GreenTree Hospitality Group Ltd. Q1 FY2024 Earnings Call

Good day, and welcome to the GreenTree Hospitality Group First Quarter 2024 Financial Results Conference Call. All participants will be in a listen-only mode. Please note, this event is being recorded. I would now like to turn the conference over to Rene Vanguestaine. Please go ahead.

Thank you, everyone, for joining us. GreenTree's earnings release was distributed earlier today and is available on our IR website 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; and Ms. Ellen Zhao, Financial Director. Mr. Xu will present the company's performance overview for the first quarter of 2024, 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 follows. Before we begin, I would like to remind you that this conference call contains forward-looking statements within the meaning 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. Hello, everyone, and thank you for joining us today. Overall, we delivered some significant improvements in the first quarter with substantial increases in both operating and net income. Conditions in our hotel businesses were mixed as consumer behavior continued to evolve in a more competitive environment, while we are continuously upgrading a large portion of hotels in our portfolio. Against this scenario, we managed to deliver an 8.8% revenue increase year-over-year and a 21.1% increase in hotel adjusted EBITDA. We believe our business metrics will improve as we are completing these upgrades and open more new hotels. We made further progress in the repositioning of our restaurant business with an absolute focus on robust profitability. We grew our network of franchisees as we further expanded the number of street stores. We have completed the closure of the restaurants in the supermarket-anchored regional shopping centers due to less foot traffic to our stores. We have now completed this phase, and our forward strategy is focused on store count growth again in regions where we have strong brand recognition. Please turn to Slide 5. Compared with the first quarter of 2023, Hotel RevPAR was RMB114, down 4.6%, and the Restaurant ADS, average daily sales per store, was RMB5,525, down 8.7%. Total revenues were RMB352.2 million, down 7.1%. Hotel revenue reached RMB274.8 million, up 8.8%, attributable to the recovery in the RevPAR of our L&O hotels, and Restaurant revenue decreased to RMB77.7 million, as we continued to execute our strategy to reposition this business. Income from operations increased to RMB72.2 million, with a margin of 20.5%. Net income was RMB57.3 million, up 76%, with a margin of 16.3%. Adjusted EBITDA was RMB109.4 million, up 17.2%, with a margin of 31.1%. Slide 6 shows detailed numbers for total revenues, income from operations, net income, and adjusted EBITDA. Slide 7 shows the trend in our quarterly operating performance. In the first quarter, compared to a year ago, RevPAR for our L&O hotels increased by 8.9% to RMB157. However, RevPAR for our F&M hotels decreased by 4.9% to RMB113. ADR for our L&O hotels increased by 2.8% to RMB235, and ADR for F&M hotels increased by 0.7% to RMB167. Occupancy at our L&O hotels increased by 3.7% to 66.6%, and occupancy at our F&M hotels decreased by 4% to 67.9%. Slide 8 highlights the growth in our membership programs, which accounted for most of our direct sales. Individual memberships grew to 93 million, up from 78 million a year ago, and the corporate memberships grew to 2.07 million, up from 1.95 million a year ago. Slide 9 shows the operating performance of Restaurants, with ADS down 8.7% year-over-year at RMB5,525, but up sequentially, that's mainly due to seasonality. Starting with Slide 11, I will review the results of 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 and the lower cities in South China. As you can see on Slide 12, we continue to grow our mid-to-upscale segment with 498 hotels, which is 11.7% of our total portfolio at the end of the quarter. While the midscale segment remains the core of our Hotel business at 69.1%, the economy segment ended the quarter at 19.2%. Please turn to Slide 13. We continued to expand in Tier 3 and the lower cities, with 71.8% of hotels in our current pipeline located in such cities, and we will further capitalize on the substantial opportunities in these locations. On Slide 14, we focused on increasing the profitability of our Restaurant businesses. Our strategy is three-pronged: close unprofitable L&O stores, increase the proportion of F&M stores, and expand the number of street stores. Franchised and managed restaurants accounted for 85.4% at the end of the quarter compared to 54.5% a year ago, and street stores accounted for 44.3% compared to 31% a year ago. Next, Selina Yang and Ellen Zhao will review the operating and financial highlights.

Thank you, Alex. Please turn to Slide 16. In the first quarter, total Hotel revenues increased 8.8% to RMB274.8 million compared to the first quarter of 2023. The increase was primarily due to the continued improvement in L&O hotels RevPAR, more newly opened L&O hotels, and offset by the decrease in F&M hotels RevPAR. Total revenues from L&O hotels were RMB122.5 million, up 49.3% year-over-year, while total revenues from F&M hotels decreased 10.8% to RMB151.2 million. On Slide 17, total Hotel operating costs and expenses increased 1.7% year-over-year to RMB206.7 million. Among the total Hotel operating costs, operating costs increased 8.9% to RMB146.2 million year-over-year, which was mainly attributable to higher utilities costs due to the improvement in L&O hotels RevPAR and higher rental and personnel costs due to the increase in the number of L&O hotels and F&M hotels. Selling and marketing expenses were RMB15.5 million, a year-over-year increase of RMB4.4 million, mainly due to the increase in business development and sales staff numbers. General and administrative expenses were RMB38.5 million, down 16.5% compared with the same quarter of last year. The decrease was mainly due to the reversal of bad debt resulting from the decrease in accounts receivable. Turning to Slide 18, thanks to the growth in revenues and the control of costs and expenses, our Hotel business improved its profitability in the first quarter. Income from Hotel operations increased from RMB52 million to RMB70.4 million year-over-year. Net income of Hotels was RMB57.3 million compared to RMB35 million in the first quarter of last year. Adjusted EBITDA increased 21.1% to RMB102.4 million, and core net income increased from RMB53 million to RMB61 million year-over-year. Next, let me turn the call over to Ellen, the Financial Director of our Restaurant Business.

