GreenTree Hospitality Group Ltd.
Q4 2020 Earnings Call Transcript

Published: 15 Apr 2021

[Operator:]

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

[Rene Vanguestaine:]

Thank you. Hello, everyone. Thank you. 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; and Mr. Nicky Zheng, IR Manager. Ms. Megan Huang, Vice President of Sales and Marketing, is attending an industry-wide conference and is not able to join our call today.

[Alex Xu:]

Thank you, Rene, and thanks, everyone, for joining our 2020 fourth quarter and full year earnings call today. In this report, we will highlight our Q4 and full year performance, followed by our strategic focus in 2021. Then we will go into the details of our operation and the financial performance in Q4 and the full year 2020. Please turn to Slide 5. We were glad to see the robust recovery continuing in the fourth quarter. Compared with Q3 2020, RevPAR increased 4.1% to RMB124.4; total revenues increased 8.6% to RMB289.8 million; income from operations increased 17.4% to RMB118.5 million with a margin of 40.9%. Non-GAAP adjusted EBITDA increased 17.8% to RMB130.6 million with a margin of 45.1%. And the non-GAAP core net income increased 18.3% to RMB109.3 million with a margin of 37.7%. While RevPAR was slightly lower than in the fourth quarter of 2019, income from operations, adjusted EBITDA and core net income was substantially higher than in the Q4 2019.

[Selina Yang:]

Thank you, Alex. Please turn to Slide 16. The impact of COVID-19 on the company's operations and performance was inevitable. The fourth quarter of 2020 blended ADR decreased 3.6% year-over-year to RMB162. Occupancy rate increased to 76.7% and RevPAR decreased 3.2% to RMB124. Nevertheless, we continue to expand our market presence across China, opening 203 new hotels in the fourth quarter. We ended the year with 1,186 hotels in our pipeline, up 25% over year-end 2019. Total revenues for the quarter were RMB289.8 million, a 0.1% increase compared to the fourth quarter of 2019. Income from operations increased 19.9% to RMB118.5 million. Non-GAAP core net income increased 22.3% to RMB109.3 million. And core net income per ADS, basic and diluted, increased 21.3% to RMB1.06. Moving to Slide 17. At the end of the fourth quarter, we had 4,340 hotels in operation, 9.7% more than a year before. 40 of these hotels were leased and operated, or L&O hotels, and 4,300 were franchised and managed, or F&M hotels, while the middle scale segment remains the core of our business with 64.2% of all our hotels. Last year, we continued our expansion into both the high-end and economy segments. This expansion accelerated in the fourth quarter as the number of the mid-to-upscale and luxury hotels increased to 8.8% of our total portfolio, while the economy segment at 27% remained stable. As Alex mentioned, we also solidified our already dominant position in Tier 3 and smaller cities. And at the end of the fourth quarter, 67.3% of our hotels were in these cities. These strategic advantages enhance our cross-marketing efforts across all our brands and locations. On Slide 18, you can see that in the fourth quarter, we opened 203 hotels compared to 190 in the fourth quarter 2019. Three hotels were in the luxury segment; 29 in the mid-to-upscale segment; 141 in the mid-scale segment; and 30 in the economy segment. 19 were in Tier 1 cities; 42 in Tier 2 cities; and the remaining 142 in Tier 3 and smaller cities in China. 15.8% of newly opened hotels in the fourth quarter were in the mid-to-upscale and luxury segments of the market. We closed 58 hotels

[Operator:]

. Your first question comes from Praveen Choudhary from Morgan Stanley.

[Praveen Choudhary:]

So first of all, thank you very much for the presentation. And great to see that out of COVID, the company did remarkably well and it came out stronger. My question is related to two things. One, I just wanted to understand the competitive dynamics. I hear from some of your competitors that in the market where it -- other companies were struggling, the incumbents and the bigger ones like you, like Huazhu, managed to add more hotels because you have the financial might and you are big enough and then you have scale. But I look at your net openings for 2020, that's not as strong as we would have liked if you capitalize. So I just want to understand what's the dynamics there. And the second question is related to the first quarter. How are you trending right now? And what do you expect in terms of RevPAR? Not -- I know you have given the guidance on revenue. But in terms of RevPAR trend in first half versus second half, how are you incorporating that in your guidance?

[Alex Xu:]

Okay. Praveen, first, I will have Selina answer the first -- the second question in terms of first quarter RevPAR trend. The first quarter we saw some resurgence in certain cities and provinces. So the occupancy and RevPAR was lower than the same period of 2019. The -- we also have -- we also given the franchisee support in terms of the wavering of certain fees and franchise fees. So in terms of adding hotels in 2020, we -- the first 6 months and including the -- especially the first two quarters, we did see the slower movement in terms of goods and people and the construction companies and also the lack of the certain people concerned about continued investment in renovating hotels for the opening. So we -- if you can see the numbers for the total year of 2020, we did not add as many as we projected. I think Selina projected 700 was short. But I think we plan to capture that in 2021. For instance, I think the first quarter, our overall pipeline, I think we should add about 200 hotels, comparing with 60 in 2020. And so the -- so that's, I think, that's mainly the impact of the COVID for the majority of the first half of the year of 2020. Okay. So, Selina?

