GreenTree Hospitality Group - Q3 2021

Transcript

Operator (participant)

Hello, ladies and gentlemen, and thank you for standing by for GreenTree's Q3 2021 Earnings Conference Call. At this time, all participants are in a listen-only mode. After management's prepared remarks, there will be a question and answer session. As a reminder, today's conference is being recorded. I would now like to turn the meeting over to your host for today's call, Mr. Rene Vanguestaine of Christensen, GreenTree's investor relations firm. Please proceed, Rene.

Rene Vanguestaine (Chairman and CEO)

Thank you, Matt. Hello, everyone, and thank you for joining us. GreenTree's earnings release was distributed earlier today and is available on our IR website at ir.998.com, as well as on PR Newswire services. As a reminder, we also posted a PowerPoint presentation that accompanies our comments to the same IR website. On the call from GreenTree are Mr. Alex Xu, Chairman and Chief Executive Officer, Ms. Selina Yang, Chief Financial Officer, Ms. Megan Huang, Vice President of Sales and Marketing, and Mr. Nicky Zheng, IR Director. Mr. Xu will present the company's Q3 2021 performance overview, followed by Ms. Huang, who will discuss business operations, and Ms. Yang will then discuss financials and guidance. They will be available to answer your questions during the Q&A session which follows.

Before we begin, I'd like to remind you that this conference call contains forward-looking statements within the meaning of Section 21 of the Securities Exchange Act of 1934, as amended, and as defined in the U.S. Private Securities Litigation Reform Act of 1995. These forward-looking statements can be identified by terminology such as may, will, expect, anticipate, aims, future, intends, plans, believes, estimates, continue, target, is or are likely to, going forward, confident, outlook, and similar statements. Any statements that are not historical facts, including statements about the company and its industry, are forward-looking statements.

Such statements are based upon management's current expectations and current market and operating conditions and relate to events that involve known and unknown risks, uncertainties, and other factors, all of which are difficult to predict and many of which are beyond the company's control, which may cause the company's actual results, performance, or achievements to differ materially from those in the forward-looking statements. You should not place undue reliance on these forward-looking statements. Further information regarding these and other risks, uncertainties, or factors is included in the company's filings with the U.S. Securities and Exchange Commission.

All information provided, including the forward-looking statements made during this conference call, are current as of today's date. The company does not undertake any obligation to update any forward-looking statement as a result of new information, future events, or otherwise, except as required under applicable law. It is now my pleasure to introduce our Chairman and Chief Executive Officer, Mr. Alex Xu. Mr. Xu, please go ahead.

Alex Xu (Chairman and CEO)

Thanks, Rene. Thanks everyone for joining our call today. Before we begin, let me mention that because of the impact of the COVID-19 on our operations in Q3 2020, we will occasionally during this call provide Q3 2019 numbers where we believe this provide a more meaningful comparison. Now let's turn to slide five of the presentation. We are glad to report a satisfactory performance in third quarter given the resurgence of COVID in various parts of China throughout the quarter. Compared with Q3 2020, RevPAR decreased 1.4% to RMB 118. Total revenues increased 16.3% to RMB 310.4 million. Income from operations decreased 45.6% to RMB 54.9 million with a margin of 17.7%.

Net income decreased 61.55% to RMB 33 million with a margin of 10.6%. Non-GAAP adjusted EBITDA decreased 33.5% to RMB 73.7 million with a margin of 23.7%. Earnings per share decreased 59.3% to RMB 0.33. Slide six provide more detailed numbers for total revenues, income from operations, net income and adjusted EBITDA. Please turn to Slide seven. Operating performance was similarly impacted compared with the last quarter. Our occupancy rate on RevPAR recovered to 84.3% and 79.1% respectively of their 2019 levels, a better performance than the industry average. Slide eight shows historical weekly RevPAR performance and compares it with 2019.

During the third quarter, RevPAR decreased in July due to the worsened COVID-19 situations in Nanjing cities and Jiangsu Province. Fortunately, by the middle of September, RevPAR rebounded quickly to around 100% of its 2019 level. Due to the resurgence of the outbreak of cases in different cities nationwide, it dropped to about 81.3% of its 2019 levels during the first week of November, but then recovered gradually, reaching 98.5% of its 2019 level in the last week of December, with the help of a resilient business model, well segmented and robust brand portfolio and the loyalty of our members. As in the last few quarters, the impact on our occupancy and RevPAR has always been lesser than the average of other hotels in China.

