GreenTree Hospitality Group Ltd. Q3 FY2023 Earnings Call

Hello, ladies and gentlemen. Thank you for standing by for GreenTree’s Third Quarter 2023 Financial Results Release. 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, MJ. 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 Ms. Ellen Zhao, Financial Director, stepping in for Mr. Bill Zhou, who is not available today. Mr. Xu will present the company’s performance overview for the third quarter of 2023, followed by Ms. Huang and Ms. Zhao, who will discuss business operations, and then Ms. Yang and Ms. Zhao will discuss financials and guidance. They will be available to answer your questions during the Q&A session, which 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 terminology such as may, will, expect, 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 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 filing with the U.S. Securities and Exchange Commission. All information provided, including the forward-looking statements made during this conference call, are current occurrences 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 hello, everyone, and thank you for joining us today. We had a good third quarter with a strong recovery in our hotel business year-over-year as tourism and business travel continued to rebound. RevPAR increased 30.5% year-over-year, reaching as high as 110% of its third quarter of 2019 levels in July and August, with a surge in the number of tourists during the summer vacation. The pace of recovery of RevPAR slowed slightly in September but remained stable. We will continue to implement our long-term strategic development plan, focused on helping franchisees to maintain high-quality service and operation and expand our hotel network and the sales channel, provide stable operating profitability and maintain long-term stable growth. Compared with the third quarter of 2022, hotel RevPAR was RMB 156, up 30.5%. And the restaurant ADS, that is average daily sales per store, was RMB 6,548, up 7.4%. Total revenues were RMB 460.9 million, up 15.3%. The increase was partially due to the recovery in RevPAR. The increase in the number of hotels and the increase in the ADS offset by the closure of 85 restaurants over the past 12 months. Income from operations increased to RMB 137.8 million with a margin of 29.9%. Net income was RMB 117.4 million with a margin of 25.5%. Adjusted EBITDA, that’s non-GAAP was RMB 173.4 million, that’s up 215% with a margin of 37.6%. Core net income, that’s non-GAAP, was RMB 127.2 million with a margin of 27.6%. Cash provided by operating activities was RMB 154.8 million. Operating performance was great. RevPAR was RMB 156. At the bottom of the slide, you can see the weekly RevPAR performance in the third quarter of 2023 compared with 2019. RevPAR gradually recovered to more than 110% of its prepandemic levels in July and August, then slowed down gradually in early September. During the mid-autumn festival and the National Day, we ushered in a new round of development and growth. In our hotel business, we further expanded into the mid- to upscale segment and increased our penetration in Tier 3 and the lower cities in South China. We continue to grow our mid-to-upscale segment with 455 hotels, that is 10.9% of our total portfolio, at the end of the quarter, up from only 50 in 2017. While the mid-scale segment remains the core of our hotel business with 70.8%, we continue our expansion into the higher-end segments. The economy segment remained stable at 18.3%. Over the past 5 years, most of our new hotels have been in China’s driving Tier 3 and the lower cities. As we pursue greater penetration in Tier 3 and the lower cities, 73.7% of hotels in our current pipelines are in such cities and we will further capitalize on the substantial opportunities in these locations. We continued to focus on increasing profitability in our restaurant business. We closed unprofitable stores, increased the proportion of franchise and managed restaurants, and expanded the number of street stores. During the third quarter of 2023, we closed 10 restaurants in areas of decreasing economic activities, helping improve profitability. You can see the growth in the proportion of our franchise and managed restaurants since the acquisition of Da Niang Dumplings and Bellagio during the first quarter of 2023. We opened the sixth F&M restaurant in the third quarter of 2023. Most of our restaurants are currently in shopping malls. However, we believe there is substantial potential for street stores, and we intend to grow this segment.

Thank you, Alex. Please turn to Slide 18 to start reviewing the operating and financial highlights. Slide 18 shows the trend in our quarterly operating performance. In the third quarter of 2023, RevPAR for our L&O hotels increased to RMB 212. RevPAR for our F&M hotels increased to RMB 155. ADR for our L&O hotels increased to RMB 268 and ADR for our F&M hotels increased to RMB 190. Occupancy at our L&O hotels increased to 79% and occupancy at our F&M hotels increased to 81.3%. Slide 19 highlights the growth in our membership programs, which accounted for most of our direct sales. Individual memberships grew to 88 million, up from 77 million a year ago. And corporate membership grew to 2.02 million, up from 1.92 million a year ago. In the restaurant business, the number of individual members grew to 2.67 million, up 1.6% year-over-year. ADS increased 7.4% to RMB 6,548 in the third quarter of 2023 compared to 1 year before. With that, I will pass the call over to our CFO, Selina Yang.

