GreenTree Hospitality Group Q4 2023 Earnings Call Transcript

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March 25, 2024

There are 7 speakers on the call.

Operator

Hello, ladies and gentlemen. Thank you for standing by for GreenTree's 4th Quarter and Fiscal Year of 2023 Earnings Conference Call. Please note this event is being recorded. I would now like to hand the meeting over to your host today, Rene Van Gerseng with Christensen. Please go ahead.

Speaker 1

Thank you, Darcy. Hello, everyone, and thank you for joining us. GreenTree's earnings release will be distributed shortly and will be available on our IR website at ir.998.com as well as on PR Newswire services. We have also posted a PowerPoint presentation that accompanies our comments to the same 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 and Ms. Ellen Jiao, Financial Director. Mr.

Speaker 1

Xu will present the company's performance overview of the Q4 of 2023, followed by Ms. Jia who will discuss restaurant business operations and Ms. Yang and Ms. Jia will then discuss financials and guidance. They will be available to answer your questions during the Q and A session, which will follow.

Speaker 1

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. Private Securities Litigation Reform Act of 1995. These forward looking statements can be identified by terminologies such as may, will, expect, 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 2

Thanks, Rene, and hello, everyone, and thank you for joining us today. We had a good and stable Q4 in our hotel business and continued to make progress in restructuring our restaurant business. Hotel RevPAR increased 23.3% year over year, reaching 110% of its 4th quarter of 2019 level during the October national holiday. Restaurant average daily sales were up 14% year over year. We continue to streamline our hotel and the restaurant and and service standard to further improve brand identity for each of our hotel brands.

Speaker 2

In our restaurant business, we are focusing on growing our network of franchisees as we expand the number of street stores, while reducing our footprints in shopping malls and supermarkets. Now please turn to Slide 5. Compared with the Q4 of 2022, hotel RevPAR was RMB 128, up 23.3 percent and the restaurant ADS was RMB5433, up 14%. Total revenues were RMB 372.2 million, up 3.2%. Hotel revenues reached RMB289,600,000, up 21.7%.

Speaker 2

The increase in total hotel revenues was partially due to the continued improvement in RevPAR and the increase in the number of hotels. Incoming from operations increased to RMB23.1 million with a margin of 6.2%. Adjusted income from operations excluding other general expenses, which include provisions for trademark, especially due to the acquisition of the restaurant business, loan receivable related to franchisee loans and impairments of assets increased to RMB99.2 million with a margin of 26.7%. Net income was RMB7 point 4,000,000 with a margin of 2%. Adjusted EBITDA as non GAAP was RMB161,300,000 that's up 2.1% with a margin of 31.3%.

Speaker 2

Slide 6 shows detailed numbers for total revenue, income from operations, net income and adjusted EBITDA. On Slide 7, RevPAR was RMB 128. At the bottom of the slide, you can see the weekly RevPAR performance in the Q4 compared with 2019. RevPAR during the October national holiday was 110% of its pre pandemic levels, but trended down for the rest of the quarter to the end of the year even compared with 2019. Slide 8 shows the trend in our quarterly operating performance.

Speaker 2

In the 4th quarter compared to a year ago, ROAR for our LO Hotels increased to RMB 161. RevPAR for our FM hotels increased to RMB127. ADR for our LO Hotels increased to RMB 241 and ADR for our FM Hotels increased to RMB175. Occupancy at our LO Hotels increased to 72.5% and at our FM hotels increased to 66.9%. Slide 9 highlights the growth in our membership programs, which accounted for most of our direct sales.

Speaker 2

Individual memberships grew to 91,000,000, up from 78,000,000 a year ago, and the Slide 10 shows the operating performance of restaurant with ADS up 14% year over year at RMB5433, but down sequentially due to seasonality. Starting with Slide 12, I will review our strategic execution across our businesses. In our hotel business, we further expanded in the mid to upscale segment and increased our penetration in Tier 3 city and lower cities. As you can see on Slide 13, we continue to grow our mid to upscale segment with 4 74 hotels, that's 11.2% of our total portfolio at the end of the quarter. While the midscale segment remains the core of our hotel business with 70.2%, We continue our expansion into the higher end segment.

Speaker 2

The economic segment remained stable at 18.6%. Please turn to Slide 14. We continued to expand in Tier 3 and the lower cities and 73.5% of our hotels in our current pipelines are in such cities. And we will further capitalize on the substantial opportunities in such locations. On Slide 15, we continued to focus on increased profitability in our restaurant business.

Speaker 2

We closed unprofitable stores, mostly in shopping malls and supermarkets, increased the proportion of franchised and managed restaurants and expanded the number of street stores. Next, Selina Young and Allen Zhao will review operating and financial highlights.

