GreenTree Hospitality Group Q1 2024 Earnings Call Transcript

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Provided by Quartr
June 25, 2024

There are 8 speakers on the call.

Operator

Good day, and welcome to the GreenTree Hospitality Group First Quarter 2024 Financial Results Conference Call. All participants will be in a listen only mode. After today's presentation, there will be an opportunity to ask questions. Please note this event is being recorded. I would now like to turn the conference over to Rene Van Guestien.

Operator

Please go ahead.

Speaker 1

Thank you, Betsy. 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 same IR website. On the call from GreenTree are Mr.

Speaker 1

Alex Xu, Chairman and Chief Executive Officer Ms. Selena Yang, Chief Financial Officer and Ms. Ellen Zhao, Financial Director. Mr. Xu will present the company's performance overview for the Q1 of 2024 and Ms.

Speaker 1

Yang and Ms. Zhao will then discuss financials guidance. They will be available to answer your questions during the Q and A session 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.

Speaker 1

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. 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.

Speaker 1

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. 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.

Speaker 1

It is now my pleasure to introduce our Chairman and Chief Executive Officer, Mr. Alex Xu. Mr. Xu, please go ahead.

Speaker 2

Thanks, Renee. Hello, everyone, and thank you for joining us today. Overall, we delivered some significant improvements in the first quarter with substantial increase in both operating and net incomes. Conditions in our hotel businesses were mixed as consumer behavior continued to evolve in a more competitive environment, while we are continuously upgrading a large portion of hotels in our portfolio. Against this scenario, we managed to deliver an 8.8% revenue increase year over year and a 21.1% increase in hotel adjusted EBITDA.

Speaker 2

We believe our business metrics will improve as we are completing these upgrades and open more new hotels. We made further progress in the repositioning of our restaurant business with an absolute focus on robust profitability. We grow our network of franchisees as we further expanded the number of street stores. We have completed our closures of the restaurants in the supermarket anchored regional shopping centers due to less food traffic to our stores. We have now completed this phase our forward strategy and are focused on store count growth again in regions where we have strong brand recognition.

Speaker 2

Please turn to Slide 5. Compared with the Q1 of 2023, hotel Royal Par was RMB114, that's down 4.6% and the restaurant ADS average daily sales per store was RMB5525, down 8.7%. Total revenues were RMB352.2 million, down 7.1%. Hotel revenue reached RMB274.8 million, that's up 8.8%, attributable to the recovery in the RevPAR of our LO Hotels and restaurant revenue decreased to RMB77.7 million as we continued to execute on our strategy to reposition this business. Income from operations increased to RMB72.2 million with a margin of 20.5 percent.

Speaker 2

Net income was RMB 57,300,000, that's up 76% with a margin of 16.3%. Adjusted EBITDA, that's non GAAP, was RMB109.4 million, that's up 17.2% with a margin of 31.1%. Slide 6 shows detailed numbers for total revenues, income from operations, net income and adjusted EBITDA. Slide 7 shows the trend in our quarterly operating performance. In the Q1 compared to a year ago, RevPAR for our LO Hotels increased by 8.9% to RMB157.

Speaker 2

However, RevPAR for our FM Hotels decreased by 4.9% to RMB113. ADR for our LO Hotels increased by 2.8% to RMB235 and ADR for FM Hotels increased by 0.7% to RMB 167. Occupancy at our L. O. Hotel increased by 3.7% to 66.6 percent, and occupancy at our FM Hotels FM Hotels decreased by 4% to 67.9%.

Speaker 2

Slide 8 highlights the growth in our membership programs, which accounted for most of our direct sales. Individual memberships grew to 93,000,000, up from 78,000,000 a year ago and the corporate memberships grew to 2,070,000, up from 1,950,000 a year ago. Slide 9 shows the operating performance of restaurants with ADS down 8.7% year over year at RMB5525, but up sequentially, that's mainly due to seasonality. Starting with Slide 11, I will review the results of 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 and the lower cities in South China.

