Earnings Call Transcript - GHG Q2 2023

Operator, Operator

Hello, ladies and gentlemen, thank you for standing by for GreenTree's First Half 2023 Earnings Conference Call. At this time all participants are in listen-only mode. 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.

Rene Vanguestaine, Investor Relations

Thank you, Ashley. 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. Bill Ju, Financial Director of the Restaurant Business. Mr. Xu will present the company's performance overview of the first half of 2023, followed by Ms. Huang and Mr. Ju, who will discuss business operations. Ms. Yang and Mr. Xu will then discuss financials and guidance. They will all be available to answer your questions during the Q&A session that 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, anticipate, aims, future, intends, plans, believes, estimates, continues, target is or are likely to go 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.

Alex Xu, CEO

Thanks, Rene. Hello, everyone. And thank you for joining us today. 2023 marked a new start for the post-COVID recovery in the economy across China. So far, compared to the same period of 2019, we reached more than 120% at the beginning of February, exceeding our expectations as demand for business travel rebounded after the Spring Festival. During the second quarter, especially during the National Labor Day holiday early in May, it reached more than 115%. During the summer vacation, it was almost stable at 110%, and tourism further expanded. As we did throughout the pandemic, we continued to execute our long-term strategic growth plan that strives to assist the franchisees in maintaining quality operations, expand our hotel network, deliver stable operating profitability, and maintain healthy cash flow. Please turn to Slide 5. Compared with the first half of 2022, hotel RevPAR was RMB 130, up 35.8%, and the restaurant ADR, which is average daily sales per store, was RMB 6,213, up 22.9%. Total revenues were RMB 794.2 million, up 12.1%. The increase was primarily due to the recovery in RevPAR, the increase in the number of hotels, and the increase in the restaurant average daily sales, partially offset by the closure of 64 restaurants. Income from operations trended positively at RMB 150.9 million with a margin of 19%. Net income was RMB 177.3 million with a margin of 22.3%. Adjusted EBITDA, non-GAAP was RMB 226.9 million, up 137.8%, with a margin of 28.6%. Core net income non-GAAP was RMB 136.1 million with a margin of 17.1%. Cash provided by operating activities was RMB 313.1 million. Slide 6 shows detailed numbers for total revenues, income from operations, net income, and adjusted EBITDA. Slide 7 shows that operating performance greatly improved during the first half of 2023. RevPAR was RMB 120 and RMB 14 in the first and second quarter respectively. At the bottom of the slide, you can see weekly RevPAR performance in the first half of 2023 compared with 2019. In the first half of 2023, due to the recovery from COVID-19, RevPAR exceeded 124% of its pre-pandemic levels after the Spring Festival. Thanks to the stable recovery in demand and the economy, RevPAR gradually recovered to more than 120% of its pre-pandemic levels during the Labor Day golden week of 2023. While the RevPAR slowed during the Dragon Boat Festival, it resumed growth and a stable development trend again during the summer vacation of the travel season. Slide 8 shows the operating performance of the restaurants which has a good trend in the first half of 2023. Now starting with Slide 10, let's talk about the strategy and execution of hotels with a further expansion in the mid to upscale segment and the Tier 3 and lower cities in South China. Besides, we are continuously adding hotels in strategic locations. Let's take a look at Slide 11. We have been continuously growing our mid to upscale segment over the past few years. For an apples-to-apples comparison, we have excluded the Argyle and Urban hotels. By the end of the first half of 2023, we had 438 hotels, 10.7% of our total portfolio in the mid to upscale segment, up from only 50 in 2017, and we plan to open more this year. While the mid-scale segment remains the core of our business with 71.4% of all our hotels, we continued our expansion into the higher-end segments. By the end of the second quarter, mid-to-upscale hotels accounted for 10.7% of our total portfolio, while the economy segment remained stable at 17.9%. Please turn to Slide 12. Over the past five years, most of our new hotels have been in thriving Tier 3 and lower cities. In addition, hotels in some lower Tier cities are performing well. As we continue to execute our strategic plan, 73.3% of hotels in our current pipelines are in such cities, and we will further capitalize on substantial opportunities in those locations. On Slide 13, during the first half of 2023, we opened three L&O hotels at Chongqing North Railway Station, Chongqing Jiangbei International Airport, and Shenzhen Futian, Huaqiang North. Four of our hotels are located around transportation hubs, central business districts, or government centers. By showcasing our brand and operating standards, we believe that these hotels will help us attract more high-quality franchisees and further contribute to growth. Slide 14 shows our strategy for our restaurant business focuses on increasing profitability with the closure of unprofitable stores and the expansion in the proportion of franchised and managed restaurants, and the growing numbers of street stores. On Slide 15, during the first half of 2023, we closed 64 restaurants in areas of decreased economic activity and reduced foot traffic, helping to improve the overall profitability of our restaurant businesses. On Slide 16, you can see the growth in the proportion of franchised and managed restaurants following the acquisition of Da Niang Dumplings and Bellagio during the first quarter of 2023. Slide 17 shows that currently most of our restaurants are in shopping malls; however, we believe there's substantial potential for street stores. We intend to develop more in this format. I want to emphasize that in the new area, we're strategically focusing on growing high-quality hotels and restaurants to build a better and stronger foundation for future growth. Now, let me turn the call over to Megan and Mr. Ju.

