GreenTree Hospitality Group Ltd (GHG) 2018 Q4 法說會逐字稿

Hello, ladies and gentlemen. Thank you for standing by for GreenTree's Fourth Quarter and Full Year 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, Keith. 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 on 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, Chief Financial Officer; Ms. Megan Huang, Director of IT Department; and Mr. Nicky Zheng, IR Manager.

Mr. Xu will present the company's Q4 and full year 2018 performance overview, followed by Ms. Huang, who will discuss business operations and company highlights, and Ms. Yang will then discuss financials and guidance. They will all be available to answer your questions during the Q&A session that follows.

Before we begin, I'd 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, expects, anticipates, 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 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 achievement 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 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.

Thank you, Rene, and thanks, everyone, for joining our earnings call today.

I'm pleased to report our 2018 fourth quarter and the full year result that you can see on Slide 5 of the PPT we presented for you. During this quarter, we continued to expand our geographical coverage across China, covering 290 cities at the end of December 2018. We now operate 2,757 hotels across 10 different brands from economy, mid-scale to mid-upscale limited services segment of the market, including our newly-started apartment business.

In the fourth quarter, we opened 224 new hotels and continued to grow our pipeline. As of December 31, 2018, we had opened a total of 554 new hotels for the full year 2018. We are on track to open more new hotels in the coming years.

In the fourth quarter of 2018, our total revenue grew 20.8% from the same quarter of 2017 to reach RMB 249.9 million. Gross profit increased by 19% to RMB 175.8 million. Non-GAAP adjusted EBITDA rose 35.2% to RMB 160.1 million, and the non-GAAP core net income rose 33.4% to RMB 115.9 million. While gross margin changed slightly from 71.4% to 70.3% in the quarter, adjusted EBITDA margin improved from 57.3% to 64.1%, and the core net margin improved from 42% to 46.4% compared to a year ago.

For the full year 2018, total revenue grew 21.4% year-over-year to reach RMB 945 million. Gross profit increased by 22% to RMB 664.1 million. Non-GAAP adjusted EBITDA rose 30.5% to RMB 609.7 million, and the non-GAAP core net income rose 31.8% year-over-year to RMB 445.3 million. While gross margin improved slightly from 70% to 70.3%, adjusted EBITDA margin improved from 60% to 64.5%, and the core net margin improved from 43.4% to 47.1% compared to a year ago.

These results were driven by continued growth in our hotel network and the improved operating performance through IT improvement at our existing hotels.

During the quarter, we opened 224 new hotels with around 12.5% of this in our mid-to-upscale brand, around 49.1% in the economy brand and around 38.4% in the mid-scale brand.

Our pipeline of new hotels increased from 306 at December 31, 2017 to 430 at December 31, 2018. More than a quarter of our pipelines is in the mid-to-upscale hotels, including Gme, Gya and VX, which we launched late last year. We are accelerating our new hotel openings under these 3 new brands, with 14 new openings in the fourth quarter of 2018 and 21 new openings for full year 2018.

To further diversify our existing product portfolio, we added one more brand, called Wumian Hotels, in the mid-scale segment during the third quarter. Wumian aims to provide comfortable, intimate, simple and a stylish space to business travelers for a deep sleep experience. Also, during the second half year of 2018, we started our apartment business and opened one apartment in 2018.

Across all brands, full year 2018 new openings increased by 30.4% from 425 to 554. In terms of operating performance, we saw steady progress across the board. Average daily room rate, or ADR, for the quarter increased by 3.8% from the same quarter of 2017 to RMB 164. Occupancy had a slight decrease of 1% to 80.4%, which was related to accelerating new hotel openings, and revenue per available room increased 2.3% from the fourth quarter to RMB 132. For the full year, ADR increased by 4.5% year-over-year to RMB 164. Occupancy had a slight decrease of 0.5% to 82.1%, and revenue per available room increased 3.8% year-over-year to RMB 135.

One of the biggest drivers of both our steady incremental improvement in operating performance and our high overall profitability is our loyalty program. We now have approximately 29 million individual loyal members, up by 38.1% from approximately 21 million members as of December 2017; and over 1.27 million corporate members, up by 54.9% from approximately 820,000 at -- as of December 31, 2017. Out of the 29 million members, approximately 21 million of them have joined our premium paid membership program. Our brand and the direct relationship with the many valued customers allowed us to sell directly. In the most recent quarter, we sold approximately 94.5% of our room nights through our direct sales channel. And for the full year 2018, approximately 95.0% of our room night was sold through our direct sales channels.

