GreenTree Hospitality Group Ltd (GHG) 2018 Q2 法說會逐字稿

Hello, ladies and gentlemen. Thank you for standing by for GreenTree's Second Quarter 2018 Earnings Conference Call. (Operator Instructions) As a reminder, today's conference call is being recorded.

I would now like to turn the meeting over to your host for today's call, Mr. Rene Vanguestaine of Christensen, the company's investor relations firm. Please proceed, Rene.

Thank you, Anita. Hello, everyone, and thank you for joining us today. GreenTree's earnings release was distributed earlier today and is available on our IR website at ir. 998.com as well as PR Newswire services. As a reminder, we also posted a PowerPoint presentation that accompanies our comments today to the same IR website.

On the call today from GreenTree are Mr. Alex Xu, Chairman and Chief Executive Officer; Ms. Selina Yang, VP of Operations; Ms. Jasmine Geffner, Chief Financial Officer; and Mr. Nicky Zheng, who recently joined as IR Manager. Nicky spent 3 years in Deloitte, Shanghai as a senior auditor, primarily for listed companies in the U.S. after obtaining a master's degree in The Hong Kong Polytechnic University.

Mr. Xu will present the company's Q2 2018 performance overview, followed by Ms. Yang, who will discuss business operations and company highlights, and Ms. Geffner will then discuss financials and guidance. They will be available to answer your questions during the Q&A session that will follow.

Before we begin, I would like to remind you that this conference call contains forward-looking statements within the meaning of Section 21E 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, anticipates, aims, future, intend, 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 expectation 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 in this conference call are current as of today's date. The company does not undertake any obligation to update any forward-looking statements 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.

Thank you, Rene. And thanks, everyone, for joining our earnings call today. I'm pleased to report our 2018 second quarter results. After our successful listing on the New York Stock Exchange on March 27 this year, we have continued to execute our organic growth strategies in the second quarter. We now operate 2,434 hotels across 8 different brands from economy, mid-scale to business to mid-to-up-scale limited services segment of the market. We continue to grow our pipeline and are on track to open more new hotels in the second half of the year. We are also actively searching for appropriate acquisition opportunities, which we believe will build a stronger hotel operating platform and create long-term shareholder value.

In the second quarter of 2018, our total revenue grew 20.3% year-over-year to reach RMB 233.4 million, gross profit increased 23.1% to RMB 167.7 million. Non-core GAAP adjusted EBITDA rose 21.2% to RMB 139.2 million. And the non-GAAP core net earnings increased 24.7% year-over-year to RMB 110.9 million. We were able to continue to improve margins as well. Gross margin improved from 70.2% to 71.9%. Adjusted EBITDA margin improved from 59.2% to 59.6%. And the core net margin improved from 50 -- 45.9% to 47.5% compared to a year ago. These results were driven by continued organic growth in our F&M hotel network and improved operating performance at our existing hotels.

During the quarter, we opened 104 new hotels with almost 2/3 of these new open hotels in our mid-scale brand and close to 30% in the economy brands. Our pipeline of new hotels increased from 306 at December 31, 2017, to 477 at June 30, 2018. Approximately 1/4 of our pipeline is in the business to mid-to-up-scale hotels, including Gme, Gya and VX, which we launched late last year.

We continue to spread our geographic footprint further across China. We now cover 267 cities up from 263 cities at end of last year. We believe opening hotels in new cities is very important to increase growth, especially in Tier 2 and other cities in China. We believe this will further enhance our brand image in those new cities and will attract new business and leisure travelers from those cities.

In terms of our operating performance, we saw steady progress across the board. Average daily room rate, or ADR, for the quarter increased to RMB 164 from RMB 156, which was a 5.1% up from the same quarter of last year. Occupancy rate had a slight decrease of 0.6% to 82.6% from 83.2% last year, which was related to accelerating new hotel openings in the first half of 2018. And revenue per available room increased 4.6% from RMB 130 in the second quarter last year to RMB 136. One of the biggest drivers of both our steady incremental improvements in operating performance and our high overall profitability is our loyalty program. We now have 24 million individual loyal members and over 930,000 corporate members. Out of the 24 million members, over 19 million of them have joined our premium paid membership program. Our strong brand and direct relationship with so many valued customers allowed us to sell direct instead of relying on selling through OTAs, which is more expensive.

