H World Group Ltd Q3 FY2024 Earnings Call

Good day, and thank you for standing by. Welcome to H World Third Quarter 2024 Earnings Conference Call. Please be advised that today's conference is being recorded. It is now my pleasure to hand you over to the Senior IR Director of the company, Mr. Jason Chen. Please go ahead.

Thank you, Amber. Good morning, and good evening, everyone. Thanks for joining us today. Welcome to H World Group 2024 Third Quarter Earnings Conference Call. Joining us today is our Chairman, Mr. Ji Qi; our CEO, Mr. Jin Hui; our CFO, Ms. Chen Hui; and our CSO, Ms. He Jihong. 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 provision 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. H World Group does not undertake any obligation 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 yesterday. As a reminder, this conference call is being recorded. The webcast of this conference call, as well as a supplementary slide presentation, is available at ir.hworld.com. With that, now I will hand over the call to our CEO, Mr. Jin Hui, to discuss our business performance in the third quarter of 2024. Mr. Jin, please?

Thank you for joining us. I will now turn the call over to our CEO, Mr. Jin Hui, to discuss our business performance in the third quarter of 2024. Mr. Jin, please proceed.

Hello, everyone. Thanks for joining H World Group's Third Quarter 2024 Earnings Conference Call. In the third quarter of 2024, the domestic travel demand continued to demonstrate steady growth. The hotel industry saw some year-over-year pullback in RevPAR from the high base ADR last year. In addition, Shanghai and its surrounding regions experienced two typhoons right before and after the mid-autumn holidays, which affected travel demand in September. On top of this, in the quarter, we proactively adjusted our operational strategies, especially on the optimization of our sales channels, which I will elaborate later. This proactive adjustment caused some negative impacts on the quarter's performance. However, it is strategically crucial to ensure the healthy sustainable growth of the company in the long term. Please turn to Page 3, on Legacy-Huazhu's operational performance in the third quarter. In the third quarter, Legacy-Huazhu's RevPAR decreased 8.1% year-over-year to RMB 256, of which ADR was down 7% year-over-year to RMB 301 from the high base last year. Despite our rapid hotel network expansion, our occupancy rate still maintained at a healthy 84.9%, declining only marginally by 1 percentage point.

Legacy-Huazhu's RevPAR decreased 8.1% year-over-year to RMB 256 in the third quarter, with ADR down 7% year-over-year to RMB 301 from the high base last year. Despite our rapid hotel network expansion, our occupancy rate remained healthy at 84.9%, declining only slightly by 1 percentage point.

Please turn to Page 4. In the third quarter, we continued our accelerated network expansion in China, and the number of hotel openings reached a record high of 774 hotels in the quarter. At the same time, we uphold our philosophy of high-quality growth, putting quality ahead of pure quantity increase and continuously raising the standard of our hotels. In the third quarter, we closed 217 hotels excluding the low-quality soft economy brand and HanTing 1.0 version, of which we closed 123 hotels. Going forward, we will continue sorting out our existing hotels and phasing out low-quality ones to ensure further enhancement of the product and the service quality of our overall hotel portfolio. As of the end of the third quarter, the number of hotels in the pipeline decreased slightly year-over-year and quarter-over-quarter to 2,899 mainly due to the rapid opening pace in the third quarter as well as the cleanup of some of the pipelines, given we continuously raise our quality standards for not only new openings but also soft pipelines. Our interest level and new signings momentum remain strong. In fact, new signings in this quarter still exceeded 800 hotels.

As of the end of the third quarter, our overall hotel portfolio has 2,899 hotels in the pipeline, which is a slight decrease compared to both the previous year and the previous quarter. This is mainly due to the fast pace of openings in the third quarter and the refinement of some pipelines, as we consistently elevate our quality standards for new openings and softer pipelines. We continue to see strong interest and momentum in new signings, with more than 800 hotels signed in this quarter.