Speaker 2

As you can see on Slide 12, we continue to grow our mid to upscale segment with 4 98 hotels, that's 11.7% of our total portfolio at the end of the quarter. While the midscale segment remains the core of our hotel business at 69.1%. The economy segment ended the quarter at 19.2%. Please turn to Slide 13. We continued to expand in Tier 3 and the lower cities and 71.8% of hotels in our current pipeline are in such cities and we will further capitalize on the substantial opportunities in such locations.

Speaker 2

On Slide 14, we continued to focus on increasing the profitability of our restaurant businesses. Our strategy is 3 pronged, close unprofitable LO stores, increase the proportion of FM stores and expand the number of street stores, Franchised and managed restaurants accounted for 85.4% at the end of the quarter compared to 54.5% a year ago and the 3 stores accounted for 44.3% compared to 31% a year ago. Next, Selina Young and Ellen Zhao will review operating and financial highlights.

Speaker 3

Thank you, Alex. Please turn to slide 16. In the Q1, total hotel revenues increased 8.8% to RMB274.8 million compared to the Q1 of 2023. The increase was primarily due to the continued improvement in LRO Hotels RevPAR, more newly opened LRO Hotels and offset by the decrease in SM Hotels RevPAR. Total revenues from LRO Hotels were RMB122.5 million, that's up 49.3% year over year, while our total revenues from F and M hotels decreased 10.8% to RMB151.2 million.

Speaker 3

On Slide 17, total hotel operating costs and expenses increased 1.7% year over year to RMB206.7 million. Among the total hotel operating costs, operating costs increased 8.9% to RMB146.2 million year over year, which was mainly attributable to higher utilities costs due to the improvement in ARO Hotels throughout PA and higher rental and personnel costs due to the increase in the number of Air Hotels and SMF Hotels. Selling and marketing expenses were RMB50.5 million, a year over year increase of RMB4.4 million, mainly due to the increase in business development and sales staff numbers. General and administrative expenses were RMB38.5 million, down 16.5% compared with same quarter of last year. The decrease was mainly due to the reversal of bad debt resulting from the decrease in accounts receivable.

Speaker 3

Turning to slide 18. Thanks to the growth in revenues and control of costs and expenses, Our hotel business improved its profitability in the Q1. Income from hotel operations increased from RMB52 1,000,000 to RMB70.4 million year over year. Net income of hotels was RMB 57.3 million compared to RMB35 1,000,000 in the Q1 of last year. Adjusted EBITDA increased 21.1 percent to RMB102.4 million and core net income increased from RMB53 million to RMB61 million year over year.

Speaker 3

Next, let me turn the call over to Alan, the Financial Director of our Restaurant Business.

Speaker 4

Please turn to Slide 19. In the Q1, we continued to reposition our restaurant business, closing unprofitable LO stores and opening more franchised and managed stores. Total restaurant revenues were RMB77.7 million, down 38 point 9% year over year. And the total restaurant costs and expenses decreased 14.4% year over year to RMB75.8 billion. And on Slide 20, these measures led to improved profitability.

Speaker 4

Income from restaurants operations was RMB1.9 million. Adjusted EBITDA increased 3.7 percent to RMB7.0 million year over year. Net profit and the core net income turned from loss to breakeven.

Speaker 3

Next, Selina will review the profitability of our group. Please turn to Slide 21. Thanks to the continuous and stable growth in revenue of the hotel segment and better performance in the restaurant segment. Our group net income per ADS, thus basic and diluted, increased by 63.2 percent to RMB0.58 and core net income per ADS, that's basic and diluted non GAAP, increased by 22.3% to RMB0.60. Let's now take a look at Slide 22.

Speaker 3

As of March 31, 2024, the company had total cash and cash equivalents, restricted cash, short term investments, investments in equity securities and time deposits of RMB 1,517 point 3,000,000 compared to RMB1337.1 million as of the end of the Q1 last year. The increase was mainly due to continued improvement in our operating performance, drawing down our bank facilities and the repayment from our franchisees. On Slide 23, based on our performance in the 1st 5 months of this year, we maintained our previous revenue guidance for the hotel business that we expect to grow 7% to 12% year over year speaking. We are withdrawing our guidance for the restaurant business given the significant revenue unpredictability resulting from its strategic repositioning. This concludes our prepared remarks.