Speaker 3

Thank you, Alex. Please turn to Slide 17. In the Q4, total revenues increased 3.2% year over year to RMB 372,200,000. The increase was primarily due to continued improvement in RevPAR and the increase in the number of hotels. Total hotel revenues increased 21.7% to RMB289,600,000 compared to the Q4 of 2022.

Speaker 3

Total revenues from F and M Hotels were RMB 162.9 million, up 6.5% year over year, while total revenues from LLO Hotels increased 48.9% to RMB125.5 million. On Slide 18, total hotel operating costs and expenses increased 9% year over year to RMB252.2 million. Excluding other general expenses consisting of provisions for trademarks, especially due to the acquisition of the restaurant business, loan receivables related to franchisee loans and impairment of assets, our total hotel operating costs and expenses increased 3.1% year over year. Among the total hotel operating costs, operating costs increased 7.6 percent to RMB154,600,000 compared to the Q4 of 2022. The increase was mainly due to higher consumer and the higher cost of general managers of franchise managed hotels due to the increase of our F and M hotels and partially offset by lower utilities.

Speaker 3

Selling and marketing expenses were RMB8.3 million, that's a year over year increase of only 8.9%. G and A expenses were RMB49.7 million, down 12.5 percent compared with same quarter of 2022. The decrease was mainly due to lower staff related expenses and lower bad debt. Turning to Slide 19. Income from hotel operations increased from RMB 13,300,000 to RMB47.4 million year over year.

Speaker 3

And net income of hotels was RMB21 1,000,000 compared to RMB7.5 million in the Q4 of 2022. Adjusted EBITDA increased 82.8 percent to RMB107,700,000 and core net income increased from RMB47,800,000 to RMB61,700,000 year over year. Next, let me turn the call over to Allen, the Financial Director of our restaurant business. In the 4th

Speaker 4

quarter, total restaurant revenues were RMB87.7 million, a 29 0.2% year over year, decrease mainly due to the growth of LRO and partially increase in ADX. Please turn to Slide 20. In the 4th quarter, total restaurant revenues were RMB87.7 million, a 29.2% year over year decrease, mainly due to the close of LO stores and partially by increase in ADS. You can also see the revenue breakdown for FM Restaurants and LO Restaurants. On Slide 21, total operating costs and expenses decreased 16 point 7% year over year to RMB118.1 million.

Speaker 4

You can also observe the downtrends in materials costs, personnel costs and the rents. Turning to Slide 22. Loss from restaurant operations was RMB 29,000,000. Net loss was RMB 18 200,000. Adjusted EBITDA increased to RMB 4,000,000 year over year.

Speaker 4

Core net income was RMB21.7 million. Next, Selina will review the profitability of our group. Please.

Speaker 3

Thank you. Please turn to slide 23. Group net income ADS that's basic and diluted was RMB0.11. Group core net income per ADS that's basic and diluted non GAAP was RMB0.87. Let's now take a look at Slide 24.

Speaker 3

As of December 31, 2023, the company had total cash and cash equivalents, restricted cash, short term investments, investments in active securities and time deposits of RMB 1377 1000000. That's compared to RMB 1331.4 million as of September 30, 2023. The minor decrease was primarily due to investment in property and the repurchase of ordinary shares, partially offset by primary partially offset by bank loans and repayments from our franchisees. On Slide 25, for the year of 2024, we expect total revenues of our organic hotels to grow 7% to 12% year over year and total combined revenues from our restaurant and organic hotel business to grow 3% to 5% year over year. This concludes our prepared remarks.

Speaker 3

Operator, we are now ready to begin the Q and A session. Thank you.

Operator

Thank you. We will now begin the question and answer session. Thank you. Your first question comes from Dan Chi from Morgan Stanley. Please go ahead.

Speaker 5

Thank you, operator. Good morning, management. Thank you so much for this opportunity to ask the question and congratulation on the Q4 result and also good work on narrowing the losses in the restaurant business. My question is, I still have not gotten a good time to look at the results in details, but I'm looking at the revenue guidance that Selena just kindly mentioned. Just want to check with you for the full year guidance of 2024 of 7% to 12% for Hotel Business.

Speaker 5

What are we factoring in, in terms of drivers from RevPAR and also drivers from hotel opening? And how is our hotel opening plan for 2024? That's my question. Thank you.

Speaker 2

Okay. Thanks, Dan. The 7% to 12% of the hotel revenue up, it consists of the following factors. We expect continued improvement of the overall RevPAR, but only slightly with the 2023. So that's around 2% or so, the RevPAR growth.

