Earnings Call Transcript - GHG Q4 2020

Operator, Operator

Hello, everyone, and thank you for joining GreenTree's Fourth Quarter and Full Year 2020 Earnings Conference Call. I would now like to hand over the meeting to your host for today, Mr. Rene Vanguestaine from Christensen, GreenTree's Investor Relations firm. Please go ahead, Rene.

Rene Vanguestaine, Investor Relations

Thank you. Hello, everyone. Thank you. 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; and Mr. Nicky Zheng, IR Manager. Ms. Megan Huang, Vice President of Sales and Marketing, is attending an industry-wide conference and is not able to join our call today. Mr. Xu will present the company's Q4 and full year 2020 performance overview, followed by Ms. Yang, who will discuss business operations, 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.

Alex Xu, CEO

Thank you, Rene, and thanks, everyone, for joining our 2020 fourth quarter and full year earnings call today. In this report, we will highlight our Q4 and full year performance, followed by our strategic focus in 2021. Then we will go into the details of our operation and the financial performance in Q4 and the full year 2020. Please turn to Slide 5. We were glad to see the robust recovery continuing in the fourth quarter. Compared with Q3 2020, RevPAR increased 4.1% to RMB124.4; total revenues increased 8.6% to RMB289.8 million; income from operations increased 17.4% to RMB118.5 million with a margin of 40.9%. Non-GAAP adjusted EBITDA increased 17.8% to RMB130.6 million with a margin of 45.1%. And the non-GAAP core net income increased 18.3% to RMB109.3 million with a margin of 37.7%. While RevPAR was slightly lower than in the fourth quarter of 2019, income from operations, adjusted EBITDA and core net income were substantially higher than in Q4 2019. Let's take a look at Slide 6. Here, you can see the considerable progress we have made since the pandemic hit our business back in January 2020. Total revenues, income from operations, adjusted EBITDA and the non-GAAP core net income all increased for 3 consecutive quarters from the lows in Q1 with consistently improving margins. Let's turn to Slide 7. The fourth quarter saw a sustained recovery in occupancy rate, ADR and RevPAR. We outperformed the industry by leveraging our strategic advantages, including our expansive footprint in Tier 3 and lower-tier cities and our industry-leading member loyalty program, as well as the hard work of our franchisees and staff. Slide 8 shows our occupancy rate and RevPAR over the past 15 months. Due to the resurgence of COVID-19 in several provinces and cities, such as Hebei, Shanghai and Beijing, our occupancy rate declined in Q4 2020 and in January 2021. As you can see, occupancy rate was at its lowest during the Chinese spring festival due to the government's stay-local policy. However, it rebounded quickly, especially after March 16 when people could travel more freely in low-risk zones. With the rollout of COVID-19 vaccines, most travel restrictions have been lifted. According to the official microblog of the Ministry of Culture and Tourism, the Tomb Sweeping holiday on April 5, 2021, saw 102 million domestic tourists. That represents a year-over-year growth of 144.6% and 94.5% of the number of domestic tourists in 2019. By early April, our occupancy rate had recovered to 77.7%, and RevPAR recovered to 92.7% of the 2019 levels. The key takeaway is that by the end of 2020, GreenTree proved to be more resilient and still performed better. Please turn to Slide 10 to begin the discussion of our strategic focus. In 2021, our strategic planning focuses on 2 key components: hotel expansion and franchisee support. Expansion targets strategic locations, Tier 3 and smaller cities and the mid-to-upscale market segment. For our franchisees in 2021, we are expanding our plan to renovate over 760 existing hotels in the following years, which should significantly increase our RevPAR. We will also continue to improve our direct sales channels and members' support, and continue our investment in IT and data infrastructure. Let's take a look at Slide 11. In Q4 2020, we accelerated our expansion into the middle and higher-end markets in Central China, Southeast China and Southwest China. During the first quarter of 2021, we opened several L&O hotels in Tier 1 and 2 cities in these regions, including Chengdu and Wuhan, all well-located around transportation hubs, central business districts or government centers. By showcasing our brand and operating standards, we believe these hotels will help us attract more high-quality franchisees, further accelerating our growth. Slide 12 highlights our strong presence in China's thriving Tier 3 and lower-tier cities. This is not by chance, but by design. Over the past 4 years, the vast majority of our new hotel openings have been in Tier 3 and lower-tier cities. 69.8% of all hotels in our current development pipeline are located in such cities. As a testament to the soundness of this strategy, during the pandemic, the pace of recovery at our hotels in Tier 3 and lower-tier cities was consistently faster than in other cities until the end of Q4 when business recovery in Tier 2 cities accelerated. The combination of our existing footprint and our strong performance in these cities gives us a real competitive advantage to capture future opportunities in China's booming hospitality industry. Now please turn to Slide 13. We have been consistently growing our high-end segment over the past few years. At the end of 2020, hotels in this segment represented 21.2% of our total portfolio compared to only 5.2% in 2017. This year, we plan to open more hotels in the mid-to-upscale and luxury segments. In 2021, we also expand our ongoing hotel upgrade program to renovate 760 hotels, which have been in operation for more than 7 years. On Slide 14, you get a summary of the marketing support that we provide to our franchisees. The same slide also shows impressive growth in both of our individual and corporate membership programs, which contributed to most of our 92.2% of all direct sales in 2020. In addition to the benefits provided to our members, they also receive advantages from our business alliances, which, in turn, help us attract more members. In summary, despite the many unprecedented challenges brought upon us by COVID-19, the company delivered a robust Q4 with above-average sequential improvement in operating and financial metrics across the hospitality industry. I am extremely grateful for the achievements of our teams. I cannot thank enough the smart government policies, strong local government and community support. I cannot thank enough all of our employees, franchisees, guests and investors for their support and dedication. Thanks to our resilient business model, we are able to weather an extremely difficult year in the travel industry and perform well above the industry benchmark. When considering our well-segmented and robust brand portfolio, the loyalty of our members and our strong balance sheet, we are well positioned to capitalize on opportunities and create long-term and sustainable growth for our shareholders in 2021 and beyond. I will now pass the call over to Selina, who will summarize our business operations and financials for the fourth quarter. Selina, please go ahead.