Speaker 3

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

Operator

We will now begin the question and answer session. The first question today comes from Nan Fang with QX Capital. Please go ahead.

Speaker 5

Thank you management for taking my question. The first question is about what's the dividend policy of GreenTree? Does the company have plan to distribute special dividend in the future? And the second one is, can you elaborate on the strategy on our restaurant opening? Thank you.

Speaker 2

Okay. I'll take this question, Selina. Thanks, man. Appreciate it for the 2 great questions. Regarding the dividend for a while.

Speaker 2

Now with the 2nd year after the lift of pandemic, We plan we discussed and planned a continue to continue the dividend policy like what we had before. But we have made the internal discussion. And I think next quarter, we'll make an announcement regarding this, our continued dividend policy resumption. Regarding the special dividend, we will evaluate our cash position and also the investment needs for our growth. And to the extent possible, we always would like to have more dividend and also share buyback to enhance the shareholders' value in addition to sound business practices.

Speaker 2

Okay. Then with regard to your second question, the number of restaurant openings and growth for the balance of the year. The restaurant business for the Q1 and the Q2, we have yet to complete it. But we'll see some of the trend that is more competitive in the restaurant landscape. And our business model, therefore, after internal discussion is being improved and we can combine the strength of our franchisees' local expertise versus local resources and with our standard and high efficient operating system and brand recognition, and we can generate a much better return to our franchised hotels.

Speaker 2

That is what we've been doing in the last quarter. And so we will plan to open, I think, 45 to 50 more new restaurant by the year end. So that's the restaurant opening business in total should end the year roughly by 230 plus or minuses. I hope Nan answered your question. And as we emphasized, I think focusing on the profitability of each store and building the restaurant business on the sound foundation, I think, is more important than the scale and the size at this moment.

Speaker 2

And we are actually deploying a couple of smaller teams to further explore the business model of the restaurants. And I would like to add one point. The restaurant ADS was done. Another reason is because we're shrinking our restaurant size and so to make the restaurant size a little bit smaller and the operating space become more efficient. So that's another reason I think the restaurant ADS is down somewhat like 8.% or so.

Speaker 2

Okay. Thank you again for the two questions.

Operator

The next question comes from Betty Du with UBS. Please go ahead.

Speaker 6

Hi. Thanks very much for giving me the precious chance to ask questions. My question is regarding the hotel business. As there is an obvious non trading trend among consumption and travel, how does this affect the company's RevPAR? And are there any divergence between economy, midscale and upper midscale segments?

Speaker 6

Many thanks.

Speaker 2

Okay. Betty, did you let me rephrase. Did you ask the RevPAR trending for the Q2? Because I missed that a little bit.

Speaker 6

Yes. Basically regarding RevPAR and what's the impact of the consumer downgrading, especially on hotel RevPAR and whether there is different trends between economic segments or upper midscale segments.

Speaker 2

Okay. Thanks, Betty. Regarding the segment, I'll leave that to Selena. But regarding the RevPAR trend trending down on the Q2, we observed our RevPAR for the Q2 is trending down at the same rate as our Q1. The Q1, we have analyzed our RevPAR drop.

Speaker 2

We find that our RevPAR dropped is caused also in the large part by our substantial number of hotels are being taken out or in semi operation to receive the upgrade and to go through the upgrade. We typically gave 6 months to 1 year of fee reduction of waiver for the hotels going through the upgrade. So therefore, it affected our global RevPAR and affects the occupancy as well. So the second quarter we'll continue to do the hotel upgrades because we have a substantial number of hotels needs to be upgraded because of the 3 years of pandemic. And so we're accelerating the upgrading process and that will reduce our RevPAR.

Speaker 2

And so we expect that we expect our RevPAR trending down the similar rate at the Q1. And with regard to which segment mid to upskills or mid scales or lower scales trending down, I'll leave that to Selena.

