Tuniu(TOUR) - 2018 Q4 - Annual Report

PART I Item 3. Key Information This section provides a comprehensive overview of Tuniu Corporation's financial performance and risk profile, highlighting a significant net loss reduction in 2018 and discussing various risk factors A. Selected Financial Data The company presents selected consolidated financial data for 2014-2018, noting a significant net loss reduction in 2018 and a major revenue recognition change (ASC 606) from 2017 Selected Consolidated Statements of Comprehensive Loss Data (2016-2018) | Indicator | 2016 (RMB in thousands) | 2017 (RMB in thousands) | 2018 (RMB in thousands) | 2018 (US$ in thousands) | | :--- | :--- | :--- | :--- | :--- | | Net Revenues | 10,530,941 | 2,192,100 | 2,240,149 | 325,816 | | Gross Profit | 639,205 | 1,167,894 | 1,175,127 | 170,915 | | Loss from Operations | (2,499,061) | (883,426) | (348,994) | (50,759) | | Net Loss | (2,422,332) | (771,316) | (199,371) | (28,997) | | Net Loss Attributable to Tuniu | (2,407,194) | (767,304) | (185,512) | (26,981) | | Net Loss per ADS (Basic & Diluted) | (19.35) | (6.12) | (1.50) | (0.21) | Selected Consolidated Balance Sheet Data (As of Dec 31) | Indicator | 2017 (RMB in thousands) | 2018 (RMB in thousands) | 2018 (US$ in thousands) | | :--- | :--- | :--- | :--- | | Total Assets | 6,657,805 | 6,556,923 | 953,665 | | Total Liabilities | 2,963,777 | 3,143,071 | 457,141 | | Total Equity | 3,597,309 | 3,344,533 | 486,442 | - The company adopted ASC 606 effective January 1, 2017, changing revenue recognition for organized tours from a gross to a net basis, significantly impacting comparability of total revenues and cost of revenues between periods[15] D. Risk Factors This section details numerous risks including business and industry challenges, corporate structure uncertainties (VIE model), complexities of doing business in China, and risks related to ADSs - Business & Industry Risks: - The business is highly dependent on the leisure travel industry, which can be affected by economic downturns, natural disasters, and political unrest[20][21] - Intense competition exists from other online travel companies, traditional agencies, and large internet search engines[32] - The company has a history of net losses, reporting losses of RMB 2,422.3 million, RMB 771.3 million, and RMB 199.4 million in 2016, 2017, and 2018, respectively, and may continue to incur losses[29] - The business relies on third-party travel suppliers, and any deterioration in their service quality could harm Tuniu's reputation and financial results[26][27] - Corporate Structure Risks: - The company uses a Variable Interest Entity (VIE) structure to comply with PRC laws restricting foreign investment in value-added telecommunications, relying on contractual arrangements rather than direct ownership, which carries risks of non-enforcement[106][114] - The newly adopted PRC Foreign Investment Law (effective Jan 1, 2020) creates substantial uncertainty regarding the treatment of VIE structures, potentially materially and adversely affecting the company's corporate structure and business operations[110][111] - Risks of Doing Business in China: - The company faces uncertainties in the interpretation and enforcement of PRC laws and regulations[129] - Tuniu may be classified as a PRC resident enterprise for tax purposes, potentially resulting in a 25% tax on its worldwide income and withholding taxes on dividends paid to non-PRC shareholders[138][139] - PRC regulations on foreign exchange may limit the ability to transfer funds from PRC subsidiaries to the offshore parent company[156][161] - Risks Related to ADSs: - The dual-class share structure gives Class B shareholders ten votes per share, concentrating significant voting power (68.8% as of Feb 28, 2019) among directors and officers, limiting the influence of Class A shareholders and ADS holders[198][199] - The company may be classified as a Passive Foreign Investment Company (PFIC) for U.S. federal income tax purposes, which could result in adverse tax consequences for U.S. investors[203][204] Item 4. Information on the Company This section details Tuniu's corporate history, business operations, and organizational structure, including its evolution, product offerings, and essential VIE structure for PRC operations A. History and Development of the Company Tuniu's history spans from its 2006 founding and 2014 Nasdaq IPO to significant strategic investments from JD.com and HNA Tourism, totaling over US$1.1 billion - The company has a history of significant strategic investments post-IPO, including from major industry players like JD.com, Ctrip, and HNA Tourism Group, totaling over US$1.1 billion between 2014 and 2016[230][231][233] - Tuniu has expanded its business through acquisitions of offline travel agencies in 2015, 2016, and 2018 to enhance direct procurement capabilities and expand overseas and destination services[234][235][236] B. Business Overview Tuniu, a