GreenTree Hospitality Group H1 2023 Earnings Call Transcript

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September 18, 2023

There are 7 speakers on the call.

Operator

Hello, ladies and gentlemen. Thank you for standing by for GreenTree's First Half twenty twenty three Earnings Conference Call. As a reminder, today's conference call is being recorded. I would now like to turn the meeting over to your host for today's call, Mr. Rene VanGustein of Christensen, GreenTree's Relations firm.

Operator

Please proceed, Rene.

Speaker 1

Thank you, Ashley. Hello, everyone, and thank you for joining us. GreenTree's earnings release was distributed earlier today and is available on our IR website at ir.998.com as well as on PR Newswire services. As a reminder, we also posted a PowerPoint presentation that accompanies our comments to the CIM IR website. On the call from GreenTree are Mr.

Speaker 1

Alex Xu, Chairman and Chief Executive Officer Ms. Selina Yang, Chief Financial Officer Ms. Megan Huang, Vice President of Sales and Marketing Mr. Bill Zhu, Financial Director of the Restaurant Business. Mr.

Speaker 1

Zhu will present the company's performance overview of the first half of twenty twenty 3, followed by Ms. Wang and Mr. Zhu, who will discuss business operations, and Ms. Yang and Mr. Zhu will then discuss financials and guidance.

Speaker 1

They will all be available to answer your questions during the Q and A session, which follows.

Speaker 2

Before we begin, I

Speaker 1

would like to remind you that this conference call contains forward looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934 as amended and as defined in the U. S. Private Securities Litigation Reform Act of 1995. These forward looking statements can be identified by terminologies such as may, will, expects, anticipates, aims, future, intends, plans, believes, estimates, continue, target, is or are likely to, going forward, confident, outlook and similar statements. Any statements that are not historical facts, including statements about the company and its industry, are forward looking statements.

Speaker 1

Such statements are based upon management's current expectations and current market and operating conditions and relate to events that involve known and unknown risks, uncertainties and other factors, all of which are difficult to predict and many of which are beyond the company's control, which may cause the company's actual results, performance or achievements to differ materially from those in the forward looking statements. You should not place undue reliance on these forward looking statements. Further information regarding these and other risks, uncertainties or factors is included in the company's filings with the U. S. Securities and Exchange Commission.

Speaker 1

All information provided, including the forward looking statements made during this conference call, are current as of today's date. The company does not undertake any obligation to update any forward looking statement as a result of new information, future events or otherwise, except as required under applicable law. It is now my pleasure to introduce our Chairman and Chief Executive Officer, Mr. Alex Xu. Mr.

Speaker 1

Xu, please go ahead.

Speaker 3

Thanks, Rene. Hello, everyone, and thank you for joining us today. 2023 marked a new start of the post COVID recovery in the economy across China. Fluorpar compared to the same periods of 2019 reached more than 120% at the beginning of February, exceeding our expectations as demand for business travel rebounded after the spring festival. During the Q2, especially during the National Labor Day holiday early in May, it reached more than 115%.

Speaker 3

And during the summer vacation, it was almost stable at 110% as the tourism further expanded. As we did throughout the pandemic, we continued to execute our long term strategic growth plan that strives to assist the franchisees in maintaining quality operations, expand our hotel network, deliver stable operating profitability and maintaining healthy cash flow. Please turn to Slide 5. Compared with the first half of twenty twenty two, hotel RevPAR was RMB130, up 35.8 percent and the restaurant ADR, that is average daily sales per store, was RMB 6,213, up 22.9%. Total revenues were RMB794.2 million, up 12.1%.

Speaker 3

The increase was partially due to the recovery in RevPAR, the increase in the number of hotels and the increase in the restaurant average daily sales, partially offset by the closure of the 64 restaurants. Income from operations turned positive at RMB 150,900,000 with a margin of 19%. Net income was RMB177,300,000 with a margin of 22.3%. Adjusted EBITDA non GAAP was RMB226,900,000, up 137.8 percent with a margin of 28.6 percent. Core net income, non GAAP was RMB 136.1 million with a margin of 17.1%.

Speaker 3

Cash provided by operating activities was RMB 313.1 million. Slide 6 shows detailed numbers for total revenues, income from operations, net income and adjusted EBITDA. On Slide 7, operating performance greatly improved during the first half of twenty twenty three. RevPAR was RMB120 and RMB141 in the first and the second quarter, respectively. At the bottom of the slide, you can see the weekly draw power performance in the first half of twenty twenty three compared with 2019.

