GreenTree Hospitality Group Ltd. Q4 FY2021 Earnings Call

Thank you, Matthew. 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 Director. Mr. Xu will present the company's Q4 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, 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 statements 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. Hello everyone, and thank you for joining us for today's phone call. First, we want to apologize for the accidental earlier termination of the phone call during last quarter's earnings call. We hope this time the operator will not accidentally terminate the call earlier. 2021 was a full year of changes, challenges, and opportunities, with a surge in COVID-19 cases and the emergence of new virus variants and intermittent lockdowns. Facing the twists and turns of the pandemic, we seized the opportunity to further innovate our brand, support our franchisees, and actively promote digital management. We believe that all these changes have paved the way for a strong recovery and the sustainable development of our business once the pandemic is finally over. Please turn to Slide 5. We are satisfied with our performance in the fourth quarter given the resurgence of COVID-19 in various parts of China. Compared with Q4 2020, RevPAR decreased 5.6% to RMB 117, total revenues increased 6.1% to RMB 307.4 million. It is worth mentioning that the total revenue for the full year increased 29.7% year-over-year to RMB 1,206.1 million, meeting our revenue guidance provided in the previous quarter. Income from operations decreased 69.5% to RMB 36.1 million, with a margin of 11.8%. Net income decreased 64.1% to RMB 28.46 million, with a margin of 9.3%. Non-GAAP adjusted EBITDA decreased 48.4% to RMB 67.5 million, with a margin of 21.9%. And earnings per share decreased 69.9% to RMB 0.25. Slide 6 shows detailed numbers for total revenue, operating income, net income, and adjusted EBITDA. On Slide 7, operating performance was impacted slightly for the last quarter. Our occupancy rate and RevPAR recovered to 90.6% and 91.3%, respectively, after 2019 levels, a better performance than the industry average. Slide 8 shows historical weekly RevPAR performance in the fourth quarter versus 2019. We actually trended all the way through May of this year. RevPAR started to recover at the beginning of October, only to drop to 81.3% in the first week of November with the resurgence of COVID-19 in several cities. It then gradually recovered as cases subsided to finish the year strongly at 98.5% in the last week of December. After a seasonal drop at the beginning of 2022, RevPAR recovered to 88% over the Chinese New Year due to family reunions and domestic tourism recovery, leading to a boom in the hospitality industry. However, the reintroduction of travel restrictions during the Winter Olympics and the increasing number of Omicron variant cases sent it down again. This downtrend was further affected by another round of COVID-19 outbreaks in March and April that resulted in some major cities being locked down and millions of residents confined at home. Prolonged outbreaks that started in March in Jilin Province and Shanghai have since caused RevPAR to further decline to 56% early in May. While China's domestic market remains under pressure due to a wave of Omicron-related infections, we believe we can continue to outperform the industry across business lines. Currently, around 800 of our hotels are under requisition by various governments, approximately 17.2% of our total portfolio. We, our franchisees, and partners stable customers' income. In addition, we support them in many ways, including reducing and eliminating recurring management fees and providing franchisee loans at an attractive interest rate. We are also supporting pandemic prevention measures with hotel staff and volunteers delivering food and water supplies to pandemic prevention and control stations. Furthermore, our staff actively responded to the calls of the government and undertook quarantine and reception tasks, including taking charge of the meals for quarantine observation and the pandemic prevention personnel. Now, starting with Slide 10, let's talk about strategies and execution with further expansion in the mid- to upscale segment and the Tier 3 and lower cities in Southwest and South China, as well as brand renovation. Let's take a look at Slide 11. We have been continuously growing our mid- to upscale and luxury segments over the past few years. By the end of the fourth quarter, hotels in these segments had increased to 552, which is 11.9% of our total portfolio, compared with only 50 in 2017. We plan to open more hotels in these segments this year. Please turn to Slide 12. Over the past five years, most of our new hotels have been in China's rising Tier 3 and lower cities, where they have recovered faster than in other cities in most quarters. Additionally, hotels in some lower-tier cities are performing well, especially those with a smaller number of rooms. As we continue to execute our strategic plan, 68.4% of all new hotels in our current pipelines are in such cities, and we will further capitalize on the substantial opportunities in such locations. Let's have a look at Slide 13. During recent quarters, we accelerated our expansion into the Central, Southeast, and Southwestern markets. The map shows our expansion footprint in provinces, including Chongqing, Sichuan, Hubei, Jiangxi, Shanghai, and other provinces for both L&O and F&M hotel openings. Please turn to Slide 14. Responding to a growing market trend, we have launched a new mid- to upscale brand called e-sports hotels. These hotels allow us to step into the e-sports segment and meet the needs of local gamers and hotel guests for this type of experience. We now have 25 e-sports hotels in operation, and we target an additional 100 over the next 12 months. These hotels typically record ADR around RMB 300 to RMB 400, with occupancy rates around 100%. The performance has been even better than usual during COVID-19. Furthermore, innovations in our renovation process have made it possible to complete renovations within 14 days, further reducing costs for the franchisees. We also introduced an innovative new brand, Geli Hotel, that embodies personality and vitality. Geli Hotel is positioned in our mid-tier segment and currently has seven hotels in operation. The road to recovery lies ahead, but it is by no means straight. In a rapidly changing market environment, over the past two years, we have implemented strict cost control measures to improve the operating efficiencies of all brands. All these efforts have enabled us to adapt quickly to changes in our industry and put us in a strong position to grow faster post-COVID-19. Going forward, we will remain highly adaptable to emerging market trends and capture growth opportunities, thanks to our resilient and flexible business model and the experience that our team and franchisees have accumulated while combatting COVID-19. Now, let me turn the call to Megan.