Now let me talk about a few important business developments in 2018 and first quarter of 2019 that you can find on Slide 6. To enhance our customer satisfaction and bring more convenience to customers, we have been improving our app functionality, including the interconnections between app and the PMS. As of December 31, 2018, our app was ranked second overall in terms of user activity on the Intelligent Mobile Observatory in hotel sector.

M&A and the strategic investments are key growth strategies for us. We have identified several appropriate targets that are complementary to our existing hotel portfolio, geographic coverage and professional comments.

First, on January 18, 2019, we invested in Gingko, a public company listed on the Hong Kong Stock Exchange. In the 2017 to 2018 school year, approximately 10,000 students are involved in this college. Gingko is currently ranked as China's #1 hospitality university by the Gaosan Web Association, a website with introductions to and the ranking of the universities in China. Our 2 companies will work together to cultivate professional talents for ourselves and for the hospitality industry in China.

Second, on January 28, 2019, we announced a strategic investment to become a majority shareholder in Argyle. The Argyle hotel network consists of 8 mid-scale to upscale brands with footprints mainly in Southwest China, Southeast China and some hotels in Southeast Asia. Argyle's highly distinguished brand portfolio and their geographic coverage are highly complementary to GreenTree's business.

And the third, on March 11, 2019, we acquired 4.95% in New Century Hotels in their initial public offering as a Cornerstone investor. New Century is also a public company listed in the Hong Kong Stock Exchange. New Century operates and manage 150 hotels ranging from mid-scale to upscale brands, with over 34,000 hotel rooms in 22 provinces in China. Our 2 companies will explore opportunities for future strategic operations.

Finally, on January 22, 2019, we announced a payment of cash dividend of USD 0.30 for ordinary shares or USD 0.30 for ADS. We plan to pay a cash dividend of $0.20 per share in the near future, assuming no immediate cash need for the company's growth or M&A opportunities, in order to create long-term value and benefit for our shareholders.

In conclusion, we are pleased with our team's performance in 2018. Although there is more hard work to be done in the coming years, we are confident in our business model, strategic positioning and the long-term growth strategies. We will continue to invest in our people, brand, system and technology in order to better serve our customers and franchisees and to ensure the long-term healthy development of our hotel network.

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

Thank you, Alex. If you are following along on our slides, I will skip the overview on Slides 5 and 6 and go straight to Slide 7. 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 kept steadily contribution to overall revenue. In the fourth quarter, the percentage reached around 77.3%. The percentage was 77.4% in the full year 2018.

Let's turn to Slide 8. Another critical area of our business is our loyalty program. Our program differs considerably from most hotel businesses in the West. We have a paid program to which people sign up to enjoy a variety of premium perks and benefits. More importantly, we found that this program had allowed us to foster closer relationships with our guests. Members can book directly with us, which has helped us and our franchisees to reduce sales and marketing fees and expenses, and our GreenTree members are very sticky customers.

Overall, we now have about 29 million members in our loyalty program, along with 1,270,000 corporate members, up from approximately 26 million and 1,020,000 as of September 30, 2018 and approximately 21 million and 820,000 as of December 31, 2017. In the fourth quarter of 2018, around 94.5% of room nights were sold through our own direct channels, which includes our individual loyal members and their corporate members.

Moving on to Slide 9. You can see our RevPAR trend here. Q4 is typically one of the low seasons during the year. In the 2 charts at the bottom of the page, you can see that on a year-over-year basis, RevPAR for L&O increased by 1.5% to RMB 137, and the RevPAR for F&M hotels increased by 2.3% to RMB 132 for the fourth quarter of 2018. Both segments showed healthy growth over the fourth quarter and the full year 2018, mainly due to higher ADR.

On Slide 10, you can see that we worked very hard this past year to further boost our pipeline of new hotels. During the fourth quarter, our pipeline is 430, while we opened 224 hotels. In particular, we are trying to boost growth and at the same time, to diversify our portfolio by adding more hotels at the higher end and economy segments of the market.

Currently, 79.2% of our hotels, really the core of our business, serve the middle end of the limited services market. In line with this strategy, during this quarter, we added 14 new GreenTree Eastern, 7 Gme and 7 VX hotels, which primarily serve business and the leisure travelers in the mid-to-upscale segment of the market. So the number of hotels in this segment increased to 3.9% of total portfolio.