Speaker 3

In the first half of twenty twenty three, due to the recovery from COVID-nineteen, Crowe Pro exceeded 124% of its pre pandemic levels after spring festival. Thanks to the stable recovery in demand and in the economy, Raw Power gradually recovered to more than 120% of its pre pandemic levels in the Labor Day Golden Week of 2023. While the railcar recovery slowed during the Dragon Boat Festival, it resumed a growth and stable development trend again in the summer vacation as the travel soared. Slide 8 shows operating performance of the restaurants. ABS had a good trend in the first half of twenty twenty three.

Speaker 3

Now starting with the Slide 10, let's talk about the strategy and the execution of hotels with the further expansion in the mid to upscale segment on the GSV and the lower cities in South China. Besides, we are continuously adding L. O. Hotels in strategic locations. Let's take a look at the Slide 11.

Speaker 3

We have been continuously growing our mid to upscale segment over the past few years. For an apple to apple comparison, we have excluded the Argyle and Urbane's hotels. By the end of the first half of twenty twenty three, we had 4 38 hotels, 10.7 percent of our total portfolio in the mid to upscale segment, up from only 50 in 2017, and we plan to open more this year. While the midscale segment remains the core of our business with the 71.4% of all of our hotels, We continued our expansion into the higher end segments. By the end of the second quarter, mid to upscale hotels accounted for 10.7% of our total portfolio, while the economy segment remained stable at 17.9%.

Speaker 3

Please turn to Slide 12. Over the past 5 years, most of our new hotels have been in China's thriving Tier 3 and the lower cities. In addition, hotels in some lower tier cities are performing well. As we continue to execute our strategic plan, 73.3% of hotels in our current pipelines are in such cities and they will further capitalize on the substantial opportunities in such locations. On Slide 13, during the first half of 2023, we opened 3 L.

Speaker 3

O. Hotels at Chongqing North Railway Station, Chongqing, Jiangbe International Airport and Shenzhen, Futian, Huaqing North. All of our L. O. Hotels are located around transportation hubs, central business district or government centers.

Speaker 3

By showcasing our brand and the operating standards, we believe that these hotels will help us attract more high quality franchisees further contributing to growth. Slide 14. Our strategy for our restaurant business focuses on increasing profitability with the closing of unprofitable stores an expansion in the proportion of franchised and managed restaurants and growing the numbers of street stores. On Slide 15. During the first half of twenty twenty three, we closed 64 restaurant in areas of decreased economic activities and reduced the food traffic, helping improving the overall profitability of our restaurant businesses.

Speaker 3

On Slide 16, you can see the growth in the proportion of franchised and managed restaurant following the acquisition of Dao Nang Dang Please and the Bellagio during the Q1 of 2023. Slide 17 shows that currently most of our restaurants

Speaker 2

are in the shopping malls.

Speaker 3

However, we believe there is substantial potential for street stores and we intend to develop more in this format. I want to focus I want to emphasize that in the new era, we're strategically focusing on growing high quality hotels and restaurant to build a better and a stronger foundation for future growth. Now, let me turn the call over to Megan and Mr. Joe.

Speaker 4

Thank you, Alex. Please turn to Slide 18 to start reviewing the operating and financial highlights. Slide 19 shows the trend in our quarterly operating performance. In the Q2 of 2023, RevPAR for our L. O.

Speaker 4

O. O. Hotels increased to RMB 190. RevPAR for our FM Hotels increased to RMB139. ADR for our L O Hotels increased to RMB 265 and ADR for our FM Hotels increased to RMB179.

Speaker 4

Occupancy at our L. O. Hotels increased to 74.6% and occupancy at our FM Hotels increased to 77.9%. Slide 20 highlights the growth in our membership programs, which accounted for the most of our direct sales. Individual memberships grew to 84,000,000, up from 74,000,000 a year ago and corporate membership grew to $1,990,000 up from $1,910,000 a year ago.

Speaker 2

Now please turn to Slide 21. In the restaurant business, the number of individual members grew to 2,670,000, up 2.3% year over year. ABS increased 57.3 percent to RMB6371 in the Q2 of 2023 compared to 1 year before. With that, I will pass the call over to our CFO, Selina Yang.

Speaker 4

Thank you, Bill. First, let's review our hotel business. Please turn to Slide 22. In the first half, total hotel revenues increased 23.1 percent year over year to RMB563,200,000. The increase was primarily due to the recovery in RevPAR and increase in the number of hotels.

Speaker 4

Total hotel revenues increased 23% to RMB 310,600,000 in the Q2 of 2023 compared with the Q1. Total revenues from our FM Hotels were RMB347,400,000, up 26.1% year over year, while total revenues from L. O. Hotels increased 24.7% to RMB213.6 million. On Slide 23, total hotel operating costs and expenses decreased 54.7 percent year over year to RMB 416,600,000.