[Selina Yang:]

Praveen, as for the second question, how the RevPAR trend in the first quarter of this year, we observed that RevPAR in January decreased by around 20%. And in February, due to the Chinese spring festival, the occupancy rate and also the RevPAR dropped to the lowest. However, in March, we observed the RevPAR rebounded quickly, declined by less than 10%. And especially by the end of March and early April, our occupancy rate has recovered to 78.5%, nearly 80% recovery as the normal for 2019. And our RevPAR has recovered to nearly 97% as of 2019. So especially during the first two weeks of April, we observed the RevPAR has continued to recover as of 2019. So that is what we observed just for the first quarter.

[Praveen Choudhary:]

And if I can follow up on the RevPAR trend. I know in 2019 second half, it was a low base. Things were a little bit difficult. So as we go to the second half of 2021, and barring any new flare-up of COVID, should we expect the RevPAR to be up compared to '19, whether it's 5%, whether it's 10%? And the reason I'm asking is that what is embedded in your guidance of the revenue growth for full year in terms of second half RevPAR versus '19?

[Selina Yang:]

Okay. Thank you, Praveen. As for our guidance, I think it's a composition of our -- it's a composition of 2 factors. The first one is our F&M expansion. Second one is our newly opened L&O hotels. So for the normal expansion of our F&M hotels, our expansion for the second half of this year, since the third quarter, we expect the RevPAR to be at the same level as 2019. And for the fourth quarter, we expect 2% to 3% above the level of 2019.

[Praveen Choudhary:]

Okay. Great. Super. I mean I had some strategic question. I just don't want to take a lot of time for you. For Alex, one question is about acquisition. You have a lot of cash. You have been talking about for some time. You did some acquisition in Argyle and Urban. What's the plan in future, considering there will be many opportunities at this time? And second was any plans for listing in Hong Kong? That's it for me.

[Alex Xu:]

Okay. Praveen, we accelerated, I think our growth in the first quarter of this year by providing in a way -- by adding strategically in the certain less -- our less growth areas such as Southeast China, Southwest China and Central China. By growing both, providing some liquidity for our franchisees, for good franchisee support, they -- and in addition, and that we -- if there are strategic locations, strategic hotels, we may add selectively L&O hotels in those regions. And so the third, and we are continually evaluating in the smaller regional, but with a robust operating team. But not as big as I think we were discussing before. But we will consider that in smaller scale, local, regional, but with a strong operating team, we may partner or make investment. So, we are aggressively evaluating those opportunities. And we also try to figure out the impact of this new dynamics to those cities, for instance, city with the tourism, the more leisure tourism and the recovery period and as well as the city with stronger business travelers and what's the impact of the cash flow to our investment in the hotels and trying to make only the smarter decisions for our -- not only growth, but with the profitable growth. So thank you so much, Praveen.

[Operator:]

Your next question comes from Colin Yao from Goldman Sachs.

[Colin Yao:]

And congratulations on the robust recovery in RevPAR. So my first question is also about M&A. So since management mentioned that the company will be doing more of kind of leased and owned hotels in strategic locations. So I would like to know, like, what's the thoughts behind that? So why we would like to do L&O hotels? And also, how many are we going to be opening this year? And thirdly will be, will we consider forming a JV like some of our peers do, probably a JV with some property owners or developers? So that's my first question. And my second question, it's also about RevPAR. So since Selina just mentioned, the recovery has been robust in the first and second quarter. So I would like to know, so what are we factoring for the full year RevPAR recovery? Are we seeing like perhaps the full year RevPAR will be about 110% versus the 2019 level, given you already mentioned that the second quarter RevPAR was like 2%, 3% above '19 already. And the third question will be also about secondary listing since I think management perhaps maybe missed that part, was asked by Praveen just now. So those are my three questions.

[Alex Xu:]

