H World Group Ltd Q3 FY2020 Earnings Call

Ladies and gentlemen, thank you for standing by. Welcome to Huazhu Group Limited Q3 2020 Earnings Conference Call. Please be advised that today's conference is being recorded. I would like to hand the conference over to your first speaker today, Mr. Jason Chen. Thank you. Please go ahead.

Thank you, Karina. Good morning and good evening, everyone. Thanks for joining us today. Welcome to Huazhu Group 2020 Third Quarter Earnings Conference Call. Joining us today is our Founder and CEO, Mr. Ji Qi; our President, Mr. Jin Hui; our Chief Digital Officer, Ms. Liu Xinxin; and our CFO, Mr. Teo Nee Chuan. Following their prepared remarks, management will be available to answer your questions. Before we continue, please note that the discussion today will include forward-looking statements made under the safe harbor provisions of the United States Private Securities Litigation Reform Act of 1995. Forward-looking statements involve inherent risks and uncertainties. As such, our results may be materially different from the views expressed today. A number of potential risks and uncertainties are outlined in our public filings with the SEC. Huazhu Group does not undertake any obligations to update any forward-looking statements, except as required under applicable laws. On the call today, we will also mention adjusted financial measures during the discussion of our performance. Reconciliations of those measures to comparable GAAP information can be found in our earnings release that was distributed last Friday. As a reminder, this conference call is being recorded. The webcast of this conference call as well as a supplementary slide presentation is available on Huazhu Group's website at ir.huazhu.com. With that, now I will turn the call over to Mr. Ji Qi.

Good morning and good evening, everyone. Thanks for joining us today. 2020 is a challenging year for the China lodging industry due to the impact of COVID-19. However, we are very glad to see the whole industry is recovering, thanks to the Chinese government's effective preventive measures and cooperation from the Chinese people. In addition, the recovery is also supported by various government stimulus policies released post the COVID-19 pandemic. Starting with the first slide. This year, 2020, is also a very special year for Huazhu. It's our 15th anniversary. We also successfully completed our Hong Kong secondary listing in September, which is another big milestone for Huazhu. The secondary listing not only brought us more capital but also enhanced our company's competitiveness in the whole market. Moving to pages three and four, every company has two sides. Despite this huge challenge, COVID-19 also provided a golden opportunity to speed up consolidation in the upcoming years. Looking back at the last two decades of each crisis, such as SARS in 2003 and the financial crisis in 2008, the chain penetration of the China lodging industry accelerated. We believe it will repeat this time. In fact, compared with 2019, we saw the total number of hotel rooms decline by 3.7% as of Q3 2020, while chain hotel rooms actually increased by 2.8% during the same period. Therefore, we think industry leaders like us will see the consolidated market. Now we move to Page 6. Huazhu is not a traditional hotel company. We build our unique 3-in-1 super composite business model. The business includes brand, traffic, and technology. Brand is fundamental. It means combining a strong brand portfolio with a massive hotel network to achieve a dominant offline presence. Our near-term target is to reach 10,000 hotels in 1,000 cities by 2022. Traffic is crucial. It means more and more sales driven by a strong policy program. Technology is a catalyst. It means future development and utilization of advanced technology to achieve a fully digital process and improve operational efficiency. We think the lodging industry is entering a new stage. Our 3-in-1 super composite business model will still be in the leading position in supporting our long-term growth. Now I will turn the call to Jin Hui to discuss our 2020 strategy review. Thanks.