Speaker 4

Excluding other general expenses, total hotel operating costs and expenses also decreased 2.8% year over year. And total hotel operating costs and expenses increased 5% to RMB213,300,000 in the second quarter compared with the 1st quarter. Total costs and expenses are composed of hotel operating costs, selling and marketing expenses, general and administrative expenses. Operating costs were RMB284,400,000, down 7.6% year over year. The decrease was mainly due to the deconsolidation of Argo and disposal of our interest in urban and partially offset by higher consumables, higher utilities due to the recovery from COVID-nineteen and higher rents with lower exemptions compared to last year.

Speaker 4

Operating costs increased 11.8 percent to RMB 150,100,000 in the 2nd quarter compared with the Q1. Selling and marketing expenses were RMB 24,800,000, a year over year increase of 31.8%. The increase was mainly attributable to higher sales channel commissions, higher sales stock salaries and higher travel expenses. The selling and marketing expenses increased 24.3 percent to RMB 13,800,000 in the Q2 of 2023 compared with the Q1. Dealer and administrative expenses were RMB90,500,000 in the first half of twenty twenty three, down 9.2% compared with the first half of last year.

Speaker 4

The decrease was mainly due to due to the deconsolidation of Argo and disposal of our interest in urban and partially offset by higher consulting fees and higher staff related expenses. The G and A expenses decreased 3.6% to RMB44.4 million in the Q2 of this year compared with the Q1. Turning to Slide 24. Income from hotel operations was RMB 160,400,000 and income from hotel operations increased 108.7 percent to RMB 108,500,000 in the Q2 of 2023 compared with the Q1. Net income of hotels was RMB191,800,000.

Speaker 4

Net income of hotels increased 138.4 percent to RMB 135,100,000 in the Q2 of 2023 compared with the Q1. Adjusted EBITDA increased 127.5 percent to RMB212,200,000 and core net income increased 42% to RMB 150,400,000. Now let me turn this call over to Bill, our Financial Director of Restaurant Business.

Speaker 2

Now let's review our restaurant business. Please turn to Slide 25. In the first half of twenty twenty three, total restaurant revenue were RMB 127,200,000 and RMB 104.9 1,000,000 in the 1st and the second quarter of 2023, respectively. You can also see the revenue breakdown for FM Restaurants and LO Restaurants. On Slide 26, total operating costs and expenses decreased 9.9% year over year to RMB242 1,000,000 and the total restaurant operating costs and expenses decreased 9.7 percent to RMB 114.9 billion 1,000,000.

Speaker 2

In the Q2 of 2023 compared with the Q1, You can also observe the downtrend in material costs, personal costs and the rents. Turning to Slide 27. Income from restaurant operations was netting RMB 9,000,000 in the first half of twenty twenty three. Income from restaurant operation was RMB 9,600,000 and negative RMB 9,600,000 in the Q1 and the Q2 of 2023, respectively. Net income was negative RMB14.1 million in the first half of twenty twenty three.

Speaker 2

Net income decreased to negative RMB 11,900,000 in the Q2 of 2023 compared with negative RMB2.2 million of the Q1. Adjusted EBITDA increased to 4 70 3.1 percent to RMB 15,200,000. Core net income was negative RMB 13,900,000. Next, Selina, please introduce the probability of our group.

Speaker 4

Please turn to Slide 28. Group net income per ADS basic and diluted was RMB 1.79. Group core net income per ADS basic and diluted non GAAP was RMB 1.73. Let's now take a look at Slide 29. As of June 30, 2023, the company had total cash and cash equivalents, restricted cash, short term investments, investments in equity securities and time deposits of RMB 1,440,100,000 compared to RMB 119,400,000 as of December 31, 2022.

Speaker 4

The increase was primarily due to cash from operating activities, repayment for franchisees, proceeds from disposal of subsidiaries and partially offset by the repayment of bank loans and investment in properties. On Slide 30, taking into account the recovery long term trends and short term industry fluctuations, we expect total revenues of organic hotels for the full year of 2023 to grow 30% to 35% of the 2022 levels. Total revenues for our restaurant business and our organic hotel business for the full year of 2023, I expect to grow 50% to 20% over the 2022 levels. This concludes our prepared remarks. Operator, we are now ready to begin the Q and A session.

Speaker 4

Thank you.

Operator

Thank you. We will now begin the question Your first question comes from Zhao Zhu with Zhejiang Capital. Please go ahead.

Speaker 2

Hello, management. As we know, in March, catering was incorporated into the listed company. Can you introduce the recovery of catering? Thank you.