Megan Huang, VP of Sales and Marketing

Thank you, Alex. Please turn to Slide 18 to start reviewing the operating and financial highlights. Slide 19 shows the change in our quarterly operating performance. In the second quarter of 2023, RevPAR for our LO hotels increased to RMB 190. RevPAR for our FM hotels increased to RMB 139. ADR for our LO hotels increased to RMB 265, and ADR for our FM hotels increased to RMB 179. Occupancy at our LO hotels increased to 74.6%, and occupancy at our FM hotels increased to 77.9%. Slide 20 highlights the growth in our membership programs, which accounted for most of our direct sales. Individual memberships grew to 84 million, up from 74 million a year ago. Corporate memberships grew to 1.99 million, up from 1.91 million a year ago.

Unidentified Company Representative, Company Representative

Now, please turn to Slide 21. In the restaurant business, the number of individual members grew to 2.67 million, up 2.3% year-over-year. ADS increased 57.3% to RMB 6,371 in the second quarter of 2023 compared to one year before. With that, I’ll pass the call over to our CFO, Selina Yang.

Selina Yang, CFO

Thank you for the question. First, let's review our hotel business. Please turn to Slide 22. In the first half, total hotel revenues increased by 23.1% year-over-year to RMB 563.2 million. The increase was primarily due to the recovery in RevPAR and the increasing number of hotels. Total hotel revenues increased 23% to RMB 310.6 million in the second quarter of 2023 compared with the first quarter. Total revenues for FM hotels were RMB 347.4 million, up 26.1% year-over-year, while total revenues for our LO hotels increased 24.7% to RMB 213.6 million. On Slide 23, total hotel operating costs and expenses decreased to 54.7% year-over-year to RMB 416.6 million. Excluding other general expenses, total hotel operating costs and expenses also decreased to 2.8% year-over-year. Total hotel operating costs and expenses increased 5% to RMB 213.3 million in the second quarter compared with the first quarter. Total costs and expenses are composed of hotel operating costs, selling and marketing expenses, and general and administrative expenses. Operating costs were RMB 284.4 million, down 7.6% year-over-year. The decrease was mainly due to the deconsolidation of Argyle and disposal of our interest in Urban, partially offset by higher costs due to recovery from COVID-19 and higher rents with lower extensions compared to last year. Operating costs increased 11.8% to RMB 158.1 million in the second quarter compared with the first quarter. Selling and marketing expenses were RMB 24.8 million, a year-over-year increase of 31.8%, mainly attributed to higher sales channel commissions, higher sales staff salaries, and higher travel expenses. Selling and marketing expenses increased 24.3% to RMB 13.8 million in the second quarter of 2023 compared with the first quarter. General and administrative expenses were RMB 90.5 million in the first half of 2023, down 9.2% compared with the first half of last year. The decrease was mainly due to the deconsolidation of Argyle and disposal of our interest in Urban, partially offset by higher consultancy fees and stock-related expenses. G&A expenses decreased 3.6% to RMB 44.4 million in the second quarter of this year compared with the first quarter. Turning to Slide 24, income from hotel operations was RMB 160.4 million, and income from hotel operations increased 108.7% to RMB 108.5 million in the second quarter of 2023 compared with the first quarter. Net income of hotels was RMB 191.8 million. Net income of hotels increased by 138.4% to RMB 135.1 million in the second quarter of 2023 compared with the first quarter. Adjusted EBITDA increased 127.5% to RMB 212.2 million, and core net income increased 42% to RMB 150.4 million. Now let me turn this call over to Bill, our Financial Director of Restaurant Business.

Unidentified Company Representative, Company Representative

Now let's review our restaurant business. Please turn to Slide 25. In the first half of 2023, total restaurant revenues were RMB 127.2 million, and RMB 104.9 million in the first and second quarters of 2023, respectively. You can also see the revenue breakdown for FM and LO restaurants. On Slide 26, total operating costs and expenses decreased 9.9% year-over-year to RMB 242 million. Total restaurants operating costs and expenses decreased 9.7% to RMB 114.9 million in the second quarter of 2023 compared with the first quarter. You can also observe the downtrend in material costs, personnel costs, and rent. Turning to Slide 27, income from restaurant operations was RMB negative 9 million in the first half of 2023. The income from restaurant operations was RMB 0.6 million and negative RMB 9.6 million in the first quarter and the second quarter of 2023, respectively. Net income was negative RMB 14.1 million in the first half of 2023. Net income decreased to negative RMB 11.9 million in the second quarter of 2023 compared with negative RMB 2.2 million in the first quarter. Adjusted EBITDA increased 473.1% to RMB 15.2 million. Core net income was negative RMB 13.9 million. Next, Selina, please introduce the profitability of our group.

