GreenTree Hospitality Group Ltd. Q1 FY2021 Earnings Call

Hello, ladies and gentlemen, and thank you for standing by for GreenTree's First Quarter 2021 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the management's prepared remarks, there will be a question-and-answer session. As a reminder, today's conference call is being recorded. 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.

Thank you, Melanie. 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. 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; Ms. Megan Huang, Vice President Of Sales and Marketing; and Mr. Nicky Zheng, IR Manager. Mr. Xu will present the company's first quarter 2021 performance overview, followed by Ms. Huang, who will discuss business operations, and Ms. Yang will then discuss financials and guidance. They will be available to answer your questions during the Q&A session, which will follow. 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, beliefs, 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 the 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.

Thanks, Rene, and thanks, everyone, for joining our 2021 first quarter earnings call today. In this report, we will highlight our Q1 hotel developments and performance. Then, we will go into the details of our operations and financial performance. Because of the impact of COVID-19 on our operations in 2020, particularly in the first quarter, we will also occasionally provide Q1 2019 numbers for a more meaningful comparison. Please turn to Slide 5. We are glad to see our outstanding performance continue in the first quarter. Compared with Q1 2020, RevPAR increased 35.1% to RMB95.5. Total revenues increased 53.3% to RMB241.2 million. Income from operations increased 64.9% to RMB61.4 million with a margin of 25.4%. Net income turned positive to RMB66 million with a margin of 27.4%. Non-GAAP adjusted EBITDA increased 74.3% to RMB64 million with a margin of 26.5%. And core net income, non-GAAP increased 58.3% to RMB43.9 million, with a margin of 18.2%. Earnings per share increased to RMB0.68, and the total revenues exceeded Q1 2019. However, income from operations and adjusted EBITDA were half of Q1 2019 with reasons outlined later. On Slide 6, we show considerable progress we have made since the pandemic began in January 2020. Total revenues, income from operations, adjusted EBITDA, and non-GAAP core net income all increased markedly compared with Q1 2020. Total revenues were up over Q1 2020 because of new hotel openings, but this was partially offset by lower RevPAR from existing hotels. The lower income from operations and adjusted EBITDA compared with Q1 2019 resulted from costs related to newly opened hotels and increasing consulting fees, while RevPAR recovery was slowed down by the resurgence of COVID-19 in most parts of China and recovered to near only 75% of Q1 2019. Let's now turn to Slide 7. The first quarter saw a robust recovery in occupancy rate and RevPAR compared with Q1 2020. We outperformed the industry by leveraging our strategic advantages, including continued deployment of hotel management systems and technologies, an expansive footprint in tier three and lower cities, and our industry-leading loyalty program, as well as the hard work of our franchisees and staff. Slide 8 shows our monthly RevPAR recovery as a percentage of 2019. We remain very encouraged by the strong recovery in China. While our occupancy rate declined in January and February 2021 due to the implementation of travel restrictions and the government's state-local policy during the Chinese Spring Festival, it rebounded quickly after this, as more people got vaccinated and more pent-up demand in China as travel restrictions were lifted. We saw a substantial month-over-month sequential increase in RevPAR in March, April, and May, especially during the Tomb Sweeping holiday and Golden Week. As we expected, these holidays triggered a resurgence in travel, with 230 million domestic tourists traveling during the Golden Week. According to the report from the Ministry of Culture and Tourism, this represents 103.2% of the number of domestic tourists in the same period in 2019 and a year-over-year growth of 119.7%. Please turn to Slide 10 to begin the discussion of our strategic focus and to share with everyone what we have done in the first quarter in new hotel developments besides technology-related research and development member development. Our current growth strategy focuses on three key parts. First, we're adding leased-and-operated hotels in strategic locations; second, we are further expanding in tier three and lower cities; and third, we are further penetrating the mid to upscale segment. Let's take a look at Slide 11. During the quarter, we accelerated our expansion into the mid-to-high-end market in central China, Southeast China, and Southwest China. We opened three leased-and-operated hotels and have 20 leased-and-operated hotels in our pipeline, all well-located around transportation hubs, central business districts, and government centers. Please turn to Slide 12. Over the past four years, the vast majority of our new hotel openings have been in China's thriving tier three and lower cities. 68.5% of all new hotels in our current pipelines are located in these cities. As a testament to the soundness of this strategy, during the pandemic, the pace of recovery at our hotels in such cities was consistently faster than in other cities until the end of 2020 when business recovery in tier two cities accelerated. This combination of our existing footprint and our strong performance in these cities gives us a real competitive advantage to capture future opportunities in China's booming hospitality industry. Now, please turn to Slide 13. We have been continuously growing our high-end segment over the past few years. By the end of the first quarter of this year, hotels in this segment increased to 9.2% of our total portfolio compared to only 2.2% in 2017. This year, we plan to open more hotels in the mid-to-upscale and luxury segments. Slide 14 shows the impressive growth in both our individual and corporate membership programs, which accounted for most of the 92.2% of all direct sales in the first quarter. Individual memberships grew to 59 million from 46 million, and corporate membership grew to 1.7 million from 1.5 million year-over-year. In closing, I would like to thank our team, franchisees, and shareholders for their tremendous efforts and support throughout the quarter. We achieved steady growth and opened more hotels in new strategic locations despite some resurgence of COVID in China. We are optimistic that travel will continue to recover as vaccine rollouts accelerate. This would help us deliver even better results next quarter. I will now pass the call over to Megan Huang, who will summarize our business operations for the first quarter. Megan, please go ahead.

