GreenTree Hospitality Group Ltd (GHG) 2023 Q2 法說會逐字稿

Hello, ladies and gentlemen. Thank you for standing by for GreenTree's First Half 2023 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, Ashley. 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; Mr. [Bill Ju,] Financial Director of the restaurant business.

Mr. Xu will present the company's performance overview of the first half of 2023, followed by Ms. Huang and [Mr. Ju,] who will discuss business operations; and Ms. Yang and [Mr. Ju] will then discuss financials and guidance. They will all be available to answer your questions during the Q&A session which follows.

Before we begin, I would like to remind you that this conference call contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934 as amended and as defined in the U.S. Private Securities Litigation Reform Act of 1995. These forward-looking statements can be identified by terminology such as may, will, 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 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.

Thanks, Rene. Hello, everyone, and thank you for joining us today. 2023 marked a new start of the post-COVID recovery in the economy across China. So par compared to the same period of 2019 reached more than 120% at the beginning of February, exceeding our expectations as demand for business travel rebounded after the spring festival.

During the second quarter, especially during the National Labor Day holiday early in May, it reached more than 115%. And during the summer vacation, it was almost stable at 110% as the tourism further expanded. As we did throughout the pandemic, we continued to execute our long-term strategic growth plan has strived to assist the franchisees in maintaining quality operations, expand our hotel network, deliver stable operating profitability and maintaining healthy cash flow.

Please turn to Slide 5. Compared with the first half of 2022, hotel RevPAR was RMB 130, up 35.8% and the restaurant ADR that is average daily sales per store was RMB 6,213, up 22.9%.

Total revenues were RMB 794.2 million, up 12.1%. The increase was partly due to the recovery in RevPAR to increase in the number of hotels and the increase in the restaurant average daily sales, partially offset by the closure of the 64 restaurants. Income from operations turned positive at RMB 150.9 million with a margin of 19%. Net income was RMB 177.3 million with a margin of 22.3%. Adjusted EBITDA non-GAAP was RMB 226.9 million, up 137.8% with a margin of 28.6%. Core net income, non-GAAP was RMB 136.1 million with a margin of 17.1%. Cash provided by operating activities was RMB 313.1 million.

Slide 6 shows detailed numbers for total revenues, income from operations, net income and adjusted EBITDA.

On Slide 7, operating performance greatly improved during the first half of 2023. The RevPAR was RMB 120 and RMB 141 in the first and second quarter, respectively. At the bottom of the slide, you can see the weekly RevPAR performance in the first half of 2023 compared with 2019. In the first half of 2023 due to the recovery from COVID-19, RevPAR exceeded 124% of its pre-pandemic levels after Spring Festival. Thanks to the stable recovery in demand and in the economy, RevPAR gradually recovered to more than 120% of its pre-pandemic levels in the Labor Day Golden week of 2023. While the RevPAR recovery slowed during the Dragon Boat Festival, it resumed a growth and the stable development trend again in the summer vacation as the travel stir up.

Slide 8 shows operating performance of the restaurants. ADS had a good trend in the first half of 2023. Now starting with Slide 10. Let's talk about the strategy and the execution of hotels with further expansion in the mid- to upscale segment on the Tier 3 and the lower cities in South China. Besides, we are continuously adding L&O hotels in strategic locations.

Let's take a look at Slide 11. We have been continuously growing our mid- to upscale segment over the past few years. For an apple-to-apple comparison, we have excluded the Argyle's and Urban's hotels. By the end of the first half of 2023, we had 438 hotels, 10.7% of our total portfolio in the mid-to-upscale segment, up from only 50 in 2017, and we plan to open more this year. While the mid-scale segment remains the core of our business with the 71.4% of all of our hotels. We continued our expansion into the higher-end segments.

By the end of the second quarter, mid-to-upscale hotels accounted for 10.7% of our total portfolio, while the economy segment remained stable at 17.9%.

Please turn to Slide 12. Over the past 5 years, most of our new hotels have been in China subscribing Tier 3 and the lower cities. In addition, hotels in some lower tier cities are performing well as we continue to execute our strategic plan, 73.3% of hotels in our current pipelines are in such cities and will further capitalize on the substantial opportunities in such locations.

