GreenTree Hospitality Group Ltd (GHG) 2022 Q2 法說會逐字稿

Hello, ladies and gentlemen. Thank you for standing by for GreenTree's First Half 2022 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, GreenTree's Investor Relations firm. Please proceed, Rene.

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

On the call from GreenTree are Mr. Alex Xu, Chairman and Chief Executive Officer; Ms. Selina Yang, Chief Financial Officer; Ms. Megan Huang, Vice President of Sales and Marketing; and Mr. Allen Wang, IR Officer. Mr. Xu will present the company's performance overview of the first half of 2022, followed by Ms. Huang, who will discuss business operations, and Ms. Yang will then discuss financials and guidance. They will be available to answer your questions during the Q&A session, which follows.

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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 terminologies such as may, will, expect, 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 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 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.

Thanks, Rene. Hello, everyone, and thank you for joining us today. The first half of 2022 was extremely challenging as COVID-19 outbreaks in many parts of the country drastically limited mobility in many regions. Nonetheless, we continued to execute our long-term strategic growth plan to deliver continued operating profitability, maintain healthy and stable cash flow, open LO hotels in new strategic locations and assist franchisees in maintaining quality operations.

With the efforts of staff and the cooperation of the franchisees, we believe that the winter will pass eventually and the spring of the hotel industry's recovery is coming quickly.

Please turn to Slide 5. Compared with the first half of 2021, RevPAR decreased 20.78% to RMB 92. Total revenues decreased 22.3% to RMB 457.4 million. Income from operations decreased 403.7% to negative RMB 457.7 million with a margin of negative 100.1%. The sharp decrease was due to the other general expenses, which included one-time impairments and provisions for other assets.

We took impairment charges for Argyle as a result of disputes with its management, add to the performance of relevant transaction documents and our compliance with the guarantees in the agreements, and the Urban in connection with the sales of our interest in that company. We also took a provision for other assets related to 2 properties in the [Hongqiao] Business Center which we intended to buy from Evergrande affiliate for headquarters and the 2 flagship hotels as well as for loan receivables related to franchisee loans.

Excluding these, income from purely operating activities was RMB 32.9 million, with a margin of 7.2%, and the net income was RMB 68.3 million with a margin of 14.9%. Non-GAAP core net income decreased 13.7% to RMB 105.9 million with a margin of 23.2%, and the core net income per ADS, that's basic and diluted non-GAAP decreased 13.7% to RMB 1.03.

Slide 6 shows detailed numbers for total revenue operating income, net income and core net income.

On Slide 7, operating performance was seriously impacted in the first half of 2022. RevPAR was at 72.6% and 65.5% of the 2019 levels in the first and second quarter, respectively, and exceeding the industry's average. And in the third quarter, we continue to outperform the industry with RevPAR recovering to 80.3% of the 2019 level.

Slide 8 shows the weekly RevPAR performance in 2022 compared with 2019. After dropping initially, RevPAR recovered to 88% over the Chinese New Year, thanks to family reunions and recovery in domestic tourism. However, COVID-19 outbreaks in March and April led to some restrictions in many cities and lockdowns in some major cities, sending RevPAR all the way down to 56% during Golden Weeks.

As lockdowns ended, RevPAR rebounded gradually to 92.9% by the last week of June and 91.2% at the beginning of August. October and November brought a fresh wave of outbreaks slowing down our recovery once again and negatively impacting travel during the National Day holiday, one of the most active travel period in China.

During this period, according to the Ministry of Culture and Tourism, the number of tourists dropped to 61.7%, and the domestic tourism revenues dropped to 44.2% of the levels in the same period of 2019, our RevPAR dropped to 68%. And as I said, again, our performance well exceeded the industry average during the entire period. However, with flexible anti-pandemic measures released by the government early December, RevPAR recovered this month to more than 85% of its prepandemic levels.

Now starting with Slide 10, let's talk about the strategy and execution with further expansion in the mid-to-up-scale segment and the Tier 3 and the lower cities, in Southwest and Southeast China as well as the opening of new LO hotels.

Let's take a look at Slide 11. We have been continuously growing our mid-to-up-scale segment over the past few years. By the end of the first half of 2022, we had 528 hotels, 11.3% of our total portfolio in this segment, up from only 50 in 2017, and we plan to open more this year.

Please turn to Slide 12. Over the past 5 years, most of our new hotels have been in China driving Tier 3 and the lower cities, where they have recovered faster than in other cities in most quarters. In addition, hotels in some lower-tier cities are performing well. As we continue to execute our strategic plan, 68.4% of our hotels in our current pipeline are in such cities, and we'll further capitalize on the substantial opportunities in these locations.

