GreenTree Hospitality Group Ltd. Q2 FY2024 Earnings Call

Hello, ladies and gentlemen. Thank you for standing by for GreenTree’s Second Quarter of 2024 Earnings Conference Call. At this time, all participants are in listen-only mode. After management’s prepared remarks, there will be a question-and-answer session. As a reminder, today’s conference call is being recorded. I would now like to turn the meeting over to your host for today’s call, Mr. Rene Vanguestaine of Christensen. Please proceed, Rene.

Thank you, Rocco. 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 on our website 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 Mr. Jason Zhang, our new Financial Director. Jason replaces our former Financial Director, Ms. Ellen Zhao, who officially retired earlier this month. Mr. Xu will present the company’s performance overview of the second quarter of 2024, and Ms. Yang and Mr. Zhang will then discuss financials and guidance. They will all 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 terminologies such as may, will, expect, anticipate, aim, future, intend, plan, believe, estimate, 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 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 obligations 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, Mr. Alex Xu. Mr. Xu, please go ahead.

Thanks, Rene, and hello everyone, and thank you for joining us today. In the second quarter, we faced challenges as China’s economy continued to recover. We believe both consumers and businesses exercised caution in discretionary spending, which negatively impacted our overall performance. However, we continued to upgrade a number of hotels in our portfolio to better respond to increasing competition. While we believe this will help our performance in the future, second quarter Hotel revenue did decrease 14.8% year-over-year. We continued to execute our strategy to return our Restaurant business to profitability by moving away from leased and operated restaurants in supermarkets and regional shopping centers towards franchised street stores. As a result, the net income turned positive this quarter after breaking even last quarter compared to losses in both corresponding quarters a year ago. Our focus is now fully on growing the number of franchised street stores and stores with stable consumer traffic. Please turn to Slide 5. Compared with the second quarter of 2023, Hotel RevPAR was RMB125, down 10.8% and the Restaurant ADS, which is average daily sales per store, was RMB4,737, down 22.1%. Total revenues were RMB329.7 million, down 20.5%. Hotel revenues were RMB264.6 million, down 14.8%, mainly due to a 10.8% year-over-year decrease in RevPAR and the closure of some hotels, which was partially offset by new openings. Restaurant revenue decreased to RMB65.3 million as we continued to execute our strategy to reposition this business and close a number of underperforming restaurants. Income from operations decreased to RMB84.4 million, with a margin of 25.6%. Net income was RMB62.3 million, down 38.9%, with a margin of 18.9%. Adjusted EBITDA non-GAAP was RMB83.1 million, down 34.5%, with a margin of 25.2%. Slide 6 shows detailed information on total revenues, income from operations, net income and adjusted EBITDA. Slide 7 shows the trend in our quarterly operational performance. In the second quarter, compared to a year ago, RevPAR for our LO hotels decreased by 7.3% to RMB177. RevPAR for our FM hotels decreased by 10.9% to RMB124. ADR for our LO hotels decreased by 2.1% to RMB250. And ADR for our FM hotels decreased by 4.4% to RMB171. Occupancy at our LO hotels was down 3.9% to 70.7% and occupancy at our FM hotels was down 5.3% to 72.6%. Slide 8 highlights the growth in our membership programs, which accounted for most of our direct sales. Individual memberships grew to 96 million, up from 84 million a year ago, and corporate memberships grew to 2.1 million, up from 1.96 million a year ago. Slide 9 shows the operating performance of restaurants with ADS down 22.1% year-over-year at RMB4,737, but up sequentially. Starting with Slide 11, I will review our strategic execution across our businesses. In our Hotel business, we further expanded into the mid-to-upscale segment and in Tier 3 and lower cities in South China. As you can see on Slide 12, we continue to grow our mid-to-upscale segment with 505 hotels, accounting for 11.8% of our total portfolio at the end of this quarter. While the mid-scale segment remains the core of our Hotel business at 69%, we continue our expansion into the higher-end segment. The economy segment ended the quarter at 19.2%. Please turn to Slide 13. We continue to expand in Tier 3 and lower cities, and 72.3% of our hotels in our current pipelines are in such cities, and we’ll further capitalize on the substantial opportunities in these locations. On Slide 14, we continued to focus on increasing the profitability of our Restaurant business. To achieve this, we have implemented a three-pronged approach to reposition the business. First, we are closing unprofitable LO stores, increasing the proportion of FM stores and expanding the number of street stores. Franchised and managed restaurants accounted for 86.9% at the end of the quarter, compared to 72.3% a year ago, and the street stores accounted for 45.4%, compared to 37.9% a year ago. Next, Selina Yang and Jason Zhang will review operating and financial highlights.