Thank you, Alex. Please turn to Slide 16, which highlights the rebound in our operating metrics year-over-year from the impact of COVID-19. Blended ADR increased 0.8% to RMB151. Occupancy rate increased 16.1% to 63.4% and RevPAR increased 35.1% to RMB96. We accelerated the expansion of our market presence across China, opening 201 new hotels in the first quarter. Moving to Slide 17. At the end of the first quarter, we had 4,464 hotels in operation, 11.7% more than the year before. 43 of these hotels are leased-and-operated, and 4,421 were franchised and managed, while the mid-scale segment remains the core of our business with 64.2% of all our hotels. Last year, we continued our expansion into both the higher-end and economy segments. This expansion accelerated in the first quarter as the number of mid-to-upscale and luxury hotels now accounts for 9.2% of our total portfolio, while the economy segment remained stable at 26.6%. As Alex mentioned, we also solidified our already dominant position in tier three and lower cities; at the end of the first quarter, 67.3% of our hotels were in these cities. This strategic advantage enhanced our cross-marketing efforts. On Slide 18, you can see that, in the first quarter, we opened 201 hotels compared to 62 in the first quarter 2020. Three hotels were in the luxury segment, 33 in the mid-to-upscale segment, 136 in the midscale segment, and 30 in the economy segment. Nine were in tier one cities, 65 in tier two cities, and the remaining 127 in tier three and lower cities in China. 17.4% of newly opened hotels in the first quarter were in the mid-to-upscale and luxury segments of the market. We closed 77 hotels, six due to brand upgrade, 30 due to noncompliance with our brand and operating standards, and 41 due to property-related issues. So net-net, we added 124 hotels to our portfolio during the quarter. Slide 19 shows the growth in our pipeline of new hotels. Despite COVID-19, our pipeline increased from 1,186 on December 31, 2020, to 1,265 on March 31, 2021. Around 41% of these new hotels are in the midscale segment, about 32% in the economy sector, and around 27% in the mid-to-upscale and luxury segments. Slide 20 shows our quarterly operating performance trend. In the first quarter, RevPAR from our leased-and-operated hotels increased to RMB95. RevPAR for our franchised and managed hotels increased to RMB96. ADR for our leased-and-operated hotels increased to RMB184, and ADR for our franchised and managed hotels increased to RMB150. Occupancy at our leased-and-operated hotels increased to 51.7%, and occupancy rate at our franchised and managed hotels increased to 63.7%. As mentioned earlier, performance in the first quarter was negatively impacted by the implementation of travel restrictions and government state-local policies during the Chinese Spring Festival.