We continue focusing on the economy and the middle scale segment for mass market penetration and development. Please turn to Page 5. As of the end of third quarter 2024, economy and middle scale hotels accounted for 91%, 80%, and 90% of our hotels in operation, hotels in pipeline, and hotel openings, respectively. We believe the mass market remains the largest and the most promising market in China, and it is also the foundation of our business. Going forward, we will consistently roll out high quality and good value for money limited service hotels and products, expanding our coverage nationwide and solidifying our leading position in the limited service segment.

Economy and mid-scale hotels made up 91%, 80%, and 90% of our operational hotels, hotels in the pipeline, and hotel openings, respectively. We think the mass market continues to be the largest and most promising sector in China, serving as the foundation of our business. Moving forward, we will continuously launch high-quality limited service hotels and products that offer good value, broadening our reach across the country and reinforcing our leadership in the limited service segment.

We keep penetrating into the lower-tier cities. Please turn to Page 6. At the end of third quarter 2024, around 42% of our hotels in operations were in Tier 3 and below cities, up 2 percentage points year-over-year. In the pipeline, hotels in Tier 3 and below cities accounted for 53%, 11 percentage points higher than in operation. At the same time, as the new signings picked up in Southern China, along with our regional strategy and as our upper midscale segment grows, the proportion of pipeline hotels in Tier 1 cities increased by 2 percentage points year-over-year. As of the end of third quarter, the number of cities we covered reached 1,324, around 117 more cities than a year ago.

The number of cities we covered reached 1,324 by the end of the third quarter, which is about 117 more cities than a year ago. In the pipeline, hotels in Tier 3 and below accounted for 53%, an increase of 11 percentage points compared to those currently in operation. Additionally, there was an increase of 2 percentage points year-over-year in the proportion of pipeline hotels located in Tier 1 cities due to the rise in new signings in Southern China and our regional strategy, coupled with the growth of our upper midscale segment.

Our upper mid segment development continued in the third quarter. Our key upper middle scale brands have been gaining recognition and traction among customers and franchisees. Please turn to Page 7. As of the end of third quarter 2024, the number of upper-mid segment hotels in operation exceeded 800, up 33% year-over-year. And the number of hotels in pipeline reached 487, up 36% year-over-year. One of our core brands in that segment, Intercity, had 125 hotels in operation and in the pipeline.

Our upper mid segment development continued in the third quarter. Our key upper middle scale brands have been gaining recognition and traction among customers and franchisees. Please turn to Page 7. As of the end of the third quarter 2024, the number of upper-mid segment hotels in operation exceeded 800, which is a 33% increase year-over-year. The number of hotels in the pipeline reached 487, up 36% year-over-year. One of our core brands in that segment, Intercity, had 125 hotels in operation and in the pipeline.

Recently, Crystal Orange, the co-brand for our upper mid segment, launched its 2.5 version. Please turn to Page 8. Crystal Orange 2.5 version is an upper-midscale product that we designed and tailored for elite business travelers. The harmonious integration of light and colors, the usage of high-quality bedding facilities, and the special crystal-designed fragrance diffuser offer a comfortable, relaxing, and high-quality space for busy business travelers working and living in fast-paced metropolises. The hotel also has launched space with special corporate tile offerings, which is a public area that is suitable for enjoying private time or hanging out with friends.

We designed and tailored our offerings for elite business travelers. The harmonious integration of light and colors, along with high-quality bedding and a specially designed fragrance diffuser, creates a comfortable and relaxing environment for busy professionals navigating fast-paced cities. Additionally, the hotel has introduced a space featuring unique corporate tile options, ideal for unwinding or socializing with friends.

After several years of development, our upper midscale segment is starting to bear some fruit this year. However, we think there are still more polishing and improvements needed in areas such as branding, product, customer insights, customer experiences, and services, especially under the background of our service excellence strategy stated since the beginning of the year. Therefore, we will continue working and improving, and we aim to become one of the leading brands in the upper midscale segment in the near future.

Our upper midscale segment is beginning to show progress this year. However, we believe there is still room for enhancement in branding, product, customer insights, customer experiences, and services, particularly in line with our service excellence strategy introduced at the start of the year. As a result, we will keep working on improvements and strive to establish ourselves as a leading brand in the upper midscale segment soon.

