H World Group Ltd (HTHT) 2014 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the China Lodging Group Q4 and full year 2014 earnings conference call. (Operator Instructions). I must advise you that this conference is being recorded today, Wednesday, March 11, 2015. I would now like to hand the conference over to your first speaker today, Ms. Ida Yu, Senior Manager of Investor Relations for China Lodging Group. Thank you. Please go ahead.

Thank you, Vincent. Good morning, everyone. Thanks to all of you for dialing in, and welcome to our Q4 and full year 2014 earnings conference call. Joining us today is Mr. Qi Ji, our Founder, Executive Chairman and CEO and Ms. Jenny Zhang, our President and CFO. Following their prepared remarks, management will be available to answer your questions.

Before we continue, please note that the discussion today will include forward-looking statements made under the Safe Harbor provisions of the United States Private Securities Litigation Reform Act of 1995. Forward-looking statements involve inherent risks and uncertainties; as such, may be materially different from the views expressed today. A number of potential risks and uncertainties are outlined in our public filing with the SEC. China Lodging Group does not undertake any obligation to update any forward-looking statements, except as required under applicable law.

On the call today, we will also mention adjusted financial measures during the discussion of our performance. Reconciliations of those measures to the comparable GAAP information can be found in the earnings release that was distributed earlier today.

As a reminder, this conference call is being recorded. The webcast of this conference call, as well as supplementary slide presentation, is available on the Investor Relations section of China Lodging Group's website, at ir.huazhu.com.

Now I would like to turn the call over to Mr. Ji. Qi Ji, please.

Good morning, everyone. Thank you for joining us today. We are excited about the rapid buildup of our hotel network in the 2014, mainly driven by our solid growth in managed [manachised] (inaudible) and a more comprehensive brand portfolio.

As shown on page 3, Huazhu has seven brands, covering economical, midscale, and upscale hotel segments. We are particularly happy about the development of our new brands, which including HanTing, contributed more than 25% of our total new hotel openings in 2014.

Furthermore, in Q4, we formed a strategic alliance with Accor. Through this alliance, we are able to offer more hotel products to our customers and more [options] for franchisees, on our unique platform. Our [market] brand strategies will further expand our scale in the coming years.

Our successful manachised business contributed to [our portfolio] in 2014. It was a record year for hotel network expansion, as shown on page 4. 92% of our new hotel openings are under manachised business model in 2014.

With strong brand popularity and an increasing brand portfolio available among our business partners, we expect to maintain our high growth in manachised business going forward.

Our (inaudible) HanTing is well supported by our digital strategy and related [initiative] activities.

As shown on page 5, we target to serve our customers, our partners and our employees with a powerful data platform.

In the following three pages we elaborate in more details from three fronts. From the customer front, we provide a smooth and a convenient process during their whole stay. From the partner front, we have established a digital interactive business. From the employee front, we provide a more (inaudible) tool to improve hotel operational efficiency.

As for 2015, we have set our top priority on page 9. We will still focus on the faster expansion of a strong brand portfolio, mainly with the manachised model. On top of that, we will leverage our scalable hotel network to generate the incremental revenues. Last, but not the least, we expect to [concentrate] the progress of Accor-Huazhu alliance in 2015.

Looking ahead, we are confident to fortify our leading position as a hotel management group in China by executing our strategies. With that, I will turn the call over to Jenny, who will talk you through our Q4 and full year operational and financial results. Jenny, please.

Thank you Qi Ji. Hello, everyone. I'm pleased to report our operational and financial results for Q4 and the full year. As Qi Ji mentioned earlier, rapid expansion remains our primary strategy.

In Q4, as shown on page 11, we opened 7 net new leased hotels and 139 new manachised hotels. At the end of 2014, we had 1,995 hotels in operation, among which 31% were leased hotels. 69% were manachised hotels. We had a pipeline of 673 hotels, with 29 leased hotels and 644 manachised hotels.