Thank you, Alex. Please turn to Slide 16, which highlights the year-over-year rebound in our operating margins from the impact of COVID-19. Blended ADR increased 4.6% to RMB 170, occupancy rates decreased 7.5% to 69.2%, and the RevPAR decreased 5.6% to RMB 117. We opened 138 new hotels in the fourth quarter, less than planned due to the impact of COVID-19. Moving to Slide 17. At the end of the fourth quarter, we had 4,659 hotels in our operations, 7.4% more than the year before. Sixty-six of these hotels were leased-and-operated, or L&O hotels; and the remaining 4,593 were franchised-and-managed, or F&M, hotels. While the mid-scale segment remains the core of our business, comprising 62.9% of all our hotels, we continued our expansion into the higher-end segment. By the end of the fourth quarter, mid- to upscale and the luxury hotels accounted for 11.9% of the total portfolio, while the economy segment remained stable at 25.2%. As Alex mentioned, we also solidified our already dominant position in Tier 3 and lower cities, where 67.7% of our hotels were located at the end of the quarter. On Slide 18, you can see that we opened 138 hotels in China, compared to 182 in the third quarter of 2021. Three hotels were in the luxury segment, 44 in the mid- to upscale segment, 59 in the mid-scale segment, and 32 in the economy segment. 74.1% of hotels opened in the quarter were in the mid- to upscale and the luxury segment of the market, with 15 in Tier 1 cities, 34 in Tier 2 cities, and the remaining 89 in Tier 3 and lower cities. We closed 105 hotels, with 23 due to noncompliance with our rent and operating standards. The remaining 82 were closed due to property-related issues. We added a net of 33 hotels to our portfolio. Slide 19 shows the trend of our quarterly operating performance. For year-over-year comparison, in the fourth quarter, RevPAR for our L&O hotels increased to RMB 136, while RevPAR for our F&M hotels decreased to RMB 117. ADR for our L&O hotels increased to RMB 224, and ADR for our F&M hotels increased to RMB 168. Occupancy at our L&O hotels decreased to 16.9%, while occupancy at our F&M hotels decreased to 69.5%. Slide 20 highlights the growth in our membership programs, which accounted for most of the 91% in direct sales in the quarter. Individual members grew to 69 million, up from 66 million a year ago; and corporate members grew to 1.9 million, up from 1.7 million a year ago. We have one of the highest percentages of room nights booked by corporate and individual members in the industry.

