GreenTree Hospitality Group Ltd.
Q3 2019 Earnings Call Transcript

Published: 20 Nov 2019

[Operator:]

Hello! And welcome to GreenTree Hospitality Group Ltd., Third Quarter 2019 Financial Results Release Call. All participants will be in listen-only mode. [Operator Instructions]. Please note, this event is being recorded.I would now like to turn the conference over to Rene Vanguestaine. Please go ahead.

[Rene Vanguestaine:]

Thank you, Andrew. Hello everyone, and thank you for joining us today. GreenTree's earnings release is still being processed and will be available on our IR website at ir.998.com soon, as well as on PR Newswire services. We have posted a PowerPoint presentation on that same website that accompanies our comments today and that you can use to follow the call.On the call today from GreenTree are Mr. Alex Xu, Chairman and Chief Executive Officer; Ms. Megan Huang, Director of IT Department; and Mr. Nicky Zheng, IR Manager. Please not that Ms. Selina Yang, Chief Financial Officer is currently on maternity leave. Mr. Xu will present the company's third quarter 2019 performance overview, business operations and company highlights and Ms. Huang on behalf of Ms. Yang will then discuss financials and guidance. They will 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, anticipate, aims, future, intend, plan, believes, estimates, continue, target, is or are likely to, going forward, confident, outlook and similar statements. Any statements that are not historical facts, including statements about the company and its industry are forward-looking statements.Such statements are based upon management's current expectations and current market and operating conditions, and relate to events that involve known and unknown risks, uncertainties and other factors, all of which are difficult to predict and many of which are beyond the company's control, which may cause the company's actual results, performance or achievements to differ materially from those in the forward-looking statements. You should not place undue reliance on these forward-looking statements.Further information regarding these and other risks, uncertainties or factors is included in the company's filings with the U.S. Securities and Exchange Commission. All information provided, including the forward-looking statements made during this conference call are current as of today's date. The company does not undertake any obligation to update any forward-looking statement as a result of new information, future events or otherwise, except as required under applicable law.It is now my pleasure to introduce our Chairman and Chief Executive Officer, Mr. Alex Xu. Mr. Xu, please go ahead.

[Alex Xu:]

Thank you, Rene, and thanks everyone for joining our earnings call today. As already mentioned, Ms. Selina Yang, Chief Financial Officer is currently on maternity leave. So you can see on slide three, we now have a new member in our management family and her name is Iris, who will say hello to everyone and I apologize for causing some delay to you this time.Now, please turn to slide – page number six. I'm pleased to report our 2019 third quarter results; our seventh consecutive quarter of solid operating and financial performance. We grew our geographic coverage to 309 cities across China by the end of September, up from 278 cities by the end of September of 2018, a 11.2% year-over-year growth. We now have 3,102 hotels in operation, a 21.3% year-over-year increase across 12 brands in the economy, mid-scale, mid-to-up-scale, and luxury brands.Total revenue grew 20.1% year-over-year to RMB292.1 million. Gross profit increased 21.4% to RMB204.9 million. Non-GAAP adjusted EBITDA rose 11.6% to RMB177.1 million, and the core net income per ADS, that’s basic and diluted non-GAAP improved by 16.5% to RMB1.3, which is equivalent to $0.18.Operating performance also remained solid, especially compared to the overall performance of the Chinese Hospitality Sector according to STR reports. Our blended average daily run rate increased by 4.2% year-over-year to RMB174. Occupancy rate had a slight 1.3% decrease to 85.9%, primarily due to 250 existing hotels in renovation, the accelerated new hotel openings in the quarter, as well as our lower occupancy rate in our luxury segment; however revenue per available room increased 2.7% year-over-year to RMB149.Moving to slide number seven; at the end of the quarter we operated 3,102 hotels, 21.3% higher than a year ago. 30 of these hotels were leased and operated or L&O hotels, and 3,072 franchised and managed or F&M hotels. While the mid-scale segment remains the core of our business with more than 73.8% of our hotels, we are diversifying our portfolio by adding hotels in both the higher end and the economy segment of the market. The number of hotels in the luxury segment and mid-to-upscale segment increased to 6.2% of the total portfolio, and the economy segment grew to 20%.Turning to slide number eight; we opened 181 hotels compared to 146 hotels in the third quarter of 2018, that’s a 24% increase. Three of those new openings were in the luxury segment, 20 were in the mid-to-upscale segment, 92 were in the mid-scale segment, and 66 were in the economy segment. 16 of the newly opened hotels were in Tier 1 cities, 32 in Tier 2 cities, and the remaining 127 in select Tier 3 cities and other cities in China.Meanwhile, we closed 34 hotels

