GreenTree Hospitality Group Ltd.
Q3 2020 Earnings Call Transcript

Published: 3 Dec 2020

[Operator:]

Hello, ladies and gentlemen, and thank you for standing by for GreenTree's Third Quarter 2020 Earnings Conference Call. 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.

[Rene Vanguestaine:]

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.

[Alex Xu:]

Thank you, Rene, and thanks, everyone, for joining our third quarter earnings call today. Let's start with the highlights on Slide No. 5. Our business continued to recover during the third quarter despite some resurgence of the infections in certain regions.

[Megan Huang:]

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 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 three and smaller cities, which were called to 67.3% of our hotels at the end of the third quarter.

[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.

[Operator:]

Our first question comes from Justin Kwok with Goldman Sachs. Please go ahead.

[Justin Kwok:]

Hi. Good morning. Thanks for taking my question. Perhaps I'll have five 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 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 you see no fire cell or no viable target for you to look for at this stage? Thank you.

[Alex Xu:]

OK. 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 that we want to build a long-term beneficial, mutually beneficial relationships with our franchisees. We want to build a continued -- launch goodwill with our franchisees. And that we are not going to sacrifice franchisees that profitability and increased their risk for the sake of adding hotels to our portfolio. Our portfolio consist of primarily standardized total 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 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. We're trying to the extent we don't have to open, we typically do not 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 the philosophy. And so we're trying to maintain a higher success rate for our franchisees. And so that is why I think in the first, second, 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 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 look down 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 to 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 to you?

[Justin Kwok:]

Sure. First, thanks for the color on the opening. On the RevPAR side, as you mentioned that the occupancy for November is already back to the pre-pandemic 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? 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? Thank you.

[Alex Xu:]

OK. 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 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. In other words, the room rate recovered to 95%. Occupancy almost recovered 100% 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 an international cross-border tourism. And so I think that the room rate may because the five-star luxury hotels maybe depressed a bit, which will also depress the rest of the -- will spread to the rest of the hotel segment. But we are confident that the domestic consumption and especially as our price range, value-priced hotel will be robust. 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 Megan, maybe anything to add to that? OK. 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 brand 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 continued to experience pressure from the return of the investment. And so especially for a smaller regional brand or smaller hotel groups. So 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 typically benefit for those companies that operating with a very disciplined approach.

[Operator:]

Our next question comes from Bruce Mi with UBS. Please go ahead Bruce.

[Bruce Mi:]

Thank you for taking my questions. So I have one question on the long-term hotel openings. So I see some other major Chinese hotel groups, they lifted their hotel opening plan for the next two years and even some company, they plan to double its number of hotels in operations in the next three 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? Thanks.

[Alex Xu:]

Bruce, thanks. That hotel opening is our main focus even in the past two 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 four-year, four-and-a-half-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, as our responsibility to our franchisees and 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 it 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 four years, that's where we want to be.

[Bruce Mi:]

Thank you.

[Operator:]

Our next question comes from Jisheng Liu with CLSA. Please go ahead.

[Jisheng Liu:]

I have two questions. Maybe I'll go one by 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? Thank you.

[Alex Xu:]

I think that -- OK.

[Selina Yang:]

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

[Jisheng Liu:]

OK. 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?

[Selina Yang:]

Thank you. To our statistics, most of the applications 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 one year -- about above one year, if according to their historic performance, if there is a good job, 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 to look at criteria for their application.

[Jisheng Liu:]

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

[Alex Xu:]

Let me add a couple of things that I think the revenue for that end is 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'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 our hotel consolidated have a lower RevPAR and the mix changed a bit. So a combination of them resulted in with not that the 2020 are fully offset. So Jisheng, in addition. So that's one of several reasons and factors contribute to that.

[Jisheng Liu:]

OK. 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 three, four 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 on a peer comparative basis that you are performing better than your peers?

[Alex Xu:]

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 take a number of measures on the sales and marketing side, and thanks to Megan's team that they are more aggressive like travel management companies and also that they are 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.

[Selina Yang:]

Thanks, Alex. Yes, it's just like, as you mentioned, Jisheng, our year-over-year decrease in November was almost the same year over 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 three was leased, that's about 8.8%...

[Alex Xu:]

He's talking November, December.

[Selina Yang:]

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

[Jisheng Liu:]

OK. 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 so have 10,000 hotels. That means, actually, you may need to reach more than 1,000 hotel crossover 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 four 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 hotels. So actually, you are also raising running your guidance. So what is the confidence behind that? And where do you see the key growth drivers over the next four years?

[Alex Xu:]

Thanks, Jisheng. That we just look 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 the 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 loss in the pipeline. So we are also evaluating, adding more on the franchise developers. And so I think that's a market that's huge. So many hotels, nonbrand, we still think 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 the block of hotels, you see typically that even the second tier cities, you see, 50% of them are -- they're no brand. On third tier cities, you see that they 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 operating 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, I think we are -- in the past that two or three years, we're improving all the platform, technology, connectivities. And 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.

[Operator:]

Next question comes from Billy Ng with Bank of America. Please go ahead.

[Billy Ng:]

Thanks. Good morning. 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 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?

[Alex Xu:]

OK, Billy. When you say supplies 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 hotel, at least, last year or the year before. And so the supplies for all the hotels is definitely, I think, that is less -- that compared without the COVID. But that also means the supplies for new hotels standardized our products that has 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 out in the first year, the opening during the ramp-up period fees and they also have an impact in that end. But overall, we believe the dynamics changed to favor to more established the company with more resources. And we also have observed a lot of smaller company, local brands that either run into major loss or closed down. So that -- so that the market conditions favors through the larger and more established platform for the near future, I believe. It's the situation, I think that next year will probably continue to be not fully recover the mode. And so the opportunity will be there for us to take to take more opportunities.

[Billy Ng:]

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? Obviously, not GreenTree, but overall, maybe nonbranded or other smaller brand hotel?

[Alex Xu:]

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. The regulations of the government becomes tightened quite a bit. I mean, a lot of cities after your initial permit expires, the city no longer extends this permit. So those hotels' properties that are going to definitely expire are the industrial and the warehouses and the offices it may have to be closed permanently and go back to the 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 a certain developers to having a portion of their development to be used at the hotel and the department. 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 brought 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 a hotel industry in general.

[Operator:]

Our next question comes from Nate Deng with China Renaissance. Please go ahead.

[Nate Deng:]

Hi management. Thanks for taking my question and 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. What is the current breakdown between leisure segment and business segment in terms of room distribution? And how does it compare with the year's -- normal years like 2019?

[Alex Xu:]

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

[Selina Yang:]

For leisure?

[Alex Xu:]

Leisure. Leisure.

[Selina Yang:]

Leisure travelers segment. Yes.

[Alex Xu:]

OK. So because our leisure travelers 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 three quarters -- the previous two quarters, quarter one, quarter two, 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.

[Nate Deng:]

Thanks Alex. So actually, you mentioned augmented 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?

[Alex Xu:]

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 case is totally under control worldwide, we still think that the leisure travels will continue to be impacted.

[Operator:]

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

[Selina Yang:]

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.

[Alex Xu:]

And thank you.

[Operator:]

The conference is now concluded. Thank you for attending today’s presentation. You may now disconnect.