Please turn to Page 9. Affected by the macro economy, the recovery of China's overall business travel demand is still relatively stagnant. To offset the impact from some missing demand from individual business travelers and to maintain a relatively stable occupancy rate during the low season of leisure travel, we have been improving our direct B2B capabilities. In the third quarter of 2024, the number of room nights booked directly via our B2B platform exceeded 7.5 million, up 41% year-over-year and 19% quarter-over-quarter. The number of active corporate clients exceeded 4,500, up 45% year-over-year and 23% quarter-over-quarter.

To offset the impact from some missing demand from individual business travelers and to maintain a relatively stable occupancy rate during the low season of leisure travel, we have been improving our direct B2B capabilities. In the third quarter of 2024, the number of room nights booked directly via our B2B platform exceeded 7.5 million, up 41% year-over-year and 19% quarter-over-quarter. The number of active corporate clients exceeded 4,500, up 45% year-over-year and 23% quarter-over-quarter.

We have always been emphasizing the importance of membership and direct sales. Please turn to Page 10. The membership base of our H Rewards continues increasing. As of the end of third quarter, H Reward had close to 260 million members. As we rapidly expand our hotel networks, entering into new regions and breaking through in some new segments, it will naturally take some time for us to accumulate new members and improve the direct sales contribution for those new hotels. As a result, in the short term, we do need traffic support from other channels during the ramping up pace of the new hotels. Nevertheless, members and direct sales remain the most important and the most sustainable sales channel for us. In the third quarter, we rolled out targeted optimization of our sales channel. We urged our hotel managers to improve their hotel level, customer acquisition and sales capabilities, and we reemphasized the importance of membership and direct sales capability for the company's long-term sustainable growth. In the third quarter, our CRS contribution improved by 2.2 percentage points year-over-year and 4.3 percentage points quarter-over-quarter to 64.2%.

In the third quarter, we rolled out targeted optimization of our sales channel. We urged our hotel managers to improve their hotel level, customer acquisition and sales capabilities, and we reemphasized the importance of membership and direct sales capability for the company's long-term sustainable growth. In the third quarter, our CRS contribution improved by 2.2 percentage points year-over-year and 4.3 percentage points quarter-over-quarter to 64.2%.

All above concludes our third quarter 2024 business updates for Legacy-Huazhu. Now I will hand over the call to our CSO, Ms. He Jihong, to give an update on Legacy-DH's business.

Thank you, Jin Hui. I'm happy to give everybody an overview of the overseas business by H World. Please turn to Page 11. We are very happy to report that the blended ADR from DH increased 2.5% from EUR 114 to EUR 117 in the third quarter 2024. With a 0.8 percentage points increase in occupancy, RevPAR increased 3.7% from EUR 79 to EUR 82. Please turn to Page 12. We restructured our economy brand and Zleep business in this quarter as well. We exited a joint venture with entrepreneur Peter Haaber and took over 100% ownership of the Zleep brand. As part of the asset-light strategy, we exited 14 leased and owned hotels in Denmark. This transaction has a minimum impact on our financial statements. Please turn to Page 13. In the third quarter, we also started a major restructuring effort in the DH business. First of all, we streamlined the headquarters and reduced at least 30% of the headquarters nonoperational staff. We stepped up our efforts to reduce G&A non-personnel costs. We continued to scrutinize hotel performance and optimize hotel operations. All these restructuring efforts incurred around RMB 81 million one-off expense in this quarter. The negative impact on the financial performance of Deutsche Hospitality in this quarter is largely due to this restructuring cost, which you will see later. We will start to observe full-year savings in 2025, and we are confident that our overseas business is on a successful trajectory. With this, I conclude the overview of the International business and hand over to our CFO, Chen Hui, for the financial performance review.

