Ladies and gentlemen, thank you for standing by and welcome to Huazhu Group Limited 2020 Fourth Quarter and Full Year Earnings Conference Call. I must advise you that this conference is being recorded. I would like to hand the conference over to your speaker, Mr. Jason Chen. Thank you. Please go ahead.

Thank you. Good morning and good evening, everyone. Thanks for joining us today. Welcome to Huazhu Group 2020 fourth quarter and full year 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 United States Private Securities Litigation Reform Act of 1995. Forward-looking statements involve inherent risks and uncertainties. As such, our results might 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 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. Please.

Good morning and good evening, everyone. Thanks for joining us today. 2020 was a challenging year. The COVID-19 pandemic strongly affected both our China and European business. However, now we're happy to see our China business recover strongly throughout the year, especially in the second half of 2020. Thanks to the Chinese government’s effective prevention measures and the cooperation from the Chinese people. More importantly, our hotel networks and the pipeline continued expanding in 2020. Thanks to our dedicated employees, our powerful brand, and solid execution. For our European business, it is still being impacted by the COVID-19 pandemic. We took the opportunity to make some organizational changes and prepare for patient recovery. Moving to Slide 2, we believe that the COVID-19 pandemic has not changed the long-term growth potential of the China lodging market. Following China’s new circulation economic development model mentioned by President Xi, Huazhu has taken steps for our long-term growth. We continue to emphasize our China-focused strategy. We are targeting to open 10,000 hotels in lower-tier cities across China by 2022. Our future strategy will not only focus on speed but also on quality as we have seen before. Secondly, we continue to focus on innovation. We are building our business around a super composite model combining brand, traffic, and technology. We are pushing for the full digitalization of hotels to provide better service for customers, improve hotel efficiency, and generate more profits for our franchises. Last but not least, we've seen an upgrade in our organizational capabilities as key. Our hotel networks are continuing to grow. We're penetrating into lower-tier cities, and we are also speeding up the development of our hotels in Europe. All these strategies require organizational transformation and talent. With that, I’ll turn the call to Jin Hui for our 2020 review and 2021 strategy focus.

Thank you, Ji Qi. Before we talk about the strategic focus for 2021, I'd like to review our achievements in 2020. Please turn to page 5. First of all, we achieved accelerated quality hotel expansion; although affected by the pandemic, the gross opening of our hotels in 2020 still reached 1,649, and the pipeline has increased to 2,449 from 2,262 at the end of 2019. From the beginning of 2020, we paid more attention to quality expansion. We redefined our nonstandard hotels and used this as a basis for the development of standard brands. In the meantime, we've been upgrading our product, launching the new version of HanTing 3.5, Hi Inn 6.0, and version 2.0 of Crystal Orange and Orange. We strengthened our direct sales capabilities through multiple channels. At the plateau level, we launched multiple touchpoints to attract members, such as Wi-Fi and team projection. We equipped local sales staff to push for local sales, and we continued to develop new corporate customers, with corporate membership contribution increasing to 10% in 2020 from 8% in 2019. Lastly, we rolled out our global technology-based shared service platform. In China, we've upgraded our infrastructure, including the rollout of PMS 2020, and we’re working on the digitalization of our operations. Now I'd like to briefly introduce the first-quarter performance of 2021. Please turn to page 6. Due to the impact of COVID-19, several provinces and cities like Hebei, Shanghai, and Beijing saw a decline in our occupancy in January. Additionally, because of the stay-local policy implemented by the government for the spring holiday, occupancy in Chinese cities dropped to the lowest point, but rebounded quickly after the holiday driven by strong travel demand. Our occupancy reached 79% by March 13, only 7% lower than the same period in 2019. Huazhu's performance is actually 21 percentage points higher than the national average. On page 7, it shows the recovery of our RevPAR, following the same trend of occupancy. Due to the COVID-19 impact, our RevPAR was only 70% and 56% of 2019's numbers in January and February, but by March, it had returned to 87% of 2019's figure. Anticipating the upcoming holiday season, we expect the net RevPAR of 2021 to reach 90% to 95% of 2019, and if we exclude the impact of January and February, the RevPAR from March to December could rebound to 95% to 100% of 2019 levels. We will continue to focus on the rapid expansion of our quality hotel network. Ji Qi and I will talk about the execution of our three strategic focuses: rapid expansion of the quality hotel network, multidimensional direct sales, and global technology platform.