On Slide 13. During the first half of 2023, we opened 3 L&O hotels at Chongqing North Railway Station, Chongqing Jiangbei International Airport, and the Shenzhen, Futian and Huaqiang North. All of our L&O hotels are located around transportation hubs, central business district or government centers. By showcasing our brand and operating standards, we believe that these hotels will help us attract more high-quality franchisees further contributing to growth.

Slide 14. Our strategy for our restaurant business focuses on increasing profitability with the closing of unprofitable stores and expansion in the proportion of franchised-and-managed restaurants and growing numbers of our street stores.

On Slide 15. During the first half of 2023, we closed 64 restaurants in areas of decreased economic activities and reduced the food traffic, helping improving the overall profitability of our restaurant businesses.

On Slide 16, you can see the growth in the proportion of franchised-and-managed restaurant forming the acquisition of Da Niang Dumplings and Bellagio during the first quarter of 2023.

Slide 17 shows that currently, most of our restaurants are in the shopping malls. However, we believe there is substantial potential for street stores, and we intend to develop more in this format. I want to focus -- I want to emphasize that in the new area, we were strategically focusing on growing high-quality hotels and restaurants to build a better and a stronger foundation for future growth.

Now let me turn the call over to Megan and Mr. Zhu.

Thank you, Alex. Please turn to Slide 18 to start reviewing the operating and financial highlights. Slide 19 shows the trend in our quarterly operating performance.

In the second quarter of 2023, RevPAR for our L&O hotels increased to RMB 190. RevPAR for our F&M hotels increased to RMB 139. ADR for our L&O hotels increased to RMB 255 and ADR for our F&M hotels increased to RMB 179. Occupancy at our L&O hotels increased to 74.6% and occupancy at our F&M hotels increased to 77.9%.

Slide 20 highlights the growth in our membership program, which accounted for most of our direct sales. Individual membership grew to 84 million, up from 74 million a year ago and corporate membership grew to 1.99 million, up from 1.91 million a year ago.

Now please turn to Slide 21. In the restaurant business, the number of individual members grew to 2.67 million, up 2.3% year-over-year. ADS increased 57.3% to RMB 6,271 in the second quarter of 2023 compared to 1 year before.

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

Thank you, Bill. First, let's review our hotel business. Please turn to Slide 22. In the first half, total hotel revenues increased to 23.1% year-over-year to RMB 563.2 million. The increase was primarily due to the recovery in RevPAR and increase in the number of hotels. Total hotel revenues increased 23% to RMB 310.6 million in the second quarter of 2023 compared with the first quarter.

Total revenues from F&M hotels were RMB 347.4 million, up 26.1% year-over-year. While total revenues for our L&O hotels increased 24.7% to RMB 213.6 million.

On Slide 23, total hotel operating costs and expenses decreased 54.7% year-over-year to RMB 416.6 million. Excluding other general expenses, total hotel operating costs and expenses also decreased 2.8% year-over-year. And total hotel operating costs and expenses increased 5% to RMB 213.3 million in the second quarter compared with the first quarter.

Total costs and expenses are composed of hotel operating costs, selling and marketing expenses, general and administrative expenses. Operating costs were RMB 284.4 million, down 7.6% year-over-year. The decrease was mainly due to the deconsolidation of Argyle and disposal of our interest in Urban and partially offset by higher consumables, higher utilities due to the recovery from COVID-19 and higher rents with lower exemptions compared to last year.

Operating costs increased 11.8% to RMB 150.1 million in the second quarter compared with the first quarter. Selling and marketing expenses were RMB 24.8 million, a year-over-year increase of 31.8%. The increase was mainly attributable to higher sales channel commissions, higher sales staff salaries and higher travel expenses.

The selling and marketing expenses increased 24.3% to RMB 13.8 million in the second quarter of 2023 compared with the first quarter.