leading online leisure travel company in China, offers packaged tours and related services through an integrated online-offline model, with overseas travel as a core strength - The company's primary offerings are packaged tours, which include organized tours (pre-arranged itineraries) and self-guided tours (flight and hotel combinations); overseas travel products accounted for over 67% of packaged tour gross bookings in 2018[242][245] - Tuniu utilizes a multi-channel approach, combining its online platform (website and mobile) with an offline service network of call centers and retail stores across China[253] - The mobile platform is a critical channel, with over 90% of total online orders placed via mobile in 2018[402] - The company manages relationships with over 16,500 travel suppliers through its proprietary N-Booking system, which facilitates product management, real-time inventory management, and data analysis[271][279] - Tuniu has expanded into complementary businesses, including financial services (consumer financing, supply chain financing) and a B2B distribution platform called Difeng Cloud[278][283] C. Organizational Structure Tuniu Corporation, a Cayman Islands holding company, operates in PRC through its subsidiary Beijing Tuniu and consolidated VIE Nanjing Tuniu, maintained via contractual agreements for regulatory compliance - The company utilizes a VIE structure where its PRC subsidiary, Beijing Tuniu, controls the operating entity, Nanjing Tuniu, through a series of contractual arrangements; this allows Tuniu to consolidate Nanjing Tuniu's financial results while complying with PRC foreign ownership restrictions[237][239] - Key contractual agreements providing effective control include: - Purchase Option Agreement: Grants Beijing Tuniu the right to purchase all equity interests in Nanjing Tuniu - Equity Interest Pledge Agreement: Nanjing Tuniu's shareholders pledge their equity to Beijing Tuniu - Shareholders' Voting Rights Agreement: Appoints Beijing Tuniu to exercise all voting rights of Nanjing Tuniu's shareholders - Cooperation Agreement: Allows Beijing Tuniu to receive substantially all economic benefits from Nanjing Tuniu in the form of service fees[391][393][394][396] Item 5. Operating and Financial Review and Prospects This section analyzes Tuniu's financial condition and operations, detailing the significant net loss reduction in 2018 driven by reduced operating expenses and the impact of the 2017 revenue recognition change A. Operating Results In 2018, net revenues slightly increased while net loss significantly narrowed to RMB 199.4 million, primarily due to a 25.7% decrease in operating expenses and improved efficiency Year-over-Year Financial Performance (2017 vs. 2018) | Metric (RMB in millions) | 2017 | 2018 | Change | Reason for Change | | :--- | :--- | :--- | :--- | :--- | | Net Revenues | 2,192.1 | 2,240.1 | +2.2% | Growth in organized tours, partially offset by a decline in financial services and insurance fees | | Gross Profit | 1,167.9 | 1,175.1 | +0.6% | Relatively stable | | Operating Expenses | 2,051.3 | 1,524.1 | -25.7% | Decreases in R&D, Sales & Marketing, and G&A expenses due to increased efficiency and optimization | | Net Loss | (771.3) | (199.4) | -74.1% | Primarily driven by the significant reduction in operating expenses | - The significant decrease in reported net revenues from RMB 10,530.9 million in 2016 to RMB 2,192.1 million in 2017 was mainly due to the change in revenue recognition for organized tours from a gross to a net basis; on a comparable net basis, revenues actually grew 49.8% from 2016 to 2017[438][439] - Sales and marketing expenses decreased by 13% in 2018 compared to 2017, attributed to the optimization of promotional expense structure and a preference for marketing channels with higher ROI[434] - Research and product development expenses decreased by 41.7% in 2018, primarily due to increased efficiency from economies of scale, refined management, and optimization of personnel[433] B. Liquidity and Capital Resources The company's liquidity is primarily from operations and past equity financing, with RMB 1,690.2 million in cash and equivalents as of December 31, 2018, and positive operating cash flow in 2018 Summary of Cash Flows (2016-2018) | Cash Flow (RMB in thousands) | 2016 | 2017 | 2018 | | :--- | :--- | :--- | :--- | | Net cash (used in)/provided by operating activities | (2,239,444) | (418,649) | 268,089 | | Net cash (used in)/provided by investing activities | (2,728,683) | 615,554 | 153,992 | | Net cash provided by/(used in) financing activities | 3,627,058 | (784,766) | (145,212) | - The company's cash position, including cash, cash equivalents, restricted cash, and short-term investments, was RMB 1,690.2 million (US$245.8 million) as of December 31, 2018[516] - The shift to positive operating cash flow in 2018 was driven by improved operational efficiency, including better management of payments to