Okay. So I will answer the first question. We're doing the L&O hotels because right now, we find that the -- we are -- we have the smallest, we have the lowest number of L&O hotels in -- among our peers. The L&O hotels that in the past several years, in the past three years, we have not done many because as we recommended to our franchisees the last three years, we've been seeing a dramatic increase in rent, in various design construction cost in -- the cost across the board increased substantially. So that is the reason I think we advised our hotel owners or franchisees to make that -- to be conservative. But this year, we see the rent and along with many other cost in the sector -- in those different sectors, they all -- I think they'll come back to a reasonable level. And in addition, in certain strategic locations, we feel that we need -- representative hotels will give us the brand standard, will also give us a place to recruit, train the best people to set operating standard. And so those are crucial for those areas we don't have a strong presence, such as in Southeast China, Southwest China and south part of China. And that the -- those will bring us more impact to accelerate our growth in F&M segment. So that is the reason why we plan to add more in that area because the financial return is also healthier with the reasonable control of all the costs such as rent, such as construction costs. And we're also able to identify some improved hotels where we can -- where the hotel owner -- previous hotel owners will have some need of financial -- and we are able to either partner or buy those hotels. So that's the reason behind this. We can earn both a great return as well as setting up a stronger base being the model hotel, so setting up the operating standard and create a base to train our team instead of training the team just in corporate office in Shanghai. Okay. So the second issue regarding the full year of RevPAR growth compared with 2019, I'll leave that to Selina. And in terms of the secondary listing, and I think I'll leave that to Selina's comment.

[Selina Yang:]

Thank you, Alex. Thank you for your question. Actually, our forecast is made on a consecutive basis. We expect a decrease of 3% to an increase of 2% in terms of RevPAR, if we compare with the year of 2019. So in our forecast, the increase of 25% to 35% may be composed of 2 parts, 20% contribution from our normal expansion of F&M hotels and the balance comes from the contribution of newly opened L&O hotels. So for your question in terms of the Hong Kong listing, we are considering the potential listing in Hong Kong. And we'll be providing information when necessary.

[Operator:]

. Your next question comes from Bruce Mi from UBS.

[Bruce Million:]

So I have two small questions. The first one is also on the L&O hotels. So may I ask, so do you have a, like a target for -- so -- for the contribution from the L&O hotels in total hotel count? So as I can see, it's only about 1% in 2020 and 2019. So as you are accelerating the opening of L&O hotels, what's your opening plan for 2021? And do you have the plan to increase its contribution? And my second question is more about the outlook for the upcoming Labor Day holiday. So could you give us some color on it? And do you -- how is the booking data for this holiday?

[Selina Yang:]

Okay. So thank you for the question. First question, what's the -- what's our plan to open L&O hotels in this year. Actually, in our forecast, we expect to -- around 10% contribution from the newly opened L&O hotels. But it's really hard to give the best number of the leased-and-operated hotels opened. As because as you know, we only want the location of the property and the condition of the property satisfy our requirements that we could make a decision to open leased-and-operated hotels. So -- and for your second question, our forecast in May, especially on the May Day. Now from the advanced reservation, we could observe around 30% in terms of occupancy already. So I think that's a signal to us that the coming holiday -- for the coming holiday, the occupancy rate will rebound continuously.

[Alex Xu:]

Okay. So I'm adding a little bit more to Selina's comments that -- the -- we do not want to force a particular number in terms of opening of L&O hotels. It has many -- first of all, the property has to be right and has to be generating sound financial returns. Secondly, that has to be more representative hotels in certain key locations that -- strategic locations such as transportation hubs. And that the -- but we see more opportunities this year, and especially the last quarter and last -- the second half of last year and first quarter of this year, we see more opportunities much more than before. And I want to elaborate a little bit about Selina's comments. We do not want to give an unrealistic projection of RevPAR growth. And we do believe the like-to-like kind of RevPAR growth, noted by the change of the composition, such as adding more higher-end hotels or spending more in terms of -- in terms of tier cities and also higher rented and higher impacted hotels. And excluding that, like-for-like, we think the RevPAR will be anywhere between probably 3% down from 2019 to somewhere 2% up from 2019, so somewhere about neutral and flat if we're able to achieve 2019 RevPAR. The -- again, the reason is the -- we do believe there is a stress levels on the personal consumption as well as the corporate travel budget due to the worldwide pandemic crisis. So even though we may see the number of tourists increase -- or achieve the same levels, but in terms of the ADR and consumption per capita will be, I think, will be constrained. And so that -- that's our production assumptions in that end. But we will be less impacted because our position of the hotels in the Tier 3 and also the position of hotels in terms of the industry zones and the development zones. In the -- we have focused our hotels for the business travelers versus leisure travelers. So I think this created a positive impact to conquer the negative impact from the COVID.

[Bruce Mi:]

So may I ask some more follow-up questions? So for our newly opened L&O hotels this year, so will it be mainly in mid-to-upscale hotels?

[Alex Xu:]

In what? In upscale?

[Bruce Mi:]

Sorry. So yes. So for the newly opened L&O hotels, will they mainly be in the mid-to-upscale segment?

[Alex Xu:]

Correct. So mainly in those areas, we have less of presence such as we mentioned, the South, Southeast, Southwest. And also in those brands, we have less presence such as mid-to-upscale, primarily in those segments. So that is correct.

[Operator:]

. There are no further questions at this time. This concludes our question-and-answer session. I would now 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 plan to reach us, please contact us. Thank you all.

[Alex Xu:]

Thank you.

[Operator:]

The conference has now concluded. Thank you for attending the conference today. You may now disconnect.