Thanks, Ji Qi. Good morning, everyone. Before we review our 2020 strategic review, I would like to first share with you our China business recovery situation and update. Please turn to Slide 8. From the occupancy rate, by the fourth week of November, our weekly average occupancy rate was roughly 76%, which was 2.6 percentage points compared to last year. We're also very happy to see that there were several weeks when the occupancy rate was actually higher than the same period last year. However, according to the STR data, the entire China lodging industry occupancy rate was only 62%, which is 7.2 percentage points lower compared to last year. Therefore, we can see that Huazhu continuously leads the recovery and achieves higher than industry recovery by 14 percentage points. Turning to Slide number 9, it shows our current recovery trend of the RevPAR. The trend also shows the tick shape in recovery trends mentioned by Ji Qi earlier. In September, our blended RevPAR has recovered to roughly 100% compared to 2019. In October, the recovery also achieved roughly 98% compared to 2019, which is close to 100%. However, considering the uncertainties brought by the current resurgence of COVID-19 in Shanghai and the future potential resurgence of COVID-19 in some other regions during the winter season, we still hold a cautiously optimistic view for the next one to two quarters. Turning into Page 10, it shows us our three key strategic focuses for 2020. There were three main parts. The first one is the accelerated quality hotel expansion; the second one is multi-dimensional direct sales; and the last one is a global technology-based shared service platform. I and Liu Xinxin will introduce an update on these three areas. I will first discuss the accelerated quality hotel expansion area. After my part, I will let Liu Xinxin introduce the direct sales and global technology-based shared service platform part. Okay, please look at Slide number 11 for the hotel expansion. This year, we focused on more quality expansion. By looking at our new signings of hotels, from the first quarter to the third quarter, we have seen that our soft brand signing numbers have been declining, while our standardized brand signing numbers have been accelerating. We also optimized our soft brand strategy. First of all, we redefined our soft brand strategy by removing soft brand hotels that do not meet our quality standard as well as raising the entry threshold for the soft brand hotels. Also, our soft brand now has been serving as our reservoir for our standardized brand and preparation for the future standardized brand expansion. Additionally, we have been continuously upgrading our products to enhance our product quality. You can look at our Slide number 12. In Slide 12, that shows that we have introduced and launched our new version for the HanTing brand and the Hi Inn brand. For the HanTing brand, we upgraded from 2.0 to 3.5, and for the Hi Inn brand, we upgraded from 4.0 to 6.0. Also, in Page 13, for our acquired brands, we also introduced and launched our Orange and Crystal Orange brands from 1.0 to 2.0 version. In Slide 14, on hotel expansion, we also focus on more lower-tier cities' penetration this year. At the end of October, roughly 44% of our net openings of hotels came from the Tier 3 and below cities, close to 50% of our net openings. By looking at our existing sales network, around 33% of sales comes from the third tier and lower cities, and roughly 50% of the pipeline comes from the lower-tier cities. Now turning into Slide 15. As Ji Qi mentioned earlier, post COVID-19, there will be a consolidation acceleration. By looking into Huazhu's new signings data, which also shows this trend, from January to October, our conversion rate achieved 59%, which was higher than last year at 54%. This is a very clear trend on the consolidation acceleration. With that, Liu Xinxin will give you an update on the sales and technology areas.

