is illegal or impractical for us to make them
available to you.

Deposit, Withdrawal and Cancellation

         
The Bank of New York will issue ADRs if you or
your broker deposit shares or evidence of rights to receive
shares with the custodian. Upon payment of its fees and expenses
and of any taxes or charges, such as stamp taxes or stock
transfer taxes or fees, The Bank of New York will register the
appropriate number of ADRs in the names you request and will
deliver the ADRs at its corporate trust office to the persons
you request.

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You may turn in your ADRs at The Bank of New
York’s office. Upon payment of its fees and expenses and of
any taxes or charges, such as stamp taxes or stock transfer
taxes or fees, The Bank of New York will deliver:

           
(1) the deliverable portion of the
underlying shares to an account designated by you; and
 
           
(2) the deliverable portion of any other
deposited securities underlying the ADR at the office of the
custodian. Or, at your request, risk and expense, The Bank of
New York will deliver the deliverable portion of the deposited
securities at its corporate trust office.

Voting Rights

         
You may instruct The Bank of New York to vote the
shares underlying your ADSs but only if we ask The Bank of New
York to ask for your instructions. Otherwise, you will not be
able to exercise your right to vote unless you withdraw the
shares. However, you may not know about the meeting enough in
advance to withdraw the shares.

         
If we ask for your instructions, The Bank of New
York will notify you of the upcoming vote and arrange to deliver
our voting materials to you. The materials will:

           
(1) describe the matters to be voted on; and
 
           
(2) explain how you, on a specified date,
may instruct The Bank of New York to vote the shares or other
deposited securities underlying your ADSs as you direct. For
instructions to be valid, The Bank of New York must receive them
on or before the date specified. The Bank of New York will try,
in compliance with Hong Kong law and the provisions of our
memorandum and articles of association, to vote or to have its
agents vote the shares or other deposited securities as you
instruct.

         
We cannot assure you that you will receive the
voting materials in time to ensure that you can instruct The
Bank of New York to vote your shares. In addition, The Bank of
New York and its agents are not responsible for failing to carry
out voting instructions or for the manner of carrying out voting
instructions. This means that you may not be able to exercise
your right to vote and there may be nothing you can do if your
shares are not voted as you requested.

Notices and Reports

         
Upon receipt of notice of any meeting of holders
of ADSs or other deposited securities, if requested in writing
by the company, The Bank of New York will, as soon as
practicable thereafter, mail to the owners of ADRs a notice
which contains (a) such information as is contained in such
notice of meeting received by The Bank of New York from the
company, (b) a statement that the owners of ADRs as of the
close of business on a specified record date will be entitled,
subject to any applicable provisions of the Cayman Islands law
and of the Memorandum and Articles of Association of the
company, to instruct The Bank of New York as to the exercise of
the voting rights, if any, pertaining to the amount of shares or
other deposited securities represented by their respective ADSs,
and (c) a statement as to the manner in which instructions
may be given.

         
The Bank of New York will make available for
inspection by registered holders at its Corporate Trust Office
any reports and communications, including any proxy soliciting
material, received from the company, which are both
(a) received by The Bank of New York as the holder of the
deposited securities, and (b) made generally available to
the holders of such deposited securities by the company.
However, such inspection shall not be for the purpose of
communicating with registered holders of ADRs in the interest of
a business or object other than the business of our company, or
matters relating to the deposit agreement or the ADRs. The Bank
of New York will also, upon written request, send to the
registered holders copies of such reports when furnished by the
company pursuant to the deposit agreement. Any such reports and
communications, including any proxy soliciting material,
furnished to The Bank of New York by the company will be
furnished in English.

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Fees and Expenses

     
Persons depositing shares or
ADR holders must pay: For:
US$5.00 (or less) per 100 ADSs (or portion
thereof)
  • Each issuance of an ADS, including as
a result of a distribution of shares or rights or other property
    • Each cancellation of an ADS,
including if the deposit agreement terminates
 
US$0.02 (or less) per ADS (or portion thereof)
  • Any cash payment
 
A fee equivalent to the fee that would be payable
if securities distributed to you had been shares and the shares
had been deposited for issuance of ADSs
  • Distribution of securities
distributed to holders of deposited securities which are
distributed by the depositary to ADR holders
 
US$0.02 (or less) per ADSs per calendar year (if
the depositary has not collected any cash distribution fee
during that year)
  • Depositary services
 
Registration or transfer fees
  • Transfer and registration of shares
on the shares register of the registrar of the Foreign Registrar
from your name to the name of the depositary or its agent when
you deposit or withdraw common shares
 
Expenses of the depositary
  • Conversion of RMB to U.S. dollars
    • Cable, telex, and facsimile
transmission expenses as are expressly provided in the deposit
agreement
 
Taxes and other governmental charges the
depositary or the custodian have to pay on any ADS or share
underlying an ADS
  • As necessary
 
Any charges incurred by the depositary or its
agents for servicing the deposited securities
  • As necessary

Payment of Taxes

         
You will be responsible for any taxes or other
governmental charges payable on your ADRs or on the deposited
securities underlying your ADRs. The Bank of New York may refuse
to transfer your ADRs or allow you to withdraw the deposited
securities underlying your ADRs until such taxes or other
charges are paid. It may apply payments owed to you or sell
deposited securities underlying your ADRs to pay any taxes owed
and you will remain liable for any deficiency. If it sells
deposited securities, it will, if appropriate, reduce the number
of ADRs to reflect the sale and pay to you any proceeds, or send
to you any property, remaining after it has paid the taxes.

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Reclassifications, Recapitalizations and
Mergers

     
If we: Then:
• Change the nominal or par value of
our shares

• Reclassify, split up or consolidate any of the
deposited securities

• Distribute securities on the shares that are not
distributed to you

• Recapitalize, reorganize, merge, liquidate, sell all
or substantially all of our assets, or take any similar action

  The cash, shares or other securities received by
the depositary will become deposited securities. Each ADS will
automatically represent its equal share of the new deposited
securities.

The depositary may, and will if we ask it to, distribute some or
all of the cash, shares or other securities it received. It may
also issue new ADSs or ask you to surrender your outstanding
ADRs in exchange for new ADRs identifying the new deposited
securities.

Amendment and Termination

         
We may agree with The Bank of New York to amend
or extend the deposit agreement and the ADRs without your
consent for any reason. If the amendment will cause any of the
following results, the amendment will become effective
30 days after The Bank of New York notifies you of the
amendment:

  • adds or increases fees or charges, except for:
            —  taxes and other governmental charges;
 
            —  registration fees;
 
            —  cable, telex or facsimile transmission costs;
 
            —  delivery costs or other such expenses; or
  • prejudices any important right of ADR holders.

         
At the time an amendment becomes effective, you
are considered, by continuing to hold your ADR, to agree to the
amendment and to be bound by the ADRs and the deposit agreement
as amended. An amendment to the deposit agreement may include
extending such agreement.

         
The Bank of New York will terminate the deposit
agreement if we ask it to do so. In such case, The Bank of New
York must notify you at least 90 days before termination.
The Bank of New York may also terminate the deposit agreement if
The Bank of New York has told us that it would like to resign
and we have not appointed a new depositary bank within
90 days.

         
After termination, The Bank of New York and its
agents will be required to do only the following under the
deposit agreement:

  • collect distributions on the deposited securities;
 
  • sell rights and other property; and
 
  • deliver shares and other deposited securities
upon cancellation of ADRs.