Speaker 2

The balance of the growth are roughly 10% of the hotel numbers growth because we planned about the detailed number of hotels opened this year, we plan to be about 500, Selena. Correct me if I'm incorrect in that number. And then also, we will have a number of hotels in the transition period that is we have a relatively older portfolio compared with some of the new start competitor group. So like the last quarter, we have taken down in the last year after the pandemic many hotels into renovation stage, so then reduced by the renovation stage. Then combined, we have been into a 7% to 12% of total revenue, okay.

Speaker 2

So that's then that consists of that number. And to further elaborate that, okay, why the only 2% of the RevPAR over 2023, why not be a little bit more aggressive? Because last year, we've seen the RevPAR increased a lot stronger than 2022 because of the post pandemic and also many, I think, pent up demands. The Tier 3 cities where we have larger percentage and over 73%. The Tier 3 cities, the RevPAR increase, I think, was in the higher single digits, comparing with the double digits 15% to around 15% to 13% in the 1st year and second year.

Speaker 2

So we expect that the 3rd tier RevPAR growth to be relatively flat on 2023 2024 compared with 2023. And with more seasonality and up and downs, for instance, we have observed during the holiday season and during the weekend, we see a sharp increase, for instance, during the Chinese Spring Festival in the RevPAR in the overall ADR and occupancy, but then trended down and also relatively sharply, just like in the Q4 national holiday. And so in balance, and that they will be trending to be a little bit upward in the 2023. And we will continue to add new products and new products has a better identity and can offer more family and leisure oriented elements. So we will expect a stronger RevPAR increase in the following several years after we complete this transition period.

Speaker 2

So Dan, that's our assessment to you.

Speaker 5

Thank you. Thank you, Alex. Can I just follow-up with one question on the RevPAR? I saw that 4th quarter RevPAR growth versus 2019 was mainly driven by ADR. And also occupancy was still, although recovered, but still, I think, around 10% below 2019 level, 6 percentage points below 2019 Q4 level.

Speaker 5

So I'm just wondering, Alex, for your 2024 and if you look at your weekly chart, we are now maybe around 90% of 2019 as of March. Are you seeing this year 2024, we are seeing occupancy increase year on year versus 2023, but ADR was flat to decline, so resulting in this 2% increase or you would say is 1% plus 1% both are growing? Just my last question. Thank you, Alex.

Speaker 2

Okay. Thanks, Dan. The 2 actually are interrelated. If we lower the ADR, then the occupancy will be increased. So on balance, there is a optimal rate, but we do not know what's the optimum should the best strategy of achieving the optimum RevPAR increase.

Speaker 2

However, we this is our plan. We plan to have a slight increase of the ADR, but the occupancy, we expect to be relatively stable. So we would like to increase the room rates. And then so we expected that the most of the growth should be the ADR. And then once the ADR reached certain levels, then we'll try to then further increase the occupancy.

Speaker 2

The occupancy some of the occupancy is resulted from the seasonality and also I said the sharp up and downs and the balance the travel pattern for the 2020 at the end of 2023 to 2024, we find there is a little bit higher trend in terms of holiday and leisure and the family related travels. So that's more seasonal than the constant demand for the business travels. So which also resulted in a blended relative a little bit lower occupancy. So our internal projections to be on the RevPAR to increase primary results from ADR.

Speaker 5

Thank you. Thank you, Alex.

Operator

Thank you. Thank you. We have a follow-up question from Dan Chi from Morgan Stanley. Please go ahead.

Speaker 2

Hi.

Speaker 5

I have another follow-up question on the hotel opening. I'm just wondering for management, what's the plan for your leased hotel, the L&0 hotels for 2024? Do we still have hotels in the pipeline? And are we still continuing to build net additions in leased and owned hotels? Thank you.

Speaker 2

Okay. Dan, as we previously stated, we will only build the L. O. Hotels in the key like Tier 1 and the transportation hub at the showcase hotels. Currently, I think there is we plan 1 to 2 showcase L and O hotels for our flagship brand such as GreenTree Eastern and GreenTree Inn.

Speaker 2

So there is a single digit numbers there as currently we're evaluating. And we are still focused on continue to grow our hotel in the franchise and manage, and that is our core competitiveness and strengths. So let me elaborate our overall business strategy again in light of this question. 2023 is a transitional year. I think that we in the past, we're trying we have evaluated potentials for acquisitions and growing of the business with many different approaches, but with also many more brands.