Thanks, Jin Hui. Despite the COVID-19 pandemic's impact, we still expanded our membership base from roughly 150 million by the end of 2019 to nearly 170 million by the end of 2020. Our strong direct sales capability was also one of the critical factors driving our strong and better-than-industry recovery during 2020. Going forward, we will further emphasize building even stronger multidimensional direct sales capabilities, focusing on four key aspects: in-store sales, the H-World app, corporate customers, and cross-industry alliances. For in-store sales, we are implementing strategies to attract new members in our hotels with minimal acquisition cost. Customers could scan the QR code we provide to become our members and utilize various amenities and services at our hotels. However, attracting new members is not enough. We also need to retain them and encourage repeat visits. Therefore, we are equipping our offline hotels with comprehensive technical tools and systems such as CRM systems to help them better understand customer needs and enhance service quality. This will enable our offline hotels to attract new members and convert them into loyal customers with high repurchase rates. Moving to our H-World app, we plan to launch the new version, H-World 3.0, in the coming days. Compared to older versions, the new app will offer more membership privileges and efficient services through innovative functions, such as online check-ins and remote room controls. Our goal is to further improve the user experience and increase the repurchasing rate. Moving to our corporate customer development, we are very pleased with the progress made during the last year. Our penetration rate among the top 3,000 publicly listed companies increased from 10% in 2019 to 32% by the end of 2020. Right-hand side of the slides shows some of the corporate customers we signed contracts with recently, which range from state-owned enterprises to global companies and online corporations. We believe corporate customers will continue to play a significant role in our direct sales strategy, especially as we penetrate the high-end segment. Even with nearly 170 million members, we find this number still quite small, as our target is to serve a broader population. Therefore, apart from our organic growth strategies, we are also exploring cross-industry alliances with large traffic aggregator platforms through a strategy we refer to as B2B2X. For the B2B2B model, we are trying to cooperate with platforms commonly used by corporations, enabling their corporate clients to easily book our hotels. For the B2B2C model, we are seeking partnerships with major traffic consumer platforms relevant to hotel services, like local maps and airline bookings, to attract new customers. Moving on to DH, despite the ongoing impact of COVID-19 on our European business, our digitalization project is progressing well. We expect to complete the entire process by mid-2021, leveraging Huazhu's core competencies for optimization and improved profitability in the European market. In conclusion, as mentioned by Ji Qi, innovation is crucial for Huazhu's long-term sustainable growth, alongside enhanced direct sales efforts and technology capabilities.

