GreenTree Hospitality Group Ltd.
Q1 2019 Earnings Call Transcript

Published: 24 May 2019

[Operator:]

Hello, ladies and gentlemen. Thank you for standing by for GreenTree's First Quarter 2019 Financial Results Release Earnings Conference Call and Webcast. At this time all participants are in a listen-only mode. After management’s prepared remarks, there will be a question-and-answer session. As a reminder, today's conference call is being recorded. I would like to now turn the meeting over to your host for today's call, to Mr. Rene Vanguestaine, of Christensen, the company's Investor Relations firm. Please proceed, Rene.

[Rene Vanguestaine:]

Thank you, Vanessa. Hello, everyone, and thank you for joining us today. GreenTree's earnings release was distributed earlier 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 today to the same IR website. On the call today from GreenTree are Mr. Alex Xu, Chairman and Chief Executive Officer; Ms. Selina Yang, Chief Financial Officer; Ms. Megan Huang, Director of IT Department; and Mr. Nicky Zheng, IR Manager. Mr. Xu will present the company's first quarter 2019 performance overview, followed by Ms. Huang, who will discuss business operations and Ms. Yang will then discuss financials and guidance. They will all be available to answer your questions during the Q&A session that follows. Before we begin, I'd like to remind you that this conference call contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934 as amended and as defined in the U.S. Private Securities Litigation Reform Act of 1995. These forward-looking statements can be identified by terminologies such as may, will, expects, anticipates, aims, future, intends, plans, believes, estimates, continue, target, is or are likely or 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 expectation 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.

[Alex Xu:]

Thank you, Rene, and thanks everyone for joining our earnings call today. I am pleased to report our 2019 first quarter results. Please turn to Slide 5. During this quarter, we continued to expand our geographic coverage to 292 cities across China at the end of the March. That’s up from 290 cities at the end of last year. We now operate 2,829 hotels across 10 different brands, expanding the economy, mid-scale to mid-upscale limited services segment of the market, including our apartment business. We opened 102 new hotels and we continued to grow our pipeline. Finally, we continue to explore appropriate value-enhancing acquisition opportunities to help strengthen our hotel platform. Total revenue grew 20.1% in the year-over-year to RMB 235.3 million. Gross profit increased 17.5% to RMB 155.3 million. Non-GAAP adjusted EBITDA rose 20% to RMB 133.9 million. Net income increased 58.5% to RMB 134 million. Our non-GAAP core net income rose 18% year-over-year to RMB 92.3 million. Gross profit margin and adjusted EBITDA margin decreased from 67.5% to 66% and from 57% to 56.9%, respectively. Selina Yang will explain for you the reason for the decrease later on, but net margin jumped up from 43.1% to 56.9%. Core net margin decreased from 39.9% to 39.2% compared to a year ago. These results were driven by continued growth in our hotel network and the higher operating performance at our existing hotels. Out of the 102 new hotels opened, 13.8% are in our mid-to-upscale brand and 43.1% in each of our economy and mid-scale brand. At the same time, our pipeline of new hotels increased from 430 at December 31, last year to 481 at March 31. Approximately a quarter of these hotels are mid-to-upscale, including our Gme, Gya and VX. We opened nine hotels under these three brands in the first quarter of 2019. In terms of our operating performance, we saw a steady progress across the Board. Average daily room rate increased by 3.9% year-over-year to RMB 162. Occupancy rate had a decrease of 1.1% to 78.1%, and the revenue for available room increased 2.5% year-over-year to RMB 127. Now let me talk about a few recent developments that you can find on Slide 6. This year, we intend to develop more hotels under the Wumian and GreenTree Apartment brand to meet taste of young business travelers. In the first quarter, we also integrated our loyalty program with Yibon Hotel. Yibon is a hotel operator focusing on the economy hotel segment in China and also is one of our accretive investees. By integrating Yibon’s CRS and PMS system with ours Yibon’s customers are able to join our paid membership program and enjoy the same benefit as Greentree members. As a result, during the first quarter, our one million new paid members were added to the Greentree loyalty member program. We plan membership program expansion and system integration with Argyle Hotel Group. This expanded network of corporate and individual members will benefit all of us. M&A and strategic investment are key growth drivers for Greentree. On May 1, 2019, we announced an agreement to acquire 70% equity stake in the Urban Hotel Group. The Urban Hotel Group is a leading franchised hotel operator, with a strong brand portfolio and the geographic coverage in China. It has more than 600 hotels in the economy to mid-scale segment in Eastern and Northern China. We plan to complete the transaction subject to customary closing conditions later. In conclusion, we are pleased with our team's performance in Q1. We are confident in our business model, strategic positioning and the long-term growth strategies. We will continue to invest in our people, plans, system and technology in order to better serve our customers and our franchisees and to ensure the long-term healthy growth of our hotel network. With that, I'll pass the call over to Megan, who will discuss our business operations to you.