Thank you, Jihong. Good morning, and good evening, everyone. Let me talk you through our operational and financial review for the third quarter of 2024. Please turn to Page 15. Our hotel network continues to expand. The overall number of rooms increased 20% year-over-year to close to 1.1 million as of the end of Q3 this year compared with 886,000 rooms a year ago. Total turnover for the third quarter of 2024 was RMB 26 billion, representing an 11% year-over-year increase, of which Legacy-Huazhu's hotel turnover grew 11% year-over-year to RMB 24 billion, and the Legacy base DH turnover grew 8% year-over-year to RMB 2.1 billion. Page 16. In the third quarter of 2024, our hotel revenue for the group increased 2.4% year-over-year to RMB 6.4 billion, in line with our guidance. Revenue from Legacy-Huazhu grew 1% year-over-year to RMB 5.2 billion, of which revenue from Huazhu leased and owned hotels decreased 10.4% due to the closure of leased hotels. We net closed 22 leased hotels in the quarter, and the number of leased and owned hotels decreased by 38 or 6.3% on a year-over-year basis. Revenue from Huazhu manachised and franchised grew 14.7% year-over-year driven primarily by our strong hotel openings but was negatively affected by the decline in RevPAR from the high base last year. Legacy-DH revenue rose 9% year-over-year to RMB 1.3 billion, which was attributed to both business recovery and hotel network expansion. Please turn to Page 17. We have been committed to growing and as a line model, expanding our hotel network using manachised and franchised hotels. As a result, revenue from our manachised and franchised hotels continued rising. In the third quarter of 2024, revenue contribution from manachised and franchised hotels reached 50% of our Legacy-Huazhu revenue, up from 44% a year ago. We expect this trend to continue as we become more and more asset-light. We believe this will drive gradual and continuous margin expansion as well as help us to become more resilient when navigating through economic cycles. Please turn to Page 18. Hotel operating costs were RMB 3.8 billion in the third quarter of 2024, up 5% year-over-year. The increase was due to rising personnel costs from our continued hotel network expansion. Preopening costs remained at a low level as we continue moving towards the asset-light model and staying selective on opening leased and owned hotels. SG&A expense was RMB 975 million in the third quarter of 2024, up 18% year-over-year, of which next quarters increased 9% year-over-year and the Legacy-DH rose 42% year-over-year. The 8% year-over-year increase in Legacy-Huazhu's SG&A was mainly due to a high share-based compensation to attract and retain core employees who are key to our sustainable long-term business growth. Excluding share-based compensation, SG&A expense for Legacy-Huazhu increased 2.5% year-over-year. The 42% year-over-year increase in Legacy-DH SG&A was due primarily to RMB 81 million one-off restructuring costs. Excluding the nonrecurring restructuring costs, SG&A expense for Legacy-DH increased 7% year-over-year. As a result, our income from operations in the quarter was RMB 1.7 billion, which represents a 10% year-over-year decline but a 10% growth from Q2. Please turn to Page 19. For our profitability and cash flow during the quarter. In the third quarter of 2024, our adjusted EBITDA decreased 9.5% year-over-year to RMB 2.1 billion. By segment, Legacy-Huazhu's adjusted EBITDA was down 7.5% year-over-year to RMB 2.1 billion due to the RevPAR decline from the high base last year and SG&A normalization. Our DH business generated RMB 21 million adjusted EBITDA, which was down year-over-year due primarily to the nonrecurring restructuring costs mentioned previously. However, after this round of restructuring, we believe our DH business will be leaner and its profitability should see some improvement next year. In the quarter, our group generated RMB 1.4 billion adjusted net income and RMB 1.7 billion operating cash flow. Page 20 for our liquidity position. As of the end of September 2024, the group had RMB 9.3 billion in cash, cash equivalents, restricted cash, and time deposits and was in a solid net cash position of RMB 4 billion, including time deposits. We also had RMB 3.6 billion unutilized bank facilities as of the end of September. Next page, please. As part of our total shareholder return plan, we continued buying back shares. As of September year-to-date, we have bought back roughly USD 270 million worth of shares from the market. In the first nine months, we have returned around USD 470 million to the shareholders through both dividends and share repurchase, which accounted for more than 80% of our free cash flow generated in the same period. Lastly, Page 22 on guidance. For the fourth quarter of 2024, apart from the ongoing RevPAR pressure, we will continue closing some leased and owned hotels as we are committed to our asset-light strategy. The closure of more leased and owned hotels will definitely bring some negative impact on our revenue in the quarter. Therefore, we expect our group revenue to grow between 1% to 5% compared to Q4 2023, and also 1% to 5%, if excluding DH, in the fourth quarter. With that, we are ready to take your questions. Operator, please open the line for Q&A.