Thanks, Jin Hui. Good morning and good evening, everyone. As shown on our Slide 15, we are glad to see a very strong recovery in direct sales post the COVID-19 outbreak in Q1. In Q3, rooms nights contributed by members have recovered to nearly the same level as last year at roughly 75%, and the central reservation contribution of room nights also recovered to the same level of last year at 56%. As of Q3, we have over 115 million members, which we think is still small since our target is to sell to a broad population. Therefore, we continually develop new strategies to further expand our membership base. Moving on to Page 17, our current strategy for attracting new members focuses on the entire lifecycle of customers' hotel stay, from before check-in to after check-out. Customers who scan the QR code we provided can become our members for using various facilities and functions of our hotel, such as room TV projection, laundry service, and invoice service, among others. Compared to the previous major way to convert non-members to members through the front desk staff, our new multi-touchpoint strategy is much more efficient without incurring incremental staff costs. Turning to Page 18, corporate sales is another key focus this year. Since Q1, we have been putting a lot of effort into acquiring corporate clients and have achieved initial fruitful outcomes in Q3. By the end of Q3, our total corporate clients increased by 33% to 12,000 compared to the year-end of 2019. We are directly linked with B2B and Huazhu's app from headquarters to headquarters, particularly corporate-to-corporate. Also, our penetration into the top 3,000 publicly listed companies ranked by market capitalization and revenue increased to 30% in Q3 compared to only 10% in 2019. We aim to achieve a 100% penetration rate by the end of 2021. Moving on to Page 19, given the increase in corporate clients, our room nights contributed by corporate clients increased to 10% in Q3 from 8% in Q1, up by 10%. More importantly, as our hotel rooms are still expanding, the absolute number of room nights contributed by corporate clients increased significantly by over 40% year-over-year to nearly 4 million in Q3. Moving to DH, recall that we announced a 500-day digitalization plan for DH in the Q1 earnings release. As of Q3, we achieved substantial progress across various aspects, as shown in Slide 20. Despite the second wave of the COVID-19 pandemic and prolonged recovery in Europe, our digitalization plan remains unchanged. We expect the entire process to be completed by the middle of next year. We would like to fully utilize China's confidence in high operational efficiency and advanced technology capabilities to further optimize the DH operation for better efficiency and profitability in the future. In conclusion, as mentioned by Ji Qi earlier, direct sales are an enhancer, and technology is essential, serving as a catalyst. Both are crucial parts of our 3-in-1 super composite winning formula to support long-term sustainable growth. Hence, we will continually reinforce our direct sales efforts and further develop our advanced technology capability. Now I will turn the call to Teo to discuss our Q3 operational and financial review. Thanks.