         
One year after termination, The Bank of New York
may sell any remaining deposited securities by public or private
sale. After that, The Bank of New York will hold the proceeds of
the sale, as well as any other cash it is holding under the
deposit agreement for the pro rata benefit of the ADR holders
that have not surrendered their ADRs. It will not invest the
money and will have no liability for interest. The Bank of New
York’s only obligations will be an indemnification
obligation and an obligation to account for the proceeds of the
sale and other cash. After termination, our only obligations
will be an indemnification obligation and our obligation to pay
specified amounts to The Bank of New York.

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Limitations On Obligations and Liability to
ADR Holders

         
The deposit agreement expressly limits our
obligations and the obligations of The Bank of New York, and it
limits our liability and the liability of The Bank of New York.
We and The Bank of New York:

  • are only obligated to take the actions
specifically provided for in the deposit agreement without
negligence or bad faith;
 
  • are not liable if either is prevented or delayed
by law or circumstances beyond their control from performing our
obligations under the deposit agreement;
 
  • are not liable if either exercises discretion
permitted under the deposit agreement;
 
  • have no obligation to become involved in a
lawsuit or other proceeding related to the ADRs or the deposit
agreement on your behalf of any other party; and
 
  • may rely upon any documents they believe in good
faith to be genuine and to have been signed or presented by the
proper party.

         
In the deposit agreement, we and The Bank of New
York agree to indemnify each other under designated
circumstances.

Requirements for Depositary Actions

         
The ADRs are transferable on the books of The
Bank of New York, provided that The Bank of New York may close
the transfer books at any time or from time to time when it
deems expedient in connection with the performance of its
duties. Before The Bank of New York will issue or register
transfer of an ADR, make a distribution on an ADR, or process a
withdrawal of shares, The Bank of New York may require:

  • payment of stock transfer or other taxes or other
governmental charges and transfer or registration fees charged
by third parties for the transfer of any shares or other
deposited securities;
 
  • production of satisfactory proof of the identity
and genuineness of any signature or other information it deems
necessary; and
 
  • compliance with regulations it may establish,
from time to time, consistent with the deposit agreement,
including presentation of transfer documents.

         
The Bank of New York may refuse to deliver,
transfer or register transfers of ADRs generally when our books
or the books of The Bank of New York are closed, or at any time
if The Bank of New York or we think it advisable to do so.

         
You have the right to cancel your ADRs and
withdraw the underlying shares at any time except:

  • when temporary delays arise because: (1) The
Bank of New York or we have closed its or our transfer books;
(2) the transfer of shares is blocked to permit voting at a
shareholders’ meeting; or (3) we are paying a dividend
on the shares;
 
  • when you or other ADR holders seeking to withdraw
shares owe money to pay fees, taxes and similar charges; or
 
  • when it is necessary to prohibit withdrawals in
order to comply with any laws or governmental regulations that
apply to ADRs or to the withdrawal of shares or other deposited
securities.

The right of withdrawal may not be limited by any
other provision of the deposit agreement.

Pre-Release of ADRs

         
In compliance with the provisions of the deposit
agreement, The Bank of New York may issue ADRs before deposit of
the underlying shares. This is called a pre-release of the ADR.
The Bank of New York may also deliver shares upon cancellation
of pre-released ADRs, even if the ADRs are cancelled before the
pre-

95


 

release transaction has been closed out. A
pre-release is closed out as soon as the underlying shares are
delivered to The Bank of New York. The Bank of New York may
receive ADRs instead of shares to close out a pre-release. The
Bank of New York may pre-release ADRs only under the following
conditions:

  • before or at the time of the pre-release, the
person to whom the pre-release is being made must represent to
The Bank of New York in writing that it or its customer owns the
shares or ADRs to be deposited;
 
  • the pre-release must be fully collateralized with
cash or other collateral that The Bank of New York considers
appropriate; and
 
  • The Bank of New York must be able to close out
the pre-release on not more than five business days’ notice.

         
In addition, The Bank of New York will limit the
number of ADRs that may be outstanding at any time as a result
of pre-release to 30.0% of total shares deposited, although The
Bank of New York may disregard the limit from time to time, if
it thinks it is appropriate to do so.

96


 

SHARES ELIGIBLE FOR FUTURE SALE

         
Upon completion of this offering, we will have
outstanding 4,200,000 ADSs representing approximately 28.0% of
our ordinary shares. All of the ADSs sold in this offering will
be freely transferable by persons other than our
“affiliates” without restriction or further
registration under the Securities Act. Sales of substantial
amounts of our ADSs in the public market could adversely affect
prevailing market prices of our ADSs. Prior to this offering,
there has been no public market for our ordinary shares or the
ADSs, and while we have applied for the ADSs to be quoted on the
Nasdaq National Market, we cannot assure you that a regular
trading market will develop in the ADSs. We do not expect that a
trading market will develop for our ordinary shares not
represented by the ADSs.

Lock-Up Agreements

         
Our directors, executive officers and
shareholders have signed lock-up agreements under which they
have agreed, subject to some exceptions, not to transfer or
dispose of, directly or indirectly, any of our ordinary shares,
in the form of ADSs or otherwise, or any securities convertible
into or exchangeable or exercisable for shares of our ordinary
shares, in the form of ADSs or otherwise, for a period of
180 days in the case of all these persons, excluding the
holders of our Series C preferred shares, and for one year
in the case of the holders of our Series C preferred
shares, after the date this registration statement becomes
effective. After the expiration of the 180-day period, the
ordinary shares or ADSs held by our directors, executive
officers or shareholders may be sold subject to the restrictions
under Rule 144 under the Securities Act or by means of
registered public offerings.

Rule 144

         
In general, under Rule 144 as currently in
effect, a person (or persons whose shares are aggregated) who
has beneficially owned our ordinary shares for at least one
year, is entitled to sell within any three-month period
commencing 90 days after the effective date of this
offering a number of ordinary shares that does not exceed the
greater of the following:

  • 1.0% of the then outstanding ordinary shares, in
the form of ADSs or otherwise, which will equal approximately
300,309 ordinary shares immediately after this offering; or
 

  •  the average weekly trading volume of our ordinary
shares in the form of ADSs or otherwise, during the four
calendar weeks preceding the date on which notice of the sale is
filed with the SEC.

         
Sales under Rule 144 must be through
unsolicited brokers’ transactions. They are also subject to
manner of sale provisions, notice requirements and the
availability of current public information about us.

Rule 144(k)

         
Under Rule 144(k), a person who is not our
affiliate at any time during the three months preceding a sale,
and who has beneficially owned the ordinary shares, in the form
of ADSs or otherwise, proposed to be sold for at least two
years, including the holding period of any prior owner other
than an affiliate, is entitled to sell those shares without
complying with the manner of sale, public information, volume
limitation or notice provisions of Rule 144. Therefore,
unless otherwise restricted, “144(k) shares” may be
sold at any time.

Rule 701

         
In general, under Rule 701 of the Securities
Act as currently in effect, each of our employees, consultants
or advisors who purchases ordinary shares, in the form of ADSs
or otherwise, from us in connection with a compensatory stock
plan or other written agreement is eligible to resell such
shares in reliance on Rule 144, but without compliance with
some of the restrictions, including the holding period,
contained in Rule 144.

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Registration Rights

         
Upon completion of this offering, certain holders
of our ordinary shares or their transferees will be entitled to
request that we register their ordinary shares under the
Securities Act, following the expiration of the lock-up
agreements described above. See “Description of Share
Capital — Registration Rights.”