[Megan Huang:]

Thank you, Alex. If you're following our slides, I'll skip this overview on Slide 5 and Slide 6 we go straight to Slide 7. Once again, the Franchise and Managed model remains our primary strategic focus. 98.9% of our hotels fall under this category. And as you can see on the chart on the right, our F&M hotels now generate almost 77.7% of our overall revenue. Let’s turn now to Slide 8. Another critical area of our business is our loyalty program. Ours is a paid program in which members enjoy a variety of premium perks and benefits. More importantly, through this program, we can foster closer relationships with our guests. Members can book directly with us, which has helped us and our franchisees to reduce sales and marketing fees and expenses, and our Greentree loyalty members are very sticky customers. Overall, we now have about 33 million individual members in our loyalty program, along with 1.32 million corporate members, up from approximately 29 million and 1.27 million as of December 31, 2018. In the first quarter, around 94.2% of all room nights were sold through our own direct channels, primarily due to our individual corporate members. Slide 9 shows our RevPAR trend. Q1 is generally one of the weaker quarters during the whole year. But as you can see on the two charts at the bottom of this page, on the year-over-year basis, RevPAR for L&O hotels increased by 2.1% to RMB 119 and a RevPAR for F&M hotels increased by 2.5% to RMB 127. Both segments showed healthy growth over the first quarter of last year, mainly due to higher ADR. On Slide 10, you can see that growth in our pipeline of new hotels. We opened 102 hotels, while our pipeline rose to 481 hotels. At the same time, we are diversifying of our portfolio by adding more hotels at the higher end and economy segments of the market. Currently, 77.7% of our hotels really the core of our business, serve in middle end of the limited services market. In line with this strategy, during this quarter, we added five new GreenTree Eastern, four Gme, three Gya and two VX hotels, which primarily serve in this and are major travelers in the business to mid-to-upscale segment of the market. So the number of hotels in the segment increased to 4.3% of the total portfolio. And on Slide 11, you can see we had 27 Gme, 28 Gya and 22 VX hotels in the pipeline as of March 31, 2019. With that, I'll pass the call over to Selina Yang, who will review our financials.

[Selina Yang:]

Thank you, Megan. We delivered the fifth solid quarter of operating and financial results. Moving on to Slide 13. We now have a total of 2,829 hotels, with 225,757 rooms. On a year-over-year basis, we increased our hotel numbers by 20.2%. We opened 102 new hotels compared to 18 new hotels in Q1 2018. 14 of this were in the mid-to-upscale segment, 44 were in the middle scale segment and 44 were in the economy segment. Six hotels were in Tier 1 cities, 20 in Tier 2 cities and the remaining 76 in smaller cities in China. We closed 30 hotels, 16 due to their noncompliance with our brands and operating standards and 14 due to property-related issues, including rezoning, returning of government-owned properties and expiry of leases. So net-net, we added 72 hotels to our portfolio. Slide 14 summarizes some of our key operating metrics. During the quarter, we continue to see improved operating performance across the Board. The key numbers to look at here are the orange bars representing the performance of our F&M hotels. These hotels make up the biggest part of our business. Our F&M hotels' ADR improved by 3.9% to RMB 162, RevPAR increased by 2.5% to RMB 127, while occupancy rates slightly decreased 1.1% to 78.4%, which was due to the acceleration of new hotel openings in this quarter. The performance of our L&O hotels also remains steady, except for slight fluctuation in occupancy rates due to the renovation of seven L&O hotels. On Slide 15, you can see that total revenues grew 20.1% year-over-year to reach RMB 235.3 million. The year-over-year increase was primarily attributed to our four factors

[Operator:]

Thank you. We’ll now begin the question-and-answer session. [Operator Instructions] Our first question today comes from Xin Chen with UBS. Please go ahead.