Let's have a look at Slide 13. Since 2021, we have started to build flagship LO hotels in strategic locations, especially in the Southeast and the Southwest markets. In 2022, despite the stress from COVID-19, we opened 2 mid-to-up-scale LO hotels. The remaining 4 in the pipeline are expected to open in 2023 at Haikou East Railway Station, Chongqing North Railway Station, Chongqing Jiangbei International Airport and Fuzhou Railway Station.

Let me now say a few words about the acquisition of affiliated Food and Restaurant business. Since our announcement of signing of the SPA in May of 2022, the company has been working on the closing of the Food and Restaurant Acquisition transaction. However, due to the resurgence of COVID-19, we experienced significant delays in the delivery of various documents to various agencies.

While China removed many COVID-related restrictions in December, the company is speeding up the closing process. We expect the formal closing will be completed in January 2023, a bit later than we originally planned. We will inform the market when the transaction formally closes.

Over the past 3 years, we have adopted strict cost control measures to enhance operating efficiencies. Our adaptable business strategy as well as insights, our team and franchisees have gained from facing COVID-19 have given us the ability to quickly adjust to changes in our industry, setting a solid foundation for future growth. The journey ahead may be difficult, but with the support of our shareholders, franchisees and staff, we are confident to pull through and embrace a bright future.

Now let me turn the call over to Megan.

Thank you, Alex. Please turn to Slide 15, which highlights the growth in the number of hotels and the year-over-year rebound in our operating metrics from the impact of COVID-19. Blended ADR of the second quarter in 2022 decreased 14% to RMB 147. Occupancy rate decreased 16.4% to 62.2%, and the RevPAR decreased 31.9% to RMB 91.

Moving to Slide 16. At the end of the second quarter of 2022, we had 4,669 hotels in operation, 2.8% more than a year before. 67 of these hotels were leased and operated or LO hotels, and 4,602 were franchised and managed, or FM hotels. While the mid-scale segment remains the core of our business with 64.2% of all our hotels. We continued our expansion into the higher-end segment. By the end of the second quarter, mid-to-up-scale hotels accounted for 11.3% of our total portfolio, while the Economy segment remained stable at 24.5%. We solidified our already dominant position in Tier 3 and the lower cities, where 67.8% of our hotels were located at the end of June 2022.

On Slide 17, you can see that we opened 201 hotels in China, less than planned due to COVID-19, compared to 402 in the first half of 2021. 43 were in the mid-to-up-scale segment, 108 in the mid-scale segment and 50 in the economy segment. 21.4% of these new hotels were in the mid-to-up-scale segment of the market. 13 were in Tier 1 cities, 52 in Tier 2 cities and the remaining 136 in Tier 3 and lower cities.

We closed 140 hotels, 54 due to noncompliance with our brand and operating standards, the remaining 86 were closed due to property-related issues. We added a net 51 hotels to our portfolio.

Slide 18 shows the trend of our quarterly operating performance. In the second quarter of 2022, RevPAR for our LO hotels increased to RMB 124. RevPAR for our FM hotels decreased to RMB 90. ADR for our LO hotels increased to RMB 217, and ADR for our FM hotels decreased to RMB 145. Occupancy at our LO hotels increased to 57.1%, and occupancy at our FM hotels increased to 62.3%. Entering the third quarter, RevPAR continued to recover for both LO hotels and FM hotels.

Slide 19 highlights the growth in our membership program, which accounted for most of our direct sales in the first half of the year. Individual members grew to 74 million, up from 62 million a year ago, and corporate members grew to 1.9 million, up from 1.8 million a year ago. We have one of the highest percentage of room night booked by corporate and individual members in the industry.

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

Thank you, Megan. Please turn to Slide 20. In the first half of 2022, total revenues decreased 22.3% year-over-year to RMB 457.4 million. Total revenues for FM hotels were RMB 275.5 million, down 30.4% year-over-year. While total revenues for LO hotels decreased 1% to RMB 171.3 million.

On Slide 21, you can see that total hotel operating costs and expenses were RMB 919 million or 100.8% year-over-year increase, which is mainly attributable to one-time provisions for other assets and higher rents and increase of other costs resulting from the expansion of our LO hotel.