Thank you, Xinxin. Good morning and good evening to everyone wherever you are. Let's move on to our operational and financial review for 2020. As shown on slide 23, at the end of 2020, we had a total of 6,789 hotels, with 652,162 rooms in operation, which is an increase of 21% from the end of 2019. Excluding the room inventory from Deutsche Hospitality, consolidated into Huazhu from January 2, 2020, legacy Huazhu room inventory would have been 628,135 at the end of 2020, an increase of 18% from the end of 2019. Despite the prolonged lockdown due to the COVID-19 pandemic, we accelerated our hotel openings in the second half of 2020. However, the total hotel turnover at the hotel level declined by 6% to RMB33 billion; excluding Deutsche Hospitality, total turnover reduced by 12% to RMB30 billion from a year ago. Turning to page 24, legacy Huazhu blended RevPAR for Q4 2020 recovered to 97% of the 2019 level. The ADR in Q4 2020 almost recovered to the 2019 level at RMB231, while occupancy in Q4 was just one percentage point lower compared to 2019. For the full year of 2020, due to lockdowns and travel restrictions from COVID-19 in China, particularly during the first half, our RevPAR declined by 25% to RMB149 compared to last year, largely due to an 11% drop in ADR and a 13 percentage point decline in occupancy. On page 25, our legacy Deutsche Hospitality business experienced severe impacts due to the COVID-19 pandemic in Europe since March 2020. Our European operations recovered during the summer but have faced additional challenges from the second and third waves of the pandemic starting in September 2020. Many European countries imposed lockdowns to contain the spread of the virus. For example, the German government initially planned to lock down from November to early December 2020, later extending it through January and February, and now to April 18, 2021. These measures significantly impacted our RevPAR. In Q4 2020, legacy DH blended RevPAR declined by more than 24% to EUR31 compared to Q4 2019. The ADR dropped by 22% to EUR76, and occupancy fell by 45 percentage points compared to Q4 2019. For the full year 2020, blended RevPAR dropped by over 50% to EUR31 due to lower ADR and significantly reduced occupancy. Our net revenue grew by 6% in Q4 but declined by 9% for the full year of 2020, which was a better trend than our previous guidance. Breaking down the revenue growth in Q4, net revenues from leased and operated hotels improved by 5% year-over-year, while net revenues from managed and franchised hotels increased by 7% year-over-year. In Q4 2020, the revenue mix of our Deutsche Hospitality business contributed to a pronounced weakening of revenues from leased and operated hotels. Revenue from our asset-light managed business models accounted for 33% of total revenues, the same as 2019. Excluding the Deutsche Hospitality revenue, the contribution from asset-light managed models improved by three percentage points to 35% in Q4 2020. We expect the contribution from our managed business to continue increasing. Please refer to slide 27 for operating income and margin details. Due to the COVID-19 impact in 2020, our revenue from mid and upscale hotels decreased by 3% to RMB6 billion, accounting for 54% of total net revenue. Excluding revenue from Deutsche Hospitality, revenue from mid and upscale hotels would have decreased by 28% to RMB4.5 billion. In Q4 2020, the reported loss from operations was RMB134 million, compared to a profit of RMB486 million last year. The loss from operations included a non-cash fixed asset impairment of RMB140 million related to two hotels in Deutsche Hospitality that we plan to close upon expiry of the leases, as well as a couple of hotels in China. Excluding this fixed asset impairment, we were close to breakeven. However, excluding Deutsche Hospitality, which has continuously been affected by the second and third waves of COVID-19 since September 2020 as well as the fixed asset impairment, legacy Huazhu recorded an income from operations of RMB315 million in Q4 2020. The hotel operating costs and other costs for Q4 2020 totaled RMB2.7 billion. As mentioned, this includes a non-cash fixed asset impairment of RMB140 million related to hotels that we plan to close. Excluding Deutsche Hospitality, hotel operating costs amounted to RMB2 billion compared to RMB1.9 billion in Q4 last year. The higher operating costs were primarily due to increased lease costs, depreciation, and the amortization costs related to our leased and operated hotels opened in Q3 and Q4 of 2020. As mentioned earlier, we will use an asset-light approach to accelerate the development of our upscale hotel brands in China. In Q4, we recorded selling and general administrative expenses of RMB399 million. Excluding Deutsche Hospitality, our SG&A expenses were RMB388 million compared to RMB375 million in Q4 last year. The increase in selling expenses in Q4 was mainly due to several significant promotional events, including the Huazhu World Conference held in various locations and the establishment of local direct sales teams to boost our B2B business as mentioned by Xinxin earlier. The increased rent expenses were partially offset by a decrease in general administrative expenses due to a headcount reduction implemented in Q1 of 2020. Turning to page 29 for the operating income and margin for the full year, the reported loss from operations was RMB1.7 billion compared to a profit of RMB2.1 billion last year. Excluding Deutsche Hospitality, which continued to be affected by COVID-19, legacy Huazhu recorded a loss of RMB100 million in 2020. Hotel operating costs for the full year amounted to RMB9.8 billion. Excluding Deutsche Hospitality, hotel operating costs totaled RMB7.4 billion compared to RMB7.2 billion for 2019. The increase in operating costs was mainly due to higher lease costs, depreciation, amortization, and expenses related to new lease and operated hotels that opened in 2020. For