Now, starting with slide 10, let's talk about strategy and execution. First, we are further expanding our hotel network in the mid to upscale segment and into the Tier 3 and the lower cities. Second, we continue to optimize our management and operating system constantly. Now, let's look at slide 11. We have been continuously growing our mid to upscale and luxury segment over the past few years. By the end of the third quarter, hotels in this segment had increased to 11.2% of our total portfolio, compared with only 2.2% in 2017. We plan to open more hotels in these segments this year. Please turn to slide 12.

Over the past four years, the vast majority of our new hotel openings have been in China's thriving Tier 3 and the lower cities, where the pace of recovery at our hotels has been faster than in other cities in most quarters. As we continue to execute our strategic plan, 68.7% of all new hotels in our current pipeline are located in such cities and will further capitalize on the substantial opportunities in such locations. We constantly strive to optimize our management and operating system, including design, technology features, sales and marketing programs, to improve hotel quality and operating performance. Our ongoing efforts in researching and testing property improvement materials allows us to lower our construction costs that also ensure hotel quality and excellent customer experience.

This has been an extraordinarily tough period, but it is one that has been shared across the industry. As for ourselves, we feel certain that we will get through the current pandemic wave thanks to our business model, the experience that our team and our franchisee have accumulated while combating COVID. Now, let me turn the call over to Megan, who will summarize our business operations in the third quarter. Megan, please go ahead.

Megan Huang (VP of Sales and Marketing)

Thank you, Alex. Please turn to slide 14, which highlights the year-over-year rebound in our operating metrics from the impact of COVID-19. Landed ADR increased 7.7% to RMB 163. Occupancy rate decreased 6.7%-72.4%, and the RevPAR decreased 1.4% to RMB 118. We opened 182 new hotels in the third quarter, less than planned due to the impact of COVID-19. Moving to slide 15. At the end of the third quarter, we had 4,626 hotels in operation, 10.3% more than the year before. 62 of these hotels were leased-and-operated or L&O hotels, and the 4,564 were franchise and managed or FM hotels.

While the mid-scale segment remains the core of our business with 62.9% of all our hotels. We continued our expansion into the higher end segments. By the end of the third quarter, mid to upscale and the luxury hotels accounted for 11.2% of all our total portfolio, while the economy segment remained stable at 25.9%. As Alex mentioned, we also solidified our already dominant position in Tier 3 and in lower cities, where 67.7% of our hotels were located at the end of the third quarter. On slide 16, you can see that in the third quarter, we opened 182 hotels in China compared to 201 in the second quarter, 2021.

Two hotels were in the luxury segment. 70 in the mid-to-upscale segment, 83 in the midscale segment, and 27 in the economy segment. 12 were in Tier 1 cities, 52 in Tier 2 cities, and the remaining 118 in Tier 3 and lower cities. 39.6% of hotel opens in the third quarter were in the mid-to-upscale and the luxury segments of the market. The company closed 98 hotels. 59 due to non-compliance with the company's brand and operating standards. The remaining 39 were closed due to property-related issues. The company added a net 84 hotels to its portfolio. Slide 17 shows the trend of our quarterly operating performance. For year-over-year comparison, in the third quarter, RevPAR for our L&O hotels increased to RMB 146. RevPAR for our FM hotels decreased to RMB 117.

ADR hotels increased to RMB 223, and ADR for our FM hotels increased to RMB 176. Occupancy at our LO hotels decreased to 65.2%, and occupancy at our FM hotels decreased to 72.6%. Slide 18 highlights the higher growth in both our individual and corporate membership programs, which accounted for most of the 91.3% in direct sales in the third quarter. Individual members grew to 66 million, up from 52 million year-over-year. Corporate membership grew to 1.8 million, up from 1.6 million a year ago. We have one of the highest percentage of room night booked by corporate and individual members in the industry. With that, I'll pass the call over to our CFO, Selina Yang.

Selina Yang (CFO)

Thank you, Megan. Please turn to slide 19. Total revenues increased 16.3% year-over-year to RMB 310.4 million. Total revenue for our FM hotels was RMB 194 million, almost the same as the same quarter last year. While total revenue from LO hotels increased 59.4% to RMB 106.5 million. On slide 20, you can see that total hotel operating costs were RMB 258.8 million, a 48.3% year-over-year increase. In the third quarter, hotel operating costs were RMB 172.8 million, up 60% year-over-year.