In the first half of the year, hotel operating costs were RMB 307.8 million, up 7.4% year-over-year. The increase was mainly attributable to the opening of 34 LO hotels since 2021, which resulted in higher rents, higher utility costs, higher staff head count and compensation and higher depreciation and amortization. Excluding the impact from newly opened LO hotels, our hotel operating costs decreased 14.1%.

Selling and marketing expenses were RMB 18.9 million, a year-over-year decrease of 52.7%. The decrease was mainly attributable to lower advertising expenses and staff-related expenses due to less business travels caused by pandemic.

General and administrative expenses were RMB 99.7 million in the first half of 2022, down 21.5% compared with the first half of 2021. The decrease was mainly attributable to the reduction of travel expenses and consulting fees.

Other general expenses were RMB 490.6 million in the first half of 2022, which included one-time impairment charges for Argyle and Urban, one-time provisions of other assets and loan receivables, as mentioned earlier.

Turning to Slide 22. Income from operations was negative RMB 457.7 million, down 403.7% year-over-year with a margin of negative 100.1%. Excluding other general expenses mentioned above, income from operating activities was RMB 32.9 million, with a margin of 7.2%, and net income was RMB 68.3 million with a margin of 14.9%.

Adjusted EBITDA decreased 46.8% to RMB 93.9 million (sic) [RMB 93.3 million] and the adjusted EBITDA margin decreased to 20.4%.

Core net income was RMB 105.9 million with a margin of 23.2%. These decreases were mainly attributable to the increased number of LO hotels, both newly opened and in the pipeline. Excluding the impact of newly opened and pipeline hotels, adjusted EBITDA non-GAAP for the first half of 2022 was RMB 139.3 million with a margin of 34.9%. And core net income non-GAAP was RMB 163.9 million with a margin of 41.1%.

Please turn to Slide 23. Net income per ADS was negative RMB 3.18, that's USD 0.47. Core net income per ADS, basic and diluted non-GAAP, was RMB 1.03, that's USD 0.15.

Let's now take a look at Slide 24. As of June 30, 2022, the company had total cash and cash equivalents, restricted cash, short-term investments, investments in equity securities and time deposits of RMB 1,079.5 million compared to RMB 1,235.9 million as of December 31, 2021. The decrease from the end of 2021 was primarily attributable to the repayment of bank loans and the loan affiliated to the Food and Restaurant business, which is to be merged with some company in January 2023, offset by cash from operating activities.

On Slide 25, given the large number of COVID outbreaks in many parts of China throughout 2022, business did not improve as we initially expected, until the easing of the restrictions early December. Consequently, we have adjusted our revenue guidance for the full year of 2022 to 81% to 84% of the 2021 levels.

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

(Operator Instructions) I am showing no questions at this time. I would like to turn the conference back over to Selina Yang for any closing remarks.

Okay. So operator, and Rene, are we able to make sure that our analysts got our message and so the phone call has no problem? And we're making sure all of our audience and including our analysts have listened -- have been able to share with what we have discussed.

I think so, Alex. There are a number of participants on the line, and everybody has been invited a few times to submit questions. Operator, can you just reconfirm last time please?

Certainly. (Operator Instructions) And now we have a question from Alpha Wang of Goldman Sachs.

Can you hear me?

Yes.

This is Alpha Wang coming from Goldman Sachs. We have 2 -- can management provide the (inaudible) of RevPAR and (inaudible) in relation to the potential conflicts with the hotel groups acquired before. Do we expect any other similar incidents going forward?

So thank you so much for questions. The first question, I couldn't hear clearly. I think the reception isn't very clear. The second, I want to repeat, you said that do you -- do we expect a similar situations like with the 1 or 2 of the groups we have acquired before. So we got that. What about the first question?

Yes. Sorry for the bad signal. Can you hear me now?

Yes.

The first question is, could you kindly share the RevPAR and [hotel] guidance for FY '23, the next year?

Okay. Got it. So for the -- for the RevPAR and the number of hotel openings, I think that the we plan to open about 600 hotels during the 2023. And the -- we still believe the first couple of months will be impacted -- the first few months will be impacted by the recovery of the COVID. So the operation will not be -- especially on the development side, will not be recovered to the full potential.

And so in terms of RevPAR and at this moment, it's really difficult to project the RevPAR, and we hope the RevPAR will minimum achieve overall 90% above the prepandemic levels during the 2023. That's considering the numbers we also received from other industry related to the travels, related to the hotels in terms of their projections of the recovery of tourism market.