[Xin Chen:]

Hi Alex, Selina and Nicky, this is Xin Chen from UBS. Thanks for you give me opportunity to ask questions. I have a question about the RevPAR. Maybe the two quarters RevPAR growth and RevPAR breakdown by cities such as Tier 1, Tier 2 and lower tier cities. And the second question is that, could you give us some color on the RevPAR trend going forward this year? And just two questions, thank you.

[Alex Xu:]

Okay. So the question, the RevPAR growth for Tier 1, Tier 2, Tier 3 cities have the breakdown, am I correct, Mr. Chen. And also going forward RevPAR – the RevPAR growth rate? So I think that my understanding is that our like-for-like RevPAR increased about 3.5% roughly, a 2.5% – 3.5%, right. And then because our portfolio mixed, which have viewed a little bit downward to more economy hotels, so the blended total RevPAR growth of 2.5% in the first quarter early in line with our large fee overall existing hotels like-to-like 3% to 5% of RevPAR growth. So that's the first quarter of the breakdown. And so we didn't experience any like-to-like RevPAR decrease in our categories. The ongoing – on the second quarter, we believe the RevPAR growth situation will improve somewhat over the first quarter as we see the trend. I think we also – it's the reasons we are benefited from the presence in the second, third and smaller tier cities. And some of the tier cities that the economy has been driven by domestic consumptions and they really less impacted by the current economic changes. So we observe that more stable in those cities. So I will pass that to Selina, you want to add anymore?

[Selina Yang:]

Thank you, Alex, and thank you for your question. Actually, for the first quarter of 2019, we observed that the Tier 1 cities still performs the best in terms of the RevPAR. And we continue to observe that the RevPAR for Tier 3 and the lower cities performance is better than that of the Tier 2 cities, and the RevPAR growth is more than 3%, okay. And we want to emphasize that you may find our occupancy rate had a slight decrease of 1.1% this quarter, and this is primarily due to the acceleration of our new hotel openings. If we exclude the fact of the new hotel openings, we find our occupancy rate for the same hotel is nearly stable decrease by 0.3%. And so if we exclude this factor, our RevPAR for the same hotel increased by 3.5% year-over-year. And the other factor is that we had more shareholder to open this quarter. So it will excluded the high percentage of shareholders, our RevPAR growth will be nearly to 4%. Thank you.

[Xin Chen:]

Thanks, Alex and Selina. I have one more questions about revenue growth. Q1 revenue growth over 20% and the company for full year guidance remains at 20% to 25%, that it means we can see revenue acceleration in the rest of the year? Thanks.

[Alex Xu:]

Sorry for that. Can you repeat the question?

[Xin Chen:]

Sure, sure. Q1 revenue growth 20%. The company’s full year guidance remains at 20% to 25%, we can see revenue acceleration in the rest of the year?

[Alex Xu:]

Yes. That’s what we expected a higher – with a higher growth in the second, third, fourth quarter on the pipelines for mid-to-upscale limited services and also mid-scale service hotels that have more openings. Even though, we have hotel opened about 28% by the hotel room count, I think, increased less than that. So if you add the room count increase plus the RevPAR, you get back to the total revenue growth rate. So we do first quarter, we met only – we only opened 102 hotels. And the following quarters, we plan and budgeted to open more hotels to have a higher accelerated growth. And that has not the 20% to 25% increase, I think, we’ll have not counted for the potential addition for the consolidation from those hotels we acquired. So that in addition other booster to the performance by the end of the year.

[Xin Chen:]

Got it. Thanks, Alex.

[Operator:]

Our next question today comes from Colin Yao with Goldman Sachs. Please go ahead.

[Colin Yao:]

Hello, management. So I’d like to, first of all, get some color of the current RevPAR run rate of the second quarter. So are we seeing like a similar growth trends for the RevPAR into April and May?

[Alex Xu:]

That is correct. So I think, we do see – we have not noticed the major – I think, we didn’t see any major upward increases, but we do see a stable, I think, a slight improvement for the past 1.5 months.

[Colin Yao:]

1.5 months, compared to the first quarter, but are we seeing like significantly better RevPAR in May comparing to April probably?