[Megan Huang:]

Thank you, Alex. Let me refer you to slide 15, where you can see that our combined total revenues grew 20.1% year-over-year to RMB 292.1 million, primarily due to three factors; the opening of 180 F&M Hotels and one L&O Hotel, improved RevPAR both in F&M and L&O Hotels and growth in our loyalty membership program. Growth was partially offset by the renovation of six L&O Hotels during the quarter.Total revenue from F&M Hotels rose 19.2% to RMB219.6 million, while total revenue from L&O Hotels rose 22.9% to RMB72.6 million. On the same slide, during the first nine months of 2019, total revenues rose by 20.6% to RMB 802.4 million. Total revenues from F&M Hotels were RMB617.5 million, up by 21.2% year-over-year, and the total revenues from L&O Hotels were RMB184.9 million, up by 18.5% year-over-year.Moving to slide 16, the cost and expense side of the P&L

[Operator:]

[Operator Instructions] And the first question comes from Ken Chong of Jefferies. Please go ahead.

[Ken Chong:]

Hi management for taking my question. Congratulations on the results, and I just wanted to ask about your RevPAR outlook towards the fourth quarter. It’s good to see that in the third quarter which you delivered positive blended RevPAR growth.I’m just wondering for the fourth quarter now, we’re already in late November. Do you have any colors on the RevPAR trends, and how is it like when we have a breakdown by room rent and remaining occupancy?And the second question is more from the trends from industry peers like OYO and they expand so many economy hotels under their soft brands. Do we see the need to open more in our size as well to sustain our market share? Thank you very much.

[Alex Xu:]

Thanks, Ken. Great questions! And let’s talk about the first – the fourth quarter first. At this moment, because we discussed before, we have a value priced business model, and we try to work really hard to focus on the direct sales. We have a loyal customer base as a result, and we see our RevPAR will be you know continuously stable or will be improved slightly for the fourth quarter this year.And that however, we will speed up the renovations, because after renovations we clearly see the major improvement after the [inaudible] CapEx and after the slight upgrade in certain hotels. So during the renovation period we may see some negative impact towards the occupancy and ADR. And so excluding the impact of that, we should be able to see some gradual and still small, slight increase of the performance over the same quarter last year. So far we have not been negatively impacted by some of the concerns from our customers.And on the second question, regarding the soft brand, the entry to that, we did see a lot of changes in that area. However, our belief is still the brand should have a certain value that is standardized or quality services through your – both to your guests and to your franchisees, and so that both of them have to be really happy and so we will maintain a higher, you know the high-quality in that end.So in order to make sure we have a sustainable growth and we certainly do not want to have an up and down for our future growth. So we have been really careful in terms of monitoring that progress, and the market is very – the market of China, the hospitality is huge. So I think that there is ample opportunities, and whoever can do a job consistently and continue the same high quality, I think eventually will succeed. So that’s why Ken we have continued to maintain our standard in our development.We have not added a lot of our non-soft brand products. But as I said, that we are monitoring that, we are evaluating that, and we also added some development personnel as well as the operations personnel, and we are training them to see whether we needed to add more. Just in case we need to add more soft brand, if there is a need from our existing franchisees for the next year.

[Ken Chong:]

Sure. Thank you very much.

[Operator:]

[Operator Instructions] The next question comes from Nate Deng of China Renaissance. Please go ahead.

[Nate Deng:]

Hi management! Thank you for taking my question and congratulations to the great results and congratulations to Selina and Iris. I have three questions if I may. The first one is about the operation metrics. Can you maybe give us a little bit color on the same hotel RevPAR growth in this quarter? And what it is like by major cities? Maybe the first one comes first.

