H World Group Limited

Good day and thank you for standing by. Welcome to the Huaju Group Limited Q2 2021 Earnings Conference Call. At this time, all participants are in listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1 on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, please press star 0. I would like to hand the conference over to your first speaker today, Jason. Please go ahead.

Thank you, Karina. Good morning and good evening, everyone. Thanks for joining us today. Welcome to Huazhou Group's 2021 Second Quarter and Interim Earnings Conference Call. Joining us today is our founder and CEO, Mr. Jiqi, our president, Mr. Jinghui, our chief digital officer, Ms. Liu Xingxing, our CFO, Ms. Chen Hui, our Deputy CFO, Ms. Ye Fei, and Mr. Li Dong. Following their prepared remarks, management will be available to answer your questions. Before we continue, please note that the discussion today will include forward-looking statements made under the safe harbor provision of the United States Private Security Litigation Reform Act of 1995. Forward-looking statements involve inherent risks and uncertainties. As such, our results may be materially different from the views expressed today. A number of potential risks and uncertainties are outlined in our public filings with the SEC. Guadu Group does not undertake any obligations to update any forward-looking statements except as required by applicable laws. On the call today, we will also mention adjusted financial measures during the discussion of our performance. Reconciliation of those measures to comparable gap information can be found in our earnings release that was distributed yesterday. As a reminder, this conference call is being recorded. The webcast of this conference call, as well as supplementary slide presentation, is available on Hua Chu Group's website at ir.huatu.com. With that, now I will turn the call over to Mr. Ji Qi. Mr. Ji, please.

Good evening, everyone. Thank you for joining us today. I would like to give you an overview of our business. In the second quarter, our China real power recovered to 102% over the same period of 2019. supported by strong leisure traveling demand in May, but offset by a relative weak river path recovery in June due to COVID-19 resurgence in Guangdong province and traffic control in Beijing. However, unfortunately, the Delta variant of COVID-19 was again detected in Nanjing since later July. With further With the fever spreading into many other provinces and cities, the Delta variant promoted the Chinese government post another round of strict traveling restrictions, which seriously affected our performance in August. Our European business saw some positive trends, with the real-power recovery into 50 to 60 percent of the 2019 level during the summer holiday. It's mainly due to the continued progress of vaccination and the restrictions. However, we remain cautious on the future recovery. Other European governments, especially the German government, are still carefully monitoring the situation regarding the Delta variant and a potential impact for it. Looking ahead, our certainties brought by the pandemic may exist for a longer than expected time, and we expect to be well prepared to overcome any business turbulence in the near term. Nevertheless, in the long term, we have high confidence in China's future economic growth, and I think the upward trend of the China lodging industry remains intact. Therefore, we will be implementing our strategies, such as further penetration of low-tier cities, building up of upper-middle-scale and up-scale segments, organize regional upgrades and talent acquisition, as well as concentrating on high-quality hotel expansion to support our sustainable growth. With that, I will turn the call to Jinghui to update our recent business developments. Thank you.

Okay, thank you, Jiqi. According to the rules, we will tell you the recent recovery situation. Please turn to the second page.

Thank you, Jiqi.

As usual, I will discuss our recent business recovery trend in details. Please enter page 2. For the second quarter, our REFPA recovery shows upward trend with RERPA in April and May recovered to 100% and 106% respectively. However, as mentioned by Jiqi earlier, Due to the COVID-19 resurgence in Guangdong and traffic control in Beijing since late May, our RAFPA recovery in June slowed down. If we excluded the impact from Guangdong and Beijing, our RAFPA recovery for the remaining areas was on track in June. Since the end of July, Nanjing has experienced a new Delta epidemic and has spread to multiple regions of the country.