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TAXATION

         
The following summary of the material Cayman
Islands and United States federal income tax consequences of an
investment in our ADSs or ordinary shares is based upon laws and
relevant interpretations thereof in effect as of the date of
this prospectus, all of which are subject to change. This
summary does not deal with all possible tax consequences
relating to an investment in our ADSs or ordinary shares, such
as the tax consequences under state, local and other tax laws.
To the extent that the discussion relates to matters of Cayman
Islands tax law, it represents the opinion of Maples and Calder
Asia, special Cayman Islands counsel to us. To the extent the
discussion relates to matters of United States law or legal
conclusions and subject to the qualification herein, it
represents the opinion of Latham & Watkins LLP, our
special U.S. counsel.

Cayman Islands Taxation

         
The Cayman Islands currently levies no taxes on
individuals or corporations based upon profits, income, gains or
appreciation and there is no taxation in the nature of
inheritance tax or estate duty. There are no other taxes likely
to be material to us levied by the government of the Cayman
Islands except for stamp duties which may be applicable on
instruments executed in, or brought within the jurisdiction of
the Cayman Islands. The Cayman Islands is not party to any
double tax treaties. There are no exchange control regulations
or currency restrictions in the Cayman Islands.

United States Federal Income
Taxation

         
The following discussion describes the material
United States federal income tax consequences under present law
of an investment in the ADSs or ordinary shares. This summary
applies only to investors that hold the ADSs or ordinary shares
as capital assets and that have the U.S. dollar as their
functional currency. This discussion is based on the tax laws of
the United States as in effect on the date of this prospectus
and on United States Treasury regulations in effect or, in some
cases, proposed, as of the date of this prospectus, as well as
judicial and administrative interpretations thereof available on
or before such date. All of the foregoing authorities are
subject to change, which change could apply retroactively and
could affect the tax consequences described below.

         
The following discussion does not deal with the
tax consequences to any particular investor or to persons in
special tax situations such as:

  • banks;
 
  • financial institutions;
 
  • insurance companies;
 
  • broker dealers;
 
  • traders that elect to mark to market;
 
  • tax-exempt entities;
 
  • persons liable for alternative minimum tax;
 
  • persons holding an ADS or ordinary share as part
of a straddle, hedging, conversion or integrated transaction;
 
  • holders that actually or constructively own 10%
or more of our voting stock; or
 
  • persons holding ADSs or ordinary shares through
partnerships or other pass-through entities.

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Prospective purchasers are urged to consult their
tax advisors about the application of the United States federal
tax rules to their particular circumstances as well as the state
and local and foreign tax consequences to them of the purchase,
ownership and disposition of ADSs or ordinary shares.

         
The discussion below of the United States federal
income tax consequences to “U.S. Holders” will apply
if you are the beneficial owner of ADSs or ordinary shares and
you are

  • a citizen or resident of the United States;
 
  • a corporation or partnership organized under the
laws of the United States, any State or the District of Columbia;
 
  • an estate whose income is subject to United
States federal income taxation regardless of its source;
 
  • a trust that (1) is subject to the
supervision of a court within the United States and the control
of one or more United States persons or (2) has a valid
election in effect under applicable U.S. Treasury regulations to
be treated as a United States person.

         
If you are not described as a U.S. Holder, you
will be considered a “Non-U.S. Holder.” Non-U.S.
Holders should consult the discussion below regarding the United
States federal income tax consequences applicable to
Non-U.S. Holders.

         
The discussion below assumes that the
representations contained in the deposit agreement are true and
that the obligations in the deposit agreement and any related
agreement will be complied with in accordance with the terms. If
you hold ADSs, you should be treated as the holder of the
underlying ordinary shares represented by those ADSs for United
States federal income tax purposes.

U.S. Holders

          Taxation
of Dividends and Other Distributions on the ADSs or Ordinary
Shares

         
Subject to the passive foreign investment company
rules discussed below, the gross amount of dividends paid with
respect to the ADSs or ordinary shares, generally will be
included in your gross income as ordinary income on the date of
receipt by the depositary, in the case of ADSs, or by you, in
the case of ordinary shares, but only to the extent that the
distribution is paid out of our current or accumulated earnings
and profits. For this purpose, earnings and profits will be
computed under United States federal income tax principles. The
dividends will not be eligible for the dividends-received
deduction allowed to corporations in respect of dividends
received from other U.S. corporations. To the extent that the
amount of the distribution exceeds our current and accumulated
earnings and profits, it will be treated first as a tax-free
return of your tax basis in your ADSs or ordinary shares, and to
the extent the amount of the distribution exceeds your tax
basis, the excess will be taxed as capital gain.

         
Dividends paid in RMB will be included in your
income as a U.S. dollar amount based on the exchange rate in
effect on the date of receipt by the depositary, in the case of
ADSs, or by you, in the case of ordinary shares, regardless of
whether the payment is in fact converted into U.S. dollars at
that time. If you do not receive U.S. dollars on the date the
dividend is distributed, you will be required to include either
gain or loss in income when you later exchange the RMB for U.S.
dollars. The gain or loss will be equal to the difference
between the U.S. dollar value of the amount that you include in
income upon receipt of the dividend and the amount that you
receive when you actually exchange the RMB for U.S. dollars. The
gain or loss generally will be ordinary income or loss from
United States sources. If we distribute to you non-cash
property, you will include in income an amount equal to the U.S.
dollar equivalent of the fair market value of the property on
the date that it is distributed.

         
Under recently enacted legislation, with respect
to non-corporate taxpayers for taxable years beginning after
December 1, 2002 and before January 1, 2009 such
dividends may be taxed at the lower applicable capital gains
rate provided that (1) the ADSs or ordinary shares are
readily tradable on an established securities market in the
United States, (2) we are not a passive foreign investment
company (as

100


 

discussed below) or a foreign personal holding
company (as discussed below) for either our taxable year in
which the dividend was paid or the preceding taxable year, and
(3) certain holding period requirements are met. You should
consult your tax advisors regarding the availability of the
lower rate for dividends paid with respect to our ADSs or
ordinary shares.

         
Dividends will constitute foreign source income
for foreign tax credit limitation purposes. The limitation on
foreign taxes eligible for credit is calculated separately with
respect to specific classes of income. For this purpose,
dividends distributed by us with respect to the ADSs or ordinary
shares will be “passive income” or, in the case of
certain U.S. Holders, “financial services income.”

          Taxation
of Disposition of Shares

         
Subject to the passive foreign investment company
rules discussed below, you will recognize taxable gain or loss
on any sale, exchange or other taxable disposition of an ADS or
ordinary share equal to the difference between the amount
realized (in U.S. dollars) for the ADS or ordinary share and
your tax basis (in U.S. dollars) in the ADS or ordinary share.
If the consideration you receive for the ADS or ordinary share
is not paid in U.S. dollars, the amount realized will be the
U.S. dollar value of the payment received. In general, the U.S.
dollar value of such a payment will be determined on the date of
receipt of payment if you are a cash basis taxpayer and on the
date of disposition if you are an accrual basis taxpayer.
However, if the ADSs or ordinary shares are treated as traded on
an established securities market and you are either a cash basis
taxpayer or an accrual basis taxpayer who has made a special
election, you will determine the U.S. dollar value of the amount
realized in a foreign currency by translating the amount
received at the spot rate of exchange on the settlement date of
the sale. The gain or loss generally will be capital gain or
loss. If you are an individual who has held the ADS or ordinary
share for more than one year, you will be eligible for reduced
rates of taxation. The deductibility of capital losses is
subject to limitation. Any such gain or loss that you recognize
will generally be treated as United States source income or loss.