Selina Yang, CFO

Thank you, Alex. Please turn to Slide 16. The impact of COVID-19 on the company's operations and performance was inevitable. The fourth quarter of 2020 blended ADR decreased 3.6% year-over-year to RMB162. Occupancy rate increased to 76.7% and RevPAR decreased 3.2% to RMB124. Nevertheless, we continue to expand our market presence across China, opening 203 new hotels in the fourth quarter. We ended the year with 1,186 hotels in our pipeline, up 25% over year-end 2019. Total revenues for the quarter were RMB289.8 million, a 0.1% increase compared to the fourth quarter of 2019. Income from operations increased 19.9% to RMB118.5 million. Non-GAAP core net income increased 22.3% to RMB109.3 million. Core net income per ADS, basic and diluted, increased 21.3% to RMB1.06. Moving to Slide 17. At the end of the fourth quarter, we had 4,340 hotels in operation, 9.7% more than a year before. 40 of these hotels were leased and operated, or L&O hotels, and 4,300 were franchised and managed, or F&M hotels, while the mid-scale segment remains the core of our business with 64.2% of all our hotels. Last year, we continued our expansion into both the high-end and economy segments. This expansion accelerated in the fourth quarter as the number of mid-to-upscale and luxury hotels increased to 8.8% of our total portfolio, while the economy segment at 27% remained stable. As Alex mentioned, we also solidified our already dominant position in Tier 3 and smaller cities. And at the end of the fourth quarter, 67.3% of our hotels were in these cities. These strategic advantages enhance our cross-marketing efforts across all our brands and locations. On Slide 18, you can see that in the fourth quarter, we opened 203 hotels compared to 190 in the fourth quarter of 2019. Three hotels were in the luxury segment; 29 in the mid-to-upscale segment; 141 in the mid-scale segment; and 30 in the economy segment. 19 were in Tier 1 cities; 42 in Tier 2 cities; and the remaining 142 in Tier 3 and smaller cities in China. 15.8% of newly opened hotels in the fourth quarter were in the mid-to-upscale and luxury segments of the market. We closed 58 hotels: 8 due to brand upgrade; 35 due to noncompliance with our brand and operating standards; and 15 due to property-related issues. So net-net, we added 145 hotels to our portfolio during the quarter. Slide 19 shows the growth in our pipeline of new hotels. Despite COVID-19, our pipeline increased from 949 on December 31, 2019, to 1,186 on December 31, 2020. Around 41% of these new hotels are in the mid-scale segment, about 34% in the economy sector, and around 25% in mid-to-upscale and luxury segments. Slide 20 shows the quarterly operating performance trend. Compared with the third quarter, RevPAR for our L&O hotels increased to RMB135; RevPAR for our F&M hotels increased to RMB124. ADR for our L&O hotels increased to RMB190, and ADR for our F&M hotels increased to RMB162. Occupancy rate in our L&O hotels increased to 31%, while the occupancy rate in our F&M hotels decreased to 76.8%, while RevPAR continued to rebound. Total revenues increased 0.1% year-over-year to RMB289.8 million. Total revenue for our F&M hotels decreased 4.6% to RMB207.2 million, while total revenue from our L&O hotels increased 11% to RMB76.1 million. The increase was primarily due to the sustained recovery in hotel operations from the impact of COVID-19 as well as the revenue contribution from our newly opened L&O hotels. This represents an 8.6% sequential increase over Q3 total revenues. Primarily is RevPAR growing from RMB120 in the third quarter to RMB124 in the fourth quarter. Turning to Slide 22, you will see that hotel operating costs were RMB99.8 million, a 7.8% year-over-year increase. That