GreenTree Hospitality Group Q3 2024 Earnings Call Transcript

Quartr
Provided by Quartr
November 21, 2024

Key Takeaways

  • Key metrics: Q3 total revenues were RMB357.1 million (–22.5% yoy), net income was RMB65.2 million (–44.4% yoy), and non-GAAP adjusted EBITDA was RMB122.5 million (–32.1% yoy).
  • Hotel segment: Q3 RevPAR declined 13.6% to RMB135, driving hotel revenues down 15.4% to RMB286.9 million, offset partly by new openings and a growing loyalty program with 100 million individual members.
  • Restaurant segment: Revenues dropped 42% to RMB70.6 million with ADS down 25.6% to RMB4,891, but the business remained profitable for a second quarter as FM stores rose to 87.9% of outlets and cost controls improved EBITDA to RMB9.4 million.
  • Strategic growth: GreenTree continued expansion in mid-to-upscale hotels (527 properties, 12.1% of portfolio) and in Tier 2/3 cities, while closing underperforming assets and upgrading properties to position for a travel recovery.
  • Balance sheet & outlook: Cash and equivalents increased to RMB1.884 billion, full-year hotel revenues are now expected to fall ~8% vs. 2023, and management reiterated its dividend policy and confidence in a Q4 sequential rebound and 2025 performance.
AI Generated. May Contain Errors.
Earnings Conference Call
GreenTree Hospitality Group Q3 2024
00:00 / 00:00

Transcript Sections

Skip to Participants
Operator

Good day, and welcome to the GreenTree Hospitality Group Third Quarter 2024 Financial Results Conference Call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your telephone keypad, and to withdraw your question, please press star then two. Please note today's event is being recorded. I would now like to turn the conference over to Rene Vanguestaine. Please go ahead.

Rene Vanguestaine
Rene Vanguestaine
Investor Relations Representative at GreenTree Hospitality Group

Thank you, Rocco. Hello everyone, and thank you for joining us. GreenTree's earnings release was distributed earlier today and is available on our IR website at ir998.com, as well as on PR Newswire services. As a reminder, we also posted a PowerPoint presentation that accompanies our comments to the same IR website. On the call from GreenTree, I'm Mr. Alex Xu, Chairman and Chief Executive Officer, and Ms. Selina Yang, Chief Financial Officer. Mr. Xu will present the company's performance overview for the third quarter of 2024, and Ms. Yang will then discuss financials and guidance. They will be available to answer your questions during the Q&A sessions, which follows. Before we begin, I'd like to remind you that this conference call contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, and as defined in the U.S.

Rene Vanguestaine
Rene Vanguestaine
Investor Relations Representative at GreenTree Hospitality Group

Private Securities Litigation Reform Act of 1995. These forward-looking statements can be identified by terminology such as may, will, expect, anticipate, aims, future, intends, plans, believes, estimates, continue, target, is or are likely to, going forward, confident, outlook, and similar statements. Any statements that are not historical facts, including statements about the company and its industry, are forward-looking statements. Such statements are based upon management's current expectations and current market and operating conditions, and relate to events that involve known as well as 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.

Rene Vanguestaine
Rene Vanguestaine
Investor Relations Representative at GreenTree Hospitality Group

Further information regarding these and other risks, uncertainties, or factors is included in the company's filings with the U.S. Securities and Exchange Commission. All information provided, including the forward-looking statements made during this conference call, are current as of today's date. The company does not undertake any obligation to update any forward-looking statement as a result of new information, future events, or otherwise, except as required under applicable law. It is now my pleasure to introduce our Chairman and Chief Executive Officer, Mr. Alex Xu. Mr. Xu, please go ahead.