          Passive
Foreign Investment Company

         
We believe that we are not a passive foreign
investment company for United Sates federal income tax purposes
and do not expect to become a passive foreign investment company
in the future. A non-U.S. corporation is considered a passive
foreign investment company for any taxable year if either

  • at least 75% of its gross income is passive
income, or
 
  • at least 50% of the value of its assets (based on
an average of the quarterly values of the assets during a
taxable year) is attributable to assets that produce or are held
for the production of passive income.

         
We will be treated as owning our proportionate
share of the assets and earning our proportionate share of the
income of any other corporation in which we own, directly or
indirectly, more than 25% (by value) of the stock.

         
We must make a separate determination each year
as to whether we are a passive foreign investment company. As a
result, our passive foreign investment company status may
change. In particular, fluctuation in the market price of our
ADSs or ordinary shares may result in us becoming a passive
foreign investment company.

         
If we are a passive foreign investment company
for any taxable year during which you hold ADSs or ordinary
shares, you will be subject to special tax rules with respect to
any “excess distribution” that you receive and any
gain you realize from a sale or other disposition (including a
pledge) of the ADSs or ordinary shares, unless you make a
“mark-to-market” election as discussed below.
Distributions you receive in a taxable year that are greater
than 125% of the average annual distributions you received
during the shorter of

101


 

the three preceding taxable years or your holding
period for the ADSs or ordinary shares will be treated as an
excess distribution. Under these special tax rules

  • the excess distribution or gain will be allocated
ratably over your holding period for the ADSs or ordinary shares,
 
  • the amount allocated to the current taxable year,
and any taxable year prior to the first taxable year in which we
were a passive foreign investment company, will be treated as
ordinary income, and
 
  • the amount allocated to each other year will be
subject to tax at the highest tax rate in effect for that year
and the interest charge generally applicable to underpayments of
tax will be imposed on the resulting tax attributable to each
such year.

         
The tax liability for amounts allocated to years
prior to the year of disposition or “excess
distribution” cannot be offset by any net operating losses
for such years, and gains (but not losses) realized on the sale
of the ADSs or ordinary shares cannot be treated as capital,
even if you hold the ADSs or ordinary shares as capital assets.

         
If we are a passive foreign investment company,
you may avoid taxation under the rules described above by making
a “qualified electing fund” election to include your
share of our income on a current basis, or a “deemed
sale” election once we no longer qualify as a passive
foreign investment company. However, you may make a qualified
electing fund election only if we agree to furnish you annually
with certain tax information, and we do not presently intend to
prepare or provide such information.

         
Alternatively, a U.S. Holder of “marketable
stock” in a passive foreign investment company may make a
mark-to-market election for stock of a passive foreign
investment company to elect out of the tax treatment discussed
three paragraphs above. If you make a mark-to-market election
for the ADSs or ordinary shares, you will include in income each
year an amount equal to the excess, if any, of the fair market
value of the ADSs or ordinary shares as of the close of your
taxable year over your adjusted basis in such ADSs or ordinary
shares. You are allowed a deduction for the excess, if any, of
the adjusted basis of the ADSs or ordinary shares over their
fair market value as of the close of the taxable year. However,
deductions are allowable only to the extent of any net
mark-to-market gains on the ADSs or ordinary shares included in
your income for prior taxable years. Amounts included in your
income under a mark-to-market election, as well as gain on the
actual sale or other disposition of the ADSs or ordinary shares,
are treated as ordinary income. Ordinary loss treatment also
applies to the deductible portion of any mark-to-market loss on
the ADSs or ordinary shares, as well as to any loss realized on
the actual sale or disposition of the ADSs or ordinary shares,
to the extent that the amount of such loss does not exceed the
net mark-to-market gains previously included for such ADSs or
ordinary shares. Your basis in the ADSs or ordinary shares will
be adjusted to reflect any such income or loss amounts. The tax
rules that apply to distributions by corporations which are not
passive foreign investment companies would apply to
distributions by us.

         
The mark-to-market election is available only for
stock which is regularly traded on a qualified exchange or other
market, as defined in applicable Treasury regulations. We expect
that the ADSs and the ordinary shares will be listed on Nasdaq
National Market and, consequently, the mark-to-market election
would be available to you were we to be or become a passive
foreign investment company.

         
If you hold ADSs or ordinary shares in any year
in which we are a passive foreign investment company, you would
be required to file Internal Revenue Service Form 8621
regarding distributions received on the ADSs or ordinary shares
and any gain realized on the disposition of the ADSs or ordinary
shares.

          Foreign
Personal Holding Company

         
Depending on the degree of direct or indirect
ownership of our shares (including shares represented by ADSs)
by individuals who are U.S. citizens or residents (directly,
indirectly or by attribution), we may constitute a foreign
personal holding company. In general, a foreign corporation will
constitute a foreign personal holding company for United States
federal income tax purposes if more than 50% of the equity of the

102


 

corporation, measured by reference to voting
power or value of the corporation, is owned directly, indirectly
or by attribution by five or fewer individuals who are U.S.
citizens or residents and at least 60% (50% in taxable years
after the corporation qualifies as a foreign personal holding
company) of the foreign corporation’s income is passive
income. We believe that we are not a foreign personal holding
company and do not expect to become a foreign personal holding
company in the future. If we were treated as a foreign personal
holding company, all U.S. Holders of our shares or ADSs would be
treated as receiving a dividend at the end of our taxable year
in an amount equal to each such holder’s pro rata share of
our “undistributed foreign personal holding company
income” (very generally, all of our taxable income less a
dividend paid deduction).

Non-U.S. Holders

         
If you are a Non-U.S. Holder, you generally will
not be subject to United States federal income tax on dividends
paid by us unless the income is effectively connected with your
conduct of a trade or business in the United States.

         
You generally will not be subject to United
States federal income tax on any gain attributable to a sale or
other disposition of the ADSs or ordinary shares unless such
gain is effectively connected with your conduct of a trade or
business within the United States or you are a natural person
who is present in the United States for 183 days or more
and certain other conditions exist.

         
Dividends and gains that are effectively
connected with your conduct of a trade or business in the United
States generally will be subject to tax in the same manner as
they would be if you were a U.S. Holder. Effectively connected
dividends and gains received by a corporate Non-U.S. Holder may
also be subject to an additional branch profits tax at a 30%
rate or a lower tax treaty rate.

Information Reporting and Backup
Withholding

         
In general, information reporting for
U.S. federal income tax purposes will apply to
distributions made on the ADSs or ordinary shares paid within
the United States to a non-corporate United States person and on
sales of the ADSs or ordinary shares to or through a United
States office of a broker by a non-corporate United States
person. Payments made outside the United States will be subject
to information reporting in limited circumstances.

         
In addition, backup withholding of
U.S. federal income tax will apply to distributions made on
ADSs or ordinary shares within the United States to a
non-corporate United States person and on sales of ADSs or
ordinary shares to or through a United States office of a broker
by a non-corporate United States person who:

  • fails to provide an accurate taxpayer
identification number,
 
  • is notified by the Internal Revenue Service that
backup withholding will be required, or
 
  • fails to comply with applicable certification
requirements.

         
The amount of any backup withholding collected
will be allowed as a credit against United States federal income
tax liability provided that appropriate returns are filed.

         
A Non-U.S. Holder generally may eliminate the
requirement for information reporting and backup withholding by
providing certification of its foreign status to the payer,
under penalties of perjury, on Internal Revenue Service
Form W-8BEN.