Meanwhile, the number of hotels in the economy segment grew to 16.9%, with addition of 110 economic hotels across our Vatica and the Shell brands in the fourth quarter of 2018. We continue to roll out our 3 new brands at the mid-to-upscale end of the market as part of our strategy to strengthen our portfolio.

On Slide 11, you can see these brands, which we have named Gme, Gya and VX. We are targeting around the same price point for all 3 hotels, but the decor and the position -- positioning of each will be quite different as we cater to the taste of different segments of the market. We had 29 Gme, 27 Gya and the 24 VX hotels in the pipeline as of December 31, 2018.

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

Thanks, Megan. We delivered another solid quarter and full year of operating and financial results.

Moving on to Slide 13. We now have a total of 2,757 hotels with 221,529 rooms. On a year-over-year basis, we increased our hotel numbers by 20.4%. We opened 224 new hotels during the quarter and 554 for the full year 2018.

By comparison, we opened 171 hotels in the fourth quarter 2017 and 425 hotels for the full year 2017. As you can see, we continued to substantially accelerate our hotel openings in the fourth quarter and full year 2018. Of the 224 hotels opened in the fourth quarter, 28 in the middle-to-upscale segment, 86 were in the middle-scale segment and 110 in the economy segment. Of this, we opened 20 hotels in Tier 1 cities, 49 in Tier 2 cities and the remaining 155 in smaller cities in China.

During the quarter, we closed 25 hotels. So net-net, we added 199 hotels to our portfolio. We closed 10 hotels due to their noncompliance with our brand and operating standards and closed 1 hotel due to hotel upgrade. We also closed 13 hotels due to property-related issues, including rezoning, returning of government-owned properties and expiry of leases, et cetera. And there was 1 leased-and-operated hotel being converted into F&M hotel in this quarter.

For the full year 2018, we closed the 86 hotels compared with the 100 hotels we closed in the year of 2017. So in that, we added 468 hotels to our portfolio during the past year.

On Slide 14, you can see some of our key operating metrics. During the quarter, we continue to see improvements in our operating performance across the board. The key numbers to look at here are orange bars representing the performances of our F&M hotels. These hotels make up the biggest part of our business. The performance of our leased-and-operated hotels skewed a bit higher, since 6 leased-and-operated hotels captured renovating since last quarter and 1 L&O hotel converted to an F&M hotel during this quarter.

In terms of our F&M hotels, our ADR improved by 3.2% to RMB 163 in the fourth quarter of this year. RevPAR increased by 2.3% to RMB 132, while occupancy rates for our F&M hotels had a slight decrease of 0.9% to 80.7%, which was due to the acceleration of new hotel openings in the quarter.

On Slide 15. For the full year in terms of our F&M hotels, ADR increased by 4.5% year-over-year to RMB 163. Occupancy rate had a slight decrease of 0.6% to 82.3%, and revenue per available room increased to 3.9% year-over-year to RMB 134.

On Slide 16, you can see that total revenue grew 20.8% from the fourth quarter of 2017 to reach RMB 249.9 million in the fourth quarter of 2018. The increase was primarily attributable to 4 factors: first, the increase of 224 F&M hotels in our network; second, the addition of a new L&O hotel and the conversion of 3 F&M hotels to L&O hotels since last quarter; third, improved RevPAR for both F&M and L&O hotels; and fourth, growth in our loyalty membership program.

This was partially offset by the renovation of 6 L&O hotels since last quarter and the conversion of 1 L&O hotel to an F&M hotel during this quarter.

Total revenue from F&M hotels for the fourth quarter rose 26.0% to RMB 193.0 million. Meanwhile, revenue from leased-and-operated hotels rose 6.1% to RMB 56.8 million. For the full year 2018, the total revenue rose 21.4% to RMB 945.0 million. Total revenues for F&M hotels for the full year 2018 was RMB 731.8 million, up by 25.2% year-over-year. Total revenues for -- from L&O hotels in the same period were RMB 213.2 million, increased by 10.1% year-over-year.