As shown on page 12, in Q4 our Group blended occupancy was 87%, a decrease of 3.5 percentage points year over year. The decrease was mainly due to soft macro-economy and a higher percentage of new hotels opened in lower-tier cities.

The blended ADR was RMB176, a decrease of 1% year over year, as a result of more hotels shifting towards lower-tier cities, partially offset by a 0.3% in same hotel ADR. In summary, in Q4, the blended RevPAR was RMB153, a decrease of 4.6% year over year.

As shown on page 13, for the full year of 2014, our Group blended occupancy was 89%, a decline of 1.7 percentage points year over year. The decline in occupancy rate was mainly due to softer macro-economy and a higher percentage of new hotels in lower-tier cities.

Blended ADR was RMB179. In 2014, the blended RevPAR was RMB159, a decrease of 2.4% from a year ago.

Page 14 provides a detailed view of the growth trends of our same-hotel RevPAR. For hotels in operation for at least 18 months, in Q4 2014 our same-hotel RevPAR decreased by 3%, with 0.3% increase in ADR and a 3 percentage point (sic - see presentation slide 14 "3%") decrease in occupancy.

The increase in same-hotel ADR was driven by price increase to enhance yield. The decrease in same-hotel occupancy rate was mainly due to the softer macro-economy, as well as a drop in demand caused by APEC in Beijing.

For full year 2014, our same-hotel RevPAR decreased by 1%, with 1% increase in ADR and 2 percentage points decrease in occupancy, which was 92.8%.

Now let me move to the financial results.

In Q4 and full year 2014, as shown on page 15, our Q4 net revenues increased 15.7% year over year. Leased hotels revenue grew 12%, and manachised and franchised hotels revenue grew 40% year over year.

For the full year of 2014, our revenues increased 19.1%. Our manachised and franchised hotels revenue reached 14% of our total revenue in 2014, compared with 12% in 2013.

On page 17, the adjusted operating margin for full year 2014 was at 8.5%, compared with 9.8% in 2013.

The hotel operating cost, as a percentage of net revenues, increased by 1.8%, year over year, mainly driven by the decrease in RevPAR and the cost inflation.

The preopening expenses as a percentage of revenue saw a 1.3% decrease, due to our enlarged revenue base and fewer leased hotels in the pipeline.

The adjusted SG&A expenses and other operating income as a percentage of net revenues increased by 0.8%. This is mainly due to various promotional activities to attract more new customers, our investments in technology for digital-related initiatives and new brands, as well as a significant growth in the number of manachised hotels.

On page 16, the adjusted quarterly operating margin came in at 4%, compared with 8.1% in Q4 last year.

The hotel operating cost, as a percentage of net revenues increased by 2.5% year over year, mainly attributable to the decrease in RevPAR and the cost inflation.

Our preopening expenses as a percentage of net revenues saw a 1.1% decrease, due to our enlarged revenue base and fewer leased hotels.

The adjusted SG&A expenses and other operating income as a percentage of net revenues increased by 2.7%. This is mainly due to various promotional activities to attract new customers and (technical difficulty) [technology], on top of significant growth in the number of manachised hotels.

Last, but not the least, move on to the cash position, as shown on page 18. Our cash balance closed at RMB809m at the end of 2014. We had a total credit facility of RMB898m, and no debt.

For the full year of 2014, our operating cash flow reached RMB1.45b, a 36% increase from a year ago. The significant growth was attributable to the Company's fast network expansion with manachised hotel, as well as our policy change with the deferred revenue caused with the [points] exchange program.

Our investing cash flow totaled RMB1.06b, an 8% decrease from a year ago. Our solid operation has demonstrated strong capability for generating cash. Our free cash flow first turned positive in 2014.

Finally, as shown on page 18 -- page 19, in [2015] we plan to add 680 to 730 hotels, with 20 to 30 leased hotels and 660 to 700 manachised and franchised hotels. Among those new openings, about 80% will be economy hotels and 20% for midscale and upscale hotels.