103


 

UNDERWRITING

         
We, together with the selling shareholders,
intend to offer the ADSs in the United States and Canada through
the U.S. underwriters and elsewhere through the international
managers. Merrill Lynch, Pierce, Fenner & Smith
Incorporated, North Tower, World Financial Center,
New York, New York 10281-1201, is acting as
representative of the U.S. underwriters named below. Subject to
the terms and conditions contained in the U.S. underwriting
agreement among us, the selling shareholders and the U.S.
underwriters, and concurrently with the sale of 2,100,000 ADSs
to the international managers, we and the selling shareholders
have agreed to sell to the U.S. underwriters, and the U.S.
underwriters severally have agreed to purchase from us and the
selling shareholders, the number of ADSs listed opposite their
names below.

         
Number
U.S. Underwriter of ADSs


Merrill Lynch, Pierce, Fenner & Smith

       

Incorporated

       
     
 

U.S. Bancorp Piper Jaffray Inc.

       
     
 

SoundView Technology Corporation

       
     
 

Total

       
     
 

         
We and the selling shareholders have also entered
into an international purchase agreement with the international
managers for the sale of the ADSs outside the United States and
Canada for whom Merrill Lynch Far East Limited, 18/F Asia
Pacific Finance Tower, 3 Garden Road, Central, Hong Kong,
is acting as the lead manager. Subject to the terms and
conditions contained in the international purchase agreement,
and concurrently with the sale of 2,100,000 ADSs to the
U.S. underwriters, we and the selling shareholders have
agreed to sell to the international managers, and the
international managers severally have agreed to purchase from us
and the selling shareholders, the number of ADSs listed opposite
their names below.

         
Number
International Manager of ADSs


Merrill Lynch Far East Limited

       
     
 

CLSA Limited

       
     
 

BOCI Asia Limited

       
     
 

Total

       
     
 

         
The public offering price per ADS and the total
underwriting discount per ADS are identical under the U.S.
underwriting agreement and the international purchase agreement.
Merrill Lynch, Pierce, Fenner & Smith Incorporated is
acting as the global coordinator and bookrunner for the offering.

         
The U.S. underwriters and the international
managers, collectively referred to as the underwriters in this
section, have agreed to purchase all of the ADSs sold under the
U.S. underwriting agreement and the international purchase
agreement if any of these ADSs are purchased. If an underwriter
defaults, the U.S. underwriting agreement and the international
purchase agreement provide that, in certain circumstances, the
purchase commitments of the nondefaulting underwriters may be
increased or the U.S. underwriting agreement and the
international purchase agreement may be terminated. The closings
for the sale of the ADSs to be purchased by the U.S.
underwriters and the international managers are conditioned on
one another.

         
We and the selling shareholders have agreed to
indemnify the U.S. underwriters and the international managers
against certain liabilities, including liabilities under the
Securities Act, or to contribute to payments the U.S.
underwriters and the international managers may be required to
make in respect of those liabilities.

         
The underwriters are offering the ADSs, subject
to prior sale, when, as and if issued to and accepted by them,
subject to the approval of legal matters by their counsel,
including the validity of the ADSs, and other conditions
contained in the U.S. underwriting agreement and the
international purchase agreement, such as the receipt by the
underwriters of officer’s certificates and legal opinions.
The underwriters reserve the right to withdraw, cancel or modify
offers to the public and to reject orders in whole or in part.

104


 

Commissions and Discounts

         
The U.S. underwriters have advised us and
the selling shareholders that the U.S. underwriters propose
initially to offer the ADSs to the public at the public offering
price on the cover page of this prospectus, and to certain
dealers at that price less a concession not in excess of
US$                    per
ADS. The U.S. underwriters may allow, and the dealers may
reallow, a concession not in excess of US$ per ADS to other
dealers. After the initial public offering, the public offering
price, concession and discount may be changed.

Overallotment Options

         
The selling shareholders have granted to the
U.S. underwriters and the international managers an option,
exercisable for 30 days from the date of this prospectus,
to purchase up to 250,000 and 250,000, respectively, additional
ADSs at the public offering price less the underwriting
discount. The U.S. underwriters and the international
managers may exercise such option to purchase solely for the
purpose of covering overallotments, if any, incurred in the sale
of the ADSs offered hereby. If the underwriters exercise such
option, each will become obligated, subject to conditions
contained in the U.S. underwriting agreement or
international purchase agreement, to purchase a number of
additional ADSs proportionate to that underwriter’s initial
amount reflected in the above table.

         
The following table shows the per ADS initial
public offering price, underwriting discount and the proceeds
before expenses to us and the selling shareholders. These
amounts are shown assuming both no exercise and full exercise of
the overallotment options.

                         
Per ADS Without Option With Option



Public offering price

  US$       US$       US$    

Underwriting discount

  US$       US$       US$    

Proceeds, before expenses, to us and the selling
shareholders

  US$       US$       US$    

Intersyndicate Agreement

         
The U.S. underwriters and the international
managers have entered into an intersyndicate agreement that
provides for the coordination of their activities. Under the
intersyndicate agreement, the U.S. underwriters and the
international managers may sell the ADSs to each other for
purposes of resale at the initial public offering price, less an
amount not greater than the selling concession. Under the
intersyndicate agreement, the U.S. underwriters and any
dealer to whom they sell the ADSs will not offer to sell or sell
the ADSs to non-U.S. or non-Canadian persons or to persons they
believe intend to resell to non-U.S. or non-Canadian persons,
except in the case of transactions under the intersyndicate
agreement. Similarly, the international managers and any dealer
to whom they sell the ADSs will not offer to sell or sell the
ADSs to U.S. persons or Canadian persons or to persons they
believe intend to resell to U.S. or Canadian persons, except in
the case of transactions under the intersyndicate agreement.

No Sale of Similar Securities

         
We and our executive officers, directors and
shareholders have agreed, with exceptions, not to sell or
transfer any of our ordinary shares or ADSs for 180 days in
the case of all of these persons, excluding the holders of our
Series C preferred shares, and for one year in the case of
the holders of our Series C preferred shares, after the
date of this prospectus without first obtaining the written
consent of the global coordinator and bookrunner. Specifically,
we and these other individuals have agreed not to directly or
indirectly:

  • offer, pledge, sell or contract to sell any
ordinary shares and ADSs,
 
  • sell any option or contract to purchase any
ordinary shares and ADSs,
 
  • purchase any option or contract to sell any
ordinary shares and ADSs,
 
  • grant any option, right or warrant for the sale
of any ordinary shares and ADSs,

105


 
  • lend or otherwise dispose of or transfer any
ordinary shares and ADSs, or
 
  • enter into any swap or other agreement that
transfers, in whole or in part, the economic consequence of
ownership of any ordinary shares and ADS whether any such swap
or transaction is to be settled by delivery of shares, ADS or
other securities, in cash or otherwise.

         
This lock-up provision applies to the ordinary
shares, ADSs and to securities convertible into or exchangeable
or exercisable for or repayable with the ordinary shares or
ADSs. It also applies to the ordinary shares and ADSs owned now
or acquired later by the person executing the agreement or for
which the person executing the agreement later acquires the
power of disposition.

Quotation on the Nasdaq National
Market

         
ADSs have been approved for quotation on the
Nasdaq National Market, subject to notice of issuance, under the
symbol “CTRP.”

         
Before this offering, there has been no public
market for our ordinary shares or ADSs. The public offering
price will be determined through negotiations among us and the
global coordinator and bookrunner. In addition to prevailing
market conditions, the factors to be considered in determining
the initial public offering price are:

  • the valuation multiples of publicly traded
companies that the global coordinator and bookrunner believes to
be comparable to us,
 
  • our financial information,
 
  • the history of, and the prospects for, our
company and the industry in which we compete,
 
  • an assessment of our management, our past and
present operations, and the prospects for, and timing of, our
future revenues,
 
  • the present state of our development, and
 
  • the above factors in relation to market values
and various valuation measures of other companies engaged in
activities similar to ours.