Speaker 3

Okay. Thank you, Alex and thank you, Du. If we compare with the Q2 of last year, for example, we used the year over year growth rate as an indicator, we will find, okay, the indicator for the middle scale segment is best, is better than mid to upscale, followed by the economy hotels. And basically, for our hotel for our company, our ratio in the economic segment takes the largest portion of our total portfolio. So I think that maybe has an impact on our total performance.

Operator

The next question comes from Alpha Wang with Goldman Sachs. Please go ahead.

Speaker 7

Thank you. Thank you for taking my question. I have two questions, if I may. The first one is, given you just mentioned in Q1 and Q2 to date, the RevPAR has been slightly down year on year, but we maintain our full year revenue guidance and change. So could you give us a sense of what full year RevPAR we're looking at?

Speaker 7

And what are the drivers to achieve the full year revenue guidance? Thank you.

Speaker 2

Okay. Thanks, Alpha. Even though the RevPAR is trending down for the 1st and second quarter, our revenue consists of the existing hotels, the revenue the existing hotels and also add new hotels. And in addition, we also have some very good performing and all hotels that adding together the hotel total revenue even though with a drop of the RevPAR for the existing hotel portfolio, the increased revenue in the L hotels and also the new FM hotels is more than makeup the loss in the existing hotels revenue, the RevPAR. So our LO and the new FM hotels revenue will increase about 12% or so to 15%.

Speaker 2

That's according to our analysis. So taking down the RevPAR decrease, so you blended them together, I'm using ballpark numbers arriving to 7% to 12% revenue increase for the year. For instance, some of our FM hotels, we have introduced the new boutique brand already performing excellent in certain regions. For instance, in the Western part, our one of our newer brand became the star in the region in the entire region within a low season, we have achieved a RevPAR of RMB2000 per room per day and expecting the high season over RMB4000 per room per day. So those are contributing to the revenue increase for the hotels.

Speaker 2

But on the other side, the restaurant, we expected revenue drop in total of 50%. So the groups previously, we didn't anticipate the restaurant competitiveness increased at least in the locations where we're operating dramatically. For instance, we have a large number of restaurants in the supermarket that anchor the regional shopping centers. We observed the least of the food traffic to our stores decreased a lot. And plus those restaurants has a large size in large area size, large footprint And therefore, we made a strategic decision to reduce the exposure in those locations and then expanded to franchise and manage the restaurant business where we only collect a fee.

Speaker 2

So that's resulted in the total revenue for the restaurant side is 50% down. So combined that will drag the entire group's revenue down a little bit. But however, because the restaurant repositioning the profitability and the list and the EBITDA get a boost and increased. So our total bottom line performance will be enhanced. So we hope we will build our business on both the bottom line and the top line growth.

Speaker 2

So that's our real power for the full year, of the impact to our revenue. I hope that answered your questions. Thanks.

Operator

The next question is a follow-up from Nan Fang with QX Capital. Please go ahead.

Speaker 5

Hello management. I have another question for you. Can you take a little bit about your expansion into the higher end segments? Thank you.

Speaker 2

Okay then. We have increased our mid to upscale segment continuously. And we have several brands that we are continuously improving the standard for both of the products and the services such as GreenTree Eastern. And we also systematically closed some of the less desirable located products. And as a result, I think that will continue to have a positive impact on the group's ADR.

Speaker 2

For instance, we reported to you the LO Hotels because most of our LO Hotels leased and operated are in the mid to upscale like GreenTree Eastern. And there you can observe, you can see our performance has increased dramatically and this will showcase for our potential franchisee to develop more similar branded hotels. And in addition that we're also developing some cultural based boutique hotel brand such as if you check the snow hotels we developed and has already become the local, the regional hotel stores. And combined, I think with the combined efforts and concerted resources to put into that area, we hope and we think that mid upscale segment will be become a larger and larger portion of our business and that we're confident that after the pandemic area is gone, we can focus on developing that in that segment. And we'll have more, I think, the positive news report to you the next quarter.