In the most recent quarter, we sold approximately 95.4% of our room nights through our direct sales channels.

M&A is one of our key growth strategies. We are actively searching for appropriate M&A targets post-IPO. We prefer targets which are brand as well as geographic complementary to our existing hotel portfolio. We believe the right acquisition as well as smooth post-acquisition integration will help accelerating our planned long-term expansion.

In conclusion, we are pleased with our performance so far this year. Although there is more hard work to be done in the coming months, we are confident in our business model, strategic positioning and the long-term growth strategies, and we will continue to invest in our people, brand, system, and technology in order to better serve our customers and franchisees and to ensure a long-term healthy development of our hotel network.

With that, I will pass the call over to Selina who will discuss our business operations and the company's highlights.

Thank you, Alex. If you are following along on our slides, I will skip over to you on Slide 5 and go straight to Slide 6. Once again, the franchised-and-managed model remains our primary strategic focus. In fact, 98.9% of our hotels fall under this category. And as you can see on the chart on the right, F&M hotels have been steadily increasing their contribution to our overall revenues. In the second quarter, the percentage reached 71%, which was an all-time high.

Let's turn to Slide 7. Another critical area of our business is our loyalty program. Our program differs considerably from most of hotel business in the West. We have a paid program to which people sign up to enjoy our loyalty premium perks and benefits. More importantly, we found that this program has allowed us to foster closer relationships with our guests. Members can book directly with us, which has helped us and our franchisees to reduce payout and the marketing fees and expenses. And our GreenTree members are very sticky customers. Overall, we now have about 24 million members in our loyal program along with 930,000 corporate clients, up from approximately 22 million and 860,000 as of March 31, 2018, and approximately 21 million and 820,000 as of December 31, 2017. Around 95.4% of room nights were sold through own direct channel, which increased our individual loyal members and corporate members.

Moving on to Slide 8. You can see our RevPAR chart here. Q2 is generally one of the high seasons during the year. In the 2 charts, at the bottom of this page, you can see that on a year-over-year basis, RevPAR for L&O increased by 8.4% from RMB 131 to RMB 142. And RevPAR for F&M hotels increased by 4.7% from RMB 129 to RMB 135 for second quarter of 2018. Both segments showed healthy growth over the second quarter and first half of last year, mainly due to higher ADR.

On Slide 9, you can see that we worked very hard this past quarter to further boost our pipeline of new hotels. During the second quarter, we added 31 hotels to our pipeline, while opening 104 hotels. In particular, we are trying to boost the growth and at that time to diversify our portfolio by adding more hotels at the high-end and economy segment of the market.

Currently, 84.7% of our hotels, really is the core of our business, serves the middle end of the limited service market. This ratio continued to trend down this year from 86.6% at the end of 2017. In line with this strategy, during this quarter, we added 4 new GreenTree Eastern and 1 VX hotel, which primary serve business and leisure travelers in the business to mid-to-up-scale segment of the market. So the number of hotels in this segment increased to 2.5% of total portfolio. Meanwhile, the network of hotels in the economy segment grew to 12.8% with an addition of 31 economy hotels across our Vatica and Shell brands in the second quarter of 2018. We have developed and continue to grow our 3 new brands at the mid-to-up-scale end of the market as part of our strategy to strengthen our portfolio.

On Slide 10, you can see these brands, which we have name G-M-E, Gme; G-Y-A, Gya, and VX. We are costing around same price points for all 3 hotels, but the decor and positioning of each will be quite different, as we cater to the taste of different segments of the markets. Gme hotels are designed to be traditional Latin American-European style for business travelers, whereas Gya, we are much more elegantly designed and fashionable. And VX will be relaxing and artistic, preferably with music and bar services inside the hotel. We have solid pipeline with more of these hotels opening in the coming months.

With that, I will pass the call over to Jasmine who will review our financials.

Thank you, Selina. We delivered another solid quarter of operating and financial results.