For revenue guidance, we expect that new revenues for Q1 -- net revenues for Q1 will grow 12% to 14% year over year. Our net revenues for full year 2015 will grow 7.5% to 11.5%.

With that, let's open the floor for questions.

(Operator Instructions). Lin He, Morgan Stanley.

Good morning, management. Thanks for taking my questions. Two questions. One is for SG&A. Jenny, we saw higher SG&A we've showed this quarter. Can you talk about your expectation for 2015, including the investments in digital strategy, how much we will spend on that?

And the second question is on the competition industry supply for Ji Zong. Ji Zong can you talk about what you have seen, in terms of competition environment, especially industry supply more recently? Do you think the new supply for the whole industry will remain very strong in the industry? Thank you.

Jenny Zhang. Thank you, Lin. For the first question on SG&A, for 2015 we are expecting the SG&A as a percentage of revenue will remain stable from the level of 2014, in general.

And in terms of the general macro-economy, we have seen a serious tighten-up in the overall macro-economy.

Actually, the forecast we provide for the full year is based on a significant decrease in the same-hotel RevPAR. We have observed a 5.4% same-hotel RevPAR decrease in the first two months of 2015. That has guided us to forecast for the full year, it's likely that we're going to see a mid single-digit decrease in that matrix. That has never happened in the history, except for the post-Expo year. So we are prepared to face a very challenging operational environment.

However, we remain confident for the long term for the travel industry, so we have no plan to slow down our expansion. We believe through our efforts to revitalize our product and extend our product offerings in the current network, we will be able to gradually improve the profitability from today's level.

Got it. Thanks, Jenny.

Jamie Zhou, Macquarie. Jamie, please go ahead.

Hi. Morning, management. Thanks for taking my questions. I just want to go over your CapEx expectation for FY 2015, since you have now reduced your leased and operated hotel expansion to just 20 to 30 hotels. So that's my first question.

Jamie, I'm sorry, could you repeat it?

What is your CapEx budget for FY 2015?

Currently, we are estimating at about RMB800m for the leased hotels. We are also budgeting another RMB100m to RMB200m R&D investments into other areas.

Will the RMB100m and RMB200m include any potential acquisitions?

That has included some minor acquisitions, like the acquisition of small-scale chains.

Right, okay. And looking at the last fiscal year, you guys have done a fantastic job in improving your cash flow and turned full-year cash flow positive. It sounds like those trends will continue well into the future as we scale back from leased and operated hotel expansion. Is there a guidance management could provide on potential initiation of a dividend policy sometime this year?

Currently, we have not formed a fixed dividend policy yet. We see today's market there's still a good opportunity for expansion, so we will seek various opportunities to redeploy the cash at this moment. But that does not exclude the possibility of issuing dividends when we get into a more stabilized situation that will continue to generate surplus of cash in the years to come.

Okay, thank you. That's all from me, thanks.

Nelson Wang, Goldman Sachs.

Hi. Good morning, management. Thank you for taking my question. I think my first question is regarding the new openings. And can you give us some outlook on the mix of the different brands in the next year?

Currently, we are seeing about -- if we analyze the pipeline, about 56% of the pipeline comes from our flagship brand HanTing. And there is another 20% to 25% coming from other economy brands. And our midscale and upscale brands will expected to generate the remaining approximately 20%.

Okay. Got you. And my second question is for the revenue growth guidance, how much of the same-hotel RevPAR growth assumptions did you guys factor into your revenue growth next year?

We have already factored the same-hotel RevPAR trend when we provide the forecast, the guidance for the full year revenue.

Okay. Got you. And sorry, my last question is for the margins outlook next year, do you still expect negative year-over-year trend?

Today -- this year is going to be particularly challenging for us, with the same-hotel RevPAR change. And we're making a lot of effort to try to extend the services to our customers to generate more non-room revenue, so it's possible that we may see a moderate decrease in our margin. But in the long run, we are confident by introducing more services and extend our product offering, we will be able to bring the margin back.