Slide 17. Moving over to the expense slide of the P&L. Please look at the 3 graphs on the right-hand side of the slide. Here our operating costs for the fourth quarter of 2018 were RMB 74.1 million. The increase of 25.5% from the fourth quarter was mainly attributable to 3 factors: first, the increased number and the increased salary of general managers in our hotel network; second, other costs associated with the expansion of F&M hotels; third, higher operating costs for the 4 newly added L&O hotels since the third quarter of 2018. This was partially offset by reduced utility costs due to the renovation of 6 L&O hotels since the third quarter and also our prospects by reduced depreciation and organization and operating costs related to the conversion of 1 L&O hotel.

Selling and marketing expenses for the fourth quarter of 2018 were RMB 16.2 million. The year-over-year increase of 3.0% in the fourth quarter of 2018 was mainly attributable to the increased personnel compensation and other costs, for example, travel expenses, of business development personnel as a result of the increased opening of our hotels.

General and administrative expenses for the fourth quarter of 2018 were RMB 34.8 million. Excluding the one-time grant of GTI's shares to certain of our directors in the third quarter of 2017, G&A in this quarter increased by 35.3% compared to the same quarter of 2017. The increase was primarily attributable to the increased salary and share-based compensation.

Overall, excluding the one-time grant of GTI's shares to certain of our directors in the third quarter of 2017, the total operating cost expenses increased by 24.7% year-over-year to RMB 130.7 million. It grew 17.6% year-over-year to RMB 432.6 million for the full year 2018.

Slide 18 shows that during the fourth quarter of 2018, gross margin had a year-over-year slight decrease by 1.1% to 70.3% while we were able to improve adjusted EBITDA margin by 6.8% to 64.1% and core net profit margin by 4.4% to 46.4%.

You can also see that during the full year 2018, gross margin increased by 23% to 70.3% while we were able to improve adjusted EBITDA margin by 4.5% to 64.5% and core net profit margin by 3.7% to 47.1%. Overall, gross profit grew 19.0% year-over-year to RMB 175.8 million, and adjusted EBITDA increased 35.2% year-over-year to RMB 160.1 million. Net income increased to RMB 53.8 million, and core net income increased 33.4% to RMB 115.9 million.

Basic and diluted earnings per ADS reached RMB 0.53. That's equivalent to USD 0.08. While basic and diluted core net income per ADS improved by 20.0% to RMB 1.14. That's equivalent to USD 0.17 in the fourth quarter of 2018.

Moving on to Slide 19. Our IPO has bolstered our balance sheet further, which was already strong, given our ability to consistently generate strong cash flow from operations. For the full year 2018, operating net cash inflow was RMB 554.9 million. As for December 31, 2018, cash and cash equivalents balance increased to almost RMB 2.3 billion. This provides us with more resources to consider and evaluate additional capital investment and potential acquisitions.

Lastly, in terms of guidance, we expect a 20% to 25% year-over-year growth in total revenues for the full year 2019.

This concludes our prepared remarks. Operator, we are now ready to begin the Q&A session. Thanks.

(Operator Instructions) And the first question comes from Justin Kwok with Goldman Sachs.

Perhaps I will start with 2 questions, one on the M&A side and the other one on the growth guidance and on the demand side. The first one on the M&A side. I guess, with reference to your announcement, you have made 3 acquisitions in the recent months, of which actually 2 of them are of a minority stake investment, so I want to get your view on how you balance between getting a higher stake or a higher ownership versus just a minority and how that would balance your strategic cooperation in the future, whether that's actually a plus or a minus for you? Because I think I would say you can also strike strategic partnership with certain companies without actually getting a minority stake. And with all this money being spent, can you remind us what's your available resources or cash resources -- cash or equivalent resources after all these acquisitions by now? That's the first question.

Justin, thank you so much for the great questions. First of all, in the potential acquisition and strategic investment, we want to be flexible and explore all source of possibilities. Sometimes, acquiring a majority of the interest or acquiring an interest of your expectation may be difficult, yet you will find there is a potential win-win or mutually beneficial working relationships as warrant for us to invest as a significant by the minority interest. We believe that will also align our true company's interests more closely, and that is one of the rationale. But given opportunities in the future -- and we clearly would like to see a higher stake in the company for GreenTree. So after those acquisitions, we still have approximately about liquid or available cash available for acquisition close to RMB 2 billion. I believe it's at least RMB 1.8 billion or so. So I be belong in that. So that adjustment, that's where we are.