Thank you, Alex. I will review our Hotel business. Please turn to Slide 16. In the second quarter, total Hotel revenues decreased 14.8% to RMB264.6 million, compared to the second quarter of 2023. Total revenues from LO hotels were RMB105.9 million, down 19.5% year-over-year. The decrease was primarily attributable to a 7.3% year-over-year decrease in the second quarter RevPAR of LO hotels. Five LO hotels closed and a reduction of subleased revenues, mainly due to the disposal of property. Total revenues from FM hotels decreased 11.3% to RMB157.8 million. The decrease was mainly due to a decrease in FM hotels RevPAR and remodeling. On Slide 17, total Hotel operating costs and expenses increased 2.1% year-over-year to RMB217.7 million. Operating costs decreased by 4.5% to RMB143.4 million year-over-year, which was mainly due to the lower personnel costs, lower hotel-related material consumption, and lower utilities resulting from the lower occupancy rate and the closure of LO hotels, offset by increased rental costs and depreciation and amortization due to newly opened LO hotels since the third quarter of last year. Salary and marketing expenses were RMB13.2 million, a year-over-year decrease of RMB0.5 million, mainly due to lower advertising expenses. General and administrative expenses were RMB54.9 million, up 23.6% compared with the third quarter of last year. The increase was mainly due to an increase in bad debt provisions for long-aged accounts receivables. Turning to Slide 18, due to the decline in revenue, our Hotel business saw a decrease in profitability in the second quarter. Income from Hotel operations decreased from RMB108.5 million to RMB81.6 million year-over-year. Net income was RMB63.1 million, compared to RMB114 million in the second quarter of last year. Adjusted EBITDA of the Hotel business decreased 37% to RMB81.9 million and core net income decreased by 22.4% to RMB67.6 million year-over-year. Next, let me turn the call over to Jason for the review of our Restaurant business.

Please turn to Slide 19. In the second quarter, we continued to refresh our Restaurant business and open more franchised and managed stores. Total revenues were RMB35.3 million, down 37.8% year-over-year, and total costs and expenses decreased 44% year-over-year to RMB34.3 million, mainly due to lower ADS and a decrease in the number of LO stores due to the closure of unprofitable LO stores. On Slide 20, these measures led to improved profitability. Income from operations was RMB2.9 million. Adjusted EBITDA was RMB1.2 million. Net profit and core net income turned from a loss to a profit. Next, Selina will review the profitability of our group.

Thank you. Please turn to Slide 21. Group net income per ADS, that is basic and diluted, decreased by 39.9% to RMB0.61, and core net income per ADS, that is basic and diluted non-GAAP, increased by 3% to RMB0.69. Let’s now take a look at Slide 22. As of June 30, 2024, the company had total cash and cash equivalents, restricted cash, short-term investments, investments in equity securities, and time deposits of RMB1,737.2 million, compared to RMB1,517.1 million as of March 31, 2024. The increase was mainly attributable to continued operating cash inflow, the disposal of property, and the repayment of loans from franchisees. On Slide 23, considering our performance during the first half of this year and the impact of closing certain LO hotels due to lease expirations and strategic decisions, we have revised our revenue guidance for the Hotel business. Now we anticipate its performance in 2024 to remain flat compared to last year. The Board of Directors has approved the payment of cash dividends of US$0.10 per ordinary share or US$0.10 per American deposit share, that is ADS, payable to holders of the company’s ordinary shares shown on the company’s record at the closing of trading on September 30, 2024. This concludes our prepared remarks. Operator, we are now ready to begin the Q&A session.

Thank you. And today’s first question comes from Bruce Lee, with UBS. Please proceed.

Hi, Alex, Selina, and Jason. Thanks for taking my question. So I have two questions. The first one will be regarding the Hotel business. So could you please introduce a bit about the RevPAR trend in July and in August so far on a year-over-year trend basis? And also, we saw that you have changed your four-year Hotel revenue guidance. So could you please also provide some color on the RevPAR outlook for the second half? And that’s my first question. And the second question is regarding the shareholder return plan and we saw that we have declared a cash dividend at this time. So will it be a long-term shareholder return plan? Thank you.