[Alex Xu:]

For the same hotel, when you take a look at the numbers because – so the same hotels, I believe we have a RevPAR, the mid-scale is up 2.3%, economy up to 3.6%, and the mid-to-upscale to luxury was down 3.7%. So that’s basically the RevPAR like for like growth, and that’s all organic, but our consolidated is breaking down by the following. The luxury, we are a flat; mid-to-upscale, 0.2% decrease and mid-scale is 2.3% increase and the economy is a 3.6% increase, that’s on RevPAR.

[Nate Deng:]

Okay, thank you. And the other question is about operating expense hike, previously we have seen a significant increase in SG&A costs. So maybe can you give us a little bit more color on the breakdown of, say IT development costs, headquarters staff bonus cost and marketing for new brands, how much is it? And going forward, shall we see – what is the kind of normalized EBITDA margins shall we expect?

[Alex Xu:]

Okay, so thanks Nate for those two questions. So the selling and marketing expenses, we have basically three components there

[Nate Deng:]

Thank you. Thank you management for the detailed explanation and congrats on the results, thank you.

[Operator:]

The next question comes from Colin Yao of Goldman Sachs. Please go ahead.

[Colin Yao:]

Thanks management for taking my questions, and congratulations on the strong results. I basically have two questions

[Alex Xu:]

Okay. So the first question; regarding our performance comparing with our peers, we really have not compared to our peers that closely, because we think that we use a business model that value pricing I think is our key and pay attention to the need of our loyalty members, our property memberships, what their need.So we do not, for instance address our price constantly, and we have basically a value pricing model, and because of the economy of the shifting, the change – because of the change of the shifting of the economy, I think that both corporate travels as well as individual travelers are - that in contrast with the travel budget.So we have always believed in the end value priced products and services will be in great demand, and secondly that we have, as we have said to you before, and we developed, strengthened our membership development programs, we strengthened our marketing programs, we targeted our membership sales and marketing.We also have a one of a kind, because our parent company has a restaurant chain which we have more than close to 100 million and 100 million visitors per year, where we can use the point of contact to market our brand. And so a combination of all of that and made the sales and marketing programs are more effective. I think that it also stabilized, and in the more volatile markets, our ADR occupancy and therefore the RevPAR. So I think those are the key factors.And with regard to the second question, we are evaluating opportunities and trying to deploy our cash responsively to further grow our China market. So we are monitoring that, and we think there will be a great opportunity ahead and so that if we have strategically located properties and also well priced, we will do selectively our own lease in our credit hotel or own hotels.So that’s the - globally, we believe our strengths, management strengths and the core competencies are based in China, so unless those opportunities are coming to us from our franchisees or from our customers. We will not divert our focus to elsewhere, and I think the opportunities here in China and also the fear of influence such as nearby China.So our focus to growth for the next few years are continuing to be focused domestically. We think the market will be really, really good, and there will be ample opportunities.

[Colin Yao:]

Okay. Thank you very much and congratulations again on the strong results. Thanks.

[Operator:]

The next question comes from Jisheng Liu of CLSA. Please go ahead.

[Jisheng Liu:]

Hey, thank you operator. Thank you Alex, Megan, Nicky for taking the questions. I have a couple of questions; maybe two quick ones first. First one was on the guidance for 2019. I noticed that you have put a new revenue guidance of 20% to 25% year-on-year growth in 2019 versus 2018. I was just wondering if this is only on organic basis.

[Alex Xu:]

Primarily, that’s including - that includes a number of months of the consolidation of Argyle. But I think that we very much delayed urban and consolidation, that’s probably less than one month or less. So primarily, you can see primarily some organic growth.

[Jisheng Liu:]

Yes. At the end of second quarter ‘19 where actually you said the revenue of 2019 was expected to grow by 23%, 28% from 2018. So by the time actually urban was already – sorry, Argyle was already consolidated. I was just wondering, so if that guidance was actually – so 20% to 25% of revenue growth for this quarter, which was announced for 2019 target. So that would be rather considered as the top line growth guide on investments? So if that was true, it means that our fourth quarter implied revenue growth will be much slower. So why was that actually?