suppliers and reduced sales and marketing expenses[515][522] C. Research and Development The company invests in proprietary technology infrastructure, with research and product development expenses decreasing to RMB 315.2 million in 2018 due to increased efficiency Research and Product Development Expenses (2016-2018) | Year | R&D Expenses (RMB in millions) | | :--- | :--- | | 2016 | 601.4 | | 2017 | 541.1 | | 2018 | 315.2 | Item 6. Directors, Senior Management and Employees This section covers Tuniu's leadership, compensation, board structure, and employee base, highlighting the dual-class share structure's impact on voting power concentration B. Compensation For fiscal year 2018, Tuniu paid RMB 5.6 million in cash to executive officers and RMB 0.8 million to non-executive directors, operating under the 2014 Share Incentive Plan - The company maintains a 2014 Share Incentive Plan which permits granting of options, restricted shares, and restricted share units; as of February 28, 2019, options to purchase 20,892,957 ordinary shares and 208,176 restricted shares were outstanding under this plan[563] - The 2008 Incentive Compensation Plan terminated automatically in 2018; as of February 28, 2019, options to purchase 3,881,334 ordinary shares remained outstanding under this plan[555] C. Board Practices The board of directors consists of ten members and three committees (Audit, Compensation, Nominating), with detailed responsibilities and compliance with Nasdaq independence requirements - The Board of Directors has three key committees: Audit, Compensation, and Nominating and Corporate Governance, each with a charter and defined responsibilities[579] - The Audit Committee, chaired by Mr. Onward Choi, includes members satisfying Nasdaq and SEC independence requirements, with Mr. Choi and Mr. Jack Xu qualifying as "audit committee financial experts"[580] D. Employees As of December 31, 2018, Tuniu had 7,355 employees, with the largest functions in offline retail stores, local tour operators, and customer service centers Employee Headcount by Function (as of Dec 31, 2018) | Function | Number of Employees | | :--- | :--- | | Management and administration | 753 | | Customer service center | 1,911 | | Sales and marketing | 688 | | Research and product development | 1,663 | | Offline retail stores and local tour operators | 2,340 | | Total | 7,355 | E. Share Ownership As of February 28, 2019, Tuniu had 369.1 million ordinary shares outstanding, with significant voting power concentrated among directors and principal shareholders due to the dual-class structure Major Shareholder Ownership and Voting Power (as of Feb 28, 2019) | Shareholder | Ownership % | Voting Power % | | :--- | :--- | :--- | | BHR Winwood Investment (HNA) | 27.3% | 19.2% | | Affiliates of JD.com, Inc. | 21.2% | 14.9% | | DCM V, L.P. and Affiliates | 8.6% | 6.1% | | Unicorn Riches Limited (Hony) | 7.4% | 5.2% | | Dunde Yu (Founder, CEO) | 5.8% | 21.7% | | All directors & execs as a group | 72.5% | 68.8% | - The company has a dual-class share structure where Class A shares have one vote per share, while Class B shares have ten votes per share; this structure concentrates significant control with holders of Class B shares[597] Item 7. Major Shareholders and Related Party Transactions This section details Tuniu's significant transactions with major shareholders like Ctrip, JD.com, and HNA Tourism Group, involving various business cooperation agreements and financial services - The company has significant business relationships with its major shareholders: - Ctrip: Tuniu earns commission fees for hotel and air ticket bookings through its platform, amounting to RMB 161.7 million in 2018[615] - JD.com: Tuniu has a five-year agreement for exclusive operation of JD's leisure travel channel, valued at RMB 660.2 million at inception[616] - HNA Tourism Group: Tuniu has a strategic partnership to access HNA's airline resources, purchasing RMB 588.9 million in air tickets in 2018; Tuniu also provided a RMB 500 million factoring service to an HNA affiliate in 2018[617] Item 8. Financial Information This section confirms the provision of full financial statements under Item 18, states no material legal proceedings, and outlines the company's policy of retaining earnings for business expansion rather than paying dividends - The company is not currently a party to any material legal or administrative proceedings[623] - Tuniu has no plan to declare or pay any dividends in the near future, intending to retain available funds for business operations and expansion[625] Item 10. Additional Information This section provides detailed information on corporate governance and legal framework, including the dual-class share structure, voting rights, and potential tax liabilities in the Cayman Islands, PRC, and for U.S. investors - The company's shares are divided into Class A (one vote per share) and Class B (ten votes per share); Class B shares are convertible