We will now take our first question from Ronald Leung from Bank of America.

Let me translate the questions into English. My first question is about RevPAR. Can you provide insights on the RevPAR trends for October and November? Additionally, what are your expectations for RevPAR growth in the fourth quarter? My second question concerns the management of the membership system. What is the company's strategy to enhance member loyalty in order to increase the direct sales ratio?

Let me translate the questions in English. My first question is about RevPAR. May I ask how the RevPAR trends in October and November? And what is your expectation for the RevPAR growth in the fourth quarter? My second question is about the management of the membership system. What is the company's strategy to enhance the membership's loyalty to increase the direct sales ratio?

Okay. Let me answer your first question regarding RevPAR. So clearly, as you may see from the market, this year, the business traveling activity remained a bit weak compared to leisure, and that caused a major ADR impact and pressures this year on a year-over-year basis as well as the high base from last year. And also, we are seeing the upper mid and upscale segments were underperforming and ADR has even higher pressures, which will also put some pressure on our segment in terms of ADR. However, on the positive side, we still see pretty good demand for overall traveling. And therefore, we can still maintain relatively healthy and high occupancy rates despite our fast pace of hotel network expansion. Therefore, we remain committed to ensuring our high-quality growth strategy. And for the fourth quarter, based on our estimates, mainly due to the ADR pressure, the RevPAR for the fourth quarter will be around a middle single-digit year-over-year decline. Thank you.

We observe strong demand for travel, allowing us to maintain healthy occupancy rates even with our rapid hotel network expansion. Our commitment to a high-quality growth strategy remains firm. For the fourth quarter, we estimate that, primarily due to pressure on average daily rates, our revenue per available room will experience a decline of about mid-single digits compared to last year. Thank you.

So regarding your second question about membership, as we are penetrating into different regions and breaking through new segments, it takes some time to create synergy from our existing membership, as well as new regions and segment coverage from our membership program. There is a lot of new demand from the leisure market as well, so we are putting in a lot of efforts to enhance our membership program, providing more variety in terms of products for different groups of customers to ensure the membership program's further growth.

As we expand into various regions and explore new segments, it requires time to build synergy from our current membership and coverage in these new areas. There's significant new demand from the leisure market, prompting us to invest considerable effort into improving our membership program. We're focused on offering a wider range of products tailored for different customer groups to foster the continued growth of the membership program.

We are also working on improving membership benefits and ensuring the lowest pricing through our direct sales channel and membership program, and therefore, we can further improve the offline membership conversion as well as improve retention rates.

We are putting in a lot of efforts to enhance our membership program, providing more variety in terms of products for different groups of customers to ensure the program's further growth. We are also working on improving membership benefits and ensuring the lowest pricing through our direct sales channel and membership program, which will help us improve offline membership conversion and retention rates.

We have been putting a lot of effort over the last several years in terms of B2B direct sales and corporate customers. We believe that a stronger capability in B2B direct sales and corporate customers will further help us to improve the membership program.

Our next question comes from the line of Simon Cheung from Goldman Sachs.

So let me translate into English. So two questions. One, given the high base on the RevPAR this year, we have seen quite a weak performance in the last several quarters continuing into the fourth quarter. But looking into next year, what is your expectation? And maybe in the longer run, what is your RevPAR expectations for the industry? And then secondly, just related to that, there are a lot of investors asking about investments or the supply situation in China, and we have heard from TCOM that their listing numbers in the third quarter have actually seen quite a noticeable deceleration. So wondering what management are thinking in terms of the supply situation going into next year?

