Following our fundamental analysis two questions require additional insight: stock based compensation and cash vs. credit card use in air ticket bookings.

Stock based compensation is important to asses because the company reported impressive net income growth without stock based compensation but we need to know how much this particular cost is to get a clear picture of the company's ongoing operations. We remember Sinovac (SVA), a small biotech firm, using U.S. equity markets to enrich employees by distributing raised capital via stock based compensation. In this extreme case cost of stock based compensation surpasses that of all SG&A if my memory serves me well. Long story short; we need to know the dynamics of this cost item because according to GAAP stock based compensation is just another cost item and should be incorporated into SG&A.

Regarding Ctrip.com, this is what we found: share-based compensations for Q1,Q2 2008 (33million and 31million RMB respectively) were greater than for Q4 2007 (22million RMB). Net income excluding the compensation for Q1,Q2 2008(132,151million) were still less than net income for Q4 2007(158million). Additionally we found that the effective tax rate has something to do with this.The tax rate for Q4 2007 was 7% and it was 28% for Q1 2008 and 26% for Q2 2008 primarily due to the application of a statutory tax rate of 25% under the new PRC Enterprise Income Tax Law effective on January 1, 2008 and the increase of share-based compensation was not tax-deductible.

The second item on our menu was to see how people pay for Ctrip services: cash or credit cards. The issue is important to understand growth potential. Should ordinary Chinese widely use credit cards, potential for Ctrip will become enormous. If they use cash, it's a somewhat different story. And remember, credit card use in China is new and is different than here in the U.S. Account holders are responsible for fraudulent use and can't claim it back from banks. Debit card use in is increase in China but we needed to know how an internet based service operates in China. So here is our finding:

Basically people in China will call the travel or ticket agency for the airtickets, and if booked,the agency will send its worker to take the ticket to the buyer then the buyer pay the ticket with cash.

Buying tickets online, you can choose to pay with credit card or you can pay with cash when the ticket is sent to your hand. But I think people who use Ctrip service online are normally "white collars" and new generation who are familiar with internet. And generally these people will pay with their credit cards. Although credit cards are now widely used in China, the security is a big issue compared with other developed countries. So still a lot of people will choose to pay with cash. And now people can choose to pay using debit cards as well and the number of people using internet service with debit or credit cards are increasing dramatically every year.

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