[Alex Xu:]

No. We basically compare with our second quarter last year, I apologize, because compare with the first quarter, we – of course, we have a improvement, we’re talking about the quarter, year-over-year increase, we still saw the slight improvement.

[Colin Yao:]

And previous – because, I think, we have guided for 3% to 5% same hotel RevPAR for the full year. So is that the guidance remain the same right now?

[Alex Xu:]

That is correct.

[Colin Yao:]

For the full year. Okay, all right guys. Thanks. And also got the other question. So as we can see right now the company has slight almost RMB 2.2 billion, but I’d like to know like approximately how much are available for like immediate deployment out of the RMB 2.2 billion?

[Alex Xu:]

Most of ready for immediate deployment free cash. As you can see from our report, we generated – we observe – our company has always focused on the cash from operations because cash – free cash flow is extremely important measure of our company’s performance. And so we generate a cash from operation. We also invest in certain of those investments we announced, and we also paid partial payment to some of those acquisitions. So even after that we still have about RMB 2.2 billion cash. A lot of them are denominated in RMB and they're ready for an immediate investment. And if we are – while we are working and exploring those opportunities, we're also trying to invest those responsibly in the sophisticated deposits in that certain – with highly liquid forms. So question – the answer is ready at any moment.

[Colin Yao:]

Okay. And my last question will be regarding on the investment. So well, you guys are maybe investing some of your leased-and-owned hotel to have some – there are two parts. The first, how do we consider investing those leased-and-owned high-end hotel to be the more flagship hotels? And the second part of this question is that as we have seen in market some of your competitors having some like non-standardized kind of hotels like some are in the form similar to a OTA in the – like OTA like some Internet company, such as like OYO or major competitors that are doing a similar thing. Would you consider being similar kind of hotel operation?

[Alex Xu:]

Great question. And the first is, if we do have the appropriate location, strategic location also that we can assist the brand marketing that we will invest in those flagship by ourselves. However, in certain cases, if our franchisee invested build a hotels, they want to free up the capital to do a new one, we may just like the last quarter and the previous quarter, we may assist them by acquiring the majority of the hotels. The second question, please let me know whether I answered your question correctly. The second question is regarding the nonstandard offering of our products. We are very careful in terms of offering that because we have pride. We have observed that many players in the industry, including OTAs in the past, have experimented that concept. And so far, we have not industry-wide spread successful business model on the hotel brand group. So GreenTree Alliance is the only experiment we have done. And we have to spend a lot more time and management powers to make sure those hotel performing because the GreenTree is driver for sustainable growth is to make sure every franchisee, no matter what brand they join, they will have a healthy and higher profit level than the industry average. So doing a non-branded, we really have to figure out the value-enhancing activities we can bring to those franchisees. Otherwise, we will cause, I think, the -- they will cause more harm than the benefit to the hotel group. And then that just like the OTA have tried to the soft brand in the past and have not proven that concept correctly is can be sustained and likewise, I think the same way. So we're very, very – we have experimented that. We're very cautious, we are making sure all the brand we're doing. And that will value a distinguish value-added activities who can bring to the franchisees.

[Colin Yao:]

All right, guys. Thank you very much.

[Operator:]

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

[Jisheng Liu:]

Hi, Alex Xu and Nicky thank you for taking the questions. Jisheng calling from CLSA. I want to clarify one thing on revenue front. So the guidance of 20% to 25% revenue growth, what is the baseline for that? Is it – as we are observing a restatement in 1Q 2019, so the revenue has been changed actually. So I was just curious, what was the baseline for the 25% top line growth for 2019. Is it based on the already reported FY 2018 revenue or that should be restated FY 2018 revenue?

[Selina Yang:]

Hello, Jisheng. Thank you for the question. Yes, that's the main reason because the accounts – our company adopted accounting standards up to-date for the first quarter of this year. So the revenues from contract with our company are full retrospective basis in the condensed consolidated financial statements. And at the most meaningful impacts of the adoption of the standards that we have the reviewed and reported in our press release.