Given the upcoming year, what are your expectations? Additionally, what are your long-term expectations for RevPAR in the industry? There are many investors curious about investments or the supply situation in China, and we've noted that TCOM has experienced a significant slowdown in their listing numbers for the third quarter. What is management's perspective on the supply situation as we approach next year?

Let me answer your first question regarding next year's RevPAR expectation. I think looking at this year's RevPAR performance, clearly, there was a high base from last year, especially during the summer holiday season and peak leisure seasons. There was a mix of reasons for the last year, either from pent-up demand and the temporary shortage of the supply due to the reopening from COVID. Overall, we think the RevPAR should gradually enter a more stabilized and growth cycle starting from next year. We think China, overall, has very good potential in the leisure market going forward. We are clearly seeing strong government support for leisure traveling to boost and stimulate domestic consumption, not only domestically but also we recently provided a lot of visa-free policies to many foreign countries, which drives both domestic demand and inbound tourism, providing incremental value for us to further develop the leisure market in China. Therefore, we think the RevPAR should trend towards stabilization and improvement starting next year. We expect at least stable RevPAR for next year. To answer your second question regarding supply, and as we have always mentioned, the China market never lacks supply but lacks high-quality supply. We have observed several clear trends happening in the market. One is that those traditionally driven by property booms, many old 5-star hotels have gradually exited the market, like the Great Wall Hotels in Beijing and the Marriott in Shanghai, which are good examples. Secondly, we think many low-quality small-scale and independent hotels are also gradually going out of the market in the near future. Overall, the hotel market is very market-driven and mature, continuously adjusting to demand-supply dynamics. We believe that in the near future, the demand and supply will reach some equilibrium, which reflects our views on the demand-supply situation going forward.

We see that the hotel market, including establishments like the Great Wall Hotels in Beijing and the Marriott in Shanghai, is evolving. Additionally, we anticipate that many low-quality small-scale and independent hotels will exit the market soon. Overall, the hotel market is driven by market forces and is mature, consistently adapting to demand and supply fluctuations. We believe that demand and supply will achieve a balance in the near future, which aligns with our perspective on the demand-supply situation ahead.

Let me add one more point. Throughout the economic cycle and over the last several years, we have clearly observed two trends. One is that investment is becoming more rational, and regarding customers, they are seeking better value-for-money products. I believe these two changes actually help us leverage our operational efficiency and cost leadership to maintain high-quality growth while providing good quality products for value-seeking customers.

Our next question comes from the line of Lydia Ling from Citi.

Management, this is Lydia from Citi. I have two questions. The first is about store openings; you've accelerated them in the third quarter. Could you share your latest target for full-year openings this year? What is the signing momentum for the fourth quarter so far? Also, could you outline your plans for openings and closures next year? My second question concerns the competitive landscape in the midscale and upper-midscale segments. With supply in this segment increasing, do you anticipate some pricing pressure moving forward? Additionally, are you experiencing more competition regarding the quality of property resources in this segment?

Could you please provide your latest target for full-year openings this year? Additionally, what is the signing momentum in the fourth quarter so far? Can you also outline your plans for openings and store closures for next year? My second question pertains to the competitive landscape in the midscale and upper-midscale segments. With the supply in this segment on the rise, do you anticipate experiencing some pricing pressure in the future? Furthermore, are you encountering increased competition concerning the quality of property resources in this segment?

Let me answer your questions regarding openings and closures. For this year, as you may see, new signings and new openings have both reached a record high. As I mentioned previously in my prepared remarks, in the third quarter, we signed up over 800 new hotels during the quarter. Therefore, for the full year, the new openings for 2024 should be around 2,400, slightly higher than our previous guided figure of 2,200 new openings. Going into 2025, we believe that overall new openings should remain within a relatively healthy range, benefitting from our branding and strategies on regional penetration, which will further increase brand recognition and awareness among franchisees. In terms of closures, under the strategy of high-quality growth and service excellence, we will continue to clean up some of the low-quality hotels in our existing portfolio. However, we have already been doing this for several years, so total closure pressures should last going forward.

