GreenTree Hospitality Group Ltd (GHG) 2020 Q3 法說會逐字稿

Hello, ladies and gentlemen, and thank you for standing by for GreenTree's Third Quarter 2020 Earnings Conference Call. (Operator Instructions) As a reminder, today's conference is being recorded.

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

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. We also posted a PowerPoint presentation that accompanies our comments on 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 Manager. Mr. Xu will present the company's third quarter 2020 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 will follow.

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 and 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 terminologies 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.

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

Let's start with the highlights on Slide #5. Our business continued to recover during the third quarter despite some resurgence of the infections in certain regions. Compared with the second quarter 2020, RevPAR increased 32.9% to RMB 120. Total revenues increased 23.6% to RMB 266.9 million. Non-GAAP adjusted EBITDA increased 46.6% to RMB 134 million with margins improved to 50.2%. Core net earnings, non-GAAP, increased 23.8% to RMB 92.4 million with margin 34.6%.

We expanded our mid-to-upscale and the luxury brand further. Of all new openings this quarter, 28.4% were made to upscale and the luxury hotels. That's a historical high for quarterly new hotel openings. This year has been like no other in the history of GreenTree. While year-over-year comparisons are always important, a look at a few key metrics for the first 3 quarters will help to realize the considerable progress we have made since the pandemic hit our businesses back in January.

Let's take a look at Slide #6. Total revenues, income from operations, adjusted EBITDA and non-GAAP and the core net earnings, non-GAAP, all increased consistently for 3 consecutive quarters since the lows in Q1 with improving margins.

Let's look at Slide 7. Our blended ADR decreased 12.9% year-over-year to RMB 151. Occupancy dropped to 79.1%, and RevPAR decreased 19.8% to RMB 120. If we exclude hotels being used for quarantine, RevPAR for same hotels decreased 16.3% to RMB 125. Nevertheless, we continue to expand our market presence across China. We opened 162 new hotels during the third quarter for a total of 4,195 hotels in operation. We ended the quarter with 1,110 hotels in our pipeline, up 70.2% year-over-year.

Total revenues for the quarter were RMB 266.9 million, an 8.6% decrease compared to the third quarter of 2019. Gross profit decreased 22.5% to RMB 158.8 million. Net income decreased 16.2% to RMB 85.6 million. Our non-GAAP adjusted EBITDA decreased 24.3% to RMB 134 million. Net income per ADS, that's basic and diluted, decreased 20% to RMB 0.81 and the core net income per ADS decreased 32.1% to RMB 0.90.

Let's now turn on Slide #9 for an update on the impact of the COVID-19. China has been balancing pandemic controls and economic recovery with positive measures introduced to help the company safely restart the business and people get back to their normal daily lives. As a result, we have seen a sustained recovery in domestic tourism and business, leading to improved occupancy rate, ADR and RevPAR during the third quarter, thanks to the tireless work and dedication of our staff and franchisees and the strong support of our loyal members.

In third quarter, GreenTree, again, outperformed the hospitality industry in China and our operating performance continued to recover. Further, thanks to government policies designed to encourage domestic consumptions, China showed strong signs of economic rebound in fourth quarter. For an example, the October Golden Week saw over 637 million domestic tourists or 79% of the last year's level, which generated RMB 466.6 billion in revenue, 69.9% of last year's level according to China's Ministry of Culture and Tourism. These figures point to a considerable improvement compared to June's 3-day Dragon Boat Festival, which brought only 48.8 million tourists or roughly half of last year's level.

Let's turn to Slide #10. Riding on the recovery, we continued to optimize our brands, products and technology to capture domestic travel demand. We focused on better serving our guests and supporting our franchisees. We strengthened our cooperation with travel management companies and expanded the joint promotions with the local merchants. As a result, our occupancy rate approached 85% during the October Golden Week, nearly the same level as last year. In November, our occupancy rate rebounded to nearly the same level as of last year and the RevPAR recovered to almost 95% of last year's level, that's for both October and continued recovery until November.