Okay, thank you. That's all my questions, thanks.

Thank you.

[Kenny Lu], [STIM].

Hi, management. Thanks for taking my question. My question is focused on the margin. So I think, Jenny, in the call you explain that the occupancy rate and the ADR fell because hotels opened in lower-tier cities. But at the same time, the hotel in the lower-tier cities has lower labor cost and lower rental, which should benefit the margin as well. So how do I -- how should I understand the dynamic of more hotels which is leading to lower RevPAR, but at the same time, the margin also go down, which doesn't benefit from the lower cost.

The lower margin is not driven by the expansion to different tiers of cities. On the other hand, it's driven by a few factors. One is the same-hotel RevPAR trend. When we -- no, so this margin is still significantly impacted by the leased-hotel operation. So when the same-hotel RevPAR decrease, that will have a material impact on the overall margin.

And secondly, structurally we have increased the number of leased hotels under the JI brand. As a midscale hotel, the cost structure for JI Hotel is different from HanTing, especially when we today still have most of the leased JI Hotel in the tier one and tier two cities. And for example, the depreciation and amortization of those hotels are higher. And the lease, as a percentage of the revenue is also 10% to 15% -- percentage points higher than HanTing Hotel. So with a different cost structure, this mix change also impacts our margin.

Of course, part of that was offset by the increased weight of the franchised and manachised revenue, which is a source of revenue of a higher margin. So the result of 2014 margin was mainly driven by those above factors.

So for the midscale hotel, from what you said, it seems that their impact on the cost side is still more than in terms of the RevPAR side, right, because we see the RevPAR is going down, even though the midscale hotel has much higher RevPAR than the economy hotel. At the same time, the cost is also going up. So basically the midscale hotel still contribute negative impact to the margin, at the same time, right now. Can I understand in this way?

Today, especially because the JI Hotel is -- still have a significant portion are new hotels. So if you take into account the preopening expenses and the lost [revenue] during the ramp-up process, the new brand is still contributing negatively to the overall margin. That's true.

However, we have seen very strong same-hotel RevPAR trend for JI Hotel in the past year.

I understand.

So same-hotel RevPAR trend for the overall midscale hotels last year, at a [same-store] basis, was 8% to 9%. So we are quite confident that this is still a valid model and that we are simply still in the investment place for those two -- especially JI Hotels.

When do you think the JI Hotel portfolio will achieve a more balanced mix?

I think it probably still have another couple of years to go.

Okay, understood. Okay. Thank you very much, Jenny.

Thank you.

Hsung Khoo, One North Capital.

Yes, hi. Good morning, and thanks for the call. I got about five questions here. The first question relates to just a clarification on the CapEx. Could you just run that by me again?

And the second question relates to the RevPAR trend deterioration that you are seeing. Maybe you could just give me more color, in terms of the deterioration that you saw in tier one cities versus the tier two, tier three cities. And I've got three more questions to follow. Thanks.

I got your second question, but I did not get the first one.

The first one is your CapEx guidance for 2015.

CapEx guidance?

Yes, for 2015.

I think we already gave that, but let me repeat here.

Right.

We're expecting the overall CapEx for new hotels, including small-scale acquisitions, at approximately RMB800m. And we're expecting another RMB100m to RMB200m in investment into other areas.

When you say other areas, what would that relate to?

It will be the hotel-related business, but not necessarily hotels.

Okay. Okay, got you. And the second question?

And in terms of the RevPAR trend, it's a little bit difficult to generalize between tier one to tier three cities. Overall speaking, the Shanghai area has been quite strong in the past two years and we continue to see it coming well this year.

However, in the northern part of China, including Beijing, we are facing a more challenging situation. So it's probably a more region-by-region than tier-by-tier trend we are seeing. And the other thing is the challenging macro-situation is a reality for all hotel leaders.

Yes.

And what we are confident about is, under these circumstances we are still performing the strongest among the industry peers. And we are confident that we will remain in that position and hopefully expand our leading gap from others.