The increase was mainly attributable to the opening of 24 LO hotels since the beginning of 2021, which resulted in higher rents, higher utilities and consumables, higher staff headcount and compensation, higher depreciation and amortization, and higher ramp-up costs. Excluding the impact of newly opened LO hotels in the year of 2021, hotel operating costs increased to 10.3% year-over-year. Selling and marketing expenses were RMB 16.5 million, a year-over-year decrease of 22.7%. The decrease was mainly attributable to our lower advertising expenses. General administrative expenses were RMB 68.8 million, up 53.6% compared with Q3 2020. The increase was mainly attributable to the opening of 24 LO hotels since the beginning of the year of 2021, and increased the one-time consulting fees for the technical market advice.

Excluding the impact from the newly opened L&O hotels and one-time consulting fees, our general administrative expenses increased by 16.6% year-over-year. Turn to slide 21. Income from operations defined as revenue minus total operating costs and expenses was RMB 54.9 million, representing a year-over-year decrease of 45.6% with a margin of 17.7%. The decrease was mainly due to the operating loss at newly opened L&O hotels in the year of 2021 during their ramping up operations. Excluding the impact of newly opened hotels, the income from operations was RMB 88.5 million, a year-over-year decrease of 12.3% with a margin increase to 31.5%. On the same slide, net income is RMB 33 million with a margin of 10.6%.

Adjusted EBITDA decreased 33.5% to RMB 73.7 million, and adjusted EBITDA margin decreased to 23.7%. Core net income decreased to RMB 50.2 million with a margin of 16.2%. These decreases in net income and adjusted EBITDA are mainly attributable to the increased number of our L&O hotels, both newly opened and in the pipeline. Excluding the impact of newly opened hotels, adjusted EBITDA was RMB 107.3 million, with a margin of 38.2%. Please turn to slide 22. Net income per ADS was RMB 0.33, that's $0.05. Core net income per ADS, basic and diluted non-GAAP, was RMB 0.49, that's $0.08. Let's now take a look at slide 23.

As of September 30, 2021, the company had total cash and cash equivalents, restricted cash, short-term investment in equity securities and third parties of RMB 1,192.1 million compared to RMB 1,291 million as of June 30, 2021. The decrease from the prior quarter was primarily attributable to the acquisition costs of our L&O hotels, loans to franchisees and property investments, offset by drawing down of bank facilities. We will continue to execute our growth strategy, including potential acquisitions and further support our franchisees. On slide 25, given the continuing outbreak of COVID in various parts of China, we expect total revenues for the full year of 2021 to grow 25%-30% over the 2020 levels and 7%-12% over the level of 2019. This concludes our prepared remarks. Operator, we are now ready to begin the Q&A session. Thank you.

Operator (participant)

We will now begin the question-and-answer session. To ask a question, you may press star then one on your touchtone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star then two. At this time, we will pause momentarily to assemble our roster. Our first question will come from Billy Ng with Bank of America. Please go ahead.

Billy Ng (Analyst)

Hi. Good morning. Thanks a lot for taking my question. I only have one quick question. We noticed that actually the pipeline continued to increase and now the company has about over 1,300 hotels in the pipeline. Does that mean like we can expect in the next 12 months the company will be able to open around that number of hotels given that historically speaking the conversion from a pipeline to operating hotels normally takes less than a year sometimes takes like six to nine months. Can you give us some outlook or comment on the opening expectation for the next few quarters?

Alex Xu (Chairman and CEO)

I'll take this question. Okay, thanks for the question. We during the last year noticed that the pace of opening the hotels, the speed is slower, is lower because there is factors. Number one, during the COVID impact period that the construction, the laborers, the planning of them is unexpectedly affected by that. Secondly, we have, you know, the higher, you know, now the requirement for our opening the hotels is higher than before. Thirdly, we also have, sometimes, you know, the franchisees are negotiating with the landlord for extension of the free rent period. Also the lack of you know certain materials and you know the investment slow down this opening pace. Nonetheless, we expect our next year's opening of hotels to be about 700-800 that we want to maintain that level.

Billy Ng (Analyst)

Thank you.

Operator (participant)

Again, if you have a question, please press star then one. Our next question will come from Dan Xu with Morgan Stanley. Please go ahead.

Dan Xu (Equity Research Analyst)

Thank you, and good morning, Alex, Megan and Selina. Thank you for taking my question. I have two quick question. The first question was about hotel closures. We observed that in this quarter we closed 90 hotels, and other than those with property use issues, we have 58 due to non-compliance. We just want to have some guidance from management. How should we look at the closures annually in the future, say 2022, 2023? Should we, because 2021 we have more than before, more than the past kind of closures over 300 we estimate for this year. Should we expect this number to go down in the future? This is my first question. Thank you.