the full year of 2020, we recorded a selling and general administrative expense of RMB1.8 billion. Excluding Deutsche Hospitality, our SG&A expenses amounted to RMB1 billion compared to RMB1.3 billion last year. The reduction in SG&A costs resulted from aggressive cost-cutting measures and headcount restructuring undertaken in Q1 2020. On page 30, our adjusted EBITDA decreased to RMB375 million in Q4 2020 from RMB854 million last year. This figure was impacted by the fixed asset impairment of RMB140 million mentioned earlier. Excluding Deutsche Hospitality, legacy Huazhu adjusted EBITDA was RMB764 million, representing an 11% decrease compared to last year due to the pandemic resurgence in selected cities within China during November and December 2020. In Q4, we recorded an adjusted net loss of RMB8 million; when excluding Deutsche Hospitality, we recorded an adjusted net income of RMB300 million, which represents a 27% decrease in adjusted income due to lower RevPAR. For the full year 2020, our adjusted EBITDA loss was RMB244 million. This amount considered a goodwill impairment of RMB437 million in Q3 and fixed asset impairment of around RMB272 million, totaling RMB700 million in impairments for 2020. Excluding these two non-cash impairments, our adjusted EBITDA would have been positive territory. Excluding Deutsche Hospitality, legacy Huazhu recorded a positive adjusted EBITDA of RMB1.1 billion. The adjusted net loss for the full year was RMB1.8 billion, while excluding Deutsche Hospitality, legacy Huazhu recorded an adjusted loss of RMB459 million. On page 33, regarding the COVID-19 update, when we previously reported the impact of COVID-19 in June 2020, we were experiencing negative operating cash flow and significant cash shortfalls. We also had substantial risks associated with a potential default on our $1 billion syndication loan due to a drop in EBITDA that fell short of financial covenants. There was also considerable redemption risk from our $475 million convertible bond due to our depressed share price falling below $0.30. Fortunately, we came a long way since last June. As Jin Hui mentioned earlier, our China business has recovered strongly from the pandemic, and so has our EBITDA and operating cash flow. Additionally, we raised $500 million from a convertible bond issuance in May 2020, followed by approximately $900 million from secondary listings on the Hong Kong Stock Exchange. This capital helped us reduce our net debt position from nearly RMB10 billion at the end of Q2 to RMB5 billion at the end of Q4 2020. The risk of breaching financial covenants on the $1 billion syndication loan has been fully resolved. We exceeded the financial covenant waiver condition requiring Huazhu China to record a minimum of RMB1 billion adjusted EBITDA during the second half of 2020, achieving an actual of RMB1.5 billion adjusted EBITDA for that period. The risk of convertible bond redemption has also been mitigated with the recovery of Huazhu’s share price, leading to negligible redemption and a 'put' in early November 2020. Moving forward, the RMB475 million convertible bond will only be redeemable or convertible into shares at the end of 2020. We’re pleased to report that both our convertible bonds are now well above water, making it more likely that investors will convert their bonds into Huazhu shares. By the end of 2020, we had around RMB7 billion in cash on hand, along with unutilized bank facilities totaling RMB6.5 billion. This liquidity positions Huazhu well to manage our bank debt obligations in 2021 and can serve as a cushion for any unforeseen circumstances. Turning to the financial impact of COVID-19 on Deutsche Hospitality, as I mentioned earlier, our European business is dealing with the ongoing second and third wave of the pandemic. The German government initially planned to impose lockdowns beginning in December, now extended until April 18, 2021. The government has also announced strict lockdown measures during the Easter holiday, greatly affecting our operations in Europe. To mitigate these losses, the German government has extended the duration and scope of government subsidies we have received. Based on our estimates, these subsidies should cover the shortfall in EBITDA resulting from the extended lockdown into 2021. We will recognize that income upon receipt of such funds. Similar to our actions in China, we are negotiating with landlords to reduce rental payments. They have been receptive. Additionally, we have temporarily furloughed staff and frozen headcounts while reducing discretionary spending and capital expenditure. We expect a maximum cash flow gap of EUR40 million to EUR50 million for our German operations in 2021, and we are also in discussions with local banks in Germany for additional support. Looking at our guidance for 2021, compared to Q1 2020, we expect our net revenue for 2021 to grow by 8% to 10%, or 61% to 63% without including Deutsche Hospitality. For the full year of 2021, comparing to 2020, we anticipate our revenue to grow by 50% to 54%. To provide a meaningful comparison to 2019, we expect our net revenue for 2021 to decline by 7% to 9%, or 12% to 14% when excluding Deutsche Hospitality. For the entire year of 2021 compared to 2019, we project our revenue growth to be around 36% to 40%, or 15% to 19% without Deutsche Hospitality. As mentioned previously, the Chinese government imposed a stay-local policy during the Chinese New Year period, adversely affecting our performance in January and February 2021. Excluding those two months, we expect net revenue growth of 7% to 9% compared to Q1 2019, and growth of 1% to 3% excluding Deutsche Hospitality. For the last 10 months of 2020, we foresee revenue growth of around 45% to 49%, or 36% to 40% excluding Deutsche Hospitality. We project gross hotel openings to range from 1,800 to 2,000 in 2021, with an estimated hotel closure range of 500 to 550. Now I’d like to open the floor for Q&A.