That's for the 2023 and later, Selina may add. But in terms of the deconsolidation, also I want to bring to attention to everybody the reason we have a late first half of 2022 result. It's also because of this deconsolidation process is we did not anticipate the delay of that cost. And looking at some of the issues, we don't think we were experiencing similar ones as others. We -- the company have enjoyed great relationships with all the partners. And because we respect and also work closely with all of our joint venture partners, with our franchisees. And I think that the cost dispute is a onetime, and we don't expect that will continue in other areas. So that's why in the New Year, we will continue. We have ample -- still capital available. We'll still plan to place the strategically at the growth of the company.

This is Selina. Yes, Alex, maybe you can enlarge your voice so that we can hear you more clearly. Yes. And this is Selina. And thank you, Mr. Wang for your question, and we will also provide our revenue guidance for the year of 2023 and our fourth quarter performance report on our earnings call. Thank you.

Selina and (inaudible) why -- was I clear in the past ? Sorry about that.

It seems you are a little far away from the microphone so that your voice is lower than before.

Okay. All right. So I'll move a little closer. Okay.

Thank you.

Go ahead, sorry.

The next question comes from Dan Xu of Morgan Stanley.

I have 2 questions. Just -- the first question is just to clarify that we will start to deconsolidate the Argyle and Urban numbers in our P&L starting second half, according to the announcement. So when you provide the guidance for 2022, that was excluding -- just to clarify, excluding Argyle and Urban. And if that's so, can you kindly remind us, in the first half revenue, how much of especially Argyle's revenue was already consolidated in the first half. So we know what kind of impact we will have for full year? That's my first question.

Okay. Alex, may I answer the question of Dan?

Sure.

Okay. The deconsolidation of Argyle since June were resulting in a 2.5% decrease in our revenue if compared with the year of 2021. And also the consolidation of Urban since the fourth quarter will result in a 3% decrease in the revenue. Thank you.

My second question was about right now, so after the deconsolidation of Urban and Argyle, what will be our strategic partnership with -- especially with Argyle since we currently have only the Argyle brand as our luxury segment. So does it mean that we will move away from luxury segment and just focus on our Eastern and Deepsleep and also our 3 [GGV] brands of mid and upscale. So just more about mid-to-up-scale and also luxury strategy going forward.

Selina, I'll pick up this question. Thanks, Dan. Okay. I want to add a couple of clarifications. You have one more comments to the previous. I think that with the deconsolidation, we hope that we'll see an improvement of the bottom line. And even though with the small loss of revenue on the top line with the deconsolidation. So the decision, the Board and we're making, is going to be for the benefit of everybody.

So with regard to the deconsolidation of Argyle, our focus are continuing to develop our own brands, including what you just said. The 5 brands we have currently, I think they're all doing -- improving rapidly. In addition, we are also developing higher-end brands with our joint venture partners, that we have several regional joint venture partners who they have experience and expertise along with us -- along with our (inaudible) and focus on growing those full service 4-star or above hotel brand.

So we'll continue trying to expand and cover the full rent of the brands in the hotel segment, which including the business and the leisure and also from the economy all the way to a 4 or 5 star. So that's our long-term strategy.

So the current immediate, our focus, we have to capitalize on the experience and the insight we have gained during the last 3 years operation during the COVID period and utilize that to better improve our system and operating efficiencies because we think that 2023, the first half of the 6 months, are going to be still challenging, and that we are also going to utilize the time to work closely with many of our regional joint-venture partners to improve our products and their products and service quality.

And we still have capital available even during the 3 years challenging time. And I think to explore more strategic investments to benefit our partners and shareholders. So that's our mid- to long-term strategy. Thanks, Dan.

The next question comes from Peter Yang of Goldman Sachs.

Alpha has already helped me to ask 1 question. Maybe just a follow-up and to confirm that the other general expenses in the second half of 2022. So there will be no more, like, one-time impairments that we can expect. Is that -- is my understanding correct?

Selina, would like you to pick up that question?

This is Selina. So the -- I repeat your question. You want to know more detailed information about the general expenses for the year of 2022. Am I correct?

Yes, for the second half and for next year, if possible.

Okay. So let me take the second question, Selina. I think for Peter's question is whether we have this one-time impairments made for the first half of 2022, do we expect more in the second half? Do we have any in the second half of the year or the future?

So we discussed -- we took this very seriously, Peter, because we want to make sure all of our investments are made prudently and we said the utmost responsibility. The past 3 years' pandemic period really lasted longer than we originally expected. So there are issues related to that period. And we take a bounded caution. And I think as much as possible, I think, for the first half of 2022. And personally, I don't expect that any major -- any major impairment due in the second half of the year or the future.