General and administrative expenses were RMB 90.5 million in the first half of 2023, down 9.2% compared with the first half of last year. The decrease was mainly due to the deconsolidation of Argyle and disposal of our interest in Urban and partially offset by higher consulting fees and higher staff-related expenses. The G&A expenses decreased 3.6% to RMB 44.4 million in the second quarter of this year compared with the first quarter.

Turning to Slide 24. Income from hotel operations was RMB 160.4 million, and income from hotel operations increased 108.7% to RMB 108.5 million in the second quarter of 2023 compared with the first quarter. Net income of hotels was RMB 191.8 million. Net income of hotels increased 138.4% to RMB 135.1 million in the second quarter of 2023 compared with the first quarter. Adjusted EBITDA increased 127.5% to RMB 212.2 million and core net income increased 42% to RMB 150.4 million.

Now let me turn this call over to Bill, our Financial Director of Restaurant Business.

Now let's review our restaurant business. Please turn to Slide 25. In the first half of 2023, total restaurant revenue were RMB 127.2 million and RMB 104.9 million in the first and second quarter of 2023, respectively. You can also see the revenue breakdown for F&M restaurant and L&O restaurants.

On Slide 26, total operating costs and expenses decreased 9.9% year-over-year to RMB 242 million, and the total restaurant operating cost and expenses decreased 9.7% to RMB 114.9 million. In the second quarter of 2023, Q3 compared with the first quarter, you can also observe the downtrend in material costs, personnel costs and rent.

Turning to Slide 27. Income from restaurant operations was negative RMB 9 million in the first half of 2023. Income from restaurants operation was 0.6 million and a negative RMB 9.6 million in the first quarter and the second quarter of 2023, respectively.

Net income was negative RMB 14.1 million in the first half of 2023. Net income decreased to negative RMB 11.9 million in the second quarter of 2023 compared with negative RMB 2.2 million of the first quarter. Adjusted EBITDA increased 473.1% to RMB 15.2 million. Core net income was negative RMB 13.9 million.

Next, Selina, please introduce the probability of our group.

Please turn to Slide 28. Group net income per ADS, basic and diluted was RMB 1.79. Group core net income per ADS, basic and diluted non-GAAP was RMB 1.33.

Let's now take a look at Slide 29. As of June 30, 2023, the company had total cash and cash equivalents, restricted cash, short-term investments, investments in equity securities and time deposits of RMB 1,440.1 million compared to RMB 1,119.4 million as of December 31, 2022. The increase was primarily due to cash from operating activities, repayment from franchisees, proceeds from disposal of subsidiaries and partially offset by the repayment of bank loans and investment in properties.

On Slide 30, taking into account the recovery long-term trends and short-term industry fluctuations, we expect total revenues of organic hotels for the full year of 2023 to grow 30% to 35% of the 2022 levels. Total revenues for our restaurant business and our organic hotel business. For the full year of 2023, I expect to grow 15% to 20% over the 2022 levels.

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

(Operator Instructions) Your first question comes from Zhao Jun with (inaudible) Capital.

Hello, management. And we know, in March, catering was incorporated into the listed company. Can you introduce the recovery of catering?

Okay. Thank you for your question. Our Financial Director, Bill, will answer this question.

Hello. The restaurant sales compared to 2019 sales recovered 18% and when compared to '22, the sales recovered is 100.7%. Thank you.

(Operator Instructions) Your next question comes from Bessie Zhu with UBS.

So could you give us some color and guidance on the RevPAR in Q4 2023 and 2024? Thank you.

Thank you for your question. So let me first answer your question. I guess Alex introduced just now in the summer vacation, the RevPAR in the July and August kept stable about 110% of the 2019 levels. And we see that here in September, the RevPAR decreased a little bit due to the seasonality fluctuation. So for the fourth quarter, yes, we forecasted the RevPAR recovery also keeps the stable level of the 2019 level, that is about 10% increase by the 2019 level, okay? So therefore the RevPAR for the next year, I think yes, it's very -- it's a little bit difficult for us to forecast this for the long term. But for the long-term trend, yes, we can see a good trend because of the recovery of the industry and especially from some locations in the year of 2023.