Please turn to Slide 19. In the first quarter, we continued to reposition our Restaurant business, closing unprofitable L&O stores and opening more franchised and managed stores. Total Restaurant revenues were RMB77.7 million, down 38.9% year-over-year, and total Restaurant costs and expenses decreased by 14.4% year-over-year to RMB75.8 million. And on Slide 20, these measures led to improved profitability. Income from Restaurants operations was RMB1.9 million. Adjusted EBITDA increased 3.7% to RMB7.0 million year-over-year. Net profit and core net income turned from loss to breakeven. Next, Selina will review the profitability of our group.

Please turn to Slide 21. Thanks to the continuous and stable growth in revenue of the Hotel segment and better performance in the Restaurant segment, our group net income per ADS, basic and diluted, increased by 63.2% to RMB0.58, and core net income per ADS, basic and diluted non-GAAP, increased by 22.3% to RMB0.60. Let's now take a look at Slide 22. As of March 31, 2024, the company had total cash and cash equivalents, restricted cash, short-term investments, investments in equity securities and time deposits of RMB1,517.3 million compared to RMB1,337.1 million as of the end of the first quarter last year. The increase was mainly due to continued improvement in our operating performance, drawing down of bank facilities, and repayment from our franchisees. On Slide 23, based on our performance in the first five months of this year, we maintained our previous revenue guidance for the Hotel business, expecting to grow 7% to 12% year-over-year. We are withdrawing our guidance for the Restaurant business given the significant revenue unpredictability resulting from its strategic repositioning. This concludes our prepared remarks. Operator, we are now ready to begin the Q&A session. Thank you.

We will now begin the question-and-answer session. The first question today comes from Nan Fang with QX Capital. Please go ahead.

Thank you, management, for taking my question. The first question is about what's the dividend policy of GreenTree? Does the company have plans to distribute a special dividend in the future? And the second one is, can you elaborate on the strategy regarding our restaurant opening? Thank you.

Okay. I'll take this question, Selina. Thanks, Nan. I appreciate the two great questions. Regarding the dividend policy, due to the pandemic impact, we actually suspended the continued dividend policy for a while. Now with the second year after the lift of the pandemic, we plan and discussed continuing the dividend policy like we had before, but we have made the internal discussion, and I think next quarter, we'll make an announcement regarding our continued dividend policy resumption. Regarding the special dividend, we will evaluate our cash position and also the investment needs for our growth. To the extent possible, we would always like to have more dividends and also share buybacks to enhance shareholder value in addition to sound business practices. Regarding your second question on restaurant openings and growth for the balance of the year, our Restaurant business for the first quarter and the second quarter is still in the process of completion, and we are seeing some trends that indicate it is becoming more competitive in the restaurant landscape. Therefore, our business model, after internal discussion, is being improved, allowing us to combine the strength of our franchisees' local expertise and resources with our established and highly efficient operating system and brand recognition. This way, we can generate much better returns to our franchised hotels. That is what we've been doing in the last quarter. We plan to open about 45 to 50 more new restaurants by the year-end. So in total, the restaurant openings will end the year at roughly 230, plus or minus. I hope, Nan, that answers your question. We emphasize that focusing on the profitability of each store and building the Restaurant business on a sound foundation is more important than the scale and size at this moment. We are deploying a couple of smaller teams to further explore the business model of the restaurants. Additionally, the Restaurant ADS was down, partly because we're reducing the size of our restaurants to make the operational space more efficient. That's another reason I think the Restaurant ADS is down somewhat around 8% or so. Thank you again for the two questions.

Hi. Thanks very much for giving me this perfect chance to ask questions. My question is regarding the Hotel business. As there is an obvious downtrading trend among consumption in travel, how does this affect the company's RevPAR? And are there any divergence between economy, midscale, and upper midscale segments? Many thanks.

Okay, Betty. Let me clarify; did you ask about the RevPAR trends for the second quarter? Because I missed that a little bit.

Yes. Basically regarding RevPAR and what's the impact of consumer downtrading, especially on hotel RevPAR, and whether there are different trends between economic segments and upper midscale segments.