is mainly attributable to higher rents and increase of other costs with the expansion of our L&O hotels. In the fourth quarter, we opened 4 new L&O hotels, which accounted for most of the increase in hotel operating costs in this quarter. If we exclude L&O hotel operating costs, costs related to F&M hotels and others decreased 7%. Compared with the third quarter, we observed a 7.6% sequential decrease. That is mainly due to higher newly opening expenses in the third quarter. Selling and marketing expenses were RMB24.2 million, a year-over-year increase of 4.7%, which was mainly attributable to higher advertising costs. Compared with the third quarter, selling and marketing expenses increased by 13.9%, attributable to higher advertising expenses. Q4 general and administrative expenses were RMB50.9 million, down 36.1% year-over-year. The decrease was primarily attributable to the effective control of business travel expenses and the impact of a one-time provision for bad debt during the same period of 2019. Excluding the impact of this bad debt in 2019, our G&A in the fourth quarter decreased by 14.3%. Compared with the third quarter, G&A expenses increased by 13.6%, which was mainly attributable to the increase of consulting fees and higher staff costs. Overall, 2020 operating costs and expenses decreased 11.8% year-over-year to RMB175 million. Excluding L&O hotel operating costs, our total operating costs and expenses decreased 23.5% from 2019. Turning to Slide 24, income from operations defined as revenue minus total operating costs and expenses for the fourth quarter of 2020 totaled RMB118.5 million, that's $18.2 million, representing a year-over-year increase of 19.9%. The increase was mainly due to the sustained recovery of RevPAR, the increased number of hotels and better control of costs and expenses during this quarter. Operating margin, defined as income from operations as a percentage of total revenues, was 40.9% compared to 34.1% a year ago. Compared with the third quarter, income from operations increased by 17.4% and operating margin increased from 37.8% to 40.9%, mainly attributable to our revenue increase. On Slide 25, adjusted EBITDA increased 17.2% year-over-year to RMB130.6 million, and the EBITDA margin increased to 45.1%. Our core net income increased 22.3% to RMB109.3 million, and the core net margin was 37.7%. If we compare with Q3, adjusted EBITDA increased by 17.8%; adjusted EBITDA margin increased 3.5%. Core net income increased by 18.3% and the margin increased 3.1%. Next, please turn to Slide 26. Net income per ADS was RMB0.83, that is $0.13, up from RMB0.75 1 year ago. Core net income per ADS, basic and diluted non-GAAP, was RMB1.06, that is $0.16, up from RMB0.87 in 2019 and up from RMB0.90 at the end of the third quarter 2020. Let's now take a look at Slide 27. As of December 31, 2020, the company had total cash and cash equivalents, restricted cash, short-term investments, investments in equity securities and time deposits of RMB1.9 billion compared to RMB1.82 billion as of September 30, 2020. The increase from the third quarter was primarily attributable to increased cash inflow from operating activities, offset by loans to franchisees, investment and upgrade costs at our L&O hotels. The cash and cash equivalents provide us with ample resources as we continue to evaluate potential investments and support our franchisees. Lastly, on Slide 28, you can see the significant impact that COVID-19 has had on our business. Assuming the pandemic remains under control in China, we expect total revenues for the full year of 2021 to grow 48% to 53% over 2020 levels and 25% to 30% over 2019. This concludes our prepared remarks. Operator, now we are ready to begin the Q&A session.