Right, right. Sure. I've got two more following question, and they relate to your pipeline on new hotels. Maybe you could just give us some update on what you're seeing on the ground in terms of inquiries for new managed or manachised contracts, as well as your own endeavors to secure sites. Do you find it easier now, or it still remains challenging to acquire good sites?

And the second question, follow-up question is the mix of new hotels. How much of it do you see coming from existing operating hotels versus the green field new-build?

Sure. If you look at our pipeline trend, clearly our pipeline has been growing very strongly in the past quarters. And at the end of 2014, we reached a record high of 673 hotels in the pipeline. So I would say we are very attractive to franchisees.

And that trend are supported by two main factors. One is our leading operational capabilities, which enable us to generate more profit than other brands in the market. And the second is by a fairly comprehensive brand portfolio that makes us the one-stop shop for people who want to invest into the hotel area.

And in terms of the follow-on. your question on what we have seen on the pipeline trend, we are quite confident that we will remain the favorite hotel group among the franchisees.

Do you find the momentum of enquiries slowing down? I'm just -- we are investors in your Company and we really think you guys are doing a fantastic job in building your franchise. But, at the same time, as you highlighted, the macro-situation is also resulting in slowing business flow. So I was just wondering if you have seen that translating or filtering down even to the -- at the enquiry level for the manachised contracts.

Currently, we haven't seen any decrease. I think the enthusiasm is still there and in particular, that the conversion cases are more frequent than the past. I haven't run the recent statistics, but clearly the brand of Elan, which is aimed to converting the existing good-quality economy hotels, received very enthusiastic response all across China. And today, the pipeline is already close to 100 hotels.

Right. Just -- and what about the site acquisition, your endeavors to acquire sites for leased hotel, do you find it easier now, given the economy softening, that you got more bargaining leverage to get good sites, or things are still pretty stable in that front?

In terms of leased hotels, the situation is both ourselves and our franchisees are looking for the good sites to open new hotels. I believe the opportunities in general are more in the market, which is supported by our [award] pipeline. However given the general enthusiasm coming from the mass amount of franchisees, I think our own development team focus has also shifted from developing more leased hotels to promoting our brand to potential franchisees.

Hsung Khoo Okay, great. And what about the mix of new hotels between existing hotels versus greenfield hotels?

I don't have the statistics handy. We can take a look and get that back to you later.

Sure, sure. Okay, all right. Thank you very much, Jenny and the team and all the best for the New Year.

Thank you.

Kenny Lu, STIM.

Hi, I have a follow up question. This one question is for Ji Zong. (Spoken in Mandarin).

(Spoken in Mandarin).

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(Spoken in Mandarin).

(Spoken in Mandarin).

Okay, let me briefly translate the conversation. The question was for Mr. Qi because Mr. Qi mentioned that the OTAs' price war had a negative impact on hotels. And so the question for him is what's his view on the impact of those price war of OTAs on the chain hotels?

And what Mr. Qi commented was the group purchase and OTA has offered some low-price channel to the consumers and has also caused less-known hotels to have access to more customers. And those supply had a impact on the tier three and tier four cities.

However, Mr. Qi believes the low price is not sustainable. For example, we are seeing RMB70, RMB80 kind of price for those non-branded hotels. We don't think that's going to be, long-term, really profitable.

And today, despite that, the hotel chains are expanding quickly. The total supply they are offering to the market is still a small fraction. Therefore, he believes, in the long run, the hotels with reliable quality and a reputable brand name still has significant advantage over the single hotels. That trend is not going to change.

And I have a follow-up question for Jenny as well. So, Jenny, on one hand, we see that HanTing is reducing the leased and operated hotels because of the RevPAR trend. But at the same time, we see a faster growth of manachised hotel demand. So how do I understand the economic difference, so basically, why the franchisee is seeing the economic for HanTing's hotel more attractive while, in reality, HanTing's own leased hotel economics are deteriorating. How do I understand that divergence.