Speaker 2

And now with the COVID and the post COVID and we have transitioned into focusing more on the traditional and the fundamental approach to the hotel operations, hotel management. That is our objective is to deliver as consistent service and products to our customers. And we need to upgrade our little bit aging portfolios. So we have taken a larger number of hotels and giving our franchisee 6 months and most of the time to almost 1 year time to renovate to a newer standard, which we find we can substantially then increase the ADR occupancy and therefore RevPAR. And we'll continue to build our team to be more proficient and more efficient in both their career growth and their productivities and they're delivering a consistent service quality to our customers.

Speaker 2

And then thirdly, we're trying to implement and upgrade our existing technology platform to incorporate the new features, especially some of the new applications in the technology industries to further improve or enhance our frontline employees' ability to serve our customers. And then combined, we also have a restaurant, 2 great brands. There are not many brands can withstand the pressure and the competition in the restaurant business for over 20 years. Unfortunately, we have 2 great brands, that's Bellagio and Da Nang Dumplings. And so we have started to build the brand and to use the core experience, understand that to expand in the franchise, the managed models.

Speaker 2

And we have managed to increase that, which will further increase, I think, our profitability in the restaurant business. And slowly, we already seen the seed and trend and they were not obvious from the previous year. But now with the travel trend to be more leisure and also more family oriented, we find that the leisure element such as the dining becomes a more essential part of the future hotels. So we do see more opportunities for synergies between the hotels and the restaurants. And so that's our business strategy.

Speaker 2

We'll continue to focus on the fundamentals. We'll find that the hotels we have built and we have established with our franchisees continue to perform very robust and that our service quality we can see slowly becoming increasingly become more satisfactory to our customers and the customer satisfaction scores are improving. So after the even after this post COVID transition period, where there's a lot of hotels coming out of that has wear and tears that even with that conditions, we slowly improved our customer service scores. So we do see a great fundamental to be built in the last year, this year and next 1 to 2 years for a stronger growth in the near future.

Operator

Thank you. Your next question comes from Simon Zhu from Goldman Sachs. Please go ahead.

Speaker 6

Thanks for taking my question. I have 3 quick questions. Just on your Slide 8, where you laid out the lease and own and the franchise RevPAR performance individually. I can't help to basically observe that the lease and own restaurant department is much stronger than the franchise. So when Alex, you mentioned that you are more doing or expecting a 2% RevPAR growth.

Speaker 6

Just wondering that obviously the franchise exposure is going to be keep increasing. The weaker performance of the franchise RevPAR performance, would that be any way that would track your overall RevPAR performance to percentage 1? On an individual basis, let's say, just from your observations, are you seeing any possibility that the franchise are starting to do better? Generally wanted to get a sense how you're thinking of the respective segments and the aggregate overall? That's the first question.

Speaker 6

And then the second one is in relation to the profitability of your boat business, great to see you do have some leverage in the last 1 to 2 quarters. But wanted to and you also mentioned some synergy benefits between the two business. Can you just briefly chat about how you're seeing the margins in the maybe in the medium term for respective business maybe in a 2, 3 year time? And equally, just also wanted to get a sense how you're thinking about the top line growth for the actually the number of hotel and restaurant because obviously for restaurant, for example, you already reduced your restaurant count by quite significantly over the last 1 year or so. And then that hotel count 4,000, is that some medium tons out there that you have in your mind?

Speaker 6

Thank you.

Speaker 2

Okay, great. Great questions. I will leave the third question to Selena about the restaurant business revenue change because the restaurant business, the revenue has a sharp drop because we have closed many direct owned leased and operated restaurants due to the impact from the traffic lower traffic to the shopping malls and the supermarket anchored malls. So even though the number of restaurant, the segment changed and we have a little bit increased number of franchise and the managed restaurant, while the number of directly owned dropped, but the impact to the revenue was much larger. But going back to the first question, leased and operated and the franchised RevPAR trend.

Speaker 2

As we have said earlier, we build the lease and operated at the showcase hotels. So naturally, with the showcase hotels, they tend to perform that well ADR wise and which has a service element, more complementary services to the family, to the businesses. So as a result, the ADR has been improved much higher than the balance of the larger base of franchised restaurants franchised hotels. But we do see that trend will be probably similar because many, many franchised hotels are going through the renovations. Once after the renovations is done and the ADR we expect the ADR will grow at the same level.

Speaker 2

And we our focus in the strategy right now has been focusing on the ADR driven growth strategy because you have an you always have the option of lower your price a little bit to increase the occupancy and thereby taking the higher a little bit different market shares resulted in an increase of the same level of ADR with the RevPAR. But with ADR increases, I think we have more room and a better potential and to move the quality of the products into a higher and higher level. So for the next 2 years, we expect that similar levels of growth for both L O hotels and the FMA hotels. So that's one thing. Another thing is that the L.