Operator, Operator

Your first question comes from Praveen Choudhary from Morgan Stanley.

Praveen Choudhary, Analyst

Thank you for the presentation. It's impressive to see that the company emerged from COVID in a strong position. My first question pertains to the competitive landscape. I've heard from some competitors that while others struggled, larger companies like Huazhu were able to add more hotels due to their financial strength and scale. However, I noticed that your net openings for 2020 weren't as robust as expected considering that context. I'd like to understand the factors at play there. My second question is about the current quarter. How are you performing so far, and what are your expectations for RevPAR? I know you provided revenue guidance, but how are you projecting RevPAR trends for the first half relative to the second half?

Alex Xu, CEO

Okay. Praveen, first, I will have Selina answer the second question in terms of first quarter RevPAR trend. The first quarter we saw some resurgence in certain cities and provinces, so the occupancy and RevPAR were lower than the same period of 2019. We also provided franchisee support in terms of waiving certain fees and franchise fees. As for adding hotels in 2020, in the first 6 months, especially the first two quarters, we did see slower movement in terms of goods and people, construction companies, and also some concerns about continued investment in renovating hotels for opening. Therefore, if you can see the numbers for the total year of 2020, we did not add as many as we projected. I think Selina projected 700, which was short. But I think we plan to capture that in 2021. For instance, I think in the first quarter, we aim to add about 200 hotels, compared to 60 in 2020. So that’s mainly the impact of COVID for the majority of the first half of the year of 2020. Okay. So, Selina?

Selina Yang, CFO

Praveen, as for the second question, regarding the RevPAR trend in the first quarter of this year, we observed that RevPAR in January decreased by around 20%. In February, due to the Chinese spring festival, the occupancy rate and RevPAR dropped to the lowest point. However, in March, we observed the RevPAR rebounded quickly, declining by less than 10%. By the end of March and early April, our occupancy rate has recovered to 78.5%, nearly 80% recovery compared to 2019. Our RevPAR has also recovered to nearly 97% compared to 2019. So especially during the first two weeks of April, we observed that the RevPAR has continued to recover compared to 2019.

Praveen Choudhary, Analyst

And if I can follow up on the RevPAR trend. I know in the second half of 2019, it was a low base. Things were a little bit difficult. So as we go to the second half of 2021, barring any new flare-up of COVID, should we expect the RevPAR to be up compared to '19, whether it's 5%, whether it's 10%? The reason I'm asking is that what's embedded in your guidance of revenue growth for the full year in terms of second half RevPAR versus '19?

Selina Yang, CFO

Okay. Thank you, Praveen. As for our guidance, I think it's a composition of our F&M expansion and our newly opened L&O hotels. For the normal expansion of our F&M hotels, our expectation for RevPAR in the second half of this year is to reach the same level as 2019 for the third quarter, and for the fourth quarter, we expect it to be 2% to 3% above the level of 2019.

Praveen Choudhary, Analyst

Great. Super. I had some strategic questions. I just don't want to take a lot of time for you. For Alex, one question is about acquisition. You have a lot of cash. You have been discussing this for some time. You did some acquisition in Argyle and Urban. What's the plan for the future, considering there will be many opportunities at this time? And the second question was any plans for listing in Hong Kong? That's it for me.