Alex Xu
Alex Xu
Chairman and CEO at GreenTree Hospitality Group

Thanks, René. Hello everyone, and thank you for joining us today. I'm pleased to report that our hotel business improved in the third quarter over the first two quarters of this year as the economy continued to recover. Travel patterns have normalized following last year's surge, which has influenced year-over-year comparisons. We're back to a more positive environment, focusing on growing our pipeline and upgrading numerous hotels across our portfolio. We are confident that we are on the right track and will benefit from the ongoing stimulus measures implemented by the government. Our restaurant business net income remained positive for a second consecutive quarter as we continued to grow the number of franchised street stores and stores with stable consumer traffic. Such stores now accounted for 55.5% of our store count compared to 44.6% a year ago.

Alex Xu
Alex Xu
Chairman and CEO at GreenTree Hospitality Group

Following the closing of unprofitable stores over the past year, the number of restaurants in operation had stabilized at 182 at the end of the quarter. We are now focusing on growing that number. Please turn to slide five. Compared with the third quarter of 2023, Hotel RevPAR was CNY 135, a decrease of 13.6%, and the restaurant ADS was CNY 4,891, a decrease of 25.6%. Total revenues were CNY 357 million, a decrease of 22.5%. Hotel revenues were CNY 286.9 million, a decrease of 15.4%, mainly due to a 13.6% year-over-year decrease in RevPAR and the closure of LO hotels, partially offset by new openings. Income from operations decreased to CNY 106.4 million with a margin of 29.8%. Net income was CNY 65.2 million, a decrease of 44.4%, with a margin of 18.3%. Adjusted EBITDA non-GAAP was CNY 122.5 million, a decrease of 32.1%, with a margin of 34.3%.

Alex Xu
Alex Xu
Chairman and CEO at GreenTree Hospitality Group

Slide six shows detailed numbers for total revenues, income from operations, net income, and adjusted EBITDA. Slide seven shows the trend in our quarterly operating performance. In the third quarter, compared to a year ago, RevPAR for our LO hotels decreased by 7.5% to CNY 196. RevPAR for our FM hotels decreased by 13.8% to CNY 133. ADR for our LO hotels decreased by 3.6% to CNY 258, and ADR for our FM hotels decreased by 6.1% to CNY 179. Occupancy at our LO hotels decreased to 75.9% from 79%, and occupancy at our FM hotels decreased to 74.6% from 81.3%. Slide eight highlights the growth in our membership programs, which accounted for most of our direct sales. Individual memberships grew to 100 million, up from 88 million a year ago, and the corporate memberships grew to 2.1 million, up from 2 million a year ago.

Alex Xu
Alex Xu
Chairman and CEO at GreenTree Hospitality Group

Slide nine shows the operating performance of restaurants with ADS decreased year-over-year to CNY 4,891, but increased sequentially from quarter two. Starting with slide 11 to slide 13, I will review our strategic execution across our businesses. In our hotel business, we further expanded in the mid-to-upscale segment and in Tier 3 and the lower cities, especially in South China. We also added more hotels in the Tier 2 cities. As you can see on slide 12, we continued to grow our mid-to-upscale segment with 527 hotels, that's 12.1% of our total portfolio at the end of the quarter. While the mid-scale segment remains the core of our hotel business at 68.4%, we continue our expansion into the higher-end segments. We also continued to grow our economy segment, ending the quarter at 19.5%. Please turn to slide 13.

Alex Xu
Alex Xu
Chairman and CEO at GreenTree Hospitality Group

Both of our current pipeline and the hotels in operations are growing in the Tier 2 cities. On slide 14, we continued to turn around our restaurant business to ensure that it is sustainably profitable going forward by focusing on areas with greater food traffic. We have closed LO stores and opened FM stores, completing the strategic transformation to our new business model. As a result, FM restaurants accounted for 87.9% at the end of the quarter compared to 74.8% a year ago, and street stores accounted for 48.9% compared to 38.6% a year ago. Next, Selina will review operating and financial highlights.