Thank you, Megan. Please turn to Slide 21. Total revenues increased 53.3% year-over-year to RMB241.2 million. Revenue from franchised and managed hotels rose 51.2% to RMB177.9 million, while revenue from leased-and-operated hotels surged 66% to RMB56.1 million. On Slide 22, hotel operating costs amounted to RMB197.7 million, showing a 43.8% year-over-year rise and a 51.6% increase compared to the first quarter of 2019, primarily due to higher rents and other costs linked to the expansion of our franchised, managed, and leased hotels. In the first quarter, hotel operating costs were RMB122.2 million, reflecting a 52.8% increase from the first quarter of 2019, mainly due to higher rents from more leased-and-operated hotels, both newly opened and in our pipeline. Furthermore, hotel operating costs in early 2021 included expenses from Argyle and Urban that were not included in the first quarter 2019 figures. Excluding these factors, hotel operating costs rose by 3.5% compared to the first quarter of 2019, primarily due to an increase in our staffing levels. Selling and marketing expenses were RMB18.1 million, a year-over-year rise of 1.6% but down 26.6% compared to the first quarter of 2019. General administrative expenses reached RMB56 million, up 117.5% from the first quarter of 2019. This increase was largely due to higher consulting fees and the absence of general and administrative expenses from Argyle and Urban in our 2019 performance. Excluding these factors, general and administrative expenses grew by 5.3% compared to the first quarter of 2019, mainly due to increased investment in research and development and new staff. Moving to Slide 23, income from operations, which is revenues minus operating costs and expenses, was RMB61.4 million, representing a year-over-year growth of 64.9%. This increase was largely driven by continuing RevPAR recovery, a higher number of hotels, and improved cost and expense management this quarter. The operating margin was 25.4%, up from 23.6% a year ago. Compared to the first quarter of 2019, income from operations declined by 45.1%, and the margin fell from 47.5% to 25.4%, largely due to costs associated with newly opened leased-and-operated hotels and the effects of travel restrictions during the Chinese Spring Festival in January and February. On the same slide, net income rose to RMB66 million, with a net income margin of 27.4%. Adjusted EBITDA grew by 74.3% to RMB64 million, and the adjusted EBITDA margin increased to 26.5% year-over-year. Core net income climbed 58.3% to RMB43.9 million, with a core net margin of 18.2%. In comparison to the first quarter of 2019, adjusted EBITDA decreased by 43.2%, with the margin falling by 21.3%. Core net income dropped by 52.4%, and the margin decreased by 21%, primarily due to lower RevPAR at the newly opened leased-and-operated hotels in our pipeline. Please proceed to Slide 24. Net income per ADS was RMB0.68, equivalent to US$0.10, an increase from a loss of RMB0.11 last year and down from RMB1.33 in the first quarter of 2019. Core net income per ADS, both basic and diluted non-GAAP, was RMB0.43, or US$0.07, up from RMB0.27 in 2020 but down from RMB0.91 in the first quarter of 2019. Now, let’s look at Slide 25. As of March 31, 2021, the company had total cash and cash equivalents, restricted cash, short-term investments, equity securities investments, and time deposits amounting to RMB1.7 billion, down from RMB1.9 billion as of December 31, 2020. This decrease was mainly due to loans to franchisees, an increase in prepaid rent and deposits, and acquisition costs for our leased-and-operated hotels, partly offset by the utilization of bank facilities. Our cash and cash equivalents provide sufficient capital as we pursue our growth strategy, including potential acquisitions and support for our franchisees. On Slide 26, we highlight the significant impact COVID-19 has had on our business. Assuming the pandemic is controlled in China, we anticipate total revenues for the full year 2021 to increase by 48% to 53% over 2020 levels, and by 25% to 30% compared to 2019. This concludes our prepared remarks. Operator, we are now ready for the Q&A session. Thank you.

We will now start the question-and-answer session. Your first question comes from Praveen Choudhary with Morgan Stanley. Please proceed.

Hi. Thank you for taking my call. I have a couple of questions. First, could you discuss the current outlook in terms of how RevPAR is trending and any openings that have occurred since the end of the first quarter? Also, could you explain why the first-quarter results were a bit later than usual? Thank you.

Okay. Thanks, Praveen. You can see from the paragraph in Slide 8, the first-quarter RevPAR was only about 75% of the pre-COVID level, but after April, pretty much RevPAR increased to the 100% level, and sometimes even higher, in a couple of cases, more than 108%, or 6% higher; the same level as the pre-COVID. So as the COVID resurgence is controlled, the RevPAR recovery is very rapid. So we're pretty confident the recovery will continue. So the Slide 8, you can refer to that all the way I think to the end of June. So the second issue is we have hired a consultant. We have been assessing the situation because, in the past, many investors have asked us what we should do with more Chinese companies seeking alternative listings. So we hired a consultant to assess the situation and that, as a result of that, the numbers from the first quarter got delayed. And that's basically the only reason. Thanks, Praveen.

