Hello, ladies and gentlemen. Thank you for standing by for GreenTree's Fourth Quarter and Fiscal Year of 2023 Earnings Conference Call. Please note this event is being recorded. I would now like to hand your meeting over to your host today, Rene Vanguestaine with Christensen. Please go ahead.

Thank you, Darcy. Hello, everyone, and thank you for joining us. GreenTree's earnings release will be distributed shortly and will be available on our IR website at ir.998.com as well as on PR Newswire services. We have 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. Mr. Xu will present the company's performance overview of the fourth quarter of 2023, followed by Ms. Zhao, who will discuss restaurant business operations, and Ms. Yang and Ms. Zhao 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 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 and stable fourth quarter in our hotel business and continued to make progress in restructuring our restaurant business. Hotel RevPAR increased 23.3% year-over-year, reaching 110% of its fourth quarter of 2019 level during the October national holiday. Restaurant average daily sales were up 14% year-over-year. We continue to streamline our hotel and restaurant operations to increase efficiency and quality. We are working on optimizing our products and service standards to further improve our brand identity for each of our hotel brands. In our restaurant business, we are focusing on growing our network of franchisees as we expand the number of street stores while reducing our footprint in shopping malls and supermarkets. Now please turn to Slide 5. Compared with the fourth quarter of 2022, hotel RevPAR was RMB 128, up 23.3%, and the restaurant ADS was RMB 5,433, up 14%. Total revenues were RMB 372.2 million, up 3.2%. Hotel revenues reached RMB 289.6 million, up 21.7%. The increase in total hotel revenues was partially due to the continued improvement in RevPAR and the increase in the number of hotels. Income from operations increased to RMB 23.1 million with a margin of 6.2%. Adjusted income from operations, excluding other general expenses, which include the provisions for trademark especially due to the acquisition of the restaurant business, loan receivable related to franchisee loans and impairment of assets, increased to RMB 99.2 million with a margin of 26.7%. Net income was RMB 7.4 million with a margin of 2%. Adjusted EBITDA as non-GAAP was RMB 161.3 million. That's up 2.1% with a margin of 31.3%. Slide 6 shows detailed numbers for total revenue, income from operations, net income and adjusted EBITDA. On Slide 7, RevPAR was RMB 128. At the bottom of the slide, you can see the weekly RevPAR performance in the fourth quarter compared with 2019. RevPAR during the October national holiday was 110% of its prepandemic levels but trended down for the rest of the quarter to the end of the year even compared with 2019. Slide 8 shows the trend in our quarterly operating performance. In the fourth quarter compared to a year ago, RevPAR for our L&O hotels increased to RMB 161. RevPAR for our F&M hotels increased to RMB 127. ADR for our L&O hotels increased to RMB 241, and ADR for our F&M hotels increased to RMB 175. Occupancy at our L&O hotels increased to 72.5% and at our F&M hotels increased to 66.9%. Slide 9 highlights the growth in our membership programs, which accounted for most of our direct sales. Individual memberships grew to 91 million, up from 78 million a year ago, and corporate memberships grew to 2.05 million, up from 1.94 million a year ago. Slide 10 shows the operating performance of restaurants with ADS up 14% year-over-year at RMB 5,433 but down sequentially due to seasonality. Starting with Slide 12, I will review our strategic execution across our businesses. In our hotel business, we further expanded in the mid-to-upscale segment and increased our penetration in Tier 3 cities and lower cities. As you can see on Slide 13, we continue to grow our mid-to-upscale segment with 474 hotels. That's 11.2% of our total portfolio at the end of the quarter. While the mid-scale segment remains the core of our hotel business with 70.2%, we continue our expansion into the higher-end segment. The economic segment remained stable at 18.6%. Please turn to Slide 14. We continued to expand in Tier 3 and lower cities, and 73.5% of our hotels in our current pipelines are in such cities, and we will further capitalize on the substantial opportunities in such locations. On Slide 15, we continue to focus on increased profitability in our restaurant business. We closed unprofitable stores, mostly in shopping malls and supermarkets; increased the proportion of franchised and managed restaurants; and expanded the number of street stores. Next, Selina Yang and Ellen Zhao will review operating and financial highlights.