Selina Yang
Selina Yang
CFO at GreenTree Hospitality Group

Thank you, Alex. I will first review our hotel business. Please turn to slide 16. In the third quarter, total hotel revenues decreased 15.4% to 286.9 million RMB, compared to the third quarter of 2023. Total revenues from LO hotels were 118.2 million RMB, a decrease of 22.2% year-over-year. The decrease was primarily attributable to a 7.5% year-over-year decrease in RevPAR of LO hotels, the closing of six hotels, and the reduction in sublease revenues, mainly due to the disposal of property in the second quarter. Total revenues from FM hotels decreased 9.7% to 167.9 million RMB, primarily due to a 13.8% decrease in RevPAR, partially offset by new openings. On slide 17, total hotel operating costs and expenses decreased 4.9% year-over-year to 201.9 million RMB. Operating costs decreased 4.8% to 152.3 million RMB year-over-year.

Selina Yang
Selina Yang
CFO at GreenTree Hospitality Group

Costs decreased less than revenues because of the costs associated with the closing of LO hotels. Selling and marketing expenses were RMB 12.9 million, a year-over-year decrease of RMB 1.4 million. The decrease was mainly due to lower advertising expenses. General administrative expenses were RMB 35.3 million, up 32.5%, compared with the same quarter of last year. The increase was mainly due to an increase of RMB 11 million in bad debt provisions for aged accounts receivable. Turning to slide 18, the declining revenue resulted in a decrease in profitability for our hotel business, despite lower operating costs and expenses. Income from hotel operations decreased from RMB 127.5 million to RMB 99.5 million year-over-year. Net income was RMB 58.6 million, compared to RMB 108.5 million in the third quarter of 2023. Adjusted EBITDA decreased 32.8% to RMB 110.5 million, and core net income decreased 21.4% to RMB 86.9 million year-over-year.

Selina Yang
Selina Yang
CFO at GreenTree Hospitality Group

Next, let me review our restaurant business. Please turn to slide 19. In the third quarter, as Alex mentioned, we substantially completed the strategic transformation of our business model. Total revenues were CNY 17.6 million, a decrease of 42% year-over-year, mainly due to lower ADS and the closure of LO stores. Total costs and expenses decreased 42.8% year-over-year to CNY 63.9 million due to better cost management of personal expenses and sales channel commissions, and on slide 20, income from operations for restaurant business was CNY 6.9 million, Adjusted EBITDA was CNY 9.4 million. Next, I will review the profitability of our group. Please turn to slide 21. Group net income at CNY 65.2 million, compared to CNY 117.4 million a year ago. That was negatively impacted by a foreign exchange loss of approximately CNY 33 million.

Selina Yang
Selina Yang
CFO at GreenTree Hospitality Group

Group net income per ADS, that's basic and diluted, decreased by 44% to RMB 0.65. And core net income per ADS, basic and diluted, non-GAAP, decreased by 26.1% to RMB 0.92. Let's now take a look at slide 22. As of September 30, 2024, the company had total cash and cash equivalents, restricted cash, short-term investments, investments in equity securities, and deposits of RMB 1,883.9 million, compared to RMB 1,737.2 million as of June 30, 2024. The increase was mainly attributable to continued operating cash inflow and repayments of loans from franchisees. On slide 23, we now anticipate revenue for our hotel business for the full year 2024 to decrease 8.6% approximately compared to the year of 2023.

Selina Yang
Selina Yang
CFO at GreenTree Hospitality Group

This is based on our operating performance so far this year, in particular lower than expected travel in the third quarter, and the strategic review of our LO hotels that led to the net closure of nine hotels by the end of the third quarter, and contributed nearly half of the decline. This concludes our prepared remarks. Operator, we are now ready to begin the Q&A session. Thank you.

Operator

Thank you. If you would like to ask a question, please press star then one on your telephone keypad. If you are using a speakerphone, we ask that you please pick up your handset before pressing the keys. To withdraw your question, please press star then two. Once again, ladies and gentlemen, that's star then one to ask a question, and we'll pause for just a moment to assemble our roster. Our first question today comes from Calvin Wong with Spica Capital. Please go ahead.