Unfortunately, since late July, a new wave of Delta variants of COVID-19 was detected again in Nanjing and spreading into many other cities in China.

posted that the government imposed another round of strict traveling restrictions, which negatively affected traveling demand. It significantly affected our business, as August was normally a peak season for traveling. Therefore, due to the impact from the Delta variant as the historical high base, as of August the 23rd, our rough power only recovered to 46% of 2019 level. However, we saw the recent wave of Delta variants has been largely content given the good provision measures posed by the government. The newly confirmed case declined significantly from the peak. Please turn to page 3. For the hotel development, we achieved a record high number of new signings at 1,502 for the first half of this year, increased by nearly 50% year-over-year. At the same time, our lower tier cities penetration is further accelerating. Lower tier cities proportion accounted over 50% for both our current hotel pipelines and new signings. Moreover, we have already penetrated into over 1,000 cities as of June, including both hotels in operation and pipeline, added 200 cities compared to the same period of last year. 需要注意的是,在Delta疫情的影响下, 各地均出现了较为严格的出行管控和流动性的限制。 因此当月的签约和营建进度也受到了一些影响。 However, please note that given the travel restrictions due to the Delta variant of COVID-19 as we mentioned above, our recent new signings and construction progress were also negatively affected. 在我们品牌矩阵中,中高端定位的品牌包括了橘子水晶,成绩,美居,曼欣,美能和诺福特。 Please turn to page 4. For our upper middle hotel segment, we will use multi-brand strategy to further exploring the market opportunities. Our upper middle hotel brand portfolio includes Crystal Orange, Intercity, Mercure, Manxing, Madison, and Novotel. As of June 2021, we have a total of 404 upper middle hotels in operation and 248 in pipelines. We are targeting to achieve over 1,000 upper middle hotels in operation and pipeline by the end of 2023. On 9th of July, we announced We announced a license agreement between Steigenberger and Porsche Design Group to establish a joint hotel brand. This is another breakthrough into the upscale and luxury hotel segment globally. Please turn to page 5. We are planning to open at least Eight hotels in next 10 years, those hotels will be all located in prime area of international metropolitan. Similar to other international hotel brands cooperation with luxury brand, Our cooperation with Porsche Design Brand will further enhance our Stagenberg brand positioning and awareness globally. It would help us to catch more opportunities in upscale and luxury segments in the future.

我们很高兴地看到我们在低线城市酒店中央预定的占比也已经达到了56%, 几乎接近高线城市的比例,进一步验证了我们下层的能力。 Now please turn to page 6.

Along with our lower tier cities penetration, our membership program synergies to lower tier cities and ability of traffic generation to hotels are the most concerned parts that you may have. We are very happy to see that our CRS contribution in lower-tier cities achieved to 56%, very close to higher-tier cities. It demonstrates our ability to further penetrate into lower-tier markets. Please turn to page 7.

We have always emphasized that data security is a vital line for Huazhou. First of all, our group has established a security committee for information security.

Please turn to page 7. We constantly emphasize on the data security matters, and it is the bottom line and the highest priority for Huazhou. First of all, we have established the Information Security Committee and set up the Information Security Center. 其次,我们的数据均采用本地化保证方式。

Finally, we also passed a series of international and domestic security certifications. As shown, in 2019, Huazhou passed ISO 27001 certification. It is the first domestic hotel group to obtain certification. In 2020, Huazhou passed ISO 27701 certification. Huazhou became one of the international hotel management groups that passed the certification.

In addition, Huazhou also obtained PCI DSS payment card industry data security standard certification. Secondly, our data are all saved locally. And lastly, we had received various certificates on data security. As shown in our slide, in year of 2019, Batu became the first domestic hotel group which received ISO 27001 certificate, and in 2020, Huazhou became one of the global hotel groups which received ISO 27701 certificate. Additionally, Huazhou has also obtained the PCI DSS payment card industry data security standard certificate. 請大家翻到第八頁。 在收購DH之後,我們啟動了500天數字化改造項目。 目前該項目的具體功能和系統已經搭建和準備完成。

Please turn to page 8. After we acquired Doge Hospitality, we launched 500 days digitalization plan for it.