Thank you, Xinxin, and good morning, everyone. As Ji Qi mentioned earlier, this dynamic will have to accelerate the lodging industry's consolidations. As shown on Slide 22, at the end of Q3, we had a total of 6,507 hotels with 634,087 rooms in operation, an increase of 26% from Q3 2019. Excluding the 23,322 rooms of Deutsche Hospitality hotel rooms, at the end of Q3, Legacy Huazhu also recorded room inventory growth of 21%, with 610,765 rooms at the end of Q3. Our China operation has been steadily recovering since Q2 this year. We achieved a RevPAR close to 12% in September and October and more than 9% in November. However, we need to remain cautious during the coming winter as we have seen some resurgence of COVID-19 in selected cities in China that could potentially impact our recovery in December and into the next couple of months in 2021. Our European business has also been steadily recovering from Q2 up until late September. However, the second wave of the pandemic in Europe since late September has impacted a number of countries in Europe. For example, a number of countries imposed lockdowns from the beginning of November, which caused a decline in hotel occupancy. I will share more in the later part of my presentation. Our system-wide hotel turnover recorded a positive 7% increase, from CNY 9.9 billion in Q3 last year to CNY 10.5 billion this year. Excluding DH, legacy Huazhu hotel turnover would have declined by 1% to CNY 9.8 billion. We will have separate discussions on our blended RevPAR for legacy Huazhu and DH because the pandemic impacted these two regions at different times with different effects. Moving to Page 23, as mentioned by Jin Hui earlier, our blended RevPAR for legacy Huazhu has been recovering steadily and has reached approximately 100% in September compared to 2019. However, for the entirety of Q3, our RevPAR still declined by 17% to RMB 179. The ADR increased by 11% to CNY 218, and occupancy decreased by 6 percentage points to 82% in Q3. With the revival of RevPAR in China, we are glad to report that we recorded a positive EBITDA of more than CNY 850 million in Q3 for our Chinese business, compared to CNY 137 million in Q2. Turning to Page 24, in Q3, DH recorded a 52% decline in blended RevPAR to EUR 35. This reflects a gradual recovery since July compared to more than an 18% decline in Q2. DH blended RevPAR declined to EUR 35 in Q3 compared to EUR 74 last year. DH ADR decreased by 5% to EUR 93, while occupancy decreased by 50 percentage points to 38% from 76% last year. Subsequently, in Q4, due to the second outbreak and lockdown in certain countries in Europe, our RevPAR dropped further in October and the beginning of November, but started to recover in the later part of November. Please see our financial results on Slide 25. Our net revenues increased by 3% in Q3 year-over-year, better than our previous guidance of 0% to 2%. Excluding DH, legacy Huazhu revenue dropped by 10.5%, within our guidance of 10% to 12%. Breaking down the revenue growth in Q3, our net revenue from our leased and operated hotels increased by 2% year-over-year, and net revenue from our managed hotels increased by 6% year-over-year. Excluding DH, our leased revenue would have declined by 18%, while our managed revenue would have increased by 4%. In Q3, revenue contributed by our asset-light managed business model accounted for 32% of total revenue, increasing by 1 percentage point from 31% in Q3 2019. However, if we exclude revenue from DH, which mainly comprises revenue from leased and operated hotels, legacy Huazhu's revenue contribution from the managed business model would have improved by 5 percentage points to 36%. We expect the contribution from our managed business to continue to increase going forward. The contribution from DH in the midscale and upscale hotel segment, as shown on Slide 26, in Q3, revenue from mid and upscale hotels increased by 9% to CNY 1.9 billion. Excluding DH, revenue from mid-to-upscale hotels would have reduced by 16% to CNY 1.5 billion. Economy and midscale hotels have been the bedrock of legacy Huazhu's business. These two segments contributed a total of 96% of our revenue. Including DH, the revenue split would have been: economy, 39%; midscale, 49%; and upscale, 12%, respectively. Let's now turn to Page 27 for the operating profit and loss. The reported loss from operation was CNY 200 million compared to operating income of CNY 703 million last year. Due to a strong recovery trend in our China business, legacy Huazhu recorded operating profit of CNY 523 million while legacy DH recorded an operating loss of CNY 723 million in Q3. Excluding DH, hotel operating costs were CNY 1.94 billion compared to CNY 1.95 billion in 2019. The higher hotel operating costs mainly arose from higher rental expenses due to increases in rental expenses, depreciation and amortizing costs, and consumables related to several new upscale leased and operated hotels that started business this year. In addition, higher other operating costs also included a provision for impairment for assets related to terminated leased and operated hotels of CNY 15 million. As mentioned during our earnings call in March, we took this opportunity to mobilize our team to improve our cost structures, including but not limited to streamlining the office headcounts. The effects have gradually been reflected in our selling and general administrative costs. Excluding DH, we recorded lower selling and general administrative expenses at CNY 230 million in Q3 compared to last year of CNY 381 