Thank you, Alex. Please turn to Slide 17. In the fourth quarter, total revenues increased 3.2% year-over-year to RMB 372.2 million. The increase was primarily due to the continued improvement in RevPAR and the increase in the number of hotels. Total hotel revenues increased 21.7% to RMB 289.6 million compared to the fourth quarter of 2022. Total revenues from F&M hotels were RMB 162.9 million, up 6.5% year-over-year. While total revenues from L&O hotels increased 48.9% to RMB 125.5 million. On Slide 18, total hotel operating costs and expenses increased 9% year-over-year to RMB 252.2 million. Excluding other general expenses consisting of provisions for trademarks, especially due to the acquisition of the restaurant business, loan receivables related to franchisee loans and impairment of assets, our total hotel operating costs and expenses increased 3.1% year-over-year. Among the total hotel operating costs, operating costs increased 7.6% to RMB 154.6 million compared to the fourth quarter of 2022. The increase was mainly due to higher consumables and higher cost of general managers of franchise-managed hotels due to the increase of our F&M hotels and partially offset by lower utilities. Selling and marketing expenses were RMB 8.3 million, a year-over-year increase of only 0.9%. G&A expenses were RMB 49.7 million, down 12.5% compared with the same quarter of 2022. The decrease was mainly due to lower staff-related expenses and lower bad debt. Turning to Slide 19, income from hotel operations increased from RMB 13.3 million to RMB 47.4 million year-over-year. Net income of hotels was RMB 21 million compared to RMB 7.5 million in the fourth quarter of 2022. Adjusted EBITDA increased 82.8% to RMB 107.7 million, and core net income increased from RMB 47.8 million to RMB 61.7 million year-over-year. Next, let me turn the call over to Ellen, the Financial Director of our restaurant business.

Please turn to Slide 20. In the fourth quarter, total restaurant revenues were RMB 87.7 million, a 29.2% year-over-year decrease mainly due to the closure of L&O stores and partially offset by an increase in ADS. You can also see the revenue breakdown for F&M restaurants and L&O restaurants. On Slide 21, total operating costs and expenses decreased 16.7% year-over-year to RMB 118.1 million. You can also observe the downtrend in material cost, personnel costs, and rents. Turning to Slide 22, loss from restaurant operations was RMB 29 million. Net loss was RMB 18.2 million. Adjusted EBITDA increased to RMB 4 million year-over-year. Core net income was RMB 21.7 million. Next, Selina will review the profitability of our group.

Thank you. Please turn to Slide 23. Group net income per ADS that's basic and diluted was RMB 0.11. Group core net income per ADS that's basic and diluted non-GAAP was RMB 0.87. Let's now take a look at Slide 24. As of December 31, 2023, the company had total cash and cash equivalents, restricted cash, short-term investments, investments in equity securities and time deposits of RMB 1,377.1 million. That's compared to RMB 1,331.4 million as of September 30, 2023. The minor decrease was primarily due to investment in property and repurchase of ordinary shares, partially offset by bank loans and repayment from our franchisees. On Slide 25, for the year of 2024, we expect total revenues of our organic hotels to grow 7% to 12% year-over-year, and total combined revenues from our restaurant and organic hotel business to grow 3% to 5% year-over-year. This concludes our prepared remarks. Operator, we are now ready to begin the Q&A session. Thank you.

Your first question comes from Dan Xu from Morgan Stanley.

Congratulations on the fourth quarter results and great job narrowing the losses in the restaurant business. I haven't had a chance to thoroughly review the results yet, but I noticed the revenue guidance that Selina mentioned. I wanted to ask about the full year guidance for 2024, which is set at 7% to 12% for the hotel business. What factors are we considering in terms of RevPAR and hotel openings? Additionally, what is the plan for our hotel openings in 2024? That's my question.