The only thing that we indicated that in the first half of 2022 because we took also precautions in terms of the franchisee loans because it's a certain product franchise that want to give our franchisee flexibility to retain their financial costs and that our accounting standard may treated that, okay. So potentially, there should be a provision for the loan receivables. So that's the -- that's the one area that we took also abundant caution for the first half of the year.

Yes, you're correct, Alex. Actually, the other general expenses included many one-time provisions for the other assets just mentioned by Alex related to our 2 properties and also as well as one-time impairment for the Argyle -- charge for Argyle and the Urban-related deconsolidation. Thank you.

And once more, Alex, you may improve your voice a little bit higher. So that otherwise we can hear -- we cannot hear you very clearly. Thank you.

Would you mind sharing how much of the franchisee loans impairments were incurred in first half? So that we know like how much would -- are roughly carried forward in the second half.

Okay. So we believe that we have about 18% of our loan receivables. And then we don't expect any major impairments for the second half of the year for the loan receivables. So Selina, again, please correct me. I'm bringing my phone. It's a lot closer. So are you able to hear me this time clearly?

Yes. It's very clear, very clear.

Okay. Wonderful, wonderful. Thanks.

The next question comes from Bruce Mi of UBS.

Okay. So I have a general question on the sector overall. So given that China has lifted -- significantly lifted the COVID restrictions, may I check what's your expectations on the travel demand and the franchisees' investment willingness in 2023? Because -- do you worry about as travelers may have concerns on their health, and so they -- in the short term, they may be unwillingly to travel? And how long will it take for the franchisees to be willing to reinvestment in hotel sectors again?

Okay. So Selina, I'll pick up this question, okay? So again, remind me if I'm speaking too low or my voice too low, okay? So thanks, Bruce, for your question. And by the way, it's a great question because we're all looking at the numbers for this immediate holiday season such as the New Year and the Chinese New Year. And we have detected pattern and the, right -- immediately right after the lift of the quarantine restrictions, our RevPAR picked up and recovered very quickly to exceed the level of 2021.

And then with the wave of the COVID infections that even we experienced a lot among even our own staff and our guests. We see the industry, I think, at least the travel industry is a more cautious to travel during this period of time. So we see a drop -- and you saw that, I think, in Slide 8, I forgot, there's one page, you see a drop in the occupancy and RevPAR. And I think with the wave of this is recovery, we'll see the first 2 to 3 months, I believe, should be up and down. And the region -- certain regions will recover better during this holiday season for uses like [Hainan] and holiday destination area, we will see big improvement of the product over the same period of last year.

But business-related travel, I think, year-end activities for the businesses, I believe, will be probably more impacted during this season. But we, do expect, I think, once this wave passed everything, we hope, will resume to normal. And we are -- our unique focus is also to improve the health of our staff and our guests. We're trying to implement a very strict sanitation program and to also improve the health of employees so that we're making sure we are able to help both of people and our guests during this travel seasons. We also have implemented a program for our own travel during this holiday season. And so we think that different parts will be impacted differently. But after winter, spring comes, we expect that everything will be back to similar to the -- hopefully, the recovery to close to prepandemic level, okay?

So in terms of franchisee investment, we see an increase of confidence. On the other side, we all have a difficult in the next 2 to 3 months. I think that both on our staff planning and also in terms of occupancy side, it's going to be challenging, but we are confident and hopeful that this is a short period, I think, that with this wave of cases that we experienced.

The long-term confidence of our franchisees are still there. So we are -- the second focus of our company is working even harder with our franchisees, with our hotel employees to deal with this new challenge.

But we do -- because the resolution time in this time period is going to be shorter and shorter, so people probably are not able to plan the holiday travel ahead of the time because they have to see the areas to know the impact. And so we looked at the numbers. I think towards the 2 weeks from now, we see that the reservation number is even better than the year of last year, than 2021, but we cannot, at this moment, detect to see whether this will continue depending on the rest of the cities, the rest of the countries, how the cases are being managed.

So -- but I think that no matter how we looked at that, this is going to be a short-term phenomenon, and this will not be probably too long term, especially China's new policy. We have a different, I think, a more prudent policy to deal with this COVID-19. So we do see both of the franchisee side on the hotel and the restaurant side, I think, the confidence level are much, much better than in the past.

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

Thank you, operator, including 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 plans to reach us, please feel free to contact us. This concludes our prepared results. Thank you.

And thank you, everyone.

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