Calvin Wong
Equity Analyst at Spica Capital

Good evening. Thank you for taking my question. I'd like to have two, if I may. The first one is, can you talk about the trend of the industry? How does the company's performance in the third quarter compare to other peers? And my second question is about the restaurant business. It seems that the business turned profitable in Q2 and turning even better in Q3. So what do you expect for Q4? Thanks.

Alex Xu
Alex Xu
Chairman and CEO at GreenTree Hospitality Group

Okay, Calvin, this is Alex. Thanks for those two questions. In terms of the trend in the hospitality industry for the year, we have compared like to like. I think our portfolio has a higher percentage of aged hotels, legacy hotels, so as a result, our RevPAR impact during the downward trend is more severe compared with the newly opened hotels portfolio, and we noticed our newly opened hotels have a much better performance than the aged hotels. We have a track record of 20 years. We have accumulated more legacy hotels in that end, so the downward pressure is more noticeable after the mid-August, like August 15th, and we see a more downward trend in the travel industry, but in October, we have also happily observed an improvement in the occupancy trend, so we expected the fourth quarter will be performing better than the third quarter.

Alex Xu
Alex Xu
Chairman and CEO at GreenTree Hospitality Group

And with more and more newer hotels adding to our portfolio, we think our trend will be reversed and will be outperforming the average of the industry in one year or two with substantial new products coming online. So that's on the hospitality side. On the restaurant, we have worked really, really hard on trying to reposition our business model. In the past, our stores are located, for instance, in supermarket-anchored shopping malls, which is a severe drop in the foot traffic. And a substantial number of those are closed, repositioned into street stores. And secondly, we also made improvements in the supply chain side because in the restaurant, the business model heavily relied on the foot traffic, the supply chain, the management system, and also the team. So as a result, I think we have performed better than the industry average in the restaurant chain side.

Alex Xu
Alex Xu
Chairman and CEO at GreenTree Hospitality Group

We're happy to see a continued profitability. And we will continue to select new locations to add the new stores at our own pace. So to make sure that, as I pointed out to you, the profitability can be sustained. So we have all business segments contributing to the bottom line. So Kevin, that's the trend in the restaurant. And we are still optimistically cautious about the restaurant business because we will see how the consumer trend will change, will shift, and how we can deliver more value at a more affordable price. And that's, I think, what the majority of the consumers are looking for. So we'll continue to improve our restaurant operating model. Thank you so much for these two questions.

Calvin Wong
Equity Analyst at Spica Capital

Very clear. Thanks.

Operator

Thank you, and as a reminder, to ask a question, please press star then one. We'll pause for just a moment to assemble our roster, and once again, that's star then one to ask a question. Today's next question comes from Betty Liu with UBS. Please go ahead.

Betty Liu
Betty Liu
Associate Director at UBS

Thank you, for giving me this chance to ask questions. I also have two questions. The first might be, could you give us some more color on your expectations for the sector supply and demand landscape going forward? Would the current fast supply expansion continue in 2025? My second question would be, what measures are the company planning to take in the next one to two years to further improve your RevPAR and meet current macro-conditions? Thank you very much.

Alex Xu
Alex Xu
Chairman and CEO at GreenTree Hospitality Group

So thanks, Betty. The industry's competition intensified a great deal, but we are getting into a more normalized period. Last year, there was a big surge after the pandemic finishes. So this year, I think we'll see a normalized competing environment. However, there are a lot more new hotels, new brands, and on the supply side. And the demand side, I think, has not caught up. As a result of that, we'll see the downward industry-wide RevPAR decrease. And you can see from our LO hotels segment, the downward pressure was not as much as our franchise hotels because our franchise hotels have a lot more older models there. So we are pretty confident our new products in the new locations are going to be a lot more competitive.