First of all, I don't fully agree with your comment. HanTing reduced the number of leased and operated hotels not mainly because of the short-term RevPAR trend. It was mainly because our own development capability is not at an advantage versus the hundreds of franchisees in the process of securing favorable locations. That was the main reason. And for the hotels that the franchisee has picked, we changed to offer them more services including inspection of sites to advise them on whether it is a good choice.

So what is the IRR -- I'm sorry, please go ahead.

Yes, so I wouldn't view the situation in that angle.

Sure. Then what is the IRR and payback period of the franchisee nowadays? I remember [what] it was like four to five years before and what are we looking at now?

Historically, we have been seeing 15% to 25% IRR as the typical range. And recent weakness in the RevPAR has caused that number to come down by a few points. We have viewed this as our own responsibility to revitalize our business model to enhance the profitability of our existing brand, especially our flagship, HanTing.

Understand. Okay, thank you very much, Jenny.

Thank you.

All the best.

Thanks a lot.

Aaron Husock, ShearLink.

Great. Thanks for taking my question. I was wondering, in the difficult macro-environment that you are facing, have you seen an increase in the number of mom-and-pop hotels that are actually closing and going out of business or do you expect to see more of that happen? And then I have a follow up.

We are seeing clearly some of the single, independent hotels close and some of them become our franchisees. (Inaudible) though is we are seeing at the upper scale market, we are seeing some of the -- these buildings are converted from hotels to office buildings. So all of that are indicating to us the less competitive operators are getting out of the market. We believe that's healthy for us in the long run.

Okay, great. And then if I'm just looking at your G&A costs in the quarter, they were up a lot from Q3 to Q4. What drove the increase in G&A and were there any costs in there for working on the Accor deal?

The increase in G&A was mainly driven by our investment into the IT platform. As I -- as Qi Ji mentioned earlier, we aim to provide a better experience for the customers as well as for the franchisees, so we have invested a quite significantly in building up some of those software as well as applications.

And then on your preopening expenses, you are going to open fewer leased hotels in 2015, would you expect preopening expenses to stay around RMB40m per quarter or can they decline meaningfully as you open fewer hotels, leased?

For 2015, we expect the preopening expenses to further decrease from 2014 because the number of new openings is expected to be lower in terms of leased hotel.

And then could they be down materially; would you expect to see pre-opening expenses to be down to RMB20m to RMB30m per quarter?

I don't think I can give a very specific guidance at this moment, but the overall trend is going to be decrease.

Okay. Great, thank you.

Thank you.

Rex Liu, GMT Capital.

Hi, Jenny. I've got a question for you. With regarding to the RevPAR trend that we are seeing in the first two months, I just wondered if there are any thought about any cost measures to ensure that the profitability would not change too much in our own leased hotel.

And then the other question I have for Mr. Qi is what would be the key focus for the Accor integration this year and any expectation on what we are going to achieve; I guess any (inaudible) or any milestone that we are looking in [the integration]?

I think I get your first question; your first one is on the profitability of leased hotels. But I'm not sure I fully captured the second one.

On the second one, I was just wondering, and for Mr. Qi, what will be the, I guess, focus on the Accor alliance for this year? What are we going to do with the Accor alliance? And then I guess, also is there any (inaudible) that we are looking into in next few years, what we are going to achieve with that alliance?

Sure. Okay. Let me address the profitability question first. Currently, we are seeing in general, our leased hotel has hold up a little bit better than our franchised hotels in terms of same-hotel RevPAR trend. Nevertheless we are seeing a decrease and that will have a material impact on our hotels. So what we are working on is actually to introduce more services to the customers, so that we will be able to capture more revenue opportunities from them. And that's likely to lead to a gradual improvement on the non-room revenue in the future.

Let me turn the Accor question to Mr. Qi.