Okay. Thanks, Dan. The 7% to 12% hotel revenue increase consists of the following factors. We expect to continue the improvement of the overall RevPAR but only slightly from 2023. So, that's around 2% or so in RevPAR growth. The balance of the growth is roughly 10% driven by hotel number growth because we plan about 500 hotel openings this year. Selina, correct me if I'm incorrect in that number. Additionally, we will have several hotels in the transition period; that is, we have a relatively older portfolio compared with some of the new competitor groups. As noted last quarter, we removed many of our hotels from operation that required renovations following the pandemic, which reduced our overall capacity. Combined, this leads us to the 7% to 12% total revenue growth assessment. To further elaborate, why only 2% growth in RevPAR compared to 2023, rather than a more aggressive approach? Last year, we saw RevPAR increase much stronger than in 2022 due to post-pandemic demand and pent-up interest. In Tier 3 cities, where we have a larger percentage of our hotels, RevPAR growth increased in the high single digits compared to 15% to 13% the previous years. We expect that Tier 3 RevPAR growth will be relatively flat in 2024 compared to 2023. There will also be more seasonality; for instance, during the holiday season and weekends, we observe sharp increases in RevPAR, but they trend down afterward. Overall, we anticipate a slight upward trend compared to 2023. We will continue to introduce new products with better branding tailored for family and leisure experiences. Therefore, we expect a stronger increase in RevPAR in the coming years after we complete this transition period. So, that's our assessment for you.

Can I follow up with a question regarding RevPAR? I noticed that the fourth quarter RevPAR growth compared to 2019 was mainly due to ADR, while occupancy, although improved, remains about 10% below 2019 levels, and 6 percentage points below the fourth quarter of 2019. Alex, for 2024, looking at your weekly data, we are currently around 90% of 2019 figures as of March. Are you observing an increase in occupancy this year compared to 2023, but with ADR remaining flat or declining, resulting in a 2% overall increase? Or is it more accurate to say both occupancy and ADR are growing, contributing to that 2% increase? That's my final question.

Okay. Thanks, Dan. The two factors are interrelated. If we lower the ADR, then occupancy will increase. So on balance, there is an optimal rate; however, we do not know what the optimum strategy is for achieving the optimal RevPAR increase. Nevertheless, we plan to have a slight increase in the ADR, while we expect occupancy to remain relatively stable. We would like to enhance our run rates. Overall, we expect that most of the growth will result from ADR. Once ADR reaches a certain level, we will then aim to further increase occupancy. Some of the occupancy issues are attributed to seasonality and fluctuations in travel patterns towards the end of 2023 into 2024. We are noticing a higher trend in holiday, leisure, and family travel, diverging from constant demand for business travel, which has resulted in a blended lower occupancy. Our internal projections for RevPAR growth will be primarily due to increased ADR.

We have a follow-up question from Dan Xu from Morgan Stanley.

I have another follow-up question on hotel openings. Just wondering, for management, what's the plan for your leased hotel, the L&O hotels for 2024? Do we still have hotels in the pipeline? And are we still continuing to build net additions in leased and owned hotels?

Okay. Dan, as we previously stated, we will only develop L&O hotels in key areas like Tier 1 markets and transportation hubs, focusing on showcase hotels. Currently, we plan to open 1 to 2 showcase L&O hotels for our flagship brands, such as GreenTree and GreenTree Inn, which will be in single-digit numbers. We are evaluating and will continue to prioritize growth in our franchised and managed hotels, which represent our core competitiveness and strength. Let me elaborate on our overall business strategy in light of this question. 2023 has been a transitional year for us. In the past, we have explored potential acquisitions and growth through various approaches, but with the COVID pandemic aftermath, we are refocusing on traditional and fundamental hotel operations and management. Our objective is to deliver consistent service and products to our customers while upgrading our aging portfolio. Consequently, we are allowing franchisees 6 months to 1 year to renovate their properties to meet our upgraded standards, which we believe will significantly improve ADR and occupancy and thus RevPAR. We are also focused on enhancing our team’s proficiency, efficiency, and customer service capabilities while upgrading our technology platform to incorporate new features that improve our employees' ability to serve customers. Additionally, our restaurant business has two strong brands, Bellagio and Da Niang Dumplings, which have been able to withstand competition for over 20 years. We aim to leverage our core experience to expand these brands in the franchised and managed models. Gradually, we are witnessing positive trends which were not as evident last year, particularly as leisure and family dining becomes a more essential part of hotel experiences. We see synergies between our hotels and restaurants providing great opportunities. Our focus will continue to be on fundamentals to ensure robust hotel performance, and customer satisfaction scores are improving.