Alex Xu
Alex Xu
Chairman and CEO at GreenTree Hospitality Group

We expected a better performance in 2025 for the year, both on the RevPAR as well as our hotel openings, because we see we'll have many, many new hotels in the pipeline. And not only in the Tier 3 city, we also had substantially more new hotels in the pipeline in the Tier 2 city. The Tier 2 city consists of primarily the regional economic centers and the provincial capital cities. I think those locations that once we have newer hotels will better showcase our hotel's presence in those regions will further help to improve our Tier 3 cities' hotel's performance. So overall, we are very optimistic about our own 2025 outlooks and performance. In terms of RevPAR, as I said to Kevin earlier, we see an improvement in the Q4 of this year already.

Alex Xu
Alex Xu
Chairman and CEO at GreenTree Hospitality Group

However, it is really, I think, difficult to project the travel pattern next year because in light of the current economic environment. GreenTree's business model has been more resilient. For instance, as you can see from our mixed portfolio, we may be hurt a little bit in the company side because when you have more hotels in the Tier 2 and Tier 3 cities, our RevPAR is not as high in the Tier 1 city. As a result, our fee incomes, other related incomes, are not as high as compared with some of the peers, which have large hotel portfolios in the Tier 1 city. However, the Tier 2 and Tier 3 cities have a higher profit margin than the Tier 1 cities. The Tier 1 cities, basically, you have higher rent, higher personnel cost. As a result, the profit margin is much smaller than the Tier 2 and Tier 3 city.

Alex Xu
Alex Xu
Chairman and CEO at GreenTree Hospitality Group

So our franchisee has a lot more room to grow. And we expect that our profitability and the RevPAR for the second- and third-tier cities will be stable, to say the least, or at least we'll withhold the pressure. We stand the pressure from the market fluctuations. So hopefully, Betty, I answered your questions regarding our 2025.

Betty Liu
Betty Liu
Associate Director at UBS

Thank you. It's very clear.

Operator

Thank you. And as a reminder, if you would like to ask a question, please press star then one on your telephone keypad. Our next question today comes from Lewen Liu with China Securities. Please go ahead.

Lewen Liu
Managing Director and Senior Analyst at China Securities

Okay. Thank you. Thank you for taking my question. And I have two questions. The first is about, as we see, the third-quarter financial report for the OTAs, like Ctrip and Tongcheng, we still see they can achieve double-digit growth in the hotel industry despite the situation. So what do you think about the buying power on the hotel side for the following next year? And this is my first question. And the second question is about, I see that we have an investment or a new project in Guizhou Province. I think it's called Shuixilou. Can you add some color on this project? Yeah.

Alex Xu
Alex Xu
Chairman and CEO at GreenTree Hospitality Group

Thanks, Liwen. With regard to the OTAs and online travel agencies taking more market shares, I think that's really understandable because we are moving into the digital period. And I think that the double-digit growth is taking the shares from the offlines, and not necessarily in terms of the overall industry hotel hospitality demand that increased double digit. And we are working closely with all of the reputable online travel agencies. I think as long as they're mutually profitable, we can bring in their business with affordable commission costs. I think that will become the new ecosystem and the new win-win situation. And we think that that trend, the average consumer becomes younger and younger, and they will use their digital tools to make the reservations. And so we are basically taking notice of that trend and working closely with them.

Alex Xu
Alex Xu
Chairman and CEO at GreenTree Hospitality Group

With regard to the Guizhou project, and we are working with. We have strategic partners in the four- or five-star hotels, which we potentially will bring into the group in the future. There is a notable, well-known project over there that's ideal for a showcase four- or five-star hotels there. And the local government has sought our cooperation to help reposition that asset and to make it workable, to reopen and reposition that in the near future. So we're really happy to have the opportunity to work with the local government and to make the non-performing asset work.

Lewen Liu
Managing Director and Senior Analyst at China Securities

Thank you. Thank you for your answer. Yeah. Thank you.