         
An active trading market for the ADSs may not
develop. It is also possible that after the offering the ADSs
will not trade in the public market at or above the public
offering price.

         
The underwriters do not expect to sell more than
5.0% of the ADSs in the aggregate to accounts over which they
exercise discretionary authority.

Price Stabilization, Short Positions and
Penalty Bids

         
Until the distribution of the ADSs is completed,
SEC rules may limit underwriters and selling group members from
bidding for and purchasing our ADSs. However, the U.S.
representative may engage in transactions that stabilize the
price of the ADSs, such as bids or purchases to peg, fix or
maintain that price.

         
If the underwriters create a short position in
the ADSs in connection with the offering, i.e., if they sell
more shares than are listed on the cover of this prospectus, the
U.S. representative may reduce that short position by purchasing
the ADSs in the open market. The U.S. representative may also
elect to reduce any short position by exercising all or part of
the overallotment option described above. The underwriters may
sell more ADSs than could be covered by exercising all of the
overallotment option, in which case, they would have to cover
these sales through open market purchases. Purchases of the ADSs
to stabilize its price or to reduce a short position may cause
the price of the ADSs to be higher than it might be in the
absence of such purchases.

         
The U.S. representative may also impose a penalty
bid on underwriters and selling group members. This means that
if the U.S. representative purchase ADSs in the open market to
reduce the underwriter’s short position or to stabilize the
price of such ADSs, they may reclaim the amount of the selling
concession

106


 

from the underwriters and selling group members
who sold those ADSs. The imposition of a penalty bid may also
affect the price of the shares in that it discourages resales of
those ADSs.

         
Neither we nor the selling shareholders nor any
of the underwriters makes any representation or prediction as to
the direction or magnitude of any effect that the transactions
described above may have on the price of the ADSs. In addition,
neither we nor the selling shareholders nor any of the
underwriters makes any representation that the U.S.
representative or the lead manager will engage in these
transactions or that these transactions, once commenced, will
not be discontinued without notice.

Selling Restrictions

         
This prospectus does not constitute an offer of,
or an invitation by or on behalf of, us or by or on behalf of
the underwriters, to subscribe for or purchase, any of the ADSs
in any jurisdiction to any person to whom it is unlawful to make
such an offer or solicitation in that jurisdiction. The
distribution of this prospectus and the offering of the ADSs in
certain jurisdictions may be restricted by law. We and the
underwriters require persons into whose possession this
prospectus comes to inform themselves about and to observe any
such restrictions.

         
We will not offer or sell any ordinary shares or
ADSs to any member of the public in the Cayman Islands.

Electronic Distributions

         
A prospectus in electronic format may be made
available on Web sites maintained by one or more of the
underwriters for sale to their online brokerage account holders.
Internet distributions will be allocated by the underwriters
that will make Internet distributions on the same basis as other
allocations. Other than the prospectus in electronic format, the
information on these Web sites is not part of this prospectus or
the registration statement of which this prospectus forms a
part, has not been approved or endorsed by us or any underwriter
in its capacity as underwriter, and should not be relied upon by
investors.

         
In addition, a prospectus in electronic format is
being made available on an Internet website maintained by
E*TRADE Securities, Inc. SoundView Technology Corporation,
pursuant to a Relationship Agreement with E*TRADE, may offer
shares that it underwrites to customers of E*TRADE. The
underwriters may allocate a number of ADSs to SoundView
Technology Corporation for sale to online brokerage account
holders of E*TRADE Securities, Inc. These online brokerage
account holders will have the opportunity to purchase ADSs using
the Internet in accordance with procedures established by
E*TRADE Securities, Inc.

Settlement Cycle

         
We expect that delivery of the ADSs will be made
against payment therefor on or about the date specified in the
last paragraph of the cover page of this prospectus, which is
the                     business
day in New York following the date of this prospectus. Pursuant
to Rule 15c6-1 under the U.S. Securities Exchange Act of
1934, as amended, or the Exchange Act, trades in the secondary
market generally are required to settle in three business days
unless the parties to any such trade expressly agree otherwise.
Accordingly, purchasers who wish to trade the ADSs on the date
of this prospectus or the next four succeeding business days
will be required, by virtue of the fact that these securities
will settle in T+3, to specify an alternate settlement cycle at
the time of any such trade to prevent a failed settlement and
should consult their own advisors.

107


 

LEGAL MATTERS

         
The validity of the ADSs and certain other legal
matters with respect to U.S. federal and New York laws in
connection with this offering will be passed upon for us by
Latham & Watkins LLP. Certain legal matters with
respect to U.S. federal and New York laws in connection
with this offering will be passed upon for the underwriters by
Simpson Thacher & Bartlett LLP. The validity of the
ordinary shares represented by the ADSs offered in this offering
will be passed upon for us by Maples and Calder Asia. Legal
matters as to Chinese law will be passed upon for us by
Commerce & Finance Law Offices and for the underwriters
by Jingtian & Gongcheng. Legal matters as to Hong Kong
law will be passed upon for us by Boughton Peterson Yang
Anderson. Latham & Watkins LLP may rely upon Maples and
Calder Asia with respect to matters governed by Cayman
Islands’ law, upon Commerce & Finance Law Offices
with respect to matters governed by Chinese law, and upon
Boughton Peterson Yang Anderson with respect to matters governed
by Hong Kong law.

EXPERTS

         
Our consolidated financial statements as of and
for the years ended December 31, 2001 and 2002, and as of
and for the nine months ended September 30, 2003, included
in this prospectus have been audited by PricewaterhouseCoopers,
independent public accountants, as stated in their reports
appearing elsewhere in this prospectus, and are included in
reliance upon the reports of PricewaterhouseCoopers given on
their authority as experts in auditing and accounting.

         
The offices of PricewaterhouseCoopers are located
at 19th Floor, Shui On Plaza, 333 Huai Hai Zhong Road, Shanghai,
200021, China.

WHERE YOU CAN FIND ADDITIONAL
INFORMATION

         
We have filed with the SEC a registration
statement on Form F-1, including relevant exhibits and
schedules under the Securities Act with respect to the ADSs and
underlying ordinary shares, to be sold in this offering. This
prospectus, which constitutes a part of the registration
statement, does not contain all of the information contained in
the registration statement. You should read the registration
statement and its exhibits and schedules for further information
with respect to us, our shares and our ADSs.

         
Immediately upon completion of this offering, we
will become subject to periodic reporting and other
informational requirements of the Exchange Act as applicable to
foreign private issuers. Accordingly, we will be required to
file reports, including annual reports on Form 20-F, and
other information with the SEC. As a foreign private issuer, we
are exempt from the rules of the Exchange Act prescribing the
furnishing and content of proxy statements to shareholders. All
information filed with the SEC can be inspected and copied at
the public reference facilities maintained by the SEC at 450
Fifth Street, N.W., Washington, D.C. 20549. You can request
copies of these documents upon payment of a duplicating fee, by
writing to the SEC. Please call the SEC at 1-800-SEC-0330 for
further information on the operation of the public reference
rooms. Additional information may also be obtained over the
Internet at the SEC’s website at www.sec.gov. Our SEC
filings, including this registration statement, and other
information may also be inspected at the offices of the Nasdaq
National Market, Reports Section, 1735 K Street, N.W.
Washington, D.C. 20006.