Alex Xu (Chairman and CEO)

Okay. Dan, the closure of this period, the closure of our first period resulted in noncompliance with our standards due to two reasons I think. The first, as we explore the capital markets further, I think our standards on the requirements for hotels holding all the licenses are higher. As a result, the hotels not holding all the necessary licenses, I think we will probably promptly require the hotels to obtain all of them. If not, we may not continue to operate those hotels. That's one reason. The second is because of the COVID impact, a lot of the hotels that wants to defer the capital improvements on the hotels.

Now, if the deferred maintenance impacts the service quality of the hotels, then we will also try to properly close down. Then those are the two major factors. We understand the hotel lacks certain, you know, cash flow to maintain the quality of the standard. But we will take it into consideration of the situation. If the hotel owners decide to use the cash to do something else instead of maintaining the hotels, then we wouldn't want to continue to maintain those hotels in our portfolio to ensure the consistent hotel quality.

I think that's one of the reasons our RevPAR impact of the COVID-19 is lesser than the average of the industry. In the future, we believe with our stabilization of RevPAR and unless there's a further, you know, bigger impact from the COVID, and I think our closure rate will not be more than what we experienced in 2021.

Dan Xu (Equity Research Analyst)

Thank you. My second question is regarding our expansion plan on the L&O hotels. Should we expect a number of more L&O hotels expansion in the future, or should we be expecting more like single digit kind of opening in the L&O? Can I add one quick question with regard to potential partnerships with other hotel groups. For example, we used to have partnership. I think we used to have some investment in New Century, which is another upscale luxury hotels. Should we expect the partnership with New Century to stop because of the delisting, or are we actively looking for partnership on the upscale side as well? Thank you.

Alex Xu (Chairman and CEO)

Dan, the expansion of our all hotels in the first quarter of 2021 is to help ourselves to expand into the area traditionally we have a weak presence, such as southern part of China, southwestern part of China, and also in central part of China. Now, our presence over there is boosted by the opening of those L&O hotels and the newly developed franchise hotels. I think our purpose of doing the L&O hotels is substantially completed, and we will not plan to do a lot more of those L&O hotels unless the opportunity arise in such an area that we have a weak presence.

Now we looked at the nationwide, we do not see a big need for opening new L&O hotels. Again, if there are opportunities such as in a high impacted area, high-speed train station or so, that will boost our local presence and sales, we will plan to do, but not. It's going to be, you know, more than what we planned or what we have done in the past. That's on the L&O hotels. Regarding the potential partnership with other hotel groups, and in the last year, we formed a couple of partnership with the local strong operators, again, to boost our presence in those areas such as Jiangxi, such as, you know, Hunan province.

We will continue to seek a local strong operator to partner with them in the responsive way to benefit both companies' operation, and to further expand our network into lower Tier 3 and the lower Tier cities.

Dan Xu (Equity Research Analyst)

Thank you so much, Alex, for your answers. I have no other questions.

Operator (participant)

Our next question will come from Simon Cheung with Goldman Sachs. Please go ahead.

Simon Cheung (Managing Director)

Hello. Thanks for taking my questions. I just have one quick question. In relation to your margin trends, I've seen quite a noticeable drop-off for this quarter, arguably because of your, you know, increase in the LO exposures. I wanted to get a sense, you know, do you have some sort of, you know, margin breakdown between the two segments. You mentioned that there were obviously some new hotels still running at losses. Can you give us a sense of how much of your hotel L&O is actually loss-making? Thank you.

Selina Yang (CFO)

Thank you, Simon. I will take this question. In the third quarter, the newly opened 24 hotels since the beginning of 2021 actually brought us a loss of RMB 32 million. That resulted in the drop of our margin of EBITDA and also dropped the margin of our net income. If we exclude the impact of these newly opened hotels, our EBITDA margin will increase to 38.5%, and our margin of net income will increase to 23%.

Simon Cheung (Managing Director)

On the second question in relation to how much of your hotels in the leased-and-operated are being still loss-making, or maybe give us a sense, how much of, you know, what is the scale of the losses, if possible?

Selina Yang (CFO)

Among the 24 newly opened hotels, about half of them are still incurring loss.

Simon Cheung (Managing Director)

Okay. Thanks a lot. Thank you.

Selina Yang (CFO)

Thank you, Simon.

Operator (participant)

This concludes our question and answer session. I would like to turn the conference back over to Selina Yang for any closing remarks. The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.