Operator

Thank you. And once again, to ask a question, please press star then one. We'll pause for just a moment to assemble our roster. And once again, that's star then one if you have a question. Today's next question comes from Victor Liu with DMHY. Please go ahead.

Victor Liu
Managing Director at DMHY

Good evening, Yiping. Thank you for taking my question. I have two questions. The first one is about the dividends. The dividends were announced in the second quarter, and now we see the performance in the third quarter is lower than expected. So do you have any plan to continue to pay the dividends in the future? And my second question is about the liquidity. Can you tell us how you plan to improve the liquidity in the capital market? Since the company has previously mentioned that the company is considering several paths to boost the liquidity. So is there any progress or timetable now? Thank you.

Alex Xu
Alex Xu
Chairman and CEO at GreenTree Hospitality Group

Thanks, Victor. I will answer the question. And, Yiping, you can always jump in. With regard to the dividends, Victor, even though we see the third quarter net income dropped and looks like a large number of drop, like 44%, however, we are pretty confident because some of the cause of the drop, as Selina mentioned to you in the report, RMB 33 million of that drop is really a paper loss of the foreign currency exchange because we have a portion of the deposit is in US dollars. I think the third quarter, the beginning of the end, the conversion, basically, there is a $33 million paper loss there. Then I think there is an RMB 11 million, a bad debt provision for the long-aged accounts receivable.

Alex Xu
Alex Xu
Chairman and CEO at GreenTree Hospitality Group

We're pretty also confident that a lot of them eventually will be worked out, given the opportunity for the franchisee to work out their hotel performance, improve the hotel performance a little bit better and slowly, and some of those will be paid back, so in addition, we have legacy hotels being improved, and that's resulted because we have a large percentage in the legacy hotels, so resulted of the RevPAR decrease and more than the industry. We also see that a large number of newly opened hotels have a better performance, so on the going forward basis, we think our operating income and EBITDA will also improve significantly. As a result, our dividend policy will continue, and like we stated in the past, we'll not deviate from the past plan and the strategy we have announced.

Alex Xu
Alex Xu
Chairman and CEO at GreenTree Hospitality Group

And regarding to the liquidity, we have, I think, also shared with our analysts and investors that our company is going through a reorganization. And as a result, the parent company will merge with our GHG as a result of that. And some of the shareholders in the parent company will become direct shareholders of the GHG. And therefore, will increase the liquidity. And hopefully, that will help and boost our liquidity in the long run. I think that's our analysis. That's our current. We are still on schedule. But because there are a number of approval processes, so hopefully, that will be completed soon. And thanks, Victor.

Victor Liu
Managing Director at DMHY

Thank you. Thank you for your answer.

Operator

Thank you. And as a reminder, if you'd like to ask a question, please press star then one at this time. And ladies and gentlemen, as a final reminder, if you'd like to ask a question, please press star then one. This concludes our question and answer session. I'd like to turn the conference back over to Selina Yang for closing remarks.

Selina Yang
Selina Yang
CFO at GreenTree Hospitality Group

Thank you, Operator. 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 plans to reach us, please feel free to contact us. Thank you all.

Alex Xu
Alex Xu
Chairman and CEO at GreenTree Hospitality Group

Thank you.

Operator

Thank you. This concludes today's conference call. We thank you all for attending today's presentation. You may now disconnect your lines and have a wonderful day or evening. Thank you.

Executives
    • Rene Vanguestaine
      Rene Vanguestaine
      Investor Relations Representative
    • Selina Yang
      Selina Yang
      CFO
    • Alex Xu
      Alex Xu
      Chairman and CEO
Analysts
    • Lewen Liu
      Managing Director and Senior Analyst at China Securities
    • Victor Liu
      Managing Director at DMHY
    • Calvin Wong
      Equity Analyst at Spica Capital
    • Betty Liu
      Associate Director at UBS
Powered by Quartr