Thank you, Bruce. Regarding the Hotel RevPAR for July and August, we saw a drop of about 15% compared to the same July last year. However, in early August, our RevPAR has somewhat recovered to a drop of less than 10% compared to last year. Last year, especially in the summer, was stronger than the previous years, and there was a correction from that record. Looking back, it is understandable. For the third quarter, we anticipate we will operate at similar levels of reduction as the second quarter compared to the same period last year, 2023. For the balance of the year, we project that our total revenue will remain flat compared to 2023 for several reasons. First, we have a reduction in RevPAR, but we also have an increase in new openings. We still anticipate and plan about 480 new openings, even though we experienced a short dip in the second quarter. We expect the pipeline for the third and fourth quarters to catch up. That will also slightly offset the expected reduction in membership income. Additionally, we have about 400 hotels in upgrade mode, with slightly more remodeling than last year. Last year marked our first year coming out of the pandemic, and we allowed our franchisees some breathing room to generate cash for their businesses. This year we have planned and encouraged significantly more hotels to undergo upgrades and remodeling, typically granting a grace period of six months to a year for hotels undergoing that phase. Given the challenging environment, especially within the service hotel and restaurant industry, we have provided our franchisees additional support regarding franchise signing application fees and various services. Combined, we expect revenue to remain flat compared to 2023. Regarding the shareholder dividend, even though our second quarter revenue dropped compared to the same period last year, we still generated strong cash flow, especially with our disposal of one property adding another RMB120 million cash to the bottom line. Therefore, we believe it is appropriate to declare this dividend, consistent with our previous dividend policy, which was interrupted by the pandemic, and our plan is to continue this practice. We are committed to delivering sustainable, profitable growth while providing sustainable returns to our shareholders. This is our long-term plan, and we will continue to pursue it. Thank you for your insightful questions, Bruce.

Thanks, Alex, for the answers. It’s very helpful. Thank you.

And our next question today comes from Lewen Liu with China Securities. Please go ahead.

Okay. Thank you. Thank you for the management team. And I have two questions. The first is about the demand. I wonder if there is a difference between the business and leisure demand. Can you provide some insights on this question? And also, the second question is about whether there is any difference in the performance of our hotels in first and second-tier cities compared to lower-tier cities? Thank you.

With regard to the operational issues, I’ll take them, Selina will address the financial numbers. The first question regarding the pattern changes in terms of the ratio between leisure and business, we do observe a trend where there is more leisure travel compared to business travel. There is also a higher demand in third-tier cities, typically noted for their scenery and resort areas. These cities, particularly those with favorable climate conditions, attract a larger number of leisure travelers, particularly in July and August. We anticipate this trend will continue, considering the increasing number of retirees entering retirement in upcoming years. Leisure travel, especially economical and budget-friendly leisure travel, is likely to rise, and we are planning accordingly. Hotels in these areas are performing exceptionally well. For instance, some of our hotels in resort and summer retreat areas have achieved record earnings and occupancy rates. Regarding the first-, second-, and third-tier cities, we have noted a trend that we can share. This year, the RevPAR in our first-tier cities dropped by approximately 12.5% while in the second tier it dropped by 11.7%. Typically, last year marked the conclusion of the pandemic, which brought about a wave of business travelers and events for government and businesses, resulting in exceptionally high numbers, but we are witnessing a reduction in that number now. The third-tier cities have exhibited the most resilience in our model, with a minimal RevPAR decrease of about 9%. This trend appears likely to continue for some time. Thank you, Lewen.

Thank you very much, Alex.

Thank you. And our next question today comes from Kelvin Wong with Mica Capital. Please go ahead.

Thank you. Good evening. Thanks for taking my questions. I would like to ask three, if I may. I think it’s better for me to ask the questions one-by-one to facilitate easier answers. The first one is more of a broader top-down inquiry. Could you discuss the trends within the industry and how you foresee these trends evolving? Additionally, are you currently facing any difficulties, and what measures have you taken to address these challenges? It would be great if you could also provide a comparison of the company’s performance in the second quarter relative to your peers. That’s my first question. I will have two more after you address this one.