In summary, we were glad to see a meaningful improvement in the third quarter of 2020 as we returned to a more normal economic activity in the living conditions in Mainland China. We continued to serve and protect our guests, our employees, constantly adapting our operations and marketing campaigns to the evolving conditions while still managing to increase income from our operations, net income and adjusted EBITDA. Our margin continued to rise, thanks to our flexible cost structure and the measures we have implemented since the outbreak of COVID-19. Having gone through the challenges of the first 9 months of 2020, we believe we continue to execute our growth strategy and further enhance our partnership with our franchisees. Because we have accumulated extensive experience, we are well prepared should the pandemic last much longer. And we are more confident in our ability to consistently achieve profitable growth and create long-term value for our shareholders.

I will now pass the call over to Megan Huang, who will summarize our business operations for the third quarter. Megan, please go ahead.

Thank you, Alex. Moving to Slide 12. At the end of the third quarter, we had 4,195 hotels in operation, 35.2% higher than a year ago. 37 of these hotels were leased and operated, or L&O hotels and 4,158 were franchise and managed, or F&M hotels while the mid-scale segment remained the core of our business with almost 64% of all our hotels. Last year, we began to expand into both the higher end and economy segment. This expansion continued to -- in the third quarter, during which the number of mid-to-upscale and luxury hotels increased to 8.5% of the total portfolio. And the economy segment grew to 27.5% of the total portfolio. We have also increased our dominant position in Tier 3 in smaller cities, which were called to 67.3% of our hotels at the end of the third quarter. These strategic moves enhance our ability to cross-market our different brands and locations.

On Slide 13, you can see that in the third quarter, we opened 162 hotels compared to 181 in the third quarter 2019. 1 hotel was in luxury segment, 55 (sic) [45] in the mid-to-upscale segment, 80 in the mid-scale segment and 36 in the economy segment. 6 were in Tier 1 tires, 31 in Tier 2 cities and the remaining 125 in Tier 3 and smaller cities in China. Nearly 30% of newly opened hotels in the third quarter were luxury and mid-to-upscale hotels.

During the third quarter, we also closed 33 hotels. 3 due to brand upgrade, 26 due to noncompliance with our brand and operating standards and 4 due to property-related issues. So net-net, we added 129 hotels to our portfolio in the third quarter.

Slide 14 shows the growth in our pipeline of new hotels. Despite COVID-19, our pipeline increased from 652 on September 30, 2019 to 1,110 on September 30, 2020. Around 41% of these hotels are in the mid-scale segment, about 34% in the economy sector and around 25% in the mid-to-upscale and the luxury segment.

Slide 16 shows the quarterly operating performance trend. As you can see, compared to the second quarter, RevPAR of our L&O hotels increased to RMB 121. RevPAR for our F&M hotels increased to RMB 120. ADR for our L&O hotels decreased to RMB 171. ADR for our F&M hotels increased to RMB 151.

Occupancy for our L&O hotels increased to 17.6% and occupancy for our F&M hotels increased to 79.3%. As Chairman Xu noted, RevPAR continued to rebound from second quarter levels. In addition to COVID, our L&O hotels performance was impacted by 6 L&O hotels in ramp-up status.

Turning now to Slide 7 (sic) [17]. We now have about 52 million loyal individual members and 1.61 million corporate members, up from 49 million and 1.56 million as of June 30. During the quarter, around 92.5% of all room nights were sold directly primarily due to our individual and corporate members.

With that, I'll pass the call over to our CFO, Selina Yang.

Thank you, Megan. Please turn to Slide 18. During the third quarter, total revenues decreased 8.6% year-over-year to RMB 266.9 million. Total revenue for our F&M hotels decreased 8.9% to RMB 200 million while total revenue from L&O hotels decreased 7.9% to RMB 66.8 million. The decrease was primarily due to the impact of COVID-19, which resulted in lower RevPAR as well as partial reduction and essential sublease income recognition.

Nevertheless, this represents a 23.6% sequential increase over the second quarter total revenues, primarily due to RevPAR growth from RMB 90 in Q2 to RMB 120 in Q3.

Turning to Slide 19. Third quarter hotel operating costs were RMB 108 million, up 23.8% year-over-year. The decrease was mainly attributable to higher rents, higher depreciation and amortization and consolidation of operating cost of Urban, which was acquired in the November of 2019. In the third quarter, there are 3 L&O hotels newly opened in operation and 5 L&O hotels under construction, which accounted for the main increase of hotels operating costs. Excluding L&O hotel operating costs, costs related to F&M hotels and others increased 0.8%, primarily due to the expansion in our business and the number of F&M hotels. Hotel operating costs increased 13.8% over Q2 levels mainly due to more L&O hotels coming into development.