Moving on to Slide 12. We now have a total of 2,434 hotels with 200,000 -- 201,275 rooms. On a year-over-year basis, we increased our hotel numbers by 19.6%. During the quarter, we opened 104 new hotels, 68 in the mid-scale segment, 5 in the business to mid-to-up-scale segment and 31 in the economy segment. Of this, we opened 7 hotels in Tier 1 cities, 22 in Tier 2 cities and the remaining 75 in other cities in China. In Q2 2017, we opened 97 hotels, while for full year 2017, we opened 425. Therefore, you could see that we accelerated our hotel openings in Q2 2018 as well as first half of 2018.

During the quarter, we only closed 24 hotels. So net-net, we added 80 hotels to our portfolio. We closed 16 hotels due to their noncompliance with our brand and operating standards. We continue to demonstrate our ability to run profitable hotels. We also closed 8 hotels due to property-related issues, including rezoning, returning of the government-owned properties and expiry of leases, et cetera.

On Slide 13, you can see some of our key operating metrics. During the quarter, we continued to see improvements in our operating performance across the board. The key numbers focused here are the orange bars representing the performance of our F&M hotels. These hotels make up the biggest part of our business. The performance of our L&O hotels skewed a bit higher because we converted 5 L&O hotels to the F&M model after the first quarter of 2017. And we opened our high-end GreenTree Eastern hotel in Shanghai in June 2017.

In terms of our F&M hotels, our ADRs improved to RMB 163 from 100 -- I'm sorry, from RMB 155 in the second quarter of last year. RevPAR increased to RMB 135 from RMB 129, while the occupancy rate for F&M hotels had a slight decrease of 0.6% to 82.9%, which was due to the acceleration of new hotel openings in the quarter.

On Slide 14, you can see that total revenues grew 20.3% year-over-year to reach RMB 233.4 million. The year-over-year increase was primarily attributable to 4 factors: First, the increase of F&M hotels in our network; second, the opening of a GreenTree Eastern L&O hotel in Shanghai in mid-2017; third, improved RevPAR for both F&M and L&O hotels; and four, growth in our loyal memberships. This was partially offset by the conversion of 5 L&O hotels to F&M model after the first quarter of 2017. Total revenues from F&M hotels for the second quarter rose 23.3% to RMB 165.5 million. Meanwhile, revenue from L&O hotels rose 5.7% to RMB 49.7 million, which again shows the impact of the converted hotels. And finally, revenue from membership fees came in at RMB 18.1 million, a 43.5% year-over-year increase.

On Slide 15. During the first half of 2018, total revenues rose by 21.7% to RMB 438.3 million. Total revenues from F&M hotels for the first half of 2018 were RMB 309.4 million, grew by 25.5% year-over-year. Total revenues from L&O hotels in the same period were RMB 93.9 million, increased by 5.7% year-over-year. Membership fees totaled RMB 35 million, a 40.6% year-over-year increase.

Moving over to the expense side of the P&L. On Slides 16 and 17, you will get a sense of our operating efficiencies. Please look at the 3 graphs on the right-hand side of Slide 16. Hotel operating costs for the second quarter of 2018 were RMB 55.6 million. The year-over-year increase of 13.7% was mainly attributable to 3 factors: First, the increased number of general managers in our hotel network; second, other costs associated with the expansion of F&M hotels; third, higher rental costs for the GreenTree Eastern L&O hotel and other L&O hotels. This was partially offset by reduced rental cost, depreciation and amortization, and operating costs related to the conversion of the 5 L&O hotels.

Selling and marketing expenses for the second quarter of 2018 were RMB 11.6 million. The year-over-year increase of 22.9% in the second quarter of 2018 was mainly attributable to model room construction, exhibition and other advertising and promotion expenses related to our 3 new business to mid-to-up-scale brands, increased personnel, compensation and other costs, i.e. travel expenses of business development personnel, as a result of the increased opening of hotels.

General and administrative expenses for the second quarter of 2018 were RMB 25.2 million. The year-over-year increase of 38.6% in the second quarter of 2018 was primarily attributable to increased headquarters staff costs, increased share-based compensation expenses and new IT program expenses. Overall, other total operating costs and expenses grew 19.6% year-over-year to RMB 102.4 million. They grew more slowly than revenues in the second quarter of 2018.

On Slide 17, total operating costs and expenses grew 16.2% year-over-year to RMB 199.4 million in the first half of 2018.