[Alex Xu:]

Initially, we anticipated that we will have a consolidation of urban for the entire fourth quarter, but that will be delayed for two months or so, so which will have a massive impact on the revenue growth for the M&A.And secondly, that we – as I mentioned to you that we speeded up. We feel that during the transition period as they speed up the existing hotels, so renovation is very important. So we have a renovation program, aggressive program that’s being implemented, and so we have a higher – we will have a higher number of hotels being renovated.So we do not necessarily wanted it for us, the closure of our hotels and we want to give and incentivize our franchisees to renovate during this period of decline. So due to these two factors and that the reduction of the growth, the revenue from consolidation, from the M&A and also the speed of this renovation, and we will see that our guidance will drop 3%.

[Jisheng Liu:]

Got it, that’s very clear, thanks. Second one was, because you just mentioned you have been adding development personnel’s. So may I know how many personnel’s in development did you actually have by the end of, let’s say June 2019? And how many do you have like just now? And how many do we plan to add in future, actually? Any color would be helpful.

[Alex Xu:]

Sorry, that – based on my memory that – I think that in this quarter, in the third quarter we added about – because we’re screening those. We come and our development personnel come in for three months, for six months, there is a trial period, because not everyone can be made it for 4x, after the trainings can be a 4x BD person.So I think the last quarter we have hired close to 45 personnel’s, and at the end of the third quarter we also have screened it out quite a bit. So at the end of the third quarter, I think we have about 200 plus or minuses, you know BD personnel’s. It is the training and also that is the screening process that costs a great deal, so that’s the number. And well this quarter we plan to add another 40, so by the year-end we think we should have 240 to 250, that’s our plan.

[Jisheng Liu:]

Great, thanks. And the third question, I actually noticed some of your brands, actually two, may have been going through a rebrand exercise. So Argyle actually in the transition of last quarter, the name was Argyle only, and this quarter it has become Argyle Grand Hotel, and for Gme Hotel, last quarter it was Gme Hotel, this quarter it was renamed to Gem Hotel. So if my understanding was right, you are actually doing some rebranding exercise out there.So, I mean we got a business. What’s the rationale behind that? Because if there’s no real economic impact, I think franchisees may get really confused, because previously they have one brand and now the brand has actually changed a little bit. So what’s the rationale behind it? If any color you could share on this? Thanks.

[Alex Xu:]

That’s a great question. No, there’s no actually – there’s no change of the brand in any of those logos, Chinese. I think that the Argyle always have the Argyle, and then they have a brand, they have a lot of other things that depending on the property type. So there is, I think we just used the representatives, one of the – most representatives of the hotel brands there.And in terms of our Gemei, you know GEMEI again, that is GEMEI Hotel, that’s how we spell and we said that G-E-M-E-I, then people will give either – couple of them on the English side, Gme and Gem, and I think our guest like Gem, the Gem that spells correctly, our English, that our English, you know the customers and the investors. So that’s the, on the English side that was just slightly modified our brand, but there’s no brand changes to our major - to our customers in China. So apologize for the confusion.

[Jisheng Liu:]

Thanks. Maybe just a little - the last little element to check with you. Actually last year during fourth quarter you actually paid out a dividend. So shall we expect a dividend during the next quarter, and if there is, what amount should we expect for next quarter? Thanks.

[Alex Xu:]

We have announced a plan for a dividend policy. We would, I think stick to that for the time being, unless announced otherwise.

[Jisheng Liu:]

Okay. Thank you very much. That’s all my questions. Many thanks.

[Operator:]

[Operator Instructions] I see we have a follow-up from Nate Deng of China Renaissance. Please go ahead.

[Nate Deng:]

Thanks Alex. Maybe one follow-up question about our strategy, because I think previously, some are asking about the OYO soft brand impact, and we are also seeing major China Hotel Group saying they are going to penetrate into lower-tier cities.So my question is, how are we projecting this increasing competition in the lower-tier city which is our target market, and are we expecting some kind of increased competition and maybe lower, but maybe priced work, something like that to happen? And shall we expect the cost of developing new hotels to increase in the future and how are we going to cope with it? Thank you.