Thank you, Megan. Please turn to Slide 21. In the fourth quarter, total revenues increased 6.1% year-over-year to RMB 307.4 million. Total revenue for our F&M hotels was RMB 184.7 million, which is a 10.8% decrease year-over-year, while total revenue for our L&O hotels increased 47.7% to RMB 112.4 million. On Slide 22, you can see that total hotel operating costs were RMB 275.1 million, which is a 57.2% year-over-year increase. In the fourth quarter, hotel operating costs were RMB 191.5 million, up 92.3% year-over-year. The increase was mainly attributable to the opening of 29 L&O hotels since the beginning of 2021, resulting in higher rents, higher utilities and consumables, higher staff headcount and compensation, higher depreciation and amortization, and higher ramp-up costs. Excluding the impacts from our newly opened leased-and-operated hotels in 2021, our hotel operating costs decreased by 3.8%. Selling and marketing expenses were RMB 10.6 million, a year-over-year decrease of 56.1%, mainly due to lower advertising expenses. General and administrative expenses were RMB 72.5 million, which is up 42.4% compared with the fourth quarter of 2020. The increase was mainly due to the opening of 29 L&O hotels since the beginning of 2021, the increase in one-time consulting fees for capital markets advice, and increased bad debts during the year of 2021. Excluding the impact from our newly opened L&O hotels and one-time consulting fees, our general and administrative expenses increased by 22.7%. Turning to Slide 23, income from operations was RMB 36 million, down 69.5% year-over-year, with a margin of 11.8%. The decrease was mainly attributable to the operating loss recorded by newly opened L&O hotels during their ramp-up period and also due to COVID-19. If we exclude the impact of newly opened L&O hotels, income from operations for the fourth quarter of 2021 was RMB 138 million, representing a year-over-year increase of 17% with a margin of 44.9%. On the same slide, net income was RMB 28.6 million, with a margin of 9.3%. Adjusted EBITDA decreased by 48.4% to RMB 67.5 million, and the adjusted EBITDA margin decreased to 21.9%. Core net income decreased to RMB 34.8 million, with a margin of 11.3%. These decreases in net income and adjusted EBITDA were also mainly attributable to the increased number of our L&O hotels, both newly opened and in our pipeline. If we exclude the impact of newly opened hotels, our adjusted EBITDA non-GAAP for the fourth quarter was RMB 102.9 million, with a margin of 39.4%. Next, let's take a look at Slide 24. Net income per ADS was RMB 0.25, which is $0.04 in U.S. dollars, and the core net income per ADS, basic and diluted, non-GAAP was RMB 0.34. Let's now take a look at Slide 25. As of December 31, 2021, the company had total cash and cash equivalents, restricted cash, short-term investments, investment in equity securities, and time deposits of RMB 1,235.9 million, compared to RMB 1,192.1 million as of September 30, 2021. The increase from the prior quarter was mainly attributable to drawing down of bank facilities, offset by dividend distributions to the shareholders, acquisition costs for our L&O hotels, and changes in the fair value of equity securities and loans to franchisees. On Slide 26, given the continuing outbreak of COVID-19 in various parts of China, we expect total revenues for the full year of 2022 to grow by 0% to 5% over the 2021 levels. On the next slide, we announced that our Board of Directors has authorized a share repurchase program, through which the company may repurchase up to $20 million over the next 12 months. This concludes our prepared remarks. Operator, we are now ready to begin the Q&A session.

Hi, good morning, everyone. Can you hear me?

Yes, very clearly, Dan. Thank you.

Good morning, Alex, Megan, and Selina. Thank you so much for the presentation. I have three questions, if I may. Can I just ask the first question first? So, my first question was relating to the L&O hotels. I saw that net opening was 26 hotels in 2021. I just want to get a sense of how many of the new L&O hotels are we currently under planning in 2022 and going forward? That was my first question. Thank you.

Thanks, Dan. For 2022, I think we have a pipeline that is yet to be opened. There's going to be six new L&O hotels. These opportunities were identified in 2021 already. And, Dan, we do not plan to add any significant number of L&O hotels in 2022. The reason why we added more L&O hotels in 2021 is due to the chart in Slide 8, which shows a clear trend that every time there is a list of travel restrictions, the demand rebounds while occupancy rates fall. The underlying demand is very strong. We think there is a compensatory consumption behavior. The tourism and travel markets are fundamentally healthy. In the first quarter of 2021, we identified several new opportunities in areas that were traditionally growing slower. By picking up those L&O hotels in those regions, especially in the Southwest and Southeast of China, we were able to accelerate our F&M hotels' growth as well. We do not expect the new variant of COVID to cause major cities to implement travel restrictions during the second half of the year, especially in February and March of 2022. As a result, the performance of L&O hotels did not meet our anticipated numbers, such as the peak we had in the second quarter of 2021. So, that's the rationale behind the increase in L&O hotels in the first quarter of 2021 and our plan for 2022 because we have substantially completed our goal to strengthen our position in traditionally weaker areas of our brands in South and Southwest China.

Thank you. Thank you, Alex. If I may, can I ask, my second question was about hotel closures. Can you remind us what the closure count was for the full year of 2021? I know that it was 105 in the first quarter and how many of those closures were due to a one-off COVID impact, noncompliance, and property use? Should we expect closures in 2022 to be similar to those in 2021? Thank you.

Okay and thank you, Dan. Actually, among all the hotels closed last year, none of them were closed due to COVID-19. Nearly 40% were closed due to property issues. We opened more hotels last year because we have higher standards for the licensing of all our hotels to ensure compliance with our operational standards.

Dan, I will elaborate a little further. The total number of hotel closures is higher. I will ask Selina to find the total number of hotels closed for you shortly. The reason we had several closures was that we had an exploratory approach to increase our hotel operation standards and ensure all our hotels were compliant with the required permits. Consequently, as Selina mentioned, about half of the hotels closed due to not possessing all the relevant permits. Another reason is that prior to the pandemic, we had fewer closures. Some of the aging hotels now do not comply with our current standards, and the pandemic has also led some hotel owners to avoid extending their leases. Thus, we do not expect to close as many hotels in 2022 since we have substantially addressed required permits.

Yes, and Dan, for last year, we closed a total of 403 hotels.

Thank you so much, Alex and Selina. If I may, my last quick question was about the recent nonbinding proposal from GTI regarding the potential acquisition of two fast-food chains in China. Without revealing too many details, how should we consider the synergy with GreenTree's hospitality business and those fast-food chains, if we can get some highlights or thoughts about this proposal, please?

Dan, the special committee is still evaluating this proposal, so at this moment, we don't have any news to share with everyone.

Sure, no problem. Thank you. Thank you, Alex, and the management.

Hi, everyone. Thanks for the presentations. I also have a couple of questions. Just back to your leased-and-owned strategies. Obviously, as you mentioned, you're already at sufficient leased-and-owned. I wanted to get a sense of several things. One, I've seen the RevPAR basically doing better compared to franchisees at RMB 130-something. What would be the break-even RevPAR for the leased-and-owned hotels, and how did the addition of the leased-and-owned hotels support or help you to kind of expand into acquiring more franchisee hotels? I guess that's the first question. I think I have two more follow-ups later on.

I believe the performance typically is 165, but 460 is the break-even for cash flow for the L&O hotels. The second reason is that we are trying to set up model hotels in cities where we didn't have an example of these hotels, thus creating a model hotel in those cities and with our staff. This increased staffing further helps us accelerate growth by showcasing the performance of those L&O hotels to our franchisees. Even some of the L&O hotels we have not fully renovated still have created a very positive influence. As a result, we've been growing our hotel portfolio by more than 20% in all those traditional weak areas. I hope I answered your question.

Actually, I'd like to add more comments. We newly opened 29 L&O hotels in the last two years, most of which opened in the second quarter of 2021. Since that point, our new hotels recorded a book loss of nearly RMB 3,000 each quarter, totaling about RMB 100 million for the full year. However, this book loss includes all the rent we paid for those hotels, whether they are in operation or in our pipeline and under construction. According to our accounting standards, if we exclude the impact of this decline in rental records, our actual losses for these new L&O hotels was less than RMB 70 million.

Understood. Thanks for that. And then my second question, regarding bad debt issues. I guess that must be related to how the franchisees are paying you the tax rate and such. Can you elaborate a bit more on that and quantify what's the percentage of that, and how are you seeing the trend over the last couple of months given the COVID situations?

For our cash flow, you may find our loan to franchisees in the fourth quarter was about RMB 5 million. That's a match back in the account occurring during the first three quarters of last year. Our franchisees are provided support for decorating their hotels, and for this year, most of our franchisees have completed their decoration process. Our maintenance team has assigned several financial institutions to assist our franchisees' loans. That's why you may find many franchisees' loans sharply decreased since the fourth quarter of last year. Regarding the second question on bad debt, a month of bad debt totaled RMB 18 million; half was due to accounts receivable, and half was impairment due to our loans to franchisees.

Great. Thanks for that. And then I guess my last question is back to your guidance that you provided, 0% to 5% year-on-year revenue guidance for the full year. Could you help us understand the breakdown between RevPAR versus your hotel expectations?

For our guidance for the full year of 2022, we expect a positive impact over the year of 2021, but the increase percentage may not be significantly higher due to COVID-19, especially during the first quarter and in April and May. For our assumptions, we believe the second quarter will be the worst season during the full year. For the third quarter, we expect a little bit of recovery but still not good, and until the fourth quarter, we expect performance to be nearly the same as that of 2021. However, the fourth quarter in 2021 was not very good. That's why we expected this trend for our operational performance for the year of 2022. This is not an aggressive forecast for the full year. If COVID-19 is over earlier than we expect, the entire industry may recover much better than our projections.

Great. Thanks a lot, Alex and Selina. Thanks a lot.

Hi. Good morning, Alex and Selina. Just quick questions on the current lockdown situation. I want to get a sense of how many of our hotels are being requisitioned, and are we collecting management fees from them? And secondly, especially for the leased-and-operated hotels, how many of them are being requisitioned, and if those hotels are requisitioned, I assume they are doing relatively well. My ultimate question is how much of a loss, drag or fee from the L&O hotels?

Thanks, Billy. Regarding the number of hotels requisitioned by the government, I believe more than 800 of our hotels in the portfolio are under requisition, approximately 17.3% of our total portfolio. Typically, we do not collect any fees in the past until now from our franchisees. This results in a loss of royalty and management fees for those hotels. The rationale is that our franchisees have faced some hardships, and they can use the hotel as a quarantine of some sort to generate more income primarily from the local government. Consequently, we decided not to collect those fees as a support for our franchisees and the government's pandemic prevention program. Those fees amounted to approximately RMB 30 million or more a year.

For the fourth quarter of last year, due to the resurgence of COVID-19 in some cities of China, we waived about RMB 7 million for our franchisees regarding the ongoing fees and eviction fees. In the first quarter of this year, especially since March and April, we found that more hotels were in quarantine, with about 800 hotels requisitioned as Alex mentioned. For those quarantine hotels, we've waived most of their ongoing fees, and that amount will be much higher, exceeding RMB 25 million.

Roughly the total may be more than RMB 100 million for the royalty fees.

Hey, management, good morning. Can you hear me?

Yes, Don.

I just have one quick question. Sorry, I joined the conference late due to some conflict. I'm wondering if you talked about the share buyback yet. What's our rationale behind it? In the past, we refrained from share buybacks. Now we've announced a $20 million buyback program; I wonder what's the thinking behind this?

The Board authorized this share buyback because we believe that returning some cash to the shareholders through the buyback will strengthen shareholder value. We are confident in our ability to navigate the pandemic and our resilient business model, supporting this decision.

I have a quick thought about the threefold issue. Given that only about 10% of our shares are free for us, this $20 million would translate into around 5% of our total issued shares, which means about 50% of our people. So, any thoughts on this?

We do not know exactly the share buyback price in the market, Don. Therefore, we cannot predict how much percentage we will accumulate in the future.

Understood. Can I have one more quick question? I was wondering if you have noticed a downward change in the rent level for your franchisees who acquired new properties compared to the fourth quarter of last year?

We noticed that in the third and fourth-tier cities, the rent has remained relatively stable. The competition has decreased in obtaining properties. In certain properties, we do see some rent adjustments compared to last year, especially during the second quarter of last year. The sentiment among franchisees regarding new hotels is affected by COVID control measures, leading to cautious investment behavior.

Hi, management. I have a question regarding the competition because we notice that Jinjiang and others are all establishing brands for low-tier cities. For example, Jinjiang has 7 Days, and others have various brands. I was wondering if this will increase competition with our hotels in Tier 3 and Tier 4 cities?

Thanks, Yaren. Absolutely. With more brands from major corporations penetrating all city levels, both layer of competition and fewer hotels opening, the market competition for our brand will increase. However, in lower-tier cities, the support to franchisees is critical. Thus, the business model from design to construction must work cohesively to deliver value. We have accumulated valuable experience in that area. We believe we can demonstrate GreenTree's competitiveness and the value we provide to franchisees. That is the reason we continue to see our hotels and pipeline grow, even during the pandemic. We remain confident in achieving growth, especially in third and fourth-tier cities.

Thanks. Very clear.

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 plans to reach us, please feel free to contact us. Thank you all.

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