As a result, as Slide 18 shows, we have been able to further improve margins. During the second quarter of 2018, gross margin grew by 1.7% to 71.9%. Adjusted EBITDA margin grew by 0.4% to 59.6%. And core net profit margin grew by 1.6% to 47.5%. Overall, gross profit grew 23.1% year-over-year to RMB 167.7 million.

Adjusted EBITDA increased 21.2% year-over-year to RMB 139.2 million. And core net income increased 24.7% to RMB 110.9 million. Basic and diluted core net income per ADS non-GAAP came in at RMB 1.09, equivalent to USD 0.16 in the second quarter of 2018 versus RMB 0.97 in the same period a year ago.

On Slide 19, we show consistent growth and healthy margins during the first half of 2018.

Moving on to Slide 20. Our IPO has bolstered our balance sheet further, which was already strong given our ability to consistently generate strong cash flow from operations. During the first half of 2018, operating cash inflow was RMB 199.4 million, cash and equivalents balance increased to almost RMB 1.9 billion. This provides us more resources to consider and evaluate additional capital investments and potential acquisitions.

Lastly, in terms of guidance, we reaffirm a 20% to 25% year-over-year growth in total revenues for the full year 2018.

This concludes our prepared remarks.

Operator, we are now ready to begin the Q&A session. Thank you.

(Operator Instructions) The first question today comes from Billy Ng with Bank of America Merrill Lynch.

I have 2 questions. The first question actually regarding the opening pipeline and also the opening schedule. We noticed that I think in the second quarter there is some slowdown in opening compared to what we expect. But at the same time, the company's full year revenue guidance remains the same. So does that mean we can expect the company can catch up in the second half in terms of the opening pace? And also if you can, please, explain in a little bit more detail what happened in the second quarter and why there was a slowdown in -- not slow down to be exact because it's still open a bit more than 1Q, but slower than expected compared to what we have in mind with about 100 openings. So what happened in 2Q? And are there any measures or any ways for the company to catch up? That's my first question.

Okay. Great. Let me answer this question. Good questions. We have 2 things here. First, our pipeline continues to increase to another 71 hotels to 477 hotels in the pipeline, and that's up from 312 at the beginning of the year. So we did experience a slight delay of opening for the second quarter for several reasons: number one, construction delays that little bit longer than we anticipated. We are increasing our construction management staff to help our franchisees to deal with the construction delays. Secondly, the government becomes more and more regulation wise that more responsible to enforce the safety and fire safety regulation as well as zoning compliance. So this will add, I think, that a little bit more delay in inspection and obtaining the necessary certificates. And so we believe -- and we believe that we are able to catch up those in the near future. So -- as can be seen in the added pipeline, we have 477. I think that's the highest number in our pipeline in the past. So I hope that I answered your question.

Yes. But just following up on that. Do you think some of the things that you mentioned, inspection take a little bit longer and -- are those more like a structural thing going forward, all the new opening will take longer? Or it's more like a temporary thing?

We believe the -- our government becomes really more and more smart in terms of making sure that the properties compliance, zoning compliance, fire safety. So just as a permitting process, I think, it will be a little bit different. And we think this will add probably some -- add some time to the constructions. So we are working. In the long run, they should be evened out. And in the -- when the regulation, let's see, takes effect and sometime will skew the numbers to the later part of the year or to the next year. So we do -- we think with zoning compliance and the fire safety, all of those, our government is going to pay more and more closer look and attention in the future.

Okay. And my second question, maybe, Alex, want to get your view is like given the macro situations and outlook may not be as strong as like, let's say, a few months ago. Do you find M&A opportunities in -- particularly in China, within China. Do you see the validation become a bit lower than before and as a result, may be easier to get some M&A done in the near future? Or you haven't seen anything change there? And also if you can provide any color or update on the M&A front that would be appreciated too.