Speaker 2

O. Hotels, because we have gone through renovations with this lower base, So the percentage of L. O. Hotels have gone through the renovation is higher than FM hotels. That's also drive up the ADR increase a little bit higher.

Speaker 2

So I hope that I answered the question for the for your first. For the second question regarding the synergy and then also the restaurant business, We have experimental moving the restaurant with the hotels, combining the breakfast delivery to be a 3 meals, 4 day restaurant. And we have seen some good result such as in our Jinan hotels in Shanghai. That increased the revenue substantially. But moving the larger staff in the restaurant into the hotels and requires a new system and new operating standard.

Speaker 2

So we are doing the second experiment in the 2nd tier city. So the 1st tier city we have done and there is many elements that we need to take into consideration. For instance, the competition landscape of F and B in the buildings. Some of the buildings that we leased hotels already have other restaurant services. And then also the space constraints and thirdly, the staff constraints.

Speaker 2

And so that though we've taken those three factors and we have taken a more experiment this year. I know we have another couple of them opened, scheduled to be in the summer. So we'll report to you the result of the synergy in that area. And right now, I think it's experiments and forming the standard and system and building a better fundamentals and making sure we are not also introducing that some of the uncertainty in the higher competition, the restaurant business into the stable hotel business. So those are the elements that we are considering.

Speaker 2

So 3rd question.

Speaker 1

Simon, could you please repeat the third question, which we think had to do with LO Hotels versus FM going forward?

Speaker 6

No. My third question is actually more related to broadly speaking, the number of hotel now you're running at slightly over 4,000 and restaurant are over 200 now. I'm big here that you have a hotel target additions, 500 for this year. But in more like a medium term, do you have any target in your mind in terms of the account for both respective segments?

Speaker 2

Simon, our ambition and the plan is always that let's build the fundamentals, then we will build a growth plan that's compatible with our current resources with the so that we can continue to improve our brand standard and brand identity. And so we plan internally the next 3 to 5 years and continue to grow our hotels by the numbers by 10% to 15% per year. And slowly, hopefully, after we build a stronger fundamental, build a stronger base, we can even further accelerate the growth. But right now, because we have a number of issues and experience and lessons we have learned through the past M and A, which also resulted some of the legacy problems that also consumes our internal resources to restructuring those kind of businesses and also to restructuring the restaurant and making sure the restaurant has a robust logistics system support to grow the franchise and manage the models. And we the hotels landscaping is very clear.

Speaker 2

And the restaurants, we're still getting a trying to learn the lessons and patterns of our strengths in which area such as community store, the street front stores and also the high traffic areas such as train stations, subway stations. And so once we have firmly built a profitable robust business model, then we will grow more quickly. So that's our the next midterm plan.

Speaker 6

Sorry, I haven't looked at the numbers yet, but then the restaurant, are you done with all the closure? Do you feel that your hotel your restaurant count is pretty much bottom and likely going to steady at least in the coming quarters?

Speaker 2

Sorry, Simon? That is correct. Right now with a substantial completion, I think the restaurant reorganization is substantially completed. And so now we can focus on instead of closing our transitioning, working restructuring of the unprofitable stores, that now we can focus on growing the franchised and more profitable stores. The legacy issues of the restaurant side, Simon, is primarily resolved.

Speaker 2

I think some of the locations are had the higher rent and continued reducing the traffic, reduced traffic. And so it's more challenging and to stay profitable even after our staff put in more efforts. And so those restaurants we have already closed, substantially closed. So we do we will expect that a number of restaurants and we're also growing, but albeit initially I think slowly because as we stated the pattern and the system are still emerging. And the restaurant the competition in the restaurant is stronger than we originally estimate and expected.

Speaker 2

And so we do not know the trend will continue, but we still think that the restaurant business, I think, will be more has more characteristics and challenging than the hotel business.

Speaker 6

If I may, just get a very final follow-up question. Just you mentioned number of hotel that you're planning for some upgrades. So out of your 4,000 ish hotel, how many of them are going to upgrade? And your reception of by the franchisee, how are they willing to take indeed to the upgrades when you compare to your assessment of the entire portfolio?

Speaker 2

Right now, about half, I think that my last numbers came in about half of them are in the renovations. And I think another half we expect them to be completed in the next 2 years next 2 to 3 years.

Speaker 6

Understood. Thanks a lot for the answers. Thank you.

Operator

Thank you. This concludes our question and answer session. I would like to turn the conference back over to Selena Young for any closing remarks.

Speaker 3

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

Speaker 2

Okay. Thank you.

Operator

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

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GreenTree Hospitality Group Q4 2023
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