Thanks, Alex. That's helpful. Can I ask you one more question about lower-tier cities where you have been normally more dominant compared to your peers? But lately, we are hearing and seeing that many of your peers are also trying to grow in lower-tier cities. So first, do you think the competition is heating up in lower-tier cities? How are you going to manage that competition? And second, do you think there are any competitive advantages that you have developed over time in lower-tier cities, which will help you more than your peers? Thank you.

China has a lot more lower-tier cities than the first and second-tier cities. So the economic growth and the Chinese lifting of the economy across the board leads us to feel again that the growth opportunities will be more in the third and other tier cities. We have been adding resources to those tier three and lower-tier cities for many years. Managing across a wide range of networks requires a lot of resources. Some companies in the past have tried to quickly expand into the lower and other tier cities, and as you can see, the results are not that easy. I think we have some advantages in getting and accumulating the experience and resources in managing effectively in those areas. I think that gives us a real advantage over the many months ahead. However, many others also realize there are opportunities in those cities, and competition is heating up everywhere, not only in the third-tier cities, but also in the first and second tiers. As urban development reaches a peak, development has started spreading into the lower-tier cities and other tier cities, but we are still confident, Praveen, that we will have a real competitive advantage in these areas. As I said, managing a wide network requires accumulated resources in the system.

Your next question comes from Billy Shaun with Bank of America. Please go ahead.

Hi. Hi. Good morning. Hi, good morning, Alex. Good morning, Selina. I have two questions. First question is, can you provide a little bit more information about our leased-and-operated hotel? In the presentation, we noticed that there were three major ones opened during the first quarter. Would you mind sharing about their operating metrics in terms of RevPAR and roughly about their profitability? After ramp-up, I think they've been in operation for like four, five months now. What kind of margin and profitability should we expect? And then, secondly, we are seeing about 20 more leased-and-operated hotels in the pipeline. What kind of P&L impact should we expect for this year in terms of pre-opening costs and in terms of CapEx? And how should we budget that for the rest of the year? And then finally, one more question on that is like we see about 1,200 hotels in the pipeline. Should we assume most of them will be able to open in the next six to 12 months?

Billy, thank you. On the first question, I will give you our reasons for making those decisions to add leased-and-operated hotels. Then, the operating metrics, I'll leave that to Selina to answer. We have been continuously trying to expand into Southeast and Southwest areas. In the past, our stronghold was in China central region, especially the Shanghai Delta area. We have been trying to accelerate our growth into our weak areas and white space through franchised and managed hotels. Last year and this year, new opportunities emerged where we are able to find some especially existing hotels that were impacted by COVID, which we were able to acquire or invest in at a much lower cost than we could have secured a new site and started building those hotels. Most of those are conversions from existing hotels. In the cities, we feel that even during the current time frame, they may be more heavily impacted by COVID than in China Central area. However, eventually, as the COVID crisis comes to an end, those opportunities will further benefit from the opening of borders, for example, in Nanning, which is a site next to Southeast Asia. So that's the rationale behind it. We are selecting those strategic locations in strategic cities, which can help us penetrate quickly into the weak and white spaces of GreenTree in the past. The performance of our hotels varies. For instance, in Wuhan, performances are really good. In Nanning, because the door to the Southeast Asian countries is still closed, it's more heavily impacted. Guangxi is more impacted than other cities. But we think with time, those hotels will perform really well. Selina?

Okay. Thank you, Alex. I can share more information about all our leased-and-operated hotels. Here in the first quarter, we have 43 leased-and-operated hotels. The RevPAR, if we compare it with the first quarter of 2019, decreased by 20%. For the total portfolio, our RevPAR decreased by 24.5%. This means the leased-and-operated hotels outperformed our total portfolio. For the second quarter, we have more than 10 additional leased-and-operated hotels added into our portfolio, and now we can see that the RevPAR of our leased-and-operated hotels for the second quarter increased by more than 5% if we compare it with the year of 2019. This also outperformed the total portfolio. Thank you.

Thanks a lot.

When we transition a hotel to GreenTree, there will be some impact on occupancy during the conversion period. The numbers indicate that in the first quarter, the occupancy of leased-and-operated hotels is lower than that of franchised and managed hotels. Additionally, we have other expenses that include hotel opening costs in our figures. Traditionally, we have not isolated opening costs from the reported numbers, so I don’t expect significant negative effects on net operating income from hotel opening costs.