First, I will review our hotel business. In the third quarter, total hotel revenues increased 40.4% year-over-year to RMB 339.1 million. The increase was primarily due to the recovery in RevPAR and the increase in the number of hotels. Total revenues from F&M hotels were RMB 186 million, up 20.8% year-over-year, while total revenues from L&O hotels increased 83.1% to RMB 151.8 million. Total hotel operating costs and expenses decreased 14.7% year-over-year to RMB 212.4 million and total hotel operating costs and expenses decreased 0.5% compared to the second quarter. Operating costs increased 12.1% year-over-year, mainly due to higher personnel costs, higher consumables, and higher utilities as business rebounded, as well as higher depreciation and amortization with an increase in assets, partially offset by the consolidation of Argyle and Urban. Operating costs increased 6.5% compared to the second quarter of this year. Selling and marketing expenses were RMB 14.3 million, a year-over-year increase of 24.9%, mainly attributable to higher sales channel commissions and higher sales staff salaries. General and administrative expenses were RMB 26.7 million, down 50.9% compared with the same quarter of last year, primarily due to lower bad debt, lower staff-related expenses, and lower consulting fees. Turning to Slide 23, income from hotel operations increased from RMB 1.3 million to RMB 127.5 million year-over-year. Net income of hotels trended positive year-over-year at RMB 108.5 million. Adjusted EBITDA increased 221.1% to RMB 164.3 million. Core net income increased from RMB 5.4 million to RMB 118.1 million year-over-year.

In the third quarter of 2023, total restaurant revenues were RMB 121.8 million. The revenue breakdown for F&M restaurants and L&O restaurants shows total operating costs and expenses decreased 29.6% year-over-year to RMB 111.8 million and decreased 2.6% sequentially. Income from restaurant operations was RMB 10.3 million. Net income was RMB 8.8 million. Adjusted EBITDA increased 134.4% to RMB 9.1 million year-over-year. Core net income was RMB 9.1 million. Next, Selina, please introduce the profitability of our group.

Group net income per ADS, basic and diluted, was RMB 1.15. Group core net income per ADS, basic and diluted non-GAAP, was RMB 1.25. As of September 30, 2023, the company had total cash and cash equivalents, restricted cash, short-term investments, investments, equity securities, and time deposits of RMB 1,331.4 million compared to RMB 1,440.1 million as of June 30, 2023. The decrease was primarily due to repayment of bank loans and investment in property, partially offset by cash from operating activities and repayments from franchisees. Based on our performance in the first 9 months of this year, we revised our full-year 2023 guidance for the total revenues of our organic hotels upwards. We now expect them to grow 36% to 38% year-over-year. We expect total combined revenues from our restaurant and organic hotel business for the full year of 2023 to grow 17% to 19% over the 2022 levels, reflecting the impact of the closure of restaurants. Finally, a word about our share repurchase program. In October this year, the company repurchased 554,158 of its ADS from a single investor at a price of USD 4.40 per ADS, for a total consideration of USD 2,438,295.20 in a private negotiated transaction. The repurchase was made under the auspices of the company’s share repurchase program for a total of USD 10 million authorized by its Board of Directors for 2 years on October 13, 2023. This concludes our prepared remarks. We are now ready to begin the Q&A session.

Today’s first question comes from Dan Xu with Morgan Stanley.

Thank you for the presentation, Alex and management. It’s good to hear from you again. I have 2 questions. Maybe let me brief my first question. My first question is about RevPAR outlook. From Slide 7, I observed that since the beginning of mid-autumn festival, there was a very linear decline in terms of the RevPAR as a percentage to 2019. And I think by the beginning of November, it went to around 95%, which was back to, I think, April level. I’m just wondering, is this what was happening in the beginning of November? Was it due to a low season or weakness of business? Was it due to timing calendar differences? And what is the management’s outlook for the remaining of the fourth quarter? And possibly, if you can, any outlook for 2024, please?

Thank you, Dan. Thank you for your question. For the first question about the RevPAR comparison for the national holiday, actually, this year, we have 8 days for the national holiday. And for the year of 2019, we had 7 days. So when we compare the RevPAR with the year 2019, we compared the first very beginning of the holiday here to the last day and also compared since the third day of the holiday period. So when we compare the third date of the holiday period end, we find our RevPAR increased by 20% over the year of 2019. But if we compare the whole period, that means, from the first day till the end, we find the increase over 2019 is about 7%.

How about for November? Early November, it seems that it has weakened a little bit to below 100% for the weekly data. Do you think that was a one-off? Or was there any calendar event also going on just like Golden Week?

Dan, and more words about your first question. So the RevPAR for October compared with 2019, that is a 5% decrease compared with 2019. So for the second question, why the whole period for the national holiday increase is less than 10% because we observed the first holiday of this year, and that is less than that first day of 2019.