Selling and marketing expenses were RMB 21.3 million in the third quarter -- a year-over-year increase of 2.3%. The increase was mainly attributable to the company's first attempt to cooperate with Internet social platforms, which became prevalent because of COVID-19. Excluding the above mentioned advertising fees, selling and marketing expenses in this quarter decreased to 40.4% year-over-year and increased 3.3% quarter-over-quarter.

Q3, general and administrative expenses were RMB 44.8 million, up 12.3% year-over-year. The increase was primarily attributable to higher depreciation and amortization of our property and equipment, increased investment in research and development, higher consulting fees and consolidation of expenses from Argyle and Urban. Compared with second quarter, G&A expenses decreased by 7%. Overall, total operating costs and expenses grew 17.9% year-over-year to RMB 174.5 million. Excluding the L&O hotel operating costs, total operating costs and expenses increased 6% compared with 1 year ago.

On Slide 21, you see net gross profit decreased 22.5% year-over-year to RMB 158.8 million in this quarter. Gross margin increased from 17.1% to 59.1%. Net income decreased 16.2% to RMB 85.6 million. And net margin decreased from 35% to 32.1%. All these year-over-year decreases were primarily due to the impact of COVID-19. Compared with Q2, gross profit increased by 31.2% and gross margin increased from 56.1% to 59.5%. Net income decreased by 8.6% quarter-over-quarter, and the margin decreased from 43.4% to 32.1%, mainly due to the decline in gains from investment in equity securities compared with the second quarter.

On Slide 22, you can see that adjusted EBITDA decreased 24.3% year-over-year to RMB 134 million. And adjusted EBITDA margin decreased to 50.2%. Core net income decreased 31.5% to RMB 92.4 million and core net margin was 34.6%. Compared with Q2, adjusted EBITDA increased by 46.6% and adjusted EBITDA margin increased from 42.3% to 50.2%. The core net income increased by 23.8% and core net margin was 34.6%.

Please turn to Slide 23. Third quarter net income per ADS was RMB 0.81, in U.S. dollar, $0.12 down from earnings per ADS of RMB 1.01, 1 year ago and down from RMB 1.01 in the second quarter of 2020. That's mainly due to the decline in gains from investment in equity securities since the second quarter.

Core net income per ADS, basic and diluted, non-GAAP was RMB 0.90, in U.S. dollar, $0.13, down from RMB 1.32 a year ago, up from RMB 0.72 of the second quarter of 2020.

Let's now take a look at Slide 24. As of September 30, 2020, the company had total cash and cash equivalents, restricted cash, short-term investments, investments in equity securities and had deposits of RMB 1.8 billion compared to RMB 1.7 billion as of June 30, 2020. The increase from the second quarter was primarily attributable to cash inflow from operating activities, changes in sale value of active securities and dividends from active securities and offset by loans to franchisees, investment in the decoration of L&O hotels and cash outflow for acquisition fees. As the cash and cash equivalents provide us with ample resources and we continue to evaluate potential investments and to support our franchisees.

On Slide 25. As Alex mentioned, COVID-19 has had a significant impact on our business. So far, in 2020, our operations are in line with our previous forecast. Assuming the pandemic remains in control in China in Q4, we expect decline in total revenues of 12% to 15% for the full year 2020 compared to 2019.

This concludes our prepared remarks.

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

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

Perhaps I'll have 3 questions. One on the opening, the other on RevPAR and the last one on the M&A side. Perhaps the first question on the opening. It seems that the number of openings during the third quarter was not as high. Would you mind to give some color on the fourth quarter opening or the net opening side? And also your plan for the coming year in 2021, given that now you have over 1,000 number in your pipeline? The second question regarding the RevPAR, it's very nice to see that. As you mentioned, in the month of November, the occupancy is already back to where you were before the COVID. But on the room rate side, where are we at the moment? And what's your outlook for the fourth quarter on the room rate? And whether you think that in 2021, we are already back to the pre-COVID level, and we should be looking for some in RevPAR from the 2019 level already? And the last one on M&A. I think that as you mentioned, you still have RMB 1.8 billion of resources. We are now like 10 months into the COVID. Are you actually seeing more targets coming out? Or you think that the government measures have been helping the situation too much that there is actually no fire sale or no viable target for you to look for at this stage?