[Alex Xu:]

Thanks Nate. It’s a great question. We clearly see there are more opportunities in the 3 Tier and the 4 Tier, 5 Tier cities in China, and the 1 Tier and 2 Tier, the brand penetration is much higher. So with going through the third, fourth, fifth tier and the demand for the management resource is much higher.I think that there is a price war right now in terms of the initial brand application fees, the initial fees, a lot of people gave you a lot of discount, and there is a competition in that end. We are clearly also seeing that impact. So we have adjusted our fees, you know to position ourselves to compete effectively, but so far I think that because our positive performance, and that because franchisees, hotel owners can see our sustained profitability and performance.So we have the development, 50% as we said, more than 50% is driven by our existing franchisees and the new openings and the referrals. So we’re pretty confident that number will continue and will potentially next year further increase.And we have a trend in the past, consistently our operating managers to be able to – to be sent to the third, fourth Tier cities. We have the largest, I think number of area managers in the company and so we think we are uniquely positioned to do a better job in the third, fourth and fifth tier cities. Because as we said, the revenue, the ADR and there is a ceiling in that end. And so the operating performance, operating efficiency in the systems and the support, the logistics are crucial to make the hotel operation profitable and sustainable.So in that end we believe we’re uniquely positioned and qualified. So we’re not really concerned, a lot more competitions. In the past 10 years we do see – in the past 15 years and some brands come and go, and it is the solid operator who will continue to deliver, the performance to the franchisee will be the one to stay.

[Nate Deng:]

Thank you. Thank you, Alex for explanation. Thank you.

[Operator:]

[Operator Instructions] The next question comes from Billy Ng of Bank of America. Please go ahead.

[Billy Ng:]

Hi Alex, just have a follow-up on that question. Would you mind to tell us what do you think about the current environment? Like you did mention the competition become a little bit more intense, but of course we do believe GreenTree is very well positioned on that aspect.But in terms of like profitability of the franchisees, how do you see your own franchisees profitability compared to a year ago, and also maybe in terms of overall industry, how profitable or not profitable at this stage, and as a result, in 2020 whether you think there will be bigger opportunities for you guys to get – to help those unprofitable operators out there to join the franchise or in general it will be a very tough environment for everyone. So like the incentive to open new hotels are low and what stage are we in at this point?

[Alex Xu:]

Okay. So Billy, thank you so much for the questions. For our franchisees, our profitability has been very stable, because in order to operate in a profitable hotel, it goes through a lot of preparation in terms of design and the construction cost, preopening cost, the operating cost, the sales marketing cost and also your, you know the ability to have direct sales forces in addition to work with so many online players there.So it is a comprehensive sales and marketing management skill set, the team has to have to deliver a returns to our franchisees. So for our existing and – existing hotels, you know we have no need for renovations, our profitability stays the same, and our original plans, the investment return period of three to 2.5 years and I think we’re still in that range for many hotels.We have hotels older – older hotels that need to be renovated and that they will be more impacted by the newly opened hotels nearby, so they have a reduced performance. So that is why – and their return, in other words their profitability can reduce, but most of them are already the capital’s paid back years ago. So they are in a better position to reinvest some of the dollars to renovate and then stay; their profitability will come back.Because what we designed in terms of the hotel products and pricing are really to meet the core demand for the everyday leisure and business travelers. So that is about 200 -- 180 across the China's hotel statistics.The average hotel space is about $177. So we really want to target the mid-market, and so that set the great demand. So we – the majority of our franchisees profitability remains the same and that's why I think they are enthused about the upcoming opportunities and that they are developing more hotels and so we anticipate next year we should have the same or higher speed of growth. And we have gone through that in 2009, 2010, and I think our growth really have not been impacted that much.But in terms of growing in the future about economy conditions, we think that because there is a pressure in terms of debt – in terms of the debt services for many small and medium sized corporation, and even for some we've seen some household debt level increase, that may put a stamp in terms of household expenditures or small business travel budget, but I believe the core demand are still there.So as long as we don't deviate, you know overspend in terms of design and construction, and the price of hotel above 4 or 5 stars RevPAR, I think the sector will be very healthy and at least the sector we stay in and comparing with a lot of different sectors, I believed the hospitality sector is really a sound rise industry and we're really blessed to be in that play.

[Billy Ng:]

Okay, thank you.

[Operator:]

[Operator Instructions] This concludes our question-and-answer session. I would like to turn the conference back over to Megan Huang for any closing remarks.

[Megan Huang:]

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 us in China, please do not hesitate to contact us. This concludes the call.

[Operator:]

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