So let me add a couple of more comments here. The Q3, the performance is better than Q2 based on the first 2.5 months, that's July, August, September, a substantial improvement over the Q2. The trend in the Q4 will see will stabilize because our hotel portfolio focuses on primarily on the -- have a lot more on the Tier 3, Tier 4 cities.

I think the Tier 4 and -- Tier 3, Tier 4 cities performance are very stable, given that they are stable during the past 3 years of COVID control period. And that -- so their performance we expect to be continuously improving and stable over the next few years, especially the Chinese policy has been focusing on we do an iteration of the countryside and also encouraging drop growth in those Tier 3, Tier 4 cities.

So the -- even though the recovery after the post-COVID period, we see the performance much better than the first-tier cities, because there is many, many new conventions and people have been traveling to the first tier cities for business and for exchange, but we think the trend for the future growth will continuously reach out to the Tier 3 and Tier 4 cities.

Your next question comes from Adam Zhu with China [Ascendas] Securities. Please go ahead. Adam Zhu, your line is now live. Please proceed with your question. (Operator Instructions)

Your next question comes from Simon Cheung with Goldman Sachs.

Alex and Selina. I've got a couple of questions. One, just on the hotel. I saw that you did a decent 38% EBITDA margin for the business. And remember, before COVID, you were hovering at about 50%. Just wanted to get a sense the difference between the, I know there's actually some mix change and closure or deconsolidation of some of the business. But I wanted to get a sense whether you feel that once your RevPAR and by the way, your RevPAR is already over 100% anyway. Do you feel that you can go back to 50% on the hotel business? That's the first question.

And then the second question is on hotels. So you have been closing down, call it, 50, 60 restaurants every 6 months. And that you finally get to breakeven level. Then I guess the question is how many closure or do you have any targets as to how many restaurants you're going to be running? And when are you -- what sort of profitability level you feel comfortable maybe in 1 or 2 years' time?

Thank you, Simon. Thank you for your question. So this is Selina. Let me introduce the background of the -- related to your first question about the EBITDA margin of the hotel business. Yes, you are very correct. Previously, our EBITDA margin was as high as 50%. But in the first half of this year, our EBITDA margin was about 38%, even though it recovered greatly from the COVID-19. However, still lower than before.

There are 2 reasons. The first one is due to our newly opened lease operating hotels in the COVID -- during the COVID-19. Okay? So according to our calculations, the impact of our newly opened lease operated hotels was negative to 10% of the EBITDA margin. So that means if we excluding the impact from our unprofitable newly opened lease operated hotels, our EBITDA margin was about 48.7%. Okay, that's nearly higher than now.

Simon, let me add a couple of more points to Selina's answers. Compared to the pre-COVID area, that we have the margin we see a dip, because our take rate is also a little bit reduced from the pre-pandemic levels for the following reasons. One, the competition also is heating up, in order to support the franchisee is we lower the overall our CRS fees potentially. And so that's one.

Secondly, that because the last 3 years, we have not really forced the standardization of the renovation of the older hotels. And so with the 2023 post-COVID -- we started actually in '14, and starting the renovation of hotels. And during the renovation, we typically gave 6 months per year of free the waiving of certain fees, especially if they upgrade to a different version. So and then those 2 factors also added a little more reduced of the top line, even though the RevPAR on the group that recovered more than the 2019 levels. So that's also added to the reduction of the margin, okay? Regard to the restaurants, I leave to Bill (inaudible) the opportunity to answer this question.

Okay. From this year, I think the adjustment of our restaurants strategy change is almost done. So maybe next year, we will try and to start to find a partner to open more restaurants for the dumpling restaurants and our restaurant business.

This is a good question that the consumer trend has been rapidly changing. For instance, in the past, a substantial number of our Da Niang Dumplings restaurants are located in supermarket mall, the street shopping malls to be anchored by the supermarket. And we see the food traffic to the supermarket mall have substantially reduced. I think this lead to the closure of most of the 64 restaurants. And we are actually finding the new consumer patterns of consumption and finding the strategically located, for instance, the street branded stores and they're trying to reorganize our team, especially the developers and that because the trend has been shifting and then with that new format and then we are able to open more, develop more restaurants in this new format.