Okay. Justin, in terms of -- later, I would like to ask you a little bit more clarification of the second question. Regarding the first question, the third quarter openings is a little bit soft and that for some reasons. GreenTree has always been a responsible company. We want to build a long-term beneficial, mutually beneficial relationships with our franchisees. We want to build a continued -- long-term goodwill with our franchisees. And that we are not going to sacrifice franchisees' profitability and their -- increase their risk for the sake of adding hotels to our portfolio.

Our portfolio consists of primarily standardized hotel products and services. So that requires a considerable amount of investment from the franchisees. And now in second quarter, third quarter, the revenue, the RevPAR was still 20% down and close to that of the normal level. And if you put the hotel open at that time, they are not going to generate a -- the enough yield. And so I think that -- if you can push the openings, I think that may create not a good relationship in the long run.

So we've been very considerate in that end. But we're trying to -- if -- to the extent that we don't have to open, we typically do not imply -- sorry, encourage and push them open. And to the extent that we are able to negotiate an extension with the owners, to the extent that they are leasing the hotels or if they own this asset then they can take a little bit more time. And so that's our position and philosophy. And so we're trying to maintain a higher successful rate -- success rate for our franchisees. And so that is why I think in the first, second and third quarter, you will see that our openings is a little bit soft. And GreenTree has always been the one that probably got the reputation in the market that we're trying to pay attention to the franchisees' financial health.

Having said that, then there are hotels that are already leased. Sooner or later, they're going to open. So I think that at this moment, we projected in the fourth quarter, we'll probably opening more than 200, more or less, probably 220 in that plus or minus range. And if there is no really resurgence of the cases. And so now I think that with our operation, with the increased operation, especially on the November's performance, in October, November performance will continue to see a dramatic increase over our third quarter. Third quarter was still down like 16% to 19%, depend on how you looked at the RevPAR. But in the fourth quarter, we're already, only, I think, in less than 5% consistently. And we are already achieving 95% or more over the last same period of last year. So we're more confident that we are able to help the franchisee realize a good return and normalized profitability. So that's on the hotel opening of the fourth quarter.

Now Justin, on the RevPAR, so can you rephrase your question, so that I am able to provide a better answer for you?

Sure. On the RevPAR side, as you mentioned that the occupancy for November is already back to the pre-COVID level on a year-over-year basis. Where are we for the room rates? Are we still double-digit down on the room rates at this stage? Or what are you looking at? Or what are you expecting for the room rates into the later part of the year or early 2021? Because I think, overall, there are some investors concerned that given the international travel still closed, with the high end hotel's RevPAR or the room rates still down easily 20% year-over-year, all the way to the mid-end or to the economy, there will still be some pricing pressure, at least for the next couple of months. What are your expectations on the room rate?

Okay. Justin that on the RevPAR side, that in our occupancy, we see a pretty much very close to resume for the last year's level at the GreenTree portfolio. And the RevPAR was down about 5% -- less than 5% on the same period, that's primarily resulted from the decrease in ADR. So the room rate is about 5% down from last year, so the same level. And so in other words, the room rate recovered to 95%. And occupancy almost recovered -- on the top of my head, it was 100% of last year's number. So we, at this moment, we expect that at the same trend will continue to the year-end. I think thanks to the rigorous pandemic control policy and procedures by the government, I think that they have done. I think that our Chinese government has done a great job in controlling the spread.

And so for the next year, it is our best hope that China will continue to recover. And with the domestic consumption resumed to the normal level. What we are lacking is the international cross-border tourism. And so I think that the room rate may, because the 5-star luxury hotels maybe depressed a bit, which will also depress the rest of the -- will spread to the rest of the hotel segment. And -- but we are confident that the domestic consumption and especially as our price range, value-priced hotels will be robust. So -- and we're looking forward to really a great year of next year for domestic China.