[Jisheng Liu:]

Yes. So just to clarify, because I know that we have revised the initial franchise fees, accounting standard, Megan as you said, as we have been accelerating our hotel openings moment three years ago, that means if we change the accounting standard, then the initial franchise fee allocated for the year, it's so 2018, maybe lower than previously reported, so that means that so 2018 revenue base maybe lower than expected previously reported. So my question was where, which base will the 20% to 25% revenue growth guidance will be based on this year?

[Alex Xu:]

I didn't -- I apologize, I didn't get into that question. So I would, at this moment, assume we are under the same base, under the same kind of rule. So we adjusted that 20%, 25% would be better matched in that comp in that – by that criteria, so that's my understanding. Typically, the principal when we – internally, we’ll do the with the auditors when we make those kinds of a comparison.

[Jisheng Liu:]

Okay. Thank you. So the next question is different RevPAR growth performance is between different brands. So I was particularly interested in, how does GreenTree Eastern’s RevPAR growth compared to the lower end products such as Shell and Vatica in 1Q 2019. Is there any difference in RevPAR growth out there?

[Alex Xu:]

So we do have GreenTree Eastern RevPAR growth is 7.7%, right? So the – Am I correct the RevPar? Okay. So it's 7.7% growth. So little higher than the other segment.

[Jisheng Liu:]

Okay. So I'm just curious. So what was the hotel brand, which is underperforming the average? So if we say the average for same hotel is 3.5%. According for Eastern is actually higher than that. So what was underperforming on the average? Is it going to remain in the main brand?

[Alex Xu:]

I think that is our Vatica – I'm sorry about that. Our – let's see – our GreenTree is a growth of 2.6%. And to Shell, our Shell growth, it will be lower. Our Shell at this moment of stage roughly flat.

[Selina Yang:]

Yes. That because for this quarter, we opened about 38% of the Shell hotel.

[Alex Xu:]

So our – all of them, it is our Shell hotel right now has the lowest RevPAR growth.

[Jisheng Liu:]

Okay. So if we talk about on same hotel basis, just for Shell, the existing hotels, let's say 18 months ago, how was their performance then? We don't take the newly open Shell hotels last year.

[Alex Xu:]

Yes. Thank you, Jisheng. Yes, for the same hotel, the RevPAR growth for the Shell is nearly 3.5%.

[Jisheng Liu:]

Okay. Thank you very much. And my last question is your M&A transactions, we are happy to see that. You have quite a 60% and 70% respectively of the two targets that we have previously disclosed. May I know if these transactions will be completed purely in cash? Or there will be some equity level swap or other related transactions like that?

[Alex Xu:]

Great. Good question. And – typically, we'd prefer to use cash in all of our transactions, but also because we're trying to negotiate a competitive price, we're trying to invest in all companies with not only earned in, but also EPS accretive. As a result that our targeted companies found our principal. We're also – they're also very, very confident in bigger expectation – higher expectation with a combined company. So typically, at that time request about half give a ballpark numbers to see what we can use converted into GreenTree shares ownership. So – and we typically will honor that request become a win-win situation. So they will become the shareholder of the GreenTree. So that’s the typical structure we'll finally end up compromising with, so we think that's a win-win. So they can capture upside and so we don't have to have a zero sum negotiation during the transaction. So I hope that, what I described to you, that makes to you at well.

[Jisheng Liu:]

Okay. Just on that front. If we're doing the equity swap, so that other companies can get our shares, I have actual two-sided questions. Number one is, if they do get our shares, will they have any lock-in period on that, so that they cannot sell, say, for the coming two years or three? Number two is that the shares swap if it’s true, is it including our previously announced share – potential share placement and shareholder selling of shares? Or are they totally independent?

[Alex Xu:]

No. They're totally, first of all, independent. And typically, they've lockup period. And that, secondly, that – but we have not been that long. And secondly, we also have a mutually agreed performance guarantee as a performance condition and we're trying to make a win-win transaction structure.

[Jisheng Liu:]

Okay. Thank you very much. I get up in the queue now. Thanks.

[Alex Xu:]

Absolutely.

[Operator:]

Our next question comes from Ron Leung with Bank of America Merrill Lynch. Please go ahead.

[Ron Leung:]

I just have a question on the Urban Hotel Group acquisition. Could you provide a little bit more color about the acquisition like federation how much earnings contribution and the RevPAR of the company, et cetera? Thank you very much.