Okay. So those are 2 questions that you want. One is the current, our plan at domestic and macroeconomic environment, the impact to our business and also the -- our M&A landscape. The first question is, we are -- we have received some inquiries from our investors, shareholders regarding the current domestic macroeconomic conditions, but we have not observed any -- that impact to our hotel development and growth. So our Q2 performance continue -- they continue to improve as we planned. And they are really consistent with our past plan and the strategy. So we believe there's 2 factors. One, our Chinese government continue to manage the economy rather well. And secondly, we have gone through -- GreenTree have gone through several cycles in the hospitality in China that give us valuable experience that we constantly factor in our evolving strategies. So our strategy is to design our -- to meet the demand for the hardcore business travelers and to making sure there is healthy gross margin for our hotel franchisees to weather any kind of changes in the economy. And thirdly, we believe our strong and growing memberships program ensure our substantial loyalty to our brands and that -- and finally, our efficient and cost-effective asset-light business model. We are not only talking about our higher gross margin will help GreenTree to weather the storm, we're also factoring in our franchisee also have a very healthy gross margin. So with all those 4 factors, we believe that we will not going to experience any impact in this marketing environment.

And lastly, I mean, it is possible and we cannot voice for other companies opinion, if other companies believe they have to be cautious in terms of, let's see, that have a tighter traveler budget or trading down. Then GreenTree will be benefited from those kinds of activities, because, as I mentioned repeatedly before, our strategy for our brand positioning is to provide value for the hardcore and value-conscious, price-conscious business travelers and leisure travelers. So that's the current macroeconomic condition. So we believe so far and combined with GreenTree strategy in the past, we have not observed impacts to our growth strategy.

The second question regarding the current M&A landscape. The M&A is our -- the strategy to grow. And we will -- we will review, evaluate possibilities in the marketplace with very disciplined approach because it's very easy to get into that for the sake of expanding our portfolio by acquiring. And -- however, as you point out, this market perception may create some further opportunities for GreenTree's M&A. Occasionally, we are -- from time to time, will be under discussion with potential M&A company targets. So we feel M&A will help GreenTree significantly to build a more larger scale increase competitiveness in the near future.

(Operator Instructions) The next question comes from Praveen Choudhary with Morgan Stanley.

One question for me only about the growth prospects in the future. My question is, if your openings have been somewhat delayed, meaning, in the second half, you will open more hotels than first half, and assuming that economic outlook has not changed, i.e. your RevPAR growth remains similar to what we have seen, then should we assume that in the second half your growth in profit or EBITDA be better than first half?

Okay. Praveen, I missed that -- the part of the question. You said assuming there is a delayed opening and also assuming the same growth of the RevPAR? So I'm a little bit -- I didn't get the question clearly. So I apologize.

Yes, I'll ask again. My point was that, second half unit growth is faster than the first half, because you're opening more hotels, and your RevPAR growth is similar in the first half. So I'm assuming that in the second half your growth, both in revenue and profit, should be faster, meaning you're accelerating your growth in the second half. Is that fair to assume?

I believe so, even though we have not break down into those numbers. Because the construction delays is going to be across the board, but we should anticipate there will be catch up in the second half of the year. And just to look at the pipeline in the beginning of the year is 312, the mid of the year is 477. And with -- the RevPAR, I think that the growth we should anticipate could be in line with our plan. So with those assumption, I would say it is safer to assume that.

One more question, if I may. About you M&A strategy. The question I have is, if you were to acquire another company tomorrow, would you use your extra cash that you have generated from business as well as from listing? Or would you use equity to do acquisitions? And also if I may ask, will the acquisition be mostly focused in China or overseas?

Thanks, Praveen. And I'll take this question again. Yes, I'm actually personally in charge with my team for the M&A. And so we will use our cash preferably unless our -- the potential target preferred part of the mosaic -- the equity, because we want to use -- we think -- the cash on the balance sheet should be primarily used for M&A. So that is our preference. But we also want to respect some of our -- the desire from our future partner and the future team members. So we are very sensitive because that's affecting our post-acquisition integration and management. GreenTree will be very responsible to make sure that when we acquire companies, investment companies, we have a similar culture and there will be less integration risk. And as I said, that we'll be very disciplined.

And the second question, yes, our -- all our focuses right now are primarily focused in domestic China. We are very confident the growth prospect of the domestic business and leisure travelers. So that -- but if the surrounding countries and regions have that potential targets, we wouldn't rule out the possibility to evaluate them, but then still those are company's plan right now.

(Operator Instructions) The next question comes from David Li with Lizard Investors.