I see. In terms of the opening pipeline, what should we expect the opening pace for the next six to twelve months?

Most of the 1,200 hotels are expected to open within the next six to eighteen months. The reason for the eighteen-month timeframe is that some hotels are newly constructed, which requires longer conversion times than before. However, we anticipate that the majority will open in the next six to twelve months, with a few taking longer. The openings in the second quarter will be slightly fewer than in the first quarter but still significantly higher than the same period last year and the year before. Selina has a better understanding of the exact numbers.

Yes. The opening for the second quarter will be more than 170.

Your next question comes from Ingrid Zhang with UBS. Please go ahead.

Hi. Many thanks Alex, Selina, Megan for taking my question. I have two questions about the recent trends. The first is could you please comment a little bit about the impact on the Henan flood and the recent resurgence of COVID cases? The second is, if possible, can you please share with us when we expect our RevPAR to return to the 2019 level? Many thanks.

Okay. Thank you so much for that question. I didn't quite understand the first question. Were you asking about the impact from Nanjing?

Yes. The impact from, first, the Henan flood and importantly, the recent resurgence of COVID cases, yes, the COVID outbreak starting from Nanjing.

Okay. Thank you. The COVID cases – COVID management, I think in the past, we have indicated that we've been prepared for occasionally certain city resurgences of COVID. We have checked from both also the flood crisis in Henan, we quickly after — as soon as we saw the newscast, our company's policies immediately alerted not only the Henan, but every potentially affected hotel to be prepared for flood control and to prepare ourselves. For our hotels in the region, we have not been affected other than the hotels hosting some of the local residents. The next couple of weeks, we hope business will resume back to normal. With the Nanjing COVID, the same thing. Some of our hotels will be or in the process of being taken by the government as COVID hotels. In terms of revenue and income impact, this will probably be offset by that. But the good thing is that none of our guests or employees have been impacted by the resurgence, and it is still relatively speaking compared with a broad number, very, very small. The government is taking very strong measures to prevent the crisis from spreading. We are very confident that this crisis will be controlled in two to three weeks, and typically, that's the time period. Just like Guangzhou, a couple of months ago, business will go back to normal. China has a very strong and effective COVID control and mitigation policy. As soon as a potential impact person is identified, there are quarantine stay-home policies implemented, and that means people are getting tracked frequently. We do not believe this will have a major impact on our company's performance.

So please allow me to answer your second question. Actually, we observed that since April, our RevPAR began to return to the levels of 2019. Especially in May, our RevPAR increased by 3% when compared to 2019 levels. June’s RevPAR still keeps positive when compared to 2019. Even in the third quarter — I mean, from the very beginning of July when now, our RevPAR is performing almost at the same level of 2019.

Your next question comes from Simon Cheung with Goldman Sachs. Please go ahead.

Hi, everyone. Thanks for taking my question and also the presentation. I think I have three questions here. One just on earlier on, you mentioned that in the second quarter, you're adding the 170 hotels. Can you give us a sense about the full-year numbers? If you can perhaps give us a sense about the breakdown between leased-and-operated and franchisees, that would be very helpful. The second question is just wanted to get a sense about your EBITDA margins between the leased-and-operated and the franchisees because, as you add more leased-and-operated, I suppose that's going to be dilutive to the margins, particularly as, Alex, you mentioned that it would take some time for the leased-and-operated project to ramp up. The thirdly, you mentioned about hiring a consultant. You can see the listing elsewhere. Just wondering whether you can share anything regarding the conclusions or if you were to list it elsewhere, what are some of the key considerations here? Thank you.

Okay. So for the first question, please allow me to share more detailed information. For the full year, in our plan, the number of new hotels will be more than 700, and we are likely to open almost 800 hotels this year. Most of them are franchised and managed hotels. We only have the opportunity to open leased-and-operated hotels in strategic positions, and only that way, we can catch the opportunity to add more leased-and-operated hotels. For the second question here, the second quarter, we can observe the EBITDA margin approaching 40%. That means they have recovered better than the first quarter. Normally, our EBITDA margin is above 50%, so that's my target for this year.

And the third question, Simon, is that our consultants are working really hard and we will report to you the progress being made. That's to the extent I'm able to report to you.

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

Thank you, Operator. In closing, on behalf of the entire GreenTree management team, we thank you all for your interest and participation in today's call. If you require any further information or have plans to reach us, please contact us. Thank you all.

Thank you.

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