As of second quarter, All functions and systems set up is completed and ready to use. We are now in the stage of massive rollout with targeting to roll out to 70% of DH hotels by the end of this year and 100% completion next year. 接下来有请叶飞为大家讲解华族二季度经营和财务的数据情况。 With that, now I will turn the call to Ms. Ye Fei to discuss our second quarter operational and financial performance.

Good morning and good evening to everyone, wherever you are. Let's move on to our operational and financial review for the second quarter of 2021. As shown on slide 10, our hotel network expanded by 15% in the second quarter to 692K rooms compared to the second quarter of last year of 599K rooms, including VH, Lexi Huatou's hotel network expanded by 16% year-on-year to roughly 668K rooms in the second quarter. For our hotel turnover in the second quarter, our total turnover grew by 98% year-on-year to RMB 13 billion in the second quarter. It was mainly due to our continuous network expansion in China and the initial recovery of Deutsch Hospitality's operation. as well as the low base for both China and the European business last year. Excluding BH, Lexi Hua Zhu's hotel net turnover grew 95% year-on-year to RMB $12.7 billion in the second quarter, and a recorded 45% increase if compared with the second quarter 2019. The growth is mainly driven by the hotel network expansion under the Exit Life model, Turn to page 11. Lexi Huazhu's blended REF PAR for the second quarter grew 2% from 2019 to RMB 210. The ADR in the second quarter grew by 8% to RMB 255 compared to 2019, while the occupancy in the second quarter is still 5% lower compared to 2019. It was mainly caused by the COVID-19 situation, especially the resurgence in Guangdong province and also the traffic control in Beijing in June. Turn to page 12. Our legacy DH business saw initial recovery in the second quarter since German government imposed a lockdown from last November. Thanks to the continued progress of vaccination and the restriction ease, Our legacy DH blended REVPAR for the second quarter grew 26% to €20 compared to the second quarter of 2020. The occupancy improved by 6 percentage points compared to the second quarter last year, while the ADR dropped by 6% to €82. Please see our financial results on slide 13. Total net revenues grew by 84% year-on-year to RMB $3.6 billion in second quarter 2021. Excluding DH, Lexi Huazhu recorded an 85% year-on-year growth rate to RMB $3.4 billion. The revenue was slightly below our previous guidance. It was mainly due to the COVID-19 resurgence in Guangdong province and traffic control in Beijing, as mentioned before. Excluding the impact from the above-mentioned areas, the revenue growth was actually in line with our previous guidance. Breaking down the revenue of the second quarter, leased and owned revenue increased by 85% year-on-year to RMB $2.3 billion. Excluding DH, the deeds and owner revenue of Lexi Huazhou grew by 84% year-on-year to RMB $2.1 billion. Net revenue from managed and franchised hotels grew by 89% to RMB $1.8 billion, mainly driven by the 89% year-on-year growth of Lexi Huazhou. Due to the further expanding hotel networks with asset life model, Monetized and franchise revenue contribution enlarged to 36% in the second quarter compared with the 35% in the second quarter 2020 at the group level. For legacy huazhou, the monetized and franchise model also expanded to 38% in the second quarter 2021 compared with 37% a year ago. Now let's move on to the cost and profitability section on slide 14. In the second quarter of 2021, the reported operating income turned positive to RMB $629 million compared to a loss of RMB $494 million last year and a loss of RMB $575 a quarter ago, mainly due to the business recovery in both China and Europe. Excluding DH, the Lexi-Watchman operation income in the second quarter of 2021 was RMB 763 million, compared to a loss of RMB 207 million last year and a loss of RMB 172 million a quarter ago. The hotel operating costs and other operating costs for the second quarter of 2021 was RMB 2.8 billion. increased by 28% year-on-year. The cost increase was mainly driven by the legacy Hua Zhu, which recorded RMB 2.2 billion hotel operating costs, indicating a 29% year-on-year growth. The increase was mainly attributable to the higher rental cost of the new