For the surrounding, for Southeast Asia, for other countries, we have a few hotels. We do not have a lot. We think it will take a while of because it takes the vaccine for quite some time to be -- to penetrate a larger population and to increase the opening of the cross-border travel and tourism and the cross-border trade. So that's our vision on the internal projection. Selina and also Megan, if anything left to add?

Okay. And so regarding the third question you have, Justin, that we are open. And I think that we believe there are smaller to medium size -- there are smaller local brands that are running into issues. I think people are still taking wait and see. And the hotels opened, this year and the last year, are continuing to experience pressure from the return of the investment. And so especially for a smaller regional brand or smaller hotel groups. So we'll -- we keep our eye open for that. We have to wait and see. But we think that there will be opportunities for us to explore. And this is what we said, this pandemic created some uncertainties. And I think we'll benefit -- we'll typically will benefit for those companies that are operating with a very disciplined approach.

Our next question comes from Bruce Mi with UBS.

So I have one question on the long-term hotel openings. So I see some other major Chinese hotel groups, they lifted their hotel openings plan for the next 3 years and even some company, they plan to double its number of hotels in operations in the next 3 years. So my question is, will GreenTree also speed up the openings? And if yes, which segment or which brand will be the main growth driver?

Bruce, thanks. That -- yes, hotel opening is our main focus even in the past 2 years and in the future. As I said, we want to be a responsible company that we want to open the hotels only -- the profitable hotels for our franchisees because we're focused on the long-term relationships, the long-term growth, long-term relationships with our franchisees. And we have a 4-year, 4.5-year plan by 2024. We also plan, I believe, through the organic growth and through our M&A, we would like to also, we think, and through our natural growth and that our franchisees continue the opening of new hotels and also double our hotel portfolio and trying to approach to 10,000.

But again, we want to maintain our duty, our responsibility to our franchisees long-term profitability. As you can see, our success rate in the hotel openings and by matching the hotel closure, because every time you close a hotel, it's a negative impact to the relationship with the franchisees. I mean you have to waste a lot of the expenditures and assets. And it's a bad impact to the environment as well and it's just wasteful. So we're trying to be very responsible in that end. And through that process, I believe we can easily -- if we maintain this responsible approach. And our portfolio will increase, obviously, in a very, very meaningful way.

So to summarize our growth plan, so that's by 20 -- in 4 years, that's where we want to be.

Our next question comes from Jisheng Liu with CLSA.

I have two questions. Maybe I'll go with one. First one is on your third quarter '20 franchise hotel take rates. So I think you mentioned that your franchise revenue this quarter was declining by 20%-ish. But I think in terms of average number of hotels, year-over-year basis, your number of rooms increased also by 20 -- such a 10% franchise revenue year-on-year decline, if our take rate was stable. So I was wondering if you have done any more waiver on franchise management fee during the quarter?

I think that -- okay.

This is Selina. It's a good question. Yes, considering the -- our franchises are facing more difficulties in the COVID-19. Some of them are planning for to lower their take rate or waive their take rate. Here now, we have some criteria where we are receiving such kind of applications. For those franchisees, which have done a good job in the previous years and has had a standard hotels decoration, we are considering to extend some of their franchise fees and ongoing fees. That's why the take rate in the -- in the second quarter and this quarter looks a little bit lower than before the COVID-19.

Okay. But could you maybe elaborate more on what the criteria are? And is there any differences across your brands? And do you plan to get the franchisees pay what they should over the next years? Or are they just one-off waivers that will not be requiring fees going forward?

Thank you. To our statistics, most of the applications are coming from the brands, including GreenTree in and some of the hotel scale hotel brands, including GreenTree Eastern in Gme, Gya and Vx, especially for those hotels newly opened during the COVID-19. Secondly, in their daily operation, and they have some standards and the rules to follow. And for those hotels, especially for those hotels has life more than 1 year -- above 1 year, if they -- according to their historic performance, if they're -- did a good job, so that's -- for those kind of hotels, they are more likely to get approval for the extension of their ongoing fee. So this is basically criterias for their application.

Okay. So what means that the waiver is an extension, right, not a waiver actually?