New openings should stay within a healthy range, benefiting from our branding and strategies on regional penetration, which will enhance brand recognition and awareness among franchisees. Regarding closures, under the strategy of high-quality growth and service excellence, we will continue to phase out some of the lower-quality hotels in our existing portfolio. However, we have been carrying out this process for several years, so total closure pressures should persist moving forward.

Regarding competition, I would like to discuss the middle-scale segment first. In this particular segment, we have established our very industry-leading brands, which are JI Hotel and Orange, which have garnered very strong brand recognition as well as customer satisfaction, making us confident competitors in this segment.

We have already been doing this for several years, so total closure pressures should last going forward. Regarding competition, I would like to discuss the middle-scale segment first. In this particular segment, we have established our very industry-leading brands, which are JI Hotel and Orange, which have garnered very strong brand recognition as well as customer satisfaction, making us confident competitors in this segment.

Especially, we are seeing a previous under-penetration in areas such as Southern China, where growth has been very rapid.

In discussing competition, I would like to focus on the middle-scale segment first. In this segment, we have established our leading brands, JI Hotel and Orange, which have gained significant brand recognition and customer satisfaction, making us confident competitors in this area. We are particularly noticing a previous under-penetration in regions like Southern China, where growth has been very rapid.

In terms of the upper mid segment, we see this industry is also consolidating, especially under the trend that customers are seeking more value-for-money products. Our key brands like Crystal Orange and Intercity actually offer high-quality products, providing excellent value to customers. Together with changes in the property market and some traditional upscale 5-star hotels being phased out, we believe this will benefit us as we further develop this segment.

In terms of the upper mid segment, we see this industry is also consolidating, especially as customers seek more value-for-money products. Our key brands like Crystal Orange and Intercity offer high-quality products, providing excellent value to customers. With changes in the property market and some traditional upscale 5-star hotels being phased out, we believe this will benefit us as we further develop this segment.

Leveraging our improvements in branding and management capabilities, we have achieved over 30% growth in this particular segment. We believe we can further develop this market relatively rapidly.

We have achieved over 30% growth in this particular segment by leveraging our improvements in branding and management capabilities. We believe we can further develop this market relatively rapidly.

From a mid- to long-term perspective, we also hope to be one of the leading brands in the upper to mid segment. Thank you.

Our next question comes from the line of Dan Xu from Morgan Stanley.

This is Dan from Morgan Stanley. My question is about Legacy-Huazhu's leased and operated businesses. We observed 25 hotel closures and a selective approach to closing underperforming leased and owned hotels. Can management provide more details on the strategy for leased and owned businesses? Is this proactive closure a one-time action, or is it part of a longer-term strategy? If it's the latter, how many leased and owned hotels in our current portfolio will be affected?

This is Dan from Morgan Stanley. My question is about Legacy-Huazhu's leased and operated businesses. We observed 25 hotel closures and a selective closure of underperforming leased and owned hotels. Can management provide more insights on the strategy for leased and owned businesses? Is this proactive closing a one-time action, or is it part of a longer-term strategy? If it is the latter, how many leased and owned hotels in our current portfolio will be affected?

Okay. Let me answer your question. First of all, our company is transitioning to a more asset-light model. You are right, in the third quarter, we closed 25 leased and owned hotels, which is more than in the first half of this year. Out of these 25 leased and owned hotel closures, around 8 of them are being transferred to manachised hotels, and the remaining were closed due to lease contracts expiring or not meeting our operational performance standards. Some of the closures were due to other issues that prevented us from renewing the contracts. In the fourth quarter and next year, we’ll continue to close more leased and owned hotels, with the quantity being higher than the first half but less than the third quarter.

We have reached the end of the question-and-answer session. Thank you all very much for your questions. I'll now turn the conference back to the management team for closing comments.

Thank you, everyone, for taking your time with us today, and we look forward to seeing you in upcoming quarters. Thank you, and goodbye.

Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.