Right. Perhaps on the second question regarding the guidance and also the demand at -- you have released a 20% to 25% revenue growth guidance in 2019. Can I check what -- would you be able to comment on what's the assumption on your RevPAR growth for this set of guidance? That's one. And the other thing, can you get -- share with us some observations of the RevPAR trend into now, year to March?

Sure. Those are -- again, I'm just trying to add from a strategic and operating point of view, and, Selina, you can also jump in to correct me. I'm just giving a ballpark of estimate. In terms of the growth guidance -- the revenue guidance, we didn't give the RevPAR guidance, we see of -- and considering the development personnels in our pipeline and our market condition, taking into consideration the new players entering China, we still think 20%, 25% is a healthy growth. In fact, Justin, we would like to target a steady, about 20% growth, for near in the future. Reason is, I think that I recall that the 2020 investment strategy, if a company can maintain a roughly close 20% growth for 20 years and you can actually increase your shareholders' value by 37x. And this is a goals and there were investment and there are also some very stable growth companies, their strategy. So we can probably force the growth a little bit higher, but I think that will add a little more stress to our current personnel. And so balance of their burden responsibilities and the market conditions. So I think that the revenue growth, 20%, 25%, should be realistically achievable. In terms of RevPAR growth, as we mentioned, we'll continue to target around 3% to 5%, in that range. And in terms of like-to-like hotels, RevPAR increased because that's in line. And I think that's a healthy growth, in line with the CPI, in line with the general consumer pricing mix trend, and if you force the growth increase too high and you then exhaust your potential to increase in the future years. And in this quarter, we have the RevPAR increased slightly lower than the previous quarter. It's not because, I think, that of a like-to-like plot. I think that's more resulted from the mix. The mixed change of the GreenTree's portfolio of new openings for the last year, especially for the fourth quarter of 2018, we have a more economy hotels in the pipe -- for the instance open. We have -- relatively have -- you have more openings. We basically have 2 themes that actively impacted the overall RevPAR growth. That is a lower ADR and a lower occupancy during the ramp-up period, and therefore reduced the result of a lower RevPAR. And then we mixed them together. Even though you have on that economy brand, we still have a like-to-like increase. But because it occupies a higher percentage, so we roughly calculated that it has a roughly 1.5% of impact to the RevPAR. And you can roughly calculate the numbers by yourself and with a simple mathematics. And deleting that, I think our RevPAR growth are still in a healthy range, and even during the first quarter, above 3.5% to close to 4%, which we believe -- and it is really healthy considering the current economic conditions. So Justin, that's my comments. Selina, anything to comment?

Yes. Please allow me to explain more. And actually, in the fourth quarter, the new hotel openings increased by 24% compared with the fourth quarter of the year of 2017 because in the year -- in the fourth quarter of 2018, we opened 224 hotels. I think it's related to the acceleration of the new hotel openings made cost decreasing in the OTC listed. So excluding the impact of the new hotel openings, we find that there's no fluctuation in occupancy rate and for the same hotel. And the RevPAR for the same hotel, the growth is higher than 3%.

But just into this -- in the last 2 months in 2019, any color?

We have -- Justin, we have -- because we focus on this value-priced hotel, so the last 2 months, in total, we really have not seen any up-and-down significant pattern we can observe. So we actually grow as planned.

And the next question comes from Billy Ng with Bank of America Merrill Lynch.

I just have one question. Alex, can you tell us -- like I understand that you guys tried to -- some of the A-share investment, and can you give us some update where we are right now?

Okay. So we have, as we mentioned to you, A-share investment was a leftover legacy from the previous -- when we -- before we became public. And that in total, I want to assure everyone that A-share investment we made is a great loss creation for the company because we did analysis given during the September 30 last year. In light of the market -- the stock market crash or the reduction in China, our total returns on the A-share, just the equity appreciation net-net is about a 20% compounded average rate of return for the cost of 4.5 to close to 5 years. So if there's a little bit of fluctuation, that's because we're gaining less or more -- gaining less. And then not we're losing actually any dollars from the A-share. But we are in the process of liquidating some of those. And to move the stock -- to move the dollars into the bank, so that we're ready for the acquisition in the near future. So our position currently, we haven't reduced the sum because we have sold some of our stocks, as we have mentioned to you before.

And maybe another sort of questions on what Justin's asked. Regarding to the M&A strategy, I think the market condition has changed, but are there any specific target? And I also noticed that you guys make some strategic investment as well. But in terms of our focus in the next 12 months or maybe in the next 24 months, where are the opportunities? Like do you see -- still possible to buy sizable companies within China? Is that still easy to start? Or are the opportunities maybe small like coming from overseas?