into Class A shares at any time by the holder, but not vice-versa, serving as a key anti-takeover provision[633][636][650] - The company discusses potential PRC tax implications, including the risk of being treated as a PRC resident enterprise, which would subject it to a 25% tax on worldwide income and potential withholding taxes on dividends and capital gains for foreign shareholders[682] - For U.S. Holders, there is a risk that the company could be classified as a Passive Foreign Investment Company (PFIC), which could lead to adverse U.S. federal income tax consequences on distributions and dispositions of ADSs or shares[688][691] Item 11. Quantitative and Qualitative Disclosures about Market Risk The company identifies primary market risks as interest rate, foreign exchange, and inflation, with foreign exchange risk being significant due to RMB-denominated business and USD-traded ADSs - The primary market risk is foreign exchange risk, as the company's business is denominated in RMB while its ADSs are traded in USD; fluctuations in the RMB/USD exchange rate can affect the value of an investor's holdings[715] - As of December 31, 2018, the company held RMB 1,690.2 million in RMB-denominated cash and investments, and US$245.8 million in USD-denominated cash and investments[718] PART II Item 15. Controls and Procedures Management concluded that the company's disclosure controls and internal control over financial reporting were effective as of December 31, 2018, a conclusion concurred by the independent auditor - Management concluded that the company's disclosure controls and procedures were effective as of December 31, 2018[735] - Management concluded that the company's internal control over financial reporting was effective as of December 31, 2018, a conclusion with which the independent registered public accounting firm, PricewaterhouseCoopers Zhong Tian LLP, concurred[738][739] Item 16. Other Information This section covers governance and compliance, including audit committee financial experts, code of ethics, principal accountant fees, share repurchase activities, and foreign private issuer corporate governance practices Principal Accountant Fees (PricewaterhouseCoopers Zhong Tian LLP) | Fee Type | 2017 (US$) | 2018 (US$) | | :--- | :--- | :--- | | Audit fees | 1,573,258 | 1,518,941 | | Audit-related fees | 44,793 | 0 | | All other fees | 0 | 86,106 | - The company has a board-authorized share repurchase program, under which Tuniu repurchased a total of 3,305,737 ADSs at an average price of US$6.71 per ADS in 2018[748][750] - As a foreign private issuer, the company follows home country (Cayman Islands) practice in lieu of the Nasdaq requirement to hold an annual shareholder meeting[754] PART III Item 18. Financial Statements This section confirms the company's election to provide full financial statements and related footnotes as required by Item 18 of Form 20-F, included at the end of the annual report - The company has elected to provide full financial statements and related footnotes as required by Item 18 of Form 20-F[758][759] Item 19. Exhibits This section lists all exhibits filed as part of the annual report, including corporate documents, share incentive plans, material contracts with major investors, and VIE structure agreements Consolidated Financial Statements This section presents the full audited consolidated financial statements for 2016-2018, prepared under U.S. GAAP, including the auditor's report, balance sheets, statements of comprehensive loss, changes in equity, cash flows, and detailed notes Notes to the Consolidated Financial Statements The notes provide detailed explanations of accounting policies and figures, covering revenue recognition (ASC 606), the VIE structure, business acquisitions, related party transactions, share-based compensation, and income taxes - Revenue Recognition (Note 2s): Starting January 1, 2017, the company changed its role from principal to agent in most organized tour arrangements, recognizing revenue on a net basis (commission earned) rather than a gross basis, while self-operated tours continue gross recognition[895][897][898] - VIE Structure (Note 2b): The company's control over its PRC operating entity, Nanjing Tuniu, relies on contractual arrangements including purchase options, equity pledges, and voting rights agreements, with associated risks under PRC law detailed[831][832][840] - Share-based Compensation (Note 17): The company recognized share-based compensation expenses of RMB 92.4 million, RMB 98.7 million, and RMB 68.7 million in 2016, 2017, and 2018, respectively, with activity detailed under the 2008 and 2014 incentive plans[918][1007] - Related Party Transactions (Note 21): The company details significant transactions with related parties, including revenue from Ctrip (RMB 161.7 million in 2018), purchases from HNA (RMB 588.9 million in 2018), and the business cooperation agreement with JD.com[1032][1033][1036]