[Alex Xu:]

Okay. So I want to get, can you repeat the question? Ron, Can you repeat the question – what was the – I couldn’t hear that clearly.

[Ron Leung:]

Okay. So I want to ask about Urban Hotel Group acquisition. So could you provide more details like the acceleration, how much consideration, the earnings contribution of the acquisition? Thank you.

[Alex Xu:]

Okay. I apologize that. We had a confidentiality agreement in place, but the concept already described to you. When we acquired the company, we typically acquire at both on P/E and on EPS side accretive to the company. And so we have not having a breakdown because we're still in the process of completing the closing conditions. So we are compiling all of them together. It's a dynamic moving process.

[Ron Leung:]

All right. Thank you. And as the companies still expect to complete, I feel more M&As before the end of this year or do you think the company may slow down a little bit on the M&A front?

[Alex Xu:]

We will continue to look for – we will continue to look for a suitable complimentary brand and resources to the company. We do believe at this moment about our membership network, our system are very beneficial to enable some of those partners should do a better business and the synergies there. So, the GreenTree’s culture has always been working well, when we do an investment. So, we’ll continue to look for and the partner and with those companies and we will have more, I think we’re trying to make the investment with the principal and also earning always with earning accretive key and EPS accretive in mind, so to generate to benefit to our existing shareholders. Meanwhile, trying to create more value for the acquirees to our investees in the – in that process. So, we will continue maintaining at a steady speed for M&A. We hope by the year and then we’ll have a more to come every quarter and we hope that we’ll generate some new activities, I think it is inciting for both our companies and our partners.

[Ron Leung:]

All right. Thank you very much. I have no more questions.

[Operator:]

Our next question comes from David Li with Lizard Investors. Please go ahead.

[David Li:]

Guys, thanks for taking my question. Can you – I have several questions. Alex, can you talk a little bit just about the macro sort of demand environment for your – all of your brands, for your demand. How you guys are – and also across different tiers of cities? How you guys are being impacted and why aren’t you guys seeing the same impact as some of your competitors are seeing?

[Alex Xu:]

That’s a good question. David, at that – the macroeconomic conditions, I think is somewhat is just overflowing a little bit. In China, we have always to be joined our strategy is to be the most revealing to any kind of economic cycle. I’ve been doing business in the U.S. for close to 32 years. I’ve been two to three cycles. The hotel – hospitality hotels is labeled as consumer cyclical and the type that is always a kind of afraid, concerned about rec. So, our business model is designed through a counter to cycles. We observe in every cycle, the value price to products and services are always in greater demand during that period of time. And in addition to have a city just like a repeat customer base in your loyal membership base is also a key to maintain your business. And so that’s why we have designed our products and also as a place, our – that our location size, where we believe it is a value driven for our day-to-day business travelers and even during the some kind of economic correction time. So, we have observed that in China and the businesses for the targeted for domestic consumption such as education sectors, such as a Medicare, such as that a lot of small to medium business that is providing service to the locals. Certainly, just the Henan Province and there is a very – I think as I said, that isn’t a lot of impact from the current macroeconomics tool – macroeconomy to their local business travelers. So, we didn’t have observed the kind of a negative impact. I believe that the leisure travelers from higher price to that those sectors will most down potentially, because company’s time will reduce that travel budget. We have a more, I think, top of the travelers inside our network than before. So, all indicating that that our business model, our – the strategy and being a little bit more conservative, being a little bit more disciplined, will pay off during this time. If you looked at our – the free cash flow from operation and we really have not been impacted that at all for the – we’re not talking about the business that the investment income, just talk about that cash from operation. You’ll observe their numbers. We have not been impacted at all. So, Selina point out, the first tier city, we have a good growth of the RevPAR. I think that that’s due to the demand side is constant also there is a higher threshold to open more hotels. not necessarily, the supplies at the – I’m sorry, the supply side is its limited and because higher threshold for the safety for the filmings. And so not necessarily from let’s say, the really very accelerated growth of the demand. But third, fourth are sticky and all our demand and the supplies are really balanced from our point of view. So, as a result, we enjoy the same way of growth similar to last year.