         
We will furnish the depositary referred to under
“Description of American Depositary Shares” with
annual reports, which will include annual audited consolidated
financial statements prepared in accordance with U.S. GAAP.
The depositary has agreed that, at our request, it will promptly
mail these reports to all registered holders of ADSs. We will
also furnish to the depositary all notices of shareholders’
meetings and other reports and communications that are made
generally available to our shareholders. The depositary will
arrange for the mailing of these documents to record holders of
ADSs. Please see “Description of American Depositary
Shares” for further details on the responsibilities of the
depositary.

108


 

CTRIP.COM INTERNATIONAL, LTD.

INDEX TO CONSOLIDATED FINANCIAL
STATEMENTS

         
Page

Year-End Financial Statements

       

Report of Independent Auditors

    F-2  

Consolidated Statements of Operations and
Comprehensive Income (Loss) for the Years Ended
December 31, 2000 (unaudited), 2001 and 2002

    F-3  

Consolidated Balance Sheets as of
December 31, 2000 (unaudited), 2001 and 2002

    F-4  

Consolidated Statements of Changes of
Shareholders’ Equity (Deficit) for the Years Ended
December 31, 2000 (unaudited), 2001 and 2002

    F-5  

Consolidated Statements of Cash Flows for the
Years Ended December 31, 2000 (unaudited),
2001 and 2002

    F-7  

Notes to the Consolidated Financial Statements
for the Years Ended December 31, 2000 (unaudited), 2001 and
2002

    F-8  

Interim Financial Statements

       

Report of Independent Auditors

    F-32  

Consolidated Statements of Operations and
Comprehensive Income for the Nine-Month Periods Ended
September 30, 2002 (unaudited) and 2003

    F-33  

Consolidated Balance Sheets as of
September 30, 2002 (unaudited) and 2003

    F-34  

Consolidated Statements of Changes in
Shareholders’ Equity (Deficit) for the Nine-Month Periods
Ended September 30, 2002 (unaudited) and 2003

    F-35  

Consolidated Statements of Cash Flows for the
Nine-Month Periods Ended September 30, 2002 (unaudited) and
2003

    F-36  

Notes to the Consolidated Financial Statememts
for the Nine-Month Periods Ended September 30, 2002
(unaudited) and 2003

    F-37  

F-1


 

REPORT OF INDEPENDENT AUDITORS

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
operations and comprehensive income (loss), of changes in
shareholders’ equity (deficit) and of cash flows expressed
in Renminbi present fairly, in all material respects, the
financial position of Ctrip.com International, Ltd. as of
December 31, 2001 and 2002, and the results of its
operations and its cash flows for the years ended
December 31, 2001 and 2002, in conformity with generally
accepted accounting principles in the United States of America.
These financial statements are the responsibility of Ctrip.com
International, Ltd.’s management; our responsibility is to
express an opinion on these financial statements based on our
audits. We conducted our audits of these statements in
accordance with generally accepted auditing standards in the
United States of America, which require that we plan and perform
the audits 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, assessing
the accounting principles used and significant estimates made by
management, and evaluating the overall financial statements
presentation. We believe that our audits provide a reasonable
basis for our opinion.

As discussed in Note 8 to the consolidated
financial statements, Ctrip.com International, Ltd. changed its
method of accounting for goodwill in the year ended
December 31, 2002, to conform to Statement of Financial
Accounting Standards No. 142, “Goodwill and Other
Intangible Assets.”

/s/ PricewaterhouseCoopers

Shanghai, People’s Republic of China

September 19, 2003

F-2


 

CTRIP.COM INTERNATIONAL, LTD.

CONSOLIDATED STATEMENTS OF OPERATIONS AND
COMPREHENSIVE INCOME (LOSS)

FOR THE YEARS ENDED DECEMBER 31, 2000,
2001 AND 2002

                                           
2000
Note (unaudited) 2001 2002 2002





RMB RMB RMB US$
(Note
2d)

Revenues:

                                       
 

Hotel reservation

            5,338,990       43,379,536       96,762,837       11,690,427  
 

Air-ticketing

            845,776       1,831,855       5,600,241       676,595  
 

Packaged tour

            310,750       594,802       432,295       52,228  
 

Others

            412,940       576,075       2,517,316       304,130  
             
     
     
     
 

Total revenues

            6,908,456       46,382,268       105,312,689       12,723,380  
             
     
     
     
 

Less: business tax and related surcharges

            (455,554 )     (2,398,690 )     (5,264,035 )     (635,976 )
             
     
     
     
 

Net revenues

            6,452,902       43,983,578       100,048,654       12,087,404  
             
     
     
     
 

Costs of services

            (1,949,479 )     (7,939,835 )     (13,673,013 )     (1,651,909 )
             
     
     
     
 

Gross profit

            4,503,423       36,043,743       86,375,641       10,435,495  
             
     
     
     
 

Operating expenses:

                                       
 

Product development

            (6,817,324 )     (7,759,081 )     (13,364,920 )     (1,614,686 )
 

Sales and marketing

            (17,378,333 )     (30,359,491 )     (32,308,004 )     (3,903,300 )
 

General and administrative

            (11,677,103 )     (14,814,417 )     (15,702,137 )     (1,897,058 )
 

Share-based compensation*

    13       —       (21,950 )     (462,140 )     (55,834 )
 

Amortization of goodwill and other intangible
assets

            (370,822 )     (1,806,611 )     (353,241 )     (42,677 )
 

Other expenses incurred for joint venture
companies

    6       —       (934,572 )     (915,056 )     (110,553 )
             
     
     
     
 

Total operating expenses

            (36,243,582 )     (55,696,122 )     (63,105,498 )     (7,624,108 )
             
     
     
     
 

Income (loss) from operations

            (31,740,159 )     (19,652,379 )     23,270,143       2,811,387  
             
     
     
     
 

Interest income

            735,178       2,190,983       319,230       38,568  

Interest expense

            —       (62,058 )     (41,261 )     (4,985 )

Other income (expense)

            (60,328 )     (79,858 )     1,014,872       122,613  
             
     
     
     
 

Income (loss) before income tax benefit
(expense), minority interests and share of loss of joint venture
companies

            (31,065,309 )     (17,603,312 )     24,562,984       2,967,583  
             
     
     
     
 

Income tax benefit (expense)

    10       7,087,874       2,341,899       (10,042,624 )     (1,213,302 )

Minority interests

            —       —       70,997       8,578  

Share of loss of joint venture companies

    6       —       —       (397,824 )     (48,064 )
             
     
     
     
 

Net income (loss) for the year

            (23,977,435 )     (15,261,413 )     14,193,533       1,714,795  
             
     
     
     
 

Accretion for Series B Redeemable
Convertible Preferred Shares

            (2,195,177 )     (14,316,112 )     (16,492,526 )     (1,992,549 )
             
     
     
     
 

Dividends to holders of Series A and
Series B Preferred Shares

            —       —       (16,762,322 )     (2,025,144 )
             
     
     
     
 

Net loss attributable to ordinary shareholders

            (26,172,612 )     (29,577,525 )     (19,061,315 )     (2,302,898 )
             
     
     
     
 

Other comprehensive income:

                                       
 

Translation adjustments

            22,851       39,433       38,904       4,700  
             
     
     
     
 

Comprehensive income (loss)

            (23,954,584 )     (15,221,980 )     14,232,437       1,719,495  
             
     
     
     
 

Loss per share

                                       

— Basic and diluted

    17       (3.03 )     (3.26 )     (2.00 )     (0.24 )
             
     
     
     
 

Weighted average ordinary shares outstanding

                                       

— Basic and diluted

            8,640,000       9,080,349       9,520,698       9,520,698  
             
     
     
     
 

* Share-based compensation was related to
the associated operating expense categories as follows:

                                       
 

Product development

            —       (4,662 )     (131,163 )     (15,847 )
 

Sales and marketing

            —       (1,399 )     (27,109 )     (3,275 )
 

General and administrative

            —       (15,889 )     (303,868 )     (36,712 )
             
     
     
     
 
              —       (21,950 )     (462,140 )     (55,834 )
             
     
     
     
 

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

F-3


 

CTRIP.COM INTERNATIONAL, LTD.