Good question, Billy, that we are -- no, I think there are still great companies out there that we -- I think we've got out there that are potentially our joint venture partners. The key issue is during the slowdown, the healthy, good company's expectation of their valuation is not going down, is not getting decreased at the market's correction. So as a result, actually, there is a gap. And during the volatile time or during the market down time, it's not as easy to do good M&A during this time either. So initially, I had an impression -- no, we have an impression, our team have the impression that maybe that with a little bit of a slowdown in the marketplace and people in our -- other players are able to reduce their expectations in reality, and that's not the case most of the time. But yet I think there are really good companies out there that we are -- we think that are still available and that makes a good partner for the GreenTree as they've been based in China. And we are -- continue to be open-minded because every company that are doing business with us have found themselves being helped by GreenTree, and they're growing. And so we have a good reputation in the marketplace for that. And then we hope this will enhance our ability to find more partners, and which we are in the process of doing so. And -- however, and we do not want to close the doors to the other nearby countries such as Southeast Asia. So we will continue to explore to expand to those regions. And the Argyle investment, I think that the provider's a good and great team and good resources in those regions, and that truly made our brand portfolio after our total merger and we'd basically cover the full range of the hotel products, from 5-star to mid-upscale limited services all the way to the economy. So I think our 2 team will work really and then will create great result. And the founding -- the Founder and the Chairman of Argyle, Mr. Kevin Zhang, is a reputable and hotel expert and business entrepreneur, very successful. So we think that the team under his leadership will accelerate his hotel portfolio growth in a much faster way than before. So we'll continue to explore that. And so we think that the opportunities are there, and we -- with the combined organic and strategic M&A, and we are able, I think, to achieve our planned growth.

And the next question comes from Aras Poon with Citigroup.

This is Aras. I just have one question related to some of your new brands that you are launching this year. Because you just mentioned that you're going to accelerate the expansion of these new brands, can we just get more sense of your marketing strategies of launching these new brands to the franchisee and also the cost of this? And also, can you tell us, should we expect any increase in marketings and promotional expense, especially given the market is so competitive, that you need to spend more to promote these new brands?

Aras, the -- we don't expect any significant market promotion expenses, but we did contracted a young star to represent our new brand and which cost a little bit more money in that end. But because we are going to rely on almost the 3,000 successful franchisee partners, so they are the ones that are being successful by doing GreenTree's hotels. So a lot of the 3 new brands are the upgrade and the new hotel opening by the existing or their referral family members. So we believe that's a healthy -- we want to find partners who has -- or franchisees who has some experience on exposures in the hotel segment. It's easier to educate, to help them and to work together to produce the best return hotels. And I think I mentioned it to everyone, I think, in comparison, our hotel franchisees enjoyed a really healthy returns in the industry, and we've been known for that. So that -- so no significant increase. There might be some increase, but I do not think they will impact our margin much at all.

And the next question comes from Jisheng Liu with CLSA.

I have actually 3 questions. The number one is just update on hotel openings guidance because we've seen that in -- so '18 full year, we have actually opened more than 550 hotels, and we have [firmed] a target of 3-year 1,800, which was 500, 600 and 700 year-by-year. So I was interested in if we have opened more hotels that are expected in 4Q '18. And would that be changing our hotel openings plan for 2019? That's my first question.

Okay. Jisheng, thanks. We -- at this moment, we're still planning for the 3 years of 1,800 good hotels. So this year, if we are able to beat the -- we have also want to take some margin of safety and that the -- so we still roughly plan for about 600 and at the -- expected to see an opening of hotels. So -- and then together, about 1,800 for the 3 years, as we discussed in about a year ago.

Okay. Number two is on the initial franchise fee in 4Q '18. So as we can see, the initial franchise fee per hotel has been actually going down. So I understand that we have still a temporary waiver for the Shell Hotel and new openings. And we have opened more economy hotels during 4Q '18, which could be a factor as well. Apart from these 2 factors, we -- do we have any other elements which are impacting the initial franchise fee per hotel?