I want to ask you about just the franchisee fees, F&M fees. I saw membership fees up quite significantly. Can you explain what really drove that membership piece, other than maybe pricing, and obviously, I'm assuming membership growth as well? And also within the franchise, outside the initial fees, the recurring fees, is there any mix shifts in that recurring fees?

Do you want to pick that? Or you want me to pick that?

David, Jasmine. Our -- you could probably see that on our press release that we have a breakdown of the initial franchise fee and recurring franchise fee. Our initial franchise fee increased due to our acceleration of gross openings of 104 hotels in the second quarter 2018 as compared to 97 hotels opened in the second quarter of 2017. Then the recurring franchise management fees, that's primarily due to RevPAR growth of 4.7% and also growth in central reservation system usage fees, annual IT marketing fees, hotel management fees, et cetera. This is all because of a result of the increased numbers of hotel and hotel rooms in operation.

Okay. And also just the -- but the membership fees, in general, that's up quite -- that was up 44% year-on-year. Any -- I'm curious any price increases across these different fee structures?

Good question. I'll take that up, David. Great observation. The membership has a compound, I believe, growth rate over there. And the first, we have more hotels who generate membership. So the hotel numbers increase. There -- you can see the revenue, I think, on the F&M increased 25%, as a sector. The L&O increased 7%. So the hotel number increased, I think, roughly about 20% or so. And meanwhile, each hotel, the membership mix depend on the customers, the types of -- we have 3 levels of premium paid memberships: regular and gold and platinum. And we did observe there is an increase in the demand for gold and platinum memberships. So as a result, the revenue for both of our franchisees and -- as well as to GreenTree also increased. If you recall, I think we reported here in the past, we split -- we shared the membership fees with our franchisees, 70% actually goes to the franchisees and 30% goes to GreenTree. So we always experienced higher growth rate of the membership growth than the -- than our hotel number growth.

Okay. Great. And also can you may be going back just talk a little bit about -- I mean, couple of analysts asked this question already. But what are your thoughts on this in general. Obviously, industry is seeing a little bit of slow down, some of it Tier 1 cities, some of the others, maybe, higher mid-scale or up, right? Can you just talk a little bit about, like, what are some of the things your competitors are seeing that sort of not applicable to you? Obviously, the beauty of your model is that you don't have to deal with a lot of the issues. You don't see that directly in your P&L. Can you just help us understand, like, what -- any of the issues that's really kind of unique to some of the peers, but not really affecting you and what might -- what caused for that?

David, that's a great question, again. We are very different in the way from most of the other players, I think, that first of all, our geographic coverage that we are growing more naturally, organically. So we have more weathered the kind of a match with the economic shift, condition shift. So our portfolio is more balanced between the first, the second and the third and the other tiers. And so the -- even if there is a 1 small sector that has, let's say, Tier 1 experience, certain regions experience slow down, we may not get that much impacted, and that's the first. The second is, even in the first tier city, second tier city, we still have a lot of properties over there. But if you recall, we have mentioned earlier that when we select the properties, we balance the ADR with rental cost. So we pay close attention to the operating margins -- operating leverage to our franchisees to ourselves. So our location -- hotel location, even among the top tier city, first or second-tier cities, we believe are strategically located. So they will be less impacted by, let's say, the prime location properties pricing changes or slowdowns, so that's the second that the -- the second difference. And the third, we use also value pricing, and we want to make sure that to our loyal memberships, GreenTree's pricing means value to them and they can return. We will have a more repeat business from them. And so you can see, even if -- even though our membership volume seems to be 24 million, it's a little bit smaller than some of our peers. However, our direct sales is 95.4%. So that number really means that our loyal members are very, very frequent visitors. So -- and that -- they will -- their visit will be less impacted by the change in terms of any geographic or -- and economic condition shift. So we have -- that -- I think, those factors contributed to -- were less sensitive or were less get affected by this current reported concerns or changes.

Okay. Great. And I've another question about the CapEx. I understand you guys -- it was an opportunistic purchase. When should we see CapEx coming down significantly because, I think, the first half is over RMB 100 million, right? And this quarter is over RMB 50 million. When should we see that sort of coming down dramatically?

What?