Let me add a couple of things that -- I think the revenue for that end has not dropped to 20%. The revenue for the franchise, I think, had only dropped about 10%. So that's about roughly 10% of the gap. And that is attributable to a few reasons. One is, there is a lot -- there's a number of newly opened hotels, we have a waiver because they are not profitable, we currently opened. And the second reason is because we also have the -- our hotel consolidated have a lower RevPAR and the mix changed a bit. So a combination of them resulted in -- would not have -- the 2020 are fully offset. So Jisheng, so that's one of several reasons and factors that contribute to that.

Okay. So maybe I'll go to the second question I have. So according to what you said just now on the call, I think your RevPAR recovery in November was actually -- and our peer companies say. So may I understand if this is related to the differences across different city tiers. For example, maybe Tier 3, Tier 4 cities are recovering better in November compared to October. So is that related to that? Or do you see any data that could support anything to -- on a peer comparative basis that you are performing better than your peers?

I can add some color to that because we analyze that our recovery, I think that the -- across the board. And we have extensive -- we indicated we took a number of measures on the sales and marketing side, all thanks to Megan's team that they are more aggressive like travel management companies and also that they increased our sales and marketing in certain online, including the -- with certain internet companies cross promotion. So all of them, I think, resulted in a better occupancy in the November. So depending -- but the tier cities breakdown, I'll leave it to Selina.

Thanks, Alex. Yes, it's just like, as you mentioned, Jisheng, our year-over-year decrease in November was almost the same year-over-year decrease as October, and didn't differ too much. As -- in terms of the city tiers, I'd like to share you our statistics in the third quarter, our RevPAR decrease in Tier 3 was least, and that's about 8.8%...

He's talking November, December.

Yes. I see. For the November and December, the same trend, that there is year-over-year decrease in Tier 3 was still the least amount of all the city tiers. And for -- in terms of the segment, RevPAR decreased in the mid-to-upscale was least for our organic brands.

Okay. Great. I may have a follow-up just on the previous question, and I may go back to the queue afterwards. So just when Alex, you mentioned that you have a long-term, let's say, target for 2024 to have 10,000 hotels. That means, actually, you may need to reach more than 1,000 hotel cross over net openings per year to hit that target. So that actually implies that you would be increasing your hotel openings per year over the next 4 years. So you are saying also that you are a responsible company that you don't want your franchisees to take on too much leverage or any risks before opening your hotels. So actually, you are also raising your guidance. So what is the confidence behind that? And where do you see the key growth drivers over the next 4 years?

Thanks, Jisheng. That we just looked at the hotels in the pipeline. And we also recently observed another trend that is if we have not focused on the so-called soft brand conversion, we have observed and we have also have some industries demand in that end because our technology systems, our overall franchise and management fees, ongoing management fees, are still the lowest in the industry. So we're the most valued brand. And through the next few years, if -- I think, especially the next year, we should be able to see some more demand from the newly constructed hotels require the brand support, the technology support and the sales and marketing support.

So we think there will be more timing from that end. And secondly, that we already have a lot in the pipeline. And so we are also evaluating, adding more on the franchise developers And so just -- I think there is -- the market is -- that's a market that's huge. So many hotels, nonbrand, we still think that the market on the -- especially on the many second, third tier cities, still so many local and nonbranded hotels there. And we do the statistics a lot of time because we have franchise developers in all major cities. Every day we accumulate the data. And that even on the second, third tier cities, in a block of hotels, you see typically that even the second tier cities, you see 10 -- 50 of them, 50% of them are -- there's no brand. On third tier cities, you see that there are 60%, 70% that are no brand. And the hotel operation, I believe, in the future, is going to be more and more brand centric because the technology for a successful hotel operation, and that connectivity requires is beyond an independent hotel operator can approach. So we believe our value proposition is right there. And we want to be responsible for our franchisees' profitability, but also the demand is there.

The demand, we are -- I think we are -- in the past that 2 or 3 years, we're improving all the platform, technology, connectivities. And you can -- I think we are very glad to see our October, November's performance demonstrated all of them are paying off as we become -- the recovery become more normalized.

Our next question comes from Billy Ng with Bank of America.

First of all, congratulations on the solid results. And I just have one follow-up question. I think some of your peers mentioned about the competition dynamic change, in particular, supply for the overall industry has come down. Have you seen any data? Or have you seen anything on the ground that suggests that supply coming down? Competition become a little bit less? And also, in terms of signing new franchisees, have you seen the requirement, the attitude difference? And whether as many suggest that they want to team up with a big franchise company or brand company like you guys?