[David Li:]

Okay. And also on the acquisition side, you guys made four acquisitions in the last few months, right? And New Century, Argyle, Gingko and Urban, understand some of these things, you probably can’t talk a little bit about, because Urban is still ongoing. Can you just talk about like all the timing of these acquisitions? It seems like they all happen like very quickly. We understand some of the strategies, but Gingko’s education. maybe just talk about – a little bit about overall the timing of these acquisitions now like why all of a sudden?

[Alex Xu:]

Okay. So, it’s some of that acquisition and the investment took a long time and the tool to understand that you tried – those are strengths and weaknesses and, it takes a month for both property to understand each other’s philosophy, culture, to understand that team. greenTree has never been really that 50 in making those kinds of investments. So, for Houston’s argyle and that we have – the Founder and I had been friends and I know that we are – all industry players said that we know each other. And then we started negotiating and discussing this joint venture for almost nine months. And similarly that it takes also months for us to understand the Gingko and the fair university’s strengths. That fair – what we can do for them, what they can do for us. So, in fact how – but they all mature that similarly in the first quarter of 2019 by a co-instant. The only, I think that the New Century is a shorter, it’s about the three months and that is introduced by all our Bank from Morgan Stanley and we discussed about the synergies there and we think there are potential synergies for, because they are the – they are one of the top five stars with actions. It’s very rare, largest Chinese brand in China. We think there are potentially many synergies and the two teams are collaborating right now in terms of the loyalty program, membership programs, systems. And so hopefully, David, I answered your question. And something investment like that they said that our investor ask, why do you even want to invest in the university like Gingko? you can just go there to recruit. but right now, there’s a talent war and not necessarily that we can go there recruit people will come, I think it takes also relationships to understand that there are faculty, education program to see what we can do on the GreenTree side so we can get students involved when we are in the first grade, in the freshman and all the way. So we’ve already have done on several programs and the ones we’ve already completed that’s in place and well received by the graduates. They have 2,000 enrollments currently just in campus and all studying for four year accredited bachelor degrees for hospitality management and they're ranked the number one. So we have this kind of joint venture. We also have enjoyed that there are appreciation of stocks is profitable and we think they have a lot more potential and so we get talent, we also get maximum returns for our shareholders. And so we think those are win-win situations that are hard to fine and that we hope our investor will understand as well. So – and with the urban, we'd be in discussion and also for many months, almost close to a year because it takes a while to understand the true teams that stick and work together because every business we acquire, we want to become mutually successful. Okay. So David, hopefully I answered the question for, you.

[David Li:]

Yes, great. I've a couple more. I know we're running short on time, but just on the EBITDA margin front, for the next quarter, for this year given you have slight decline in EBITDA margins, going forward is there still room, opportunity for you to continue to increase the EBITDA margin year-on-year? And what's going to drive that, obviously the renovation, the one-time expense, can you just talk a little bit about – for the next few quarters if the opportunities still remain to improve our EBITDA margin by year-on-year?

[Alex Xu:]

Thanks David, that's a great question. I'm leaving that to – I'm going to give you one comment and again leaving that to Selina. We believe that first quarter is very special because we had an ambassador program. We had one time also as franchisee appreciation celebration, that’s annual celebration and so it cost a lot at one-time cost, but on a going forward basis our EBITDA margins could be maintained the same or higher. So I'm going to pass that to Selina.

[Selina Yang:]

I totally agree with Alex. Yes. We think the still have the ability to increase our EBITDA margin, as you if we exclude the one-time and fees on the annual conference our EBITDA margin, it's still more than 60% and as our IT system efficiency increases as we expect, our EBITDA margin will continue to increase.

[Alex Xu:]

That's a good point Selina. And David, that our IT system, we think that's one of the core competitiveness of the company because most of the system we use that's servicing not only our franchise – not servicing not only our customers, but mainly enable our employees to do a better job, to reduce their workload and increase the efficiencies and so that – those comprehensive technology tools, we think that will increase our productivity further and with certain robotic, also AI to be further deployed in our network.

[David Li:]

Okay. And one more, just shelf filing recently, just last one, 11.7 million shares, can you just talk a little bit about that? Obviously, within the [shelf] filing, the insiders are about to sell 3 million shares and you guys allowed to 8 million new shares primary. Can you just talk a little bit about that, given the fact that the stock prices are pretty under-valued, when we see things like this, as investors we're not sure what to think of that? Can you just comment a little bit about what the rationale and your thoughts behind the shelf filing?