Speaker 5

Okay, okay. Thank you.

Operator

The next question is a follow-up from Alpha Wang with Goldman Sachs. Please go ahead.

Speaker 7

Thank you. And then another follow-up question is on the hotel expansion side. And could you kindly provide an update of what kind of hotel opening target we are looking at this year? And if we break down by LO versus FM, what are we targeting? Thank you.

Speaker 2

Okay. Our like we reported last time, the total hotel opening we planned for the year is 480, primarily I think 99% of them are going to be franchised and managed. And so we may still do a couple of them or select a very, very few and showcase our hotels. But our focus has always been on the franchised and managed hotels.

Operator

The next question comes from Bruce Mee with UBS. Please go ahead.

Speaker 1

Okay. Hi, Alex. Hi, Selina. So thanks for taking my questions. I also have a question regarding the hotel openings.

Speaker 1

So could you please give us a breakdown, a geographic breakdown of the new openings? For example, how much will be in Tier 1 cities and how much will be in lower tier cities? Thank you.

Speaker 3

Thank you for your question. Actually for among the 4 80 hotels to be opened this year, I think most still in the Tier 3 and the lower cities that is about 62% to 65%, yeah? And about 15% to 20% new open hotels in Tier 2 and the remaining hotels to open in the Tier 1 cities? Thank you.

Speaker 2

And to add on that, Bruce said, we have a team that used to be very strong in the Eastern region, but we are enhancing the team, build a team nationwide where we have more white space in the southern part of China like Southeastern, Southwestern China and also North Eastern. We have added more development members and we're seeing a great result. So our close to 500 new hotels can be even hopefully, we hope it can be evenly spread there, more evenly spread across the continent of China. And the business development is a driver after the pandemic. So we're focusing more and more even though the six strategies we had historically made our company continuously profitable and other than some of the pandemic area are continued improving the existing portfolio and building showcase hotels and continue to enhance our technology delivering and enhance the efficiency of our operation because our margin, that's a safety, still among the best in our service businesses.

Speaker 2

We want to continue to improve on that year addition that will continue to enhance our membership benefit and program, which will increase hopefully the percentage of the membership contribution in the future as well. So with all of that combined with our repositioning of the restaurant business and we'll have all lines of business are contributing to the company's profitability and the bottom line. And we're in a stronger foundation now, I think, to grow the business continuously. And we that's the reason why we also have a share buyback and the plus as we answered earlier and having continuous dividend policy reinstated, planned to be reinstated. So all of that we hope that we can enhance our shareholder value and that building a stronger company for both the franchisees, customers as well as our employees' career growth, okay?

Speaker 2

Thanks, Bruce, for your great question.

Operator

This concludes our question and answer session. I would like to turn the conference back over to Selina Yang for any closing remarks.

Speaker 3

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 passed to visit us, please feel free to contact us. Thank you again. Thank you.

Operator

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

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Key Takeaways

  • Q1 hotel revenue rose 8.8% year-over-year to RMB274.8 million, driving a 21.1% increase in hotel adjusted EBITDA to RMB102.4 million, supported by LO hotels’ RevPAR growth (+8.9%) and expanded membership (93 million members).
  • Total group revenue declined 7.1% to RMB352.2 million, weighed down by a 38.9% drop in restaurant revenues as underperforming stores were closed.
  • Restaurant repositioning boosted adjusted EBITDA by 3.7% to RMB7.0 million and delivered break-even net profit, as franchised & managed formats grew to 85.4% of stores and 230 locations are targeted by year-end.
  • GreenTree plans 480 new hotel openings in 2024 (99% franchised/managed), with 62%–65% in Tier 3 and lower cities and mid-upscale brands now comprising 11.7% of the portfolio.
  • The company reaffirmed full-year hotel revenue guidance of +7%–12%, withdrew restaurant guidance due to strategic repositioning, and plans to resume dividends and consider share buybacks.
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Earnings Conference Call
GreenTree Hospitality Group Q1 2024
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