These are the only factors under that. But with the increased competition in the marketplace, we have to also -- because, for instance, they're allowed and then now entered into the China that they have a different business model. They actually impacted our franchisees or the market hotel owners' expectation. And the -- so there is a competition for that. And so we have to consider the market overall competition forces and flexible in terms of initial franchisee. But we, on the going forward, GreenTree will always be the one that take initiatives and to be the value provider. And if I'm -- and making sure our franchisee gets the best value. So our financial programs are already taking into consideration of those kind of changes. And so that what we are continuing to monitor and continue to be flexible, I think the market, they're -- adding new hotels are more important than in terms of -- than if they actually, for instance, higher price or higher initial application fees.

Great. And the number three question is on the capital management. I want to get more sense on what the company is actually planning to do, because when we did our IPO, we said we're going to use more than half of the proceeds to the M&A transactions, and now we are starting to pay dividends starting from 4Q '18. Now we will continue to pay that going forward. So we actually have internally a target for shareholder returns for share return on equity. And I want to get some color on why the dividend going forward is $0.20 per year and in which kind of circumstances we can not pay that dividend? Or any other circumstance can we pay more than that?

Good question. We have half of the -- our investors. We listen to our investors. We have half of our investors there that just keep on growing, no dividend. We have half the investors said, "We are a stable cash flow company. We should continue some dividend." And so it's kind of difficult to meet everybody's expectation, but the company listens to our shareholders' requests. And that they -- we feel like a dividend. If the company doesn't have the immediate cash need and that then we should pay certain percentages -- for a certain percentage of dividend to our shareholder. And that will continue unless there is a major M&A and if we have to exhaust all the cash and the plans we have to take some -- take on some debt, then that year's dividend may be stopped. And that then any acquisitions we planned for half are going to be eventually cash flow and the net earnings accretive. We're going to resume that and with higher -- in terms of per shares -- per share dividend. But in terms of percentage-wise, we have not set a target. But we just calculate that even with our other ongoing pipelines, we believe we still can have a steady stream of dividend to our shareholders without affecting the company's growth. So taking -- that's the company's rationale for announcing that.

And the next question comes from [Allen Liu] with SWS Research.

I have 2 questions. And the first one is, as we see like the Huazhu and the Jinjia the recent data and we see more declines in occupancy rate. And I think they focus more -- may affects more on Tier 1 and Tier 2 cities. But like us, we focus on other cities. And do you think that in the other cities are better than the Tier 1 and Tier 2 cities for the last year or at present? I mean, the situation for the macro. This is my first question.

Great, [Allen], and that's a good question. I think Selina had done some research for you. The -- for the question, the -- we -- the last -- year before last year and the previous couple of years, the Tier 1 cities enjoyed a much higher RevPAR increase, driven by the need because the rent cost -- rental cost, property cost skyrocketed. So -- and clearly, indeed that's the RevPAR growth of the first tier cities. And then the last, I think, 1 to 2 -- second-tier cities also enjoyed some good increase. And now I believe the trend, the third tier or fourth tier cities, they're just starting to get -- catch up a little bit with their real estate property costs in place. So I'm going to leave it to Selina. Selina?

Yes. Thanks. The RevPAR growth in the fourth quarter of last year in different cities -- actually, in lower cities, the growth rate -- the RevPAR growth is very healthy, and including not even better than the Tier 2 cities. We're happy to find this.

So the third tier, four tier cities and the RevPAR growth, [Allen], is higher than the Tier 2, but lower than Tier 1.

Yes, lower than Tier 1, Tier 1, 2, and that is the best.

Sure. And my second question is about the VAT. So we see that there will be a relief on the value-added tax, but I don't think that's the benefit for the service industry. So do you think there'll be any difference for the VAT that's going down from 15% to 13%?

For our business, and I think that it will not have a lot of impact because we are providing a brand and management. And I think on -- if you have a large sum of fixed rental expenses with the equipments, and then that way, we get benefit by that -- by the lower VAT tax. And then our portfolio and you can see that our gross margin remains about the same. Gross profit margin did not increase much. However, our adjusted EBITDA growth increased because our percentage of F&M hotels increased by 0.3%. So that 0.3% increase actually increased the -- lowered the fixed expenses on the properties' rental-related expenses, therefore, actually increased the EBITDA much faster than gross margins -- than gross profit increase.

And this concludes the question-and-answer session. I would like to turn the floor back to Selina Yang for any closing comments.

Thanks, 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.

Thank you.

Thank you.

Thank you. Thank you for attending today's presentation. You may now disconnect your lines.