Thanks, Betty. Regarding the segment trends, I'll leave that to Selina. But regarding the RevPAR trend trending down in the second quarter, we observed our RevPAR for the second quarter is trending down at the same rate as in the first quarter. In the first quarter, we analyzed our RevPAR drop and identified that it was partly caused by the substantial number of hotels being taken out or in semi-operation for upgrades. We typically provide six months to one year of fee reduction or waiver for hotels undergoing upgrades. Therefore, this impacted our overall RevPAR and affected occupancy as well. We will continue to upgrade hotels in the second quarter, as many still need to be upgraded due to the three years of pandemic disruption. Consequently, we expect our RevPAR to continue trending down at a similar rate as in Q1. With respect to which segments are trending down, I will leave that to Selina.

Thank you, Alex, and thank you, Du. If we compare with the second quarter of last year, we will see that the growth rate for the midscale segment is better than for the mid-to-upscale segment, followed by the economy hotels. Our company's largest portion is in the economic segment, which may impact our overall performance.

Thank you for taking my question. I have two questions, if I may. The first one is, given you just mentioned that in the first quarter and second quarter to date the RevPAR has been slightly down year-on-year, but we're maintaining our full-year revenue guidance unchanged. Could you provide a sense of what full-year RevPAR we're looking at? And what are the drivers to achieve the full-year revenue guidance? Thank you.

Okay, thanks, Alpha. Even though the RevPAR is trending down for the first and second quarters, our revenue consists of the existing hotels' revenue and revenue from new hotels. Additionally, we also have some well-performing L&O hotels, which, when combined, help mitigate some of the revenue losses from the existing hotels due to the falling RevPAR. We estimate that revenue from L&O and the new F&M hotels will increase about 12% to 15%. According to our analysis, even considering the decline in revenue from existing hotels, we believe we can achieve a total revenue increase of 7% to 12% for the year. For example, some of our F&M hotels have introduced a new boutique brand that is performing excellently in certain regions. In one of our newer brands, we achieved a RevPAR of RMB2,000 per room per day in low season, with expectations of over RMB4,000 per room per day in high season. Those are contributing to the revenue increase for the hotels. However, on the Restaurant side, we expect total revenue to drop by 50%. The previous estimates didn’t account for the increased competition in the restaurant sector, particularly in our operating locations. We have many restaurants in supermarket-anchored regional shopping centers, and we've observed significantly decreased foot traffic in these areas, which has led to our strategic decision to reduce our exposure in those locations and further grow our franchise and management restaurant business, where we only collect a fee. This repositioning and the associated revenue drop on the restaurant side will have an overall effect on our group's revenues. Nonetheless, we anticipate improved profitability on the bottom line due to our restaurant repositioning. Our aim is to foster growth in both the top line and bottom line.

Hello, management. I have another question for you. Can you speak a little bit about your expansion into the higher-end segments? Thank you.

Okay then. We have continuously increased our mid-to-upscale segment. We have several brands that we are consistently improving in terms of both product and service quality, such as GreenTree Eastern. We have also systematically closed some less desirable locations. As a result, I think this will continue to positively impact the group's ADR. For instance, we reported that most of our L&O hotels are in mid-to-upscale categories, where our performance has improved significantly. This will showcase our potential franchisees to develop more similar branded hotels. Additionally, we are developing some cultural-based boutique hotel brands that are gaining recognition in their regions. With all these efforts combined, we believe our mid-to-upscale segment will become an increasingly larger portion of our business. I am confident that after the pandemic era, we can focus on developing in this segment, and we hope to share positive news in the next quarter.

Thank you. Then another follow-up question is on the hotel expansion side. Could you kindly provide an update on what kind of hotel opening target we are looking at this year? If we break it down by L&O versus F&M, what are we targeting?

Okay, Alpha. As reported previously, the total hotel openings we plan for the year is 480, with primarily 99% of them expected to be franchised and managed. We may still proceed with a few select showcase hotels, but our focus remains on franchised and managed hotels.

Okay. Hi, Alex. Hi, Selina. Thanks for taking my questions. I also have a question regarding hotel openings. Could you please provide a geographic breakdown of the new openings? For example, how much will be in Tier 1 cities and how much in lower-tier cities? Thank you.

Thank you for your question. Among the 480 hotels planned to open this year, most will be in Tier 3 and lower cities, which accounts for about 62% to 65%. Around 15% to 20% of new hotel openings will be in Tier 2 cities, with the remaining openings in Tier 1 cities.

To add to that, Bruce, we have a team that used to be strong in the Eastern region, but we are now enhancing this team to operate nationwide. We see more opportunities in the southern part of China, like the Southeastern and Southwestern regions, and we've added more development team members, witnessing great results. So, our goal is for nearly 500 new hotels to be spread evenly across the continent of China. Business development is a driver for us post-pandemic. While we focus on enhancing our existing portfolio and technology, we also aim to improve membership benefits, which will increase future contributions from members as well. Our overall goal is to ensure profitability across the board, enhancing shareholder value through share buybacks and the reinstatement of our dividend policy. We're committed to building a stronger company for franchisees, customers, and employee career growth.

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

Thank you, operator. In closing, on behalf of the 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. Thank you again.

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