Selina Yang, CFO

Please turn to Slide 28. Group net income per ADS basic and diluted was RMB 1.79. Group core net income per ADS basic and diluted non-GAAP was RMB 1.33. Let's now take a look at Slide 29. As of June 30, 2023, the company had total cash and cash equivalents, restricted cash, short-term investments, investments in equity securities, and term deposits of RMB 1,440.1 million compared to RMB 1,119.4 million as of December 31, 2022. The increase was primarily due to cash flow from operating activities, repayments from our franchisees, proceeds from the disposal of staff salaries, partially offset by the repayment of bank loans and investments in properties. On Slide 30, taking into account the recovery of long-term trends and short-term industry fluctuations, we expect total revenues of organic hotels for the full year of 2023 to grow 30% to 35% of the 2022 levels. Total revenues for our restaurant business and our organic hotel business for the full year of 2023 are expected to grow 15% to 20% over the 2022 levels. This concludes our prepared remarks. Operator, we are now ready to begin the Q&A session. Thank you.

Operator, Operator

Your first question comes from Zhao Ju with Shezan Capital. Please go ahead.

Unidentified Analyst, Analyst

Hello, management. I know you are not catering was incorporated into the listed company. Can you introduce the recovery of catering? Thank you.

Selina Yang, CFO

Okay, thank you for the question. Our Financial Director, Bill, will answer this question.

Unidentified Company Representative, Company Representative

Hello. The restaurant sales compared to 2019 sales recovery was 18%, and compared to 2022, the sales recovery was 100.7%. Thank you.

Operator, Operator

Thank you. Your next question comes from Bessie Zhu with UBS. Please proceed.

Unidentified Analyst, Analyst

Hi, hello Selina. Hello management. So could you give us some color and guidance on the RevPAR for Q4 2023 and 2024? Thank you.

Selina Yang, CFO

Thank you for the question. So let me first answer your question. As Alex introduced just now, in the summer vacation, the RevPAR in July and August kept stable at about 110% of the 2019 levels. We see that in September the RevPAR decreased due to seasonal fluctuations. So for the fourth quarter, we forecast that RevPAR recovery also keeps at a stable level at about 10% increase compared to the 2019 levels. For the restaurant business next year, it's very difficult for us to forecast for the long term, but for the long-term trends, we can see a good trend because of the recovery of the industry, especially from some locations in the year of 2023. Thank you.

Unidentified Company Representative, Company Representative

So let me add a couple more comments here. In Q3, the performance is better than Q2, based on the first 2.5 months, that's July, August, and September, showing substantial improvement over Q2. The trend in Q4 is expected to stabilize because our hotel portfolio focuses primarily on Tier 3 and Tier 4 cities. We think the performance in Tier 3 and Tier 4 cities is very stable, even though they have been consistent during the past three years of COVID control periods. The recovery after the post-COVID period shows much better performance in first-tier cities due to many new conventions and increased travel for business and exchange, but we believe the trend for future growth will continue to reach out to Tier 3 and Tier 4 cities.

Selina Yang, CFO

Thank you very much.

Operator, Operator

Thank you. Your next question comes from Adam Sue with China Ascendas Securities. Please go ahead.

Unidentified Analyst, Analyst

Hello management. Can you hear me?

Alex Xu, CEO

Yes, very clearly Adam.

Unidentified Analyst, Analyst

Okay. Sorry for the bad line. My first question is how do you see the competition and the market structure below our tiered city market? For the first reason, as I understand the recovery of the lower Tier city market is not as good as Tier 1 cities this year. The second reason is I saw many players coming into this lower Tier city market, and how do you assess the competition in this market? My second question is about the attitude from our franchise partners over the past segment: is there any changes in their attitude? That's all. Thank you.

Alex Xu, CEO

Okay. Thanks, Adam. The competition in the lower Tier cities has been growing stronger in the past few years, but we do not see it becoming stronger this year. Some players entered the Tier 3 and Tier 4 cities, and their performance has been challenged in managing them closely and effectively. We observe some changes in brand closures. However, our strength has always been in managing remotely, allowing our hotels in the lower Tier cities to perform really well. They have been stable and generating substantial cash flow to our franchisees. Our strength in being a leading player in diversified lower Tier city markets continues to remain strong. In terms of our franchisees' attitudes, it takes a little more time for them to adapt to the new environment. The initial few months were packed with issues to resolve due to the pandemic era. However, we have seen a substantial boom in the number of travelers, especially in first and second Tier cities, keeping our franchisees busy. It may take longer for them to share the same confidence they had before the pandemic, but we are seeing increasing confidence returning to the market, especially on the hotel side. On the restaurant side, the trends have shifted quickly; foot traffic changes have made franchisees a bit more reserved and conservative. Nevertheless, we maintain confidence that our franchisees are beginning to explore opportunities and are working with us on additional properties, resulting in a robust pipeline, particularly for high-quality ones. The competitive pressure has reduced somewhat, which is favorable for our franchisees as rent pressures have eased compared to 2019 levels, so those are the sentiments we have observed.

Operator, Operator

There are no further questions at this time. This concludes our question and answer session. I would like to turn the conference back over to Ms. Selina Yang for any closing remarks.

Selina Yang, CFO

Thank you, and 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 time to reach us, please feel free to contact us. Thank you all. Thank you, operator.

Operator, Operator

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