Speaker 4

Okay. Thank you for your question. Our financial director, Bill, will answer this question.

Speaker 2

Hello. The restaurant sales compared to 2019 sales coverage 18% and compared to 2022, the sales recovery is 100 and 0.7%. Thank you.

Operator

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

Speaker 4

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

Operator

Thank you.

Speaker 4

Okay. Thank you. Thank you for your question. So let me first ask your question. I guess Alex introduced just now in the summer vacation, the RevPAR in the July August kept stable about 110% of the 2019 levels.

Speaker 4

And we see that, yes, in September, the for the Q4, yes, we forecasted a RevPAR recovery also keeps the stable level of the 2019 levels that is about 10% increase by the 2019 levels. Okay. So for the RevPAR for the next year, I think, yes, it's a little bit difficult for us to forecast for the long term. But for the long term trend, yes, we can see a good trend because of the recovery of the industry and especially from some occasions in the year of 2023. Thank you.

Speaker 3

So let me add a couple of more comments here. The Q3, the performance is better than Q2 based on the 1st two and a half months, that's July, August, September, a substantial improvement over the Q2. The trend in the Q4 we'll see will stabilize because our hotel portfolio focuses on primarily on the have a lot more on the Tier 3, Tier 4 cities. I think the Tier 4 and Tier 4 cities performance are very stable, even they are stable during the past 3 years of COVID control period. And so their performance, we expect to be continuously improving and stable over the next few years, especially the China's policy has been focusing on redulination of the countryside and also encouraging drop growth in those 2 Tier 3, Tier 4 cities.

Speaker 3

So even though the recovery after the post COVID period, we see the performance much better in the 1st tier cities because there is new many, many new conventions and people have been traveling to the 1st tier cities for business and for exchange. But we think the trend for the future growth will continuously reach out to the Tier 3 and Tier 4 cities.

Speaker 4

Thank you very much.

Operator

Thank you. Your next question comes from Adam Su with China Cinder Securities. Please go ahead. Thank you. Your next question comes from Simon Chung with Goldman Sachs.

Operator

Please go ahead.

Speaker 5

Hi, Alex and Celine and FFO. And thanks for the presentation. I got a couple of questions. One, just on the hotel. I saw that you did a decent 38% EBITDA margin for the business.

Speaker 5

And remember, before COVID, you were hovering at about 50%. Just wanted to get a sense of the difference between the 2. I know there's actually some mix change and closure or deconsolidation of some of the business. But I wanted to get a sense whether you feel that once your RevPAR and by the way, your RevPAR is already over 100% anyway. Do you feel that you can go back to 50% on the hotel business?

Speaker 5

That's the first question. And then on the second question is on hotel. So you have been closing down, call it, fifty-sixty restaurants every 6 months And that you finally get to breakeven level. Then I guess the question is how many closure or do you have any targets as to how many restaurants you're going to be running? And when are you what's the profitability level you feel comfortable maybe in a 1 or 2 years' time?

Speaker 5

Thank you.

Speaker 4

Thank you, Simon. Thank you for your questions. So this is Selena. Let me introduce the background of the relating to your first question about the EBITDA margin of the hotel business. Yes, you did very correct.

Speaker 4

Previously, our EBITDA margin was as high as 50%, But in the first half of this year, our EBITDA margin was about 38%, Even though it recovered greatly from the COVID-nineteen, however, still lower than before. There are two reasons. The first one is due to our newly opened lease operated hotels during the COVID-nineteen, okay? So according to our calculation, the impact of our newly opened and operated hotels was negative to 10% of the EBITDA margin. So that means if we're excluding the impact for our unprofitable newly opened lease operated hotels, our EBITDA margin was about 48.7%.

Speaker 4

Okay, that's nearly a 10% higher than now.

Speaker 3

Simon, let me add a couple of more points to Selina's answers. Compared to the pre COVID area that we have the margin we see dip because our take rate is also a little bit reduced from the pre pandemic levels for the following reasons. 1, our CRS fees financially. And so that's one. Secondly, that because the last 3 years, we have not really forced the standardization of the renovation of the older hotels.

Speaker 3

And so with the 2023 post COVID, we started actually enforcing and starting the renovation of hotels. And during the renovation, we typically gave 6 months to a year of free waiving certain fees, especially if they upgrade to a different version. So and then those two factors also added a little bit more reduced of the top line even though the RevPAR on the group that recovered more than the 2019 levels. So that's also added to the reduction of the margin, okay? Regarding the restaurant, I'll leave a fill the opportunity to answer this question.