Your next question comes from Simon Cheung from Goldman Sachs.

I have three quick questions. On your Slide 8, you outlined the performance of leased, owned, and franchised RevPAR individually. I noticed that the performance of leased and owned restaurants is much stronger than that of the franchised ones. Alex, when you mentioned that you are modeling or expecting a 2% RevPAR growth, I wonder if the increasing franchise exposure and the weaker performance of the franchised RevPAR could limit your overall RevPAR growth by 2 percentage points. Are you seeing any potential for improvement in the franchised hotels based on your observations? I want to better understand how you view the different segments and the overall equity. That's my first question.

Okay. Great questions. I will leave the third question to Selina about the restaurant business revenue change because the restaurant revenue has sharply dropped due to the closure of many owned, leased, and operated restaurants as a result of decreased traffic to shopping malls and supermarkets. Although we have decreased the number of directly owned restaurants and increased the number of franchised and managed restaurants, the revenue impact from closing our owned restaurants has been significant. Regarding the first question, the RevPAR trend for leased and operated hotels tends to perform better due to the service and offering enhancements we make at showcase hotels. Consequently, this drives higher ADR. However, we expect similar trends moving forward as many franchised hotels are undergoing renovations. Once renovations conclude, we anticipate that ADR for franchised hotels will rise similarly. Presently, our strategy focuses on ADR-driven growth because we have the option to lower prices slightly to increase occupancy but prefer to enhance the quality of our product to elevate ADR. For the next couple of years, we expect stable growth in both L&O and F&M hotels. Another factor is that the share of L&O hotels undergoing renovations is higher compared to F&M hotels, which also supports increased ADR. Regarding the second question about synergy and margins, we are experimenting with integrating restaurants and hotels, such as providing full-day meal options, which significantly increased revenue at our Jingan hotels in Shanghai. However, introducing a larger staff into hotels requires new operating systems and standards, which we are testing in second-tier cities. We'll report back on our findings and results from these initiatives in the future. Right now, we focus on fundamental improvements while also being cautious about the impact of stronger restaurant competition on stable hotel operations.

Simon, could you please repeat the third question, which we think had to do with L&O hotels versus F&M going forward?

My third question is actually more related to the number of hotels you're running at slightly over 4,000 and restaurant count over 200. I did hear that you have a hotel target add of 500 for this year, but do you have a mid-term target for both segments?

Okay. Our ambition and plan are always to build on strong fundamentals before developing a growth strategy that is compatible with our current resources. Internally, we aim to grow our hotel numbers by 10% to 15% per year over the next 3 to 5 years. Once we establish a stronger foundation and profitable business model, we may further accelerate growth. We learned significant lessons from past acquisitions that have resulted in legacy issues consuming our internal resources as we restructure these operations. In the restaurant sector, we are still discovering patterns and strategies for success, including exploring community-based street-front stores and high-traffic areas like train and subway stations. Following the completion of our restructuring efforts, we anticipate a potential for accelerated growth within both business segments.

Sorry, I haven't looked at the numbers yet, but then the restaurant, are you done with all the closures? Do you feel that your restaurant count is steady for the coming quarters?

That is correct. Currently, our restaurant reorganization is substantially completed. We can now shift focus from closing unprofitable locations to growing our franchise and more profitable stores. The legacy challenges we faced in the restaurant business primarily arose from locations with higher rents and gradually reducing traffic, which made profitability difficult despite our efforts. We've successfully closed many of these less sustainable restaurants, enabling us to concentrate on developing more promising locations. Moving forward, we expect gradual growth in our restaurant count, but it will be initially slow as our systems are still being established and we navigate a competitive landscape in the restaurant sector.

If I may just get a very final follow-up question, just you mentioned the number of hotels that you're planning for upgrades. So out of your 4,000 aged hotels, how many are you planning to upgrade, and how receptive are franchisees to making those upgrades?

Currently, about half of our hotels are undergoing renovations. We expect to complete upgrades for another half over the next 2 to 3 years.

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

In closing, on behalf of the entire GreenTree management team, we thank you for your interest in our company 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. Thank you, everybody.

Thank you.

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