Alex Xu, CEO

Okay. Praveen, we accelerated our growth in the first quarter of this year by providing support in the areas with less growth, such as Southeast China, Southwest China, and Central China. We are providing some liquidity for our franchisees and good franchisee support. If there are strategic locations and hotels available, we may add selectively L&O hotels. We are continually evaluating smaller regional opportunities with a robust operating team, although not as big as we discussed before. We will consider partnerships or investments in those areas. We are aggressively evaluating those opportunities. We also aim to understand the impact of new dynamics on these cities, regarding tourism and business travelers and how that affects cash flow for our hotel investments, making smarter decisions to ensure not only growth but profitable growth. Thank you, Praveen.

Colin Yao, Analyst

And congratulations on the robust recovery in RevPAR. My first question is also about M&A. Management mentioned that the company will be doing more leased and owned hotels in strategic locations. I would like to understand the reasoning behind that decision. Why would we like to do L&O hotels, how many are we going to open this year, and will we consider forming a JV like some of our peers likely with property owners or developers?

Alex Xu, CEO

We're focusing on L&O hotels because we currently have the lowest number of L&O hotels among our peers. Over the past several years, we haven’t pursued many because of the dramatic increase in rents and construction costs. However, this year, we see these costs coming back to reasonable levels, and we believe we need representative hotels in key locations to establish brand standards and recruit the best people. This will also accelerate our growth in the F&M segment, as we can earn better returns with reasonable control of costs. We are also identifying improved hotels where previous owners may require financial assistance, allowing us to potentially partner or purchase. That’s the rationale behind this strategy.

Selina Yang, CFO

Thank you, Alex, and thank you for your question. Our forecast is made on a consecutive basis. We expect a decrease of 3% to an increase of 2% in terms of RevPAR compared to the year of 2019. In our forecast, the increase of 25% to 35% is composed of 20% contribution from our normal expansion of F&M hotels and the balance coming from newly opened L&O hotels. Regarding the potential listing in Hong Kong, we are considering it and will provide information when necessary.

Bruce Mi, Analyst

I have two small questions. First, on the L&O hotels, do you have a target for the contribution from L&O hotels in total hotel count? As I see, it's only about 1% in 2020 and 2019. As you are accelerating the opening of L&O hotels, what's your opening plan for 2021? Do you have plans to increase its contribution? My second question is about the outlook for the upcoming Labor Day holiday. Could you give us some insight on that? How is the booking data for this holiday?

Selina Yang, CFO

Thank you for the question. Regarding our plan to open L&O hotels this year, we expect about 10% contribution from the newly opened L&O hotels. However, it's challenging to provide a specific number, as we only want to open hotels in properties that meet our requirements. As for the second question about the May Day holiday, from the advanced reservations, we see around 30% in terms of occupancy already. This signals to us that the occupancy rate will continue to rebound during the upcoming holiday.

Alex Xu, CEO

I'm adding a bit more to Selina's comments. We do not want to force a particular number for opening L&O hotels. The property needs to be right and should yield sound financial returns. We are seeing more opportunities this year, particularly from the latter half of last year and the first quarter of this year. I want to clarify about Selina’s points. We do not wish to give unrealistic projections of RevPAR growth. We're anticipating RevPAR in the range of about 3% down from 2019 to 2% up from 2019, which we believe balances the challenges posed by the pandemic. Factors like personal consumption stress and corporate travel budgets remain a concern. Our hotels mostly cater to business travelers, which is a significant advantage amidst these challenges.

Bruce Mi, Analyst

For our newly opened L&O hotels this year, will it be primarily in the mid-to-upscale segment?

Alex Xu, CEO

Yes, the newly opened L&O hotels will primarily focus on mid-to-upscale segments in areas where we have less presence, such as the South, Southeast, and Southwest. So that is correct.

Operator, Operator

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

Selina Yang, CFO

In closing, on behalf of the entire GreenTree management team, we thank you for your interest and participation in today's call. If you require any further information or have plans to reach us, please contact us. Thank you all.

Alex Xu, CEO

Thank you.

Operator, Operator

The conference has now concluded. Thank you for attending the conference today. You may now disconnect.