(Interpreted). Through the Accor alliance, this year we are expecting to close the deal, at the end of this year or beginning of next year. This alliance is of strategic value to us. If you look back ten years, that has been the golden years for the economy hotels and we continue the -- we believe that the economy hotels will continue to expand and grow well in the next ten years.

Aside from that, we also see great opportunities coming in the next ten years for midscale hotels. Through the collaboration with Accor, we will manage two of their upper midscale brands, Mercure and Novotel, and one upscale Grand Mercure. And if we add those brands to our existing midscale brand of JI Hotel and Starway hotels, that will make us the leader in the midscale market and has a full spectrum of coverage.

Of course, aside from the midscale and the upscale brands we are going to run for Accor, we also are going to operate Ibis and Ibis Styles. With our strength and experience in the economy hotel segment, we believe we will significantly strengthen the performance of those two brands also.

Jenny, I have got a follow-up question. With regarding to you are saying you are trying to cross-sell and introduce more services to your customers, maybe can you elaborate and maybe give some examples of what are the services you could see incremental revenue opportunity for your hotel business.

I believe it's a little bit early to discuss this in detail, for our own business purpose. We will be happy to explain that when we introduce those new services to the customers.

Fawne Jiang, Brean Capital.

Good morning Ji Zong, good morning Jenny. (Spoken in Mandarin).

(Spoken in Mandarin).

(Spoken in Mandarin).

(Spoken in Mandarin).

Let me briefly translate the conversation. The question is, given the significant increase of demand -- or the significant increase of supply from all major brands, does Mr. Qi has a good feeling where to draw the line to manage the expansion speed. Are we too fast; is there any signal that we need to slow down.

And Mr. Qi's answer is, if you look at the overall supply pie, the branded hotel chains are still a small fraction of the overall supply. So in the big picture, we believe we still have a lot of room to expand.

However, in some particular locations, for example, Yinchuan which is a tier three city, we had a interesting experience. The first hotel we opened there achieved a fairly high RevPAR, around RMB170 to RMB180. And that gave us the confidence to open more hotels and our competitors followed. So in a very short period of time the number of hotels with brands increased to close to 20. And that has clearly caused an oversupply in a very short period of time in that particular city.

However, we believe after one to two years, the less competitive players in that city will be squeezed out and the demand and supply will rebalance. Aside from that natural rebalance, we also are working on the refined approach of adding new hotels. We aim to develop our own system to target particular locations when we open new hotels. So there is, we do think, the risk of oversupply, significant over-supply in the short term in any particular location.

(Spoken in Mandarin), Thank you, Jenny.

(Spoken in Mandarin).

(Spoken in Mandarin).

Stephen Wan, HSBC.

Hi, thanks for taking my call. I've got two questions. First of all, I understand that you invested a bit on the digital-related costs and those are mainly in general and administrative expenses. Are there any other cost items that would be affected by those that show related OpEx? And just wondering, in terms of going forward in 2015, are all these costs done, or should we be expecting more of these costs to come through in 2105? That's my first question.

And then my second question is that back, during the beginning of the Q&A, I think Jenny mentioned that she is expecting OpEx to relatively be stable percentage of revenue. Are we talking about full year 2014 kind of percentages or fourth quarter 2014 kind of percentages? Thank you.

Sure. As we explained in our 6K, the cost increase in SG&A was mainly due to a few areas. One, in terms of absolute amount, one area we invested heavily was the acquisition of new customers, so that increased our marketing costs. And the other area was in IT.

And percentage-wise, the increase is also attributable to the revenue mix shift towards a heavier portion of franchised and manachised revenue. So the spending we have for those hotels will move significantly higher as a percentage of the revenue we generated because it's of a different structure.

And in terms of the guidance for 2015, we refer to the general, the overall 2014 SG&A percentage as revenue.

With that, I guess I have to close the call. Once again, thanks to everyone for making time from your busy schedule to join our call today. We look forward to talking to you in the next quarter. Good bye, everyone.

Ladies and gentlemen, that does conclude our conference for today. We thank you for your participation. You may now disconnect.