Sorry, can I quickly follow up just on the 2 respective? So on the 2 respective segments, hotel and restaurant, do you have a sense or can you give us a target of the addition of the stores, for example, for the full year, how many hotels you're expecting to add? And equally for the restaurants, I saw obviously, it has dropped a lot. Do you have indications maybe in medium term, what sort of store count are you expecting?

For the hotel side, that we have actually moved to more focus on those high-quality hotels and that we think that will build a better foundation for the future. So this year, I think the signing of the new contracts is going to be more than 600. But because the openings takes more time and that we calculated in the pipelines and the number of new stores -- new hotels can be around 420 for the year of 2023. And for the -- Bill, will give you the answer about new restaurants.

For the new restaurants, we have targets like 20 to 30 restaurants for this year.

And for the restaurant side, it's easy to add more. I think that we focus on more high-quality growth and making sure it doesn't burn a lot of cash and to make sure that we can catch the consumer trend and the insight of this, they are growing the number of locations. And so that's our strategy for the remaining and the next year, Simon.

(Operator Instructions) Your next question comes from Adam Zhu with China [Ascendas] Securities.

Management, can you hear me?

Yes. Very clearly, Adam.

Well, sorry for the bad line. My first question is how do you like the competition and the market structure of the lower tier city market. For the first reason that as I can understand the recovery of the lower tier city market is not that good as Tier 1 city this year. And the second reason, this year, I saw so many players coming into this lower tier city market. And how do you like the competition in this market? And for my second question is that, what is the attitude from our franchisee partners, our partner -- our partner selling our (inaudible) Is there any changes from their attitude? That's all.

Okay. Thanks, Adam. The competition in the lower-tier cities has grown -- has been growing stronger in the past few years. But we do not see it become stronger this year. I think that some players went to the 3rd Tier, 4 Tier cities. I think the performance due to the challenge of managing them closely and effectively, we see some changes of the brand, the change of the closure. We see more closures and change of the brand in the Tier 3, Tier 4 cities. But we -- I think our strength has always been managing remotely. We're managing 3, 4 Tier cities very effectively. So our hotels has been performing really well and during the COVID and after the COVID and they've been very stable and generating substantial cash flows to our franchisees. And -- we think that our strength has been there, a leading players in those diversified booming lower -- Tier 3 in the lower tier cities.

In terms of attitude of franchisees, it takes a little bit more time for our franchisees to adapt to the new environment because the first few months, they have many, many issues we have to solve that accumulated during the -- during the pandemic era. And secondly, that we also have experienced substantial boom in the number of travelers as well, especially in the first and second tier cities. So we've been busy in terms of -- our franchisees has been busy in terms of forgetting everything getting our people along with the GreenTree and hire that we trend to meet the new demand. So the first few months has been very busy.

And -- but I think that I will use the word, it takes a little bit more time for our franchisee attitude towards expansion and growth compared with the pre-pandemic levels. But we see more and more confidence coming to the market, especially on the hotel side. I think the restaurant there will be -- because there is -- the trend has been shifting very quickly. The track footprint especially the food traffic has been changing. And so we do see the franchise a little bit more reserved conservative in the restaurant segment.

And -- but in the long run, we have -- we have been pretty confident that our franchisees, we already see some of existing franchisees and they started reaching out other the 2, researching additional properties and working with us. So we have more, a lot more product in the pipeline and especially high-quality lines. Under that -- on the competition of the property side, that is a little bit less, so -- which is good for our franchisees because the rent, the rent pressure is somewhat reduced compared with 2019 levels. So Adam those are the sentiments that we have experienced.

(Operator Instructions) There are no further questions at this time. This concludes our question-and-answer session. I would like to turn the conference back over to Ms. Selina Yang for any closing remarks.

Thank you, including on behalf of the entire GreenTree management team, we thank you for your interest in Greentree and your participation in today's call. If you require any further information or have plans to reach us, please feel free to contact us. Thank you all. Thank you, operator.

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