[Alex Xu:]

David that's a very – that's a great question. We’ve been observing that because 90% of the shares are regionally in the IPO plan. We want to have a 20% of primary sharing issued and at the week of the IPO, the market was volatile. So, we actually issued 10%. Due to that, our liquidity is really low. And so [a part of] our group companies hold 90%. We do not want to sell. And so that created even further constraint. And so that’s one actually possibly to increase the liquidity is to having our group floating it, and fell 10% to the other investors, but our group feel that the stock price also has not realized the maximum – has not realized the potential. So, we didn’t – our group investors did not want to sell. And so we want – we filed this, because this share filing, which will be valid for three years. And so in the next – when the market has the conditions right, we want to actually float a little more, so to increase our liquidity. Many institutional buyers are not able to buy due to the liquidity, not able to invest in the company. And I think that’s one of the reasons, I think, what we saw one of the reports ranked our PEG ratio, we are ranked one of the top, I think in the stock market. And so that’s basically ended by issue also that the primary shares, we hope that will give the company some additional liquidity resource, just in case we are [indiscernible] systematically screening the M&A candidates in this marketplace. So, we think that will solve the problem, but we’ll as a –company will make the decision responsibly. We want every investor, every shareholder in our company will be profitable. We’re making a profit. So, we’ll be sensitive to how and when and so that to benefit all shareholders. And eventually, I think this exercise will lead to higher liquidity and then hopefully, that higher – that more institutional, more investors came to our company.

[David Li:]

Okay. All right, great. Thank you guys.

[Alex Xu:]

Okay.

[Operator:]

Our next question comes from Aras Poon with Citigroup. Please go ahead.

[Aras Poon:]

Hi. this is Aras from Citi. Thanks for taking my question. So, I just have one question. I understand that you guys have been launching this GreenTree Apartment more those and there is a target of 30 apartments for the rest of the year? So, I just want to get an understanding, maybe, can you give us some more colors on how the business model for this apartment is going to be. So, in terms of how you – how the economy works with the franchisees or how long the contract is generally signed with the customer, because I – where that’s in the presentation that the prices charged on a monthly basis. So, I assume that’s the economics is kind of different from the hotel that you are operating. maybe, can you help us understand how this will impact your financials moving forward?

[Alex Xu:]

That’s a great question that, because in the marketplace, a lot of the – I was pulled with a lot of the apartment operators are not running a profitable business. So, we observed that. So, our apartment that’s GreenTree apartment business model is very different. First of all, at least, we open one, is become profitable. We just want to use that the testing models. But apartment, the business model will be working on either as a total asset heavy or the total asset light and business model in Bitcoin for instance say your lease and then act as a second landlord and then leased to the customers, those models are having high risk and are working really well. So our business model is going to be 2 Tiers one, primarily to use our technology to help the landlord to serve their apartment well. So we earn, we don’t take the property risk, we just provided the technical system reservation, handling the services and that's out of the nine under contract, most of them are in that category. So I think the typical contract is about 10 years. And then second, if we do – if we have an opportunity to be able to secure some of the properties at a much lower, for instance cost base, which can generate a 7% to 8% returns on the investment, then we will work to see whether we can secure with a directly process invested in those properties in the provided strategy locations, they have a higher appreciation, they can generate IRR in a higher – in mid-10s. So those are the second, but I think will be rare to find properties in major cities that fall into that category. So our business model for the GreenTree Apartment are primarily long-term extended stay management for third-parties, for primarily property owners, real estate developers and that's our business model. So it's going to be a earning accretive to GreenTree as a group.

[Aras Poon:]

So you mentioned most of these apartments would be run under a more asset like, where you will be helping the landlord. Can you share with us how the – say the management fee will be calculated? Is it based on top line or is it more like a base fee?

[Alex Xu:]

Typically, we as a top line, we always do a top line and then if in certain cases if the landlord wants to have a fixed fee, we will consider those as well.

[Aras Poon:]

Okay. Thank you very much.

[Alex Xu:]

Okay. All right.

[Operator:]

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

[Selina Yang:]

Thank you, operator. 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 any interest in visiting China, please don't hesitate to contact us. This concludes today's call. Thank you all.

[Alex Xu:]

Thank you.

[Operator:]

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