Thank you, Kelvin. Regarding the trend in the Hotel industry, we do not have access to industry-wide statistics of the second quarter, so we cannot provide a meaningful peer comparison, but I can share our observations. Feedback from leading industry OTAs indicates that we are performing better than our peers in terms of price, occupancy, and reservation numbers compared to the same period last year. Our company has strengthened its capacity to face challenges, both upward and downward. Our main concern is our franchisees' health and profitability, along with maintaining a stable employment environment for our employees. To mitigate marketplace volatility, we prioritize enhancing our core competitiveness. In recent years, especially post-pandemic, we have addressed many aged properties needing upgrades and have collaborated with our franchisees to enhance brand value. This year, we have made significant efforts to provide improved and timely support to our franchisees. Our focus is on local sales and business development. As a result, we believe our comparable properties have shown better performance in face of downward trends. We aim to maintain and replicate successful business practices among our franchisees to help navigate these challenges. Thank you for your inquiry, Kelvin.

That's very helpful.

Regarding your second question about the Hotel industry, while we plan to open approximately 480 to 490 hotels this year, we did experience a lower number of openings in the second quarter. This was primarily due to some scheduled openings getting delayed a bit. Regulations surrounding hotel openings have become slightly more restrictive, making it harder to secure the necessary licenses. We are working to better guide our franchisees and support them through this process. We anticipate opening around 170 hotels in the third quarter and maintaining that pace in the fourth quarter. We expect to conclude the year with approximately 480 hotel openings or even closer to 500. Although competition exists, our focus remains on sustained, high-quality growth rather than expansion for growth's sake. Ensuring standardization and high quality is critical for the long-term profitability of our franchisees. Regarding M&A opportunities, we have not aggressively pursued them, partly because of two former unsuccessful attempts and the challenges posed by the pandemic and performance guarantees. Our focus will remain on preserving our culture, and we will only consider acquisitions that align with our mission to ensure profitability for our franchisees. Our goal is to become the most valued brand for our customers in the industry.

Great. That's very clear. One final small question regarding your Restaurant business. I’m glad to see the profitability in Q1 and the improvements in Q2. What are your plans for this business going forward, especially concerning store openings, both FM and LO? Are there any potential difficulties you foresee? Finally, is there any plan to separate this Restaurant business because of its current success?

Thank you, Kelvin. We appreciate the positive feedback on the Restaurant business. This field is challenging, and we have devoted time to repositioning our business model. We have two well-established brands, each over 20 years old. Surviving and growing in such a competitive environment after two decades is quite an achievement for our team. One of the reasons behind our successful turnaround is our focus on understanding consumer demands, traffic patterns, and product mix, improving team efficiency, and creating value. We want to ensure Da Niang Dumplings and Lu Gang Café remain relevant to our customers. We have received numerous inquiries about potential investments in other restaurant brands, but we are still in a transition phase. It will take time to determine the best format, product mix, and value propositions for our customers and franchisees before accelerating Restaurant development. We originally planned about 60 new restaurant openings for this year, focusing on community street stores with the right offerings. Our reduced ADS was partially due to decreasing the footprint of our restaurants. Ultimately, we envision cultivating this Restaurant business into a separate entity, whether through M&A or an independent IPO, but we recognize that the industry remains tough and requires careful decision-making. We are open to recommendations and collaborations with reputable operators to enhance our competitive edge.

That was very helpful. Thank you for addressing my questions.

Thank you. Our next question comes from Storm Shu with ABC Capital. Please go ahead.

Hello. Thank you for taking my question. I have one inquiry regarding the capital market. Can you comment on how you plan to improve liquidity in the capital market? Previously, the company considered several paths. Has there been any progress or timeline on this matter?

I understand, Storm. Regarding your question about increasing liquidity, our shares are primarily held by a few major institutional investors, with our corporate company owning around 90%. We are in the process of pursuing a reverse merger, and post-merger, we will consider systematically offering shares to outside investors to incrementally increase liquidity. The timeline for this depends on the completion of our restructuring, which we hope to finalize in the next quarter. This liquidity concern is significant for us, and we have an actionable plan to address it. Meanwhile, we will continue to prioritize building our core competitive strengths and delivering sustainable, profitable growth, which we believe will enhance long-term value for our shareholders.

Thank you. Got it.

Thank you. And this concludes our question-and-answer session. I’d 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 all.

Thank you.

Thank you. This concludes today’s conference call. We thank you all for attending today’s presentation. You may now disconnect your lines and have a wonderful day.