million. In particular, selling expenses were lower by CNY 12 million. General and administrative expenses were lower by CNY 42 million compared to last year. Additionally, we recorded a high amount of tax refunds of CNY 100 million on income tax previously paid in 2019. Including DH, the selling and administrative expenses, other operating income totaled CNY 832 million. This amount is significantly higher than CNY 206 million recorded in Q2 2020 because in Q3, we recorded a goodwill impairment of CNY 437 million related to DH due to the prolonged timing of recovery in our European business. In addition, DH recorded a subsidy income and insurance compensation received due to business disruptions totaling CNY 137 million in Q2, which did not recur in Q3. As also mentioned during our last earnings call presentation in the previous quarters, we will slow down our pace in opening leased and operated upscale hotels and focus more on developing our managed business. This has been reflected in the lower pre-operating expenses compared to Q3 2019 and Q2 2020. Turn to Page 28. Our adjusted EBITDA declined to CNY 184 million compared to CNY 901 million last year. Our adjusted net income declined from CNY 434 million to a negative of CNY 218 million. Excluding DH, legacy Huazhu recorded adjusted EBITDA of CNY 853 million, approximately 5 percentage points lower compared to Q3 2019, and net income of CNY 476 million, approximately 10% higher than 2019. Due to the impact of COVID-19, we made a provision related to the DH acquisition totaling CNY 437 million. This has been reflected in both our adjusted EBITDA and adjusted net loss of CNY 218 million under legacy Huazhu and legacy DH. The non-GAAP pro forma adjustment mentioned on this page includes the unrealized gain or losses from the fair value changes of equity securities related to our investors. Let's move on to the update on the financial impact from COVID-19 on our Chinese business on Page 30. As mentioned by Jin Hui, our China operation has been recovering since the last few quarters. We managed to generate CNY 1.2 billion of operating cash flow in Q3. We expect our revenue to continue to recover in Q4. However, we need to be cautious regarding the resurgence of COVID-19 during this winter. Over the last few quarters, we managed to secure the approval for the syndication loans to amend our financial covenants in April. With this amendment, we raised $500 million in convertible bonds in May, which helped support Huazhu's share price. With the immediate liquidity risk expected, our stock price improved, and we reached CNY 5.2 billion in equity from our Hong Kong secondary listing in September. As mentioned in our previous call, we had a convertible note totaling $425 million that gave investors a right to put the notes back to Huazhu on November 2, 2020, should the convertible price be below $100 million. All the liquidity improvement measures mentioned above helped to restore investor confidence in the $425 million convertible bond. Consequently, we only received a $6,000 redemption request from the convertible bond investment on November 2, 2020. This convertible bond will not be due for repayment until the end of 2022. I'm also happy to report that Huazhu's current share price is above the conversion price of these 2017 convertible notes. With the proceeds raised and our operating cash flows, we repaid several of our bank borrowings, including the full repayment of revolving facilities amounting to $500 million. This will not only allow us to reduce interest payments on our bank loans, but also provide us with the flexibility to draw them down in the future when needed. We will also use a portion of these proceeds to repay CNY 900 million of the Chinese bank borrowings with higher interest rates. Supported by recovery in the Chinese market and our cost-cutting strategies, we have recorded positive EBITDA since May. At the end of June, we had a cash balance of CNY 6.6 billion and unutilized bank facilities in China of CNY 4.1 billion to finance our operations. Regarding the financial impact of COVID-19 on Deutsche Hospitality on Page 31. At the peak of COVID-19 in Europe at the end of March and early April, the local government requested nearly 73% of these hotels to close to contain the spread of the virus. Since May, European governments have gradually reopened the economy following some early success in containing this pandemic. In this connection, we saw a steady recovery of occupancy up to 42% at the end of September. However, this recovery trend has been interrupted by the second wave of COVID-19 in certain countries in Europe. The German government instructed a lockdown from early November to early January. In this connection, we have seen RevPAR drop below EUR 10. However, in November, we noticed improvement in occupancy and RevPAR, trending around EUR 16 by the last week of November. We have restarted negotiations with landlords to defer rental repayments. Additionally, we have placed our staff on temporary furlough and frozen headcounts while reducing discretionary spending and capital expenditure. We have also secured long-term financial support from local German banks totaling EUR 38 million to support DH operations. Turning to Page 32 regarding guidance. We expect our net revenue for Q4 2020 to grow by 0% to 3% or decline by 4% to 7%, excluding Deutsche Hospitality. We maintain our gross soft opening target of 1,600 to 1,800 in 2020. On the other hand, we estimate our hotel closures to be in the range of 550 to 600.