The capital expenditure.

David, that -- can you repeat the question?

Yes. When are you going to see -- because I understand the CapEx is due to an opportunistic purchase of a property, right? And -- just kind of curious when is that -- when is the CapEx going to come down sharply? Is it in the next -- in the second half or next year?

The CapEx will come down -- I wasn't -- the capital expenditures in those kind of opportunity -- opportunistic investment purchases may or may not come down, David. Because those kind of purchases, I think, are concurrent with our L&O model direct leases, which provide really a very, very favorable returns to our shareholders and can weather also the kind of -- there are some concerns, there's foreign currency, the exchange rate changes. So we believe those properties will -- first of all, will financially perform well. Secondly, the -- they are in a very -- a transportation hub that provide great advertising for the company. And thirdly, those assets will appreciate -- we believe those assets will appreciate very nicely in the future. So when we see those opportunities in the future, I think we'll continue to see those for our shareholders. And you are referring to a couple of properties we purchased at -- near second-tier city, it's important, like, in the transportation hub, which overall cost, I think, roughly less than, I believe, the first-floor commercial space is less than RMB 5,000 per square meters in a great location. So it is just a rare opportunity. So we do not know, but we strongly recommend. I even recommend to the board and shareholders when we see those opportunities, we should seek those.

Okay. And one last one, sorry I didn't mean to hold the line. You have total about 8 brands now. Sort of medium term, do you feel like 8 brands are enough for you to keep growing or for you to double? At what point of the size of the business in terms of units would you need more than 8 brands?

We believe, we should have 15 brands. So we still have 7 more to go in the past. So because the -- we -- as a brand, we should really target different price range, and then we're not even talking about decor just like Selina said. But if we combine the basically the brand that should consist of 2 major components, I think one is the price range, exactly what our travelers and customers can afford; secondly, what kind of taste. So there are 2 dimensions to the brand. So with 2 dimensions, there may be even more variety and -- but we will -- and the M&A will take that into consideration, David. So as our team internally we all know, the M&A target would have to be both brands as well as a geographic coverage. They have to be complementary to GreenTree and the existing brand and portfolio. We do not want to do something that cannibalize each other.

The last question comes from Xin Chen with UBS.

I have a question. My question is about, may I know the second quarter RevPAR growth Tier 1, Tier 2 and lower cities separately, and trend in the second half of this year?

Do you have the number? No, the past -- the current quarter. Do you have the number? Selina Jasmine. Jasmine will have the second quarter, Tier 1, Tier 2, Tier 3 cities RevPAR growth.

Yes. In our second quarter 2018, our Tier 1 cities the RevPAR growth is low double digit, primarily driven by ADR growth. Our Tier 2 -- Tier 2 cities is in -- around 7% in Tier 2 cities; in Tier 3 and lower cities, is in low single digit. Does that answer your question?

Yes. May I know the trend in the second half of this year?

Trending forward. We have -- we believe, the trend will continue to be consistent with what we have reported and planned earlier. So in the past that I believe we said full year, we will anticipate our RevPAR growth is between 4% to 6%. And so we continue to see the trend in that regard in light of even -- in light of some of the investors concerned of the current economy.

And as you can see, we're also seeing Chinese government is trying to (inaudible) in order to revitalize smaller cities. So we believe, eventually leisure travel growth -- we see a lot of opportunities to grow RevPAR since our (inaudible) can with brand positioning.

Good comment, Selina. The first -- I think the last couple of years you can see some RevPAR increase in the first-tier cities and then spread in second-tier cities. I think that the next catch-up, I think, should be in more third or fourth tier cities, because once we have a dramatic growth then the growth rate tends to slow down. And then, it is like a wave spreading into the other cities eventually evenly. So the -- it's like that our current [CPI]. So that -- we believe our current mix and the -- current mix of the portfolio will ensure that we'll have a very healthy growth in the RevPAR.

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

Thank you, operator. In closing, on behalf of the entire GreenTree management team, we'd like to thank you for your interest and participation in today's call. If you require any further information or have any interest in visiting us in China, please don't hesitate to contact us. This concludes the call. Thank you all.

Thank you.

This conference has now concluded. Thank you for attending today's presentation, you may now disconnect.