Okay, Billy. When you say supplies are coming down, you mean supplies of new hotels. And for sure. We have just like that if -- without COVID, we probably had a lot more supplies, more opening of hotels and the franchisees hotels are more cautious right now. And so I think the rent, the lease -- the rent of the hotels is also coming down a little bit. So that will create a little bit pressure -- a little bit more pressure probably on the hotels we leased last year or the year before. And so the supplies there for hotels is definitely, I think, that is less -- that compared without the COVID. But that also means the supplies for new hotels are standardized of products that -- which also become less. So I think the investors may feel less comfortable to spending more to build new hotels.

So we have different dynamics in terms of brand competition -- competition between the branded company. So the demand for support in terms of certain fee waivers, for instance, the initial application fees and after the first year, the opening during the ramp-up period fees and they also have an impact in that end. So -- but overall, we believe the dynamics changed to favor to more established company with more resources. And we see -- we also have observed a lot of smaller company, local brands that either run into major loss or closed down. So that the market conditions favors to the larger and more established platform for the near future, I believe. It's a situation, I think that next year will probably continue to be in the not fully recovered mode. And so the opportunity will be there for us to take to take more opportunities.

I see. And just one follow-up question. Actually, when I asked supply, I also mean including the existing hotel inventory across the different companies and across the nation. Do you see overall number of hotels coming down, too? Not -- obviously, not GreenTree, but in particular -- but overall, maybe nonbranded or other smaller brand hotel?

That's -- Billy, that's a great question. That's a great observation, by the way. Yes, indeed. So in the past 20 years, there are many, many properties before that were zoned for industrial or warehouse, and they're being converted into hotel use. But the regulations of government becomes tightened quite a bit. I mean, a lot of cities after your initial permit expires, they no longer extend -- the city no longer extend this permit. So those hotels' properties that are going to definitely expire are the industrial and the warehouses and the offices that may -- it may have to be closed permanently and go back to their normal use. So we see that kind of shrinkage in that end.

And on the other side, there's the suburban area new development, the city may also require certain developers to having a portion of their development to be used at the hotel and apartment. So we are also trying to partner with some of the real estate developers in China. And with a strategic partnership where we can -- when we build a new development and they can supply our -- have given us the first level to build hotels there. So that's a very, very good observation, Billy.

And it started with, I think, the major cities. I think that trend will continue. So the zoning regulation will be more strict, which is really beneficial to hotel industry in general.

Our next question comes from Nate Deng with China Renaissance.

Congratulations to the strong result in the third quarter. I just have a small question regarding the recovery of leisure segment because I think the business customer segment is recovering pretty good. So what is the current breakdown between leisure segment and business segment in terms of room distribution? And how does it compare with the years -- normal years like 2019?

Do you have the numbers -- specific numbers for leisure?

Specifically for leisure?

Leisure. Leisure.

Leisure travelers segment.

Okay. So we didn't -- because our leisure travelers are not -- didn't consist of a major component in our portfolio. But we did observe in the cities, where we have like a function. The previous 3 quarters -- the previous 2 quarters, quarter 1, quarter 2, the performance that was quite -- I mean, suffered quite a bit. And the third quarter recovered sharply, but still under subdued, and the impact is a lot more. I think is worse -- still continue to be worse than the -- let's see, the major cities and the third, fourth tier cities in the -- for the business travelers or for the essential business travelers. And so that's -- we don't -- I didn't have that number right now in front of us.

So actually, you mentioned occupancy rate has already caught up with last year's level. So may I assume this is because of more business travelers in the recent months. And looking into the future, if the leisure segment is also recovering. So we are expecting actually a better occupancy rate versus 2019. Can I think this way?

We do not know how that the leisure side -- because I think that the travel from our -- just from our market leading, the leisure side is always a little bit lagging behind. And that our -- I believe, unless the cases is totally under control worldwide, we still think that the leisure travels will continue to be impacted.

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

In closing, on behalf of the entire GreenTree management team, we thank you for your interest and participation in today's call. If you require any further information or have a plan to visit us, please contact us. Thank you all.

And thank you.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.