Your first question comes from the line of Justin Kwok from Goldman Sachs.

I have three questions. Two are about strategy and one relates to recent operations. First, regarding the market consolidation after COVID, what do you see in the M&A landscape, both in onshore China and in other regions where you operate, such as Europe and Asia? What is your current appetite for opportunities? Are you ready to make a move in this area? Second, I noticed there wasn't much discussion about the high-end hotel business in the presentation. Can you provide an update on the progress of the DH brand rollout in China? What are your preparations for this? Lastly, concerning your recent operations, your occupancy appears to be approaching pre-COVID levels. What are your expectations for room rates, particularly heading into 2021? Do you anticipate a return to like-for-like growth in room rates in China? Those are my three questions.

So basically, for the top-tier companies, like us, and other choose-own companies, those choose-and-owned companies supported by us and supported by the capital markets, but post the COVID-19, we have been seeing some minor opportunities, which are more like cooperation instead of major M&A. Not only for introducing the DH brands to mainland China, we also introduced several new products such as Joya Hotel and Hua Ting Tao Blossom. And as a Chinese old saying goes, we must build our house during sunny days. So basically, currently, the overall market is still in quite a tough period. So Huazhu is always trying to move back in advance before the market gets too hot. So as we have been dominating or we have a strong presence in the middle scale and economy hotels, we want to move a step forward to enter into the upscale market. Okay. In terms of the ADR recovery, you have been seeing that the OCC has recovered roughly to the same level as 2019. However, for the ADR recovery, it really depends on the entire lodging industry recovery, especially for the middle upscale and upscale segments. Because as you can see, post-COVID-19, this middle upscale and upscale hotels have faced quite a lot of pressure on ADR. We also analyzed a very mature market in the U.S. in terms of hotel recovery after the crisis. We have been seeing a similar trend, where OCC has been leading the recovery while ADR has to follow. As we expect that the vaccine will be available in the next one to two quarters, we remain quite confident that ADR could continue to trend upwards. I think especially for our strong presence in the economic and mid-scale hotels, we believe that ADR for these segments could recover slightly faster. However, for the upscale and middle-upscale segments, it's likely to take longer.

Your next question comes from the line of Billy Ng of Bank of America.

I have two questions here. First of all, I just want to follow-up on the RevPAR questions that Justin just asked. Can you tell us a little bit more about the same-store RevPAR trend? I think from the presentation, you guys showed that the blended RevPAR is largely recovered at this point. But can you tell us a bit more about the same-store RevPAR trend at this point and what you are seeing recently? And also in terms of the revenue guidance for the fourth quarter, what's the implied same-store RevPAR that you guys are using in order to get to the 4% to 7% decline of the revenue from China for the fourth quarter 2020? That's my first question. And I will ask another question later, yes.

Billy, this is Teo. The revenue guidance is actually based on the blended RevPAR rather than same-store RevPAR. The same-store RevPAR was actually slightly below the blended RevPAR because the blended RevPAR takes into account the new hotels opening, okay? So it's a couple of percentage below. However, if they are taking line by line, the recoveries in the blended RevPAR also reflects the same hotel RevPAR recovery as well. Now to answer the second question, in October and November, we have seen pretty strong recoveries in Q4. However, due to some resurgence in particularly the bigger cities like Shanghai and Tianjin, we have actually taken a more cautious outlook on the blended RevPAR for December. So we are expecting approximately 85% to 90% recoveries. But let's see how it goes. So far, the trend is actually on the positive side, at the high end or even slightly higher than the higher end of estimates, but there are still three more weeks to go. So we have to remain cautious and monitor the numbers closely. Thank you.

And my second question is, in terms of your presentation, you guys also showed that the Tier 3 and Tier 4 cities' exposures are increasing, and more than half of the pipeline will come from the Tier 3 and Tier 4 cities' exposure. I just wonder, can you tell us roughly what kind of profitability for the franchisees in Tier 3 and Tier 4 cities are achieving right now in terms of return and margin? And how does that compare to the Tier 1 and Tier 2 cities' franchisees? Also, in terms of RevPAR, going forward, what do you think the difference will be between Tier 1, Tier 2 cities and the Tier 3, Tier 4 cities' hotel RevPAR? Is that going to be like a 30%, 40% difference? Or what should be the right number to think of?