Speaker 2

Okay. From this year, I think the adjustment of our restaurant strategy is almost done. So maybe next year, we will try and start to find a partner to open more restaurants for the Dunkin' restaurants and our restaurant business?

Speaker 3

Thanks, Simon. This is a good question that the consumer trend has been rapidly changing. For instance, in the past, a substantial number of our dining and dumplings restaurants are located in supermarket mall, the street shopping malls, they are anchored by the supermarket. And we see the food traffic to the supermarket mall have substantially reduced. I think this lead to the closure of most of the 64 restaurants.

Speaker 3

And we are actually finding the new consumer patterns of consumption and finding the strategic located, for instance, the street fronted stores. And they're trying to reorganize our team, especially the developers and that because the trend has been shifting and then with that new format and then we are able to open more develop more restaurants in this new format. Thanks, Simon.

Speaker 5

Sorry, can I quickly follow-up? It's just on the 2 respective sorry, on the 2 respective segment, hotel and restaurant, did you have a sense or can you give us a target of the addition of the stores? For example, for the full year, how many hotel you are expecting to add? And equally for the restaurants, I saw, obviously, it has dropped a lot. Do you have indications maybe in medium term what sort of store count are you expecting?

Speaker 3

For the hotel side, we have actually moved to more focus on those high quality hotels and that we think that will build a better foundation for future. So this year, I think the signing of the new contracts is going to be more than 600. But because of the openings takes more time and that we calculated in the pipelines and the number of new stores, new hotels can be around 420 for the year of 2023. And for the bill, I'll give you the for the new restaurants.

Speaker 2

For new restaurants, we have targets like 20 to 30 restaurants for this year.

Speaker 3

Thank you. And for the restaurant side, it's easy to add more. I think that we're focusing on more high quality growth and making sure it doesn't burn a lot of cash and to make sure that we can catch the consumer trend and the inside of just a growing the number of locations. And so that's our strategy for the remaining and the next year segment.

Speaker 5

Thanks a lot, Alex. Thanks.

Operator

Your next question comes from Adam Su with China Cinder Securities. Please go

Speaker 3

ahead.

Speaker 6

Hello, management. Can you hear me?

Speaker 3

Yes, very clearly, Adam.

Speaker 6

Well, sorry for the bad luck. My first question is how do you like the competition and the market structure of the lower tier city market. First reason is that I can see that the recovery of the lower tier city market is not that good Tier 1 city this year. And for some reason, this year, I saw so many players coming into this lower tier setting market and how do you like the competition in this market? And for my second question is that, what is the attitude from our franchisee partners over the past 7 or 8 months.

Speaker 6

Is there any changes from their attitude? That's all. Thank you.

Speaker 3

Okay. Thanks, Adam. The competition in the lower tier cities has grown this has been grown stronger in the past few years. But we do not see it become stronger this year. I think that some players went to the 3rd tier 4th tier cities.

Speaker 3

I think the performance due to the challenge of managing them closely and effectively, we see some changes of the brand, change of the closure. We see more closures and change of the brand in the Tier 3, Tier 4 cities. But we I think our strength has always been managing remotely. We're managing 3rd, 4th year cities very effectively. So our hotels has been performing really well and during the COVID and after the COVID and they've been very stable and generating substantial cash flows to our franchisees.

Speaker 3

And we think that our strengths has been there, a leading players in those diversified, booming lower Tier 3 and the lower tier cities. In terms of attitude, our franchisees, it takes a little bit more time for our franchisees to adapt to the new environment because the first few months, they have many, many issues we have to solve that accumulated during the pre during the pandemic era. And secondly, that we also have experienced substantial boom in the number of travelers, especially in the first and second tier cities. And so we've been busy in terms of our franchisees have been busy in terms of forgetting everything, getting our people along with GreenTree hired retrained to meet the new demand. So this is the 1st few months has been very busy.

Speaker 3

And but I think that I will use the word, it will take a little bit more time for our franchisees attitude towards expansion and growth compared with the pre pandemic levels. But we see the more and more confidence coming to the market, especially on the hotel side. I think the restaurant there will be because there is the trend has been shifting very quickly, the track footprint, especially the food traffic has been changing. And so we do see the franchisee a little bit more reserved, conservative in the restaurant segment. And but in the long run, we have been pretty confident that our franchisees we already see some of our existing franchisees and started reaching out to researching additional properties and working with us.

Speaker 3

So we have more a lot more product in the pipeline and especially high quality ones. And on the competition of the property side, that is a little bit less, so which is good for our franchisees because pressure is somewhat reduced compared with 2019 levels. So Adam, those are the sentiments that we have experienced.

Operator

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

Speaker 4

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

Speaker 3

Thank you.

Operator

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

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