CONSOLIDATED BALANCE SHEETS

AS OF DECEMBER 31, 2000, 2001 AND
2002

                                           
2000
Note (unaudited) 2001 2002 2002





RMB RMB RMB US$
(Note 2d)

ASSETS

                                       

Current assets:

                                       
 

Cash

            88,907,851       42,463,537       38,931,118       4,703,473  
 

Restricted short-term investment

    4       —       24,829,800       —       —  
 

Accounts receivable

            1,705,447       7,369,159       13,969,400       1,687,717  
 

Due from related parties

    15       —       —       2,610,807       315,425  
 

Prepayments and other current assets

    5       1,601,089       3,896,008       3,406,593       411,568  
 

Deferred tax assets, current

    10       36,222       9,837,979       593,143       71,661  
             
     
     
     
 

Total current assets

            92,250,609       88,396,483       59,511,061       7,189,844  
             
     
     
     
 

Investments in joint venture companies

    6       —       —       5,102,176       616,421  

Long-term loans to related parties

    15       2,000,000       2,000,000       2,100,000       253,712  

Long-term deposits

            829,109       701,527       1,332,456       160,981  

Property, equipment and software

    7       5,288,388       9,571,311       18,707,187       2,260,114  

Goodwill

    8       7,702,552       6,915,849       9,515,849       1,149,660  

Other intangible assets

    8       2,359,281       1,339,373       986,132       119,140  

Deferred tax assets, non-current

    10       7,459,858       —       —       —  
             
     
     
     
 

Total assets

            117,889,797       108,924,543       97,254,861       11,749,872  
             
     
     
     
 

LIABILITIES

                                       

Current liabilities:

                                       
 

Short-term bank loan

    9       —       4,000,000       —       —  
 

Accounts payable

            1,797,037       589,304       1,001,359       120,979  
 

Due to related parties

    15       212,017       1,807,567       1,250,862       151,123  
 

Salary and welfare payable

            2,214,082       2,779,213       2,381,713       287,748  
 

Taxes payable

            147,167       706,147       1,937,586       234,090  
 

Advances from customers

            235,746       258,394       1,891,494       228,521  
 

Provisions for customer reward program

    2L       109,762       911,526       2,297,403       277,561  
 

Deferred acquisition costs

    3       3,008,749       —       —       —  
 

Other payables and accruals

    16       2,011,168       1,909,604       2,333,114       281,876  
             
     
     
     
 

Total current liabilities

            9,735,728       12,961,755       13,093,531       1,581,898  
             
     
     
     
 

Minority interests

            —       —       827,961       100,030  

Series B Redeemable Convertible Preferred
Shares (US$0.01 par value; 7,193,464 shares authorized, issued
and outstanding as of December 31, 2000, 2001 and 2002,
respectively; redeemable in October 2005 at US$3.1334 per share)

    12       94,153,866       108,469,978       124,962,504       15,097,378  

Commitments and contingencies

    18       —       —       —       —  

Shareholders’ equity (deficit)

                                       
 

Share capital (US$0.01 par value;
40,000,000 shares authorized, 8,640,000 shares issued
and outstanding as of December 31, 2000, and 9,520,698
issued and outstanding as of December 31, 2001 and 2002,
respectively)

            715,392       788,314       788,314       95,240  
 

Series A Convertible Preferred Shares
(US$0.01 par value; 4,320,000 shares authorized, issued and
outstanding as of December 31, 2000, 2001 and 2002,
respectively)

    11       357,696       357,696       357,696       43,215  
 

Additional paid-in capital

            37,883,425       26,621,353       —       —  
 

Deferred share-based compensation

    13       —       (96,263 )     (1,077,460 )     (130,174 )
 

Cumulative translation adjustments

            22,851       62,284       101,188       12,226  
 

Accumulated deficit

            (24,979,161 )     (40,240,574 )     (41,798,873 )     (5,049,941 )
             
     
     
     
 

Total shareholders’ equity (deficit)

            14,000,203       (12,507,190 )     (41,629,135 )     (5,029,434 )
             
     
     
     
 

Total liabilities and shareholders’
equity (deficit)

            117,889,797       108,924,543       97,254,861       11,749,872  
             
     
     
     
 

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

F-4


 

CTRIP.COM INTERNATIONAL, LTD.

CONSOLIDATED STATEMENTS OF CHANGES IN
SHAREHOLDERS’ EQUITY (DEFICIT)

FOR THE YEARS ENDED DECEMBER 31, 2000,
2001 AND 2002

                                                                                           
Ordinary shares of
Ctrip.com Ordinary shares of
(Hong Kong) Ctrip.com, Series A Convertible
Limited International Ltd. Preferred Share
(US$1 par value) (US$0.01 par value) (US$0.01 par value)



Additional Deferred Cumulative Total
Number Par Number Par Number Par paid-in share-based translation Accumulated shareholders’
of shares value of shares value of shares value capital compensation adjustments deficit equity (deficit)











RMB RMB RMB RMB RMB RMB RMB RMB

Balance as of January 1, 2000 (unaudited)

    1,000       7,334       —       —       —       —       —       —       —       (1,001,726 )     (994,392 )

Issuance of ordinary shares of Ctrip.com
International, Ltd. in exchange for ordinary shares of Ctrip.com
(Hong Kong) Limited

    (1,000 )     (7,334 )     8,640,000       715,392       —       —       2,593,525       —       —       —       3,301,583  

Issuance of Series A Convertible Preferred
Shares

    —       —       —       —       4,320,000       357,696       35,870,437       —       —       —       36,228,133  

Accretion for Series B Redeemable
Convertible Preferred Shares

    —       —       —       —       —       —       (2,195,177 )     —       —       —       (2,195,177 )

Loans waived by shareholders

    —       —       —       —       —       —       1,614,640       —       —       —       1,614,640  

Translation adjustments

    —       —       —       —       —       —       —       —       22,851       —       22,851  

Net loss

    —       —       —       —       —       —       —       —       —       (23,977,435 )     (23,977,435 )
     
     
     
     
     
     
     
     
     
     
     
 

Balance as of December 31, 2000

                                                                                       
 

(unaudited)

    —       —       8,640,000       715,392       4,320,000       357,696       37,883,425       —       22,851       (24,979,161 )     14,000,203  
     
     
     
     
     
     
     
     
     
     
     
 

Accretion for Series B Redeemable
Convertible Preferred Shares

    —       —       —       —       —       —       (14,316,112 )     —       —       —       (14,316,112 )

Issuance of ordinary shares for an acquisition

    —       —       880,698       72,922       —       —       2,935,827       —       —       —       3,008,749  

Deferred share- based compensation

    —       —       —       —       —       —       118,213       (96,263 )     —       —       21,950  

Translation adjustments

    —       —       —       —       —       —       —       —       39,433       —       39,433  

Net loss

    —       —       —       —       —       —       —       —       —       (15,261,413 )     (15,261,413 )
     
     
     
     
     
     
     
     
     
     
     
 

Balance as of December 31, 2001

    —       —       9,520,698       788,314       4,320,000       357,696