Billy, it's Teo again. Now I think to answer the questions on the profitability of the lower-tier cities. Now this is how we see it. I would say that for hotel operations, the largest costs are actually rental, people cost, and depreciation and amortization. Now we have to acknowledge that currently, at this moment, what we have seen is that the RevPAR for the lower-tier cities is actually lower compared to the higher-tier cities. However, the stronger recovery in lower-tier cities means that they are closer to the range of the higher-tier cities. Therefore, the RevPAR has been pretty good or even slightly better compared to the higher-tier cities. However, the rental cost in the lower-tier cities is much lower. The people costs are much lower, while the depreciation and amortizing costs are relatively the same compared to the higher-tier cities. I won't be able to comment exactly on the profitability to the franchisees. But what we have observed is that franchisees, when making investment decisions on opening Huazhu's hotels, are not comparing the hotels in higher-tier cities. The reason is that for the hotel business, it is a local business. The local franchisees have connections in the lower-tier cities to secure properties. On the other hand, they do not have access to the business network in the higher-tier cities to secure properties. Therefore, they are not comparing those. Secondly, with excess property in lower-tier cities, they are actually comparing opening Huazhu hotels to other brands in the local areas or to other commercial activities in the local areas. We must acknowledge that the business activities in lower-tier cities are slightly lower due to lower disposable income. However, our franchisees are looking for better yields per square meter for the properties they can access. From Huazhu's perspective, our fee revenue is based on a percentage of total hotel turnover. Our operating leverage is very high due to the centralized operating platform. Our incremental cost compared to our fee revenue is minimal, making this a win-win situation for both franchisees and Huazhu. Thank you.

I have a quick follow-up question. Is the RevPAR difference between Tier 1 cities and Tier 3 and Tier 4 cities increasing or decreasing? How significant is that difference right now?

The RevPAR trend is actually narrowing. As I mentioned earlier, RevPAR in lower-tier cities is actually higher compared to higher-tier cities. So the gaps are actually narrowing.

I just want to give some supplemental information in terms of our lower-tier cities' penetration strategy. Over the past 15 years, we have been serving roughly 300 million to 400 million urban populations. However, we are targeting to serve up to 1.4 billion populations for all consumers. By doing this, we can further strengthen our direct sales and serve more customers. Thank you.

For the lower-tier cities’ penetrations, because over the past few years, the urbanization rate in the lower-tier cities has been increasing, and we have seen the population in these lower-tier cities has also increased. Until now, what we have observed is that in the lower-tier cities, our middle-scale hotels have performed pretty well. For example, our JI Hotels has seen their performance exceed our previous expectations. Going forward, in terms of our lower-tier cities’ penetrations, we will use both middle-scale brands and economic brands. We believe both will be effective. Thank you.

Your next question comes from the line of Lina Yan from HSBC.

My question is about the structure of the new store and the new hotel openings while you maintained the target of 1,600 to 1,800 new openings. However, based on the nine months of new hotel additions, the openings in midscale appear to be below the initial target set at the beginning of the year. I'm curious to know if this situation is temporary or if this shift towards more economy-type openings is expected to continue for a while. As Teo mentioned, our same hotel RevPAR usually runs a few percentage points below the blended RevPAR because of this mix. Yet, this year seems different from previous years, so I’d like to gain a clearer understanding of this issue.

I will answer your questions. Due to the impact of the COVID-19 pandemic, many middle-scale and middle-upscale hotels have experienced construction delays because of low liquidity, particularly in the second quarter. As a result, there will be delays in new openings. Additionally, many franchisees that previously focused on middle to upscale hotels may postpone their demand due to significant capital expenditures and the effects of COVID-19. Specifically for the Starway brand hotels, we have raised the entry thresholds for franchisees and improved quality standards, which is another reason for the fewer openings this year.

Okay. That's very clear. But is there any data you can share, for example, the monthly opening? Have we seen a pick-up in the opening of new midscale hotels?

We have been working on our new openings plan for next year 2021, and we have been deciding to return the middle-scale hotel openings to the previous general normal level.

I just want to add one more note. We – actually, we have seen that in November, December, we have noted that the pace of hotel openings for the midscale segment has picked up. Thank you.

I would like to hand the conference back to today's presenters. Please continue.

Thank you, everyone, for taking your time with us today. We look forward to connecting with you again in the coming quarters. This concludes the call today. Thank you very much. Bye-bye.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may all disconnect.