And our first question comes from the line of Justin Kwok from Goldman Sachs. Justin, your line is now open.

Thanks for taking my question and glad to hear about the strong recovery for March to date, since the further reopening of the country. I have two top-down questions. The first is on the expansion plan and the other on the high-end segment. So on the first, it seems like you guys are on track to achieve 1,000 cities and 10,000 hotels sometime next year. Can you share your thoughts on the next milestones for the company over the next three to five years in terms of city numbers and portfolio size? With that in mind, what would be the split of the segments and cities? The second question is about the high-end side. I'm glad to see you making progress with the transaction with Sunac. Could you share what you're observing for the aggregate growth in your high-end segment expansion plan? You still have your standalone brands like Joya and InterCity, which are not part of the joint venture, so what growth trajectory do you foresee for these brands as well? Thank you.

Okay. We foresee promising growth potential in all segments, Justin, not just upscale but also economy and midscale. We believe that as we penetrate into lower-tier cities, the majority of our development will focus on midscale and economy hotels, while we will add more upscale hotels in Tier 1 and Tier 2 cities. Our target is to reach 10,000 to 15,000 hotels in the next five years, and we expect the majority of these to be midscale and economy hotels.

Huazhu's target is growth across all segments, including economy, midscale, upscale, and resort hotels. I want to echo Chairman Ji's point regarding organizational capabilities. We require transformation across all organizational levels to support this growth. In the upscale segment, we're seeing increased diversified demand from various customer profiles, so we are deploying a multi-brand strategy in this area. For example, InterCity will follow the development of high-speed train networks in China, and Joya embodies a new style reflecting Oriental culture. In summary, we will introduce various types of hotels to cater to different customer needs. Next question, please.

I have two questions. My first question relates to the revenue guidance for 2021. Can you provide us with more detail? I know you mentioned that excluding January and February, the RevPAR growth assumption should be around 95% to 100% of 2019 levels. If we look at the guidance for 2021, what will be the same-store RevPAR growth assumption for both the Chinese portfolio and the DH portfolio?

For the Chinese portfolio, we expect our same-store RevPAR to be in the range of 95% to 100%. For Deutsche Hospitality, we have revised our expectations downwards given the uncertainty surrounding the timing and completion of lockdowns, but we've provided an appropriate range to cover potential shortfalls.

Got it. And the 95% to 100% you mentioned—that's the same-store RevPAR number, correct?

Correct.

Got it. And how is the recent trend? As you mentioned, recovery was quite strong in March. Did that trend vary in Tier 3, Tier 4 cities and specifically in Shanghai? Is there anything noteworthy to share?

In March, our occupancy reached approximately 87%. This accounts for a climb considering the ramp-up phase leading up to the party conferences before mid-March and subsequent to that, a big rebound.

I see. My second question relates to the cost side; if I understand correctly, there's a RMB140 million write-down? How should we approach the cost structure for Q4? Should we consider it as a baseline for 2021?

Yes, it's a good place to start. However, we will share more about our programs since 2021 will be a recovery year but also an aggressive expansion year for both developments and sales efforts. We will provide further guidance in the Q1 conference call. For the RMB140 million write-off, RMB120 million is related to Deutsche Hospitality, and RMB20 million is connected to our China business.

I have two questions. The first is about the upscale business. For the joint venture with Sunac, we target to finance 1,200 hotels in the pipeline over five years. How many could we expect to open this year and next? And how should we assess the impact on P&L? Will we see partnerships with other real estate companies soon, or will we wait for the Sunac partnership to demonstrate some progress and success first?

Our collaboration with Sunac is a significant breakthrough in our upscale hotel segment. This year, we plan to sign 26 hotels and another 50 hotels next year, leveraging their extensive asset ownership in diverse hotels and their strong presence in real estate. We envision this joint venture leading to more collaborations with other property developers as well. However, I must note that estimating the precise timing for upscale hotel openings is challenging due to construction timelines and RevPAR fluctuations. We will provide more accurate predictions later. Our partnership with Sunac marks the first step, and we anticipate more similar collaborations with various asset owners.

Thank you very much. For my second question, as major players in the hotel industry increase market share and competition intensifies, should we expect a decrease in franchisees?

We believe that the value a top player brings to the industry positively influences franchise deals. Huazhu has been making considerable efforts to enhance our value through innovations in business models and organizational growth. Looking at the low penetration of the top players in this market, especially in upscale hotels, we foresee healthy growth in our franchise business. Our centralized reservation system has seen an increase in bookings, which contributes significantly to our overall revenue. Thank you, everyone, for your time today. We look forward to connecting with you again in the upcoming quarters. This concludes the call today. Thank you. Bye-bye.

This concludes the conference for today. Thank you for participating. You may all disconnect.