Let me continue to add on the comments, Dan, to Selina’s comments. After the national holidays, we typically experience a slowdown period. And then the business travels and work will resume before the end of the year. But in November, we do see a slightly downward trend on the RevPAR. Traditionally, our business model has been more resilient to the fluctuations of the hotel market. So we will observe and see whether before the year-end there is going to be a major shift in the upward trend. But at this moment, our November trend shows a slight figure below the 2019 level. So that is our projection at this moment because we began with a relatively higher occupancy. So we may be able to adjust our pricing structure to offset this downward pressure. Regarding 2024, we believe the economic recovery will continue, but it may be uncertain. Our business model, in the past, has dealt with future changes, and we will report in the next quarter what we observed for the early part of next year.

My last question is regarding your share repurchase program or share repurchase transaction. Can you share a little bit more of the details or rationale on this transaction in October? We know that our trading volume, daily trading volume and liquidity has been relatively lower compared to our peers. So I’m just wondering, is this a one-off transaction to just one-time? Or does the company actively seek from investors to do share repurchases in this sort of transaction? And is there any concern on our liquidity from the management’s perspective?

Regarding, Dan, the purchase of this privately negotiated transaction. Since it is not an open market transaction, it hasn’t impacted the daily volume of our hotel ADS. We have a relatively lower volume because the number of floating shares is much smaller. Besides, our shares are also concentrated, and we are making efforts to increase the trading volume of the shares. The Board believes the private investors that the block sales would benefit all shareholders. That’s all I can share with you.

Today’s next question comes from Bruce Mi with UBS.

I actually have 2 questions. The first one is regarding the hotel opening. Could you please share with us about your hotel opening plan for 2024 and your long-term hotel operation target? The second question is still on RevPAR. We have observed very strong leisure demand in the summer travel season and also during the national day, The Golden Week. Some investors worry that it’s perhaps a one-off pent-up demand after China’s reopening. So do you worry that this leisure travel demand could be sustainable next year? What is your RevPAR assumption for 2024 and Q1 next year?

Thank you for your question. For this year, we have shared the number of signed contracts last time, that is 600 towards the end of this year. We are likely to open more than 400 hotels this year. For the next year, we plan to sign more than 650, that is about 650 to 680 hotels in 2024, and we are likely to open 450 to 470 hotels next year. That means about a 12% to 15% increase from this year.

Regarding the RevPAR projection, as we discussed earlier, we believe the pressure is there. We are trying to maintain the same level as 2019 in the fourth quarter of 2023. We do not see a significant increase like in the third quarter. That was driven by leisure tourism. Regarding next year, our hotels primarily target the affordable value-driven market. We do not believe our system-wide RevPAR will be significantly impacted. We still expect continued demand in the leisure tourism segment, particularly among retirees. We also anticipate a gradual recovery of economic activities resulting in more business travelers. However, we do not expect the same strength in leisure travel as last summer. Our assumption is to maintain the same store RevPAR and expect upward movement in system-wide RevPAR as we open more mid- to upscale hotels and close underperforming locations.

Today’s next question comes from Simon Cheung with Goldman Sachs.

I have 2 questions. One is just on the hotel opening numbers that Selina was sharing. Is that 650 or 680, and were the other 450 and 470 gross or net for next year and this year? Can you give us a sense of your assumption for the fourth quarter, what sort of RevPAR you are expecting?

The 650 to 680, that’s the signing up of the hotels. The 450 to 470 refers to the opening of hotels. That’s what I wanted to clarify. Regarding the next quarter’s RevPAR, we continue to project to achieve at least the same level as that of 2019 in the fourth quarter of 2023.

Regarding the restaurant margin, it was better than before for this quarter. The net income of the restaurant was nearly RMB 10 million, that’s much better than before for several reasons: seasonality and recovery of the industry, performance of restaurants was better than before, we closed 85 unprofitable restaurant stores over the past 12 months, which was better than before. We changed the franchise model and began to open more street stores. For the fourth quarter, we can see the profitability with a slightly downward trend compared to the third quarter.

We projected the future margin to continue improving, and we hope to reach the previous margin level. We’ll focus on product and service quality improvement. The market competition has also led us to lower some fees for existing franchisees to assist them and offset some previous obligations while maintaining our own healthy profit margin. The hotel sector is full of opportunities, and we need to work hard to achieve optimal margin moving forward.

Seeing no further questions, this concludes our question-and-answer session. I would like to turn the call back to Selina Yang for closing remarks.

Before the operator ends, I would like to address an earlier question regarding liquidity, which I forgot to answer. We only discussed the privately negotiated block sales in the stock repurchase. Our liquidity is fine; we have implemented the share repurchase program due to the belief that the share price is undervalued. After becoming public, we made some mergers and acquisitions that had varied performance due to several factors, especially during the pandemic. We’ll continue to reassure investors while improving core efficiencies and continuous growth. I’m confident in our potential in the next three years with our new hotel openings in strategic locations.

Thank you, Alex. On behalf of our entire GreenTree management team, we thank you for your interest in GreenTree and your participation in today’s call. If you require any further information or have plans to reach us, please feel free to contact us. This concludes today’s call. Thank you.

Thank you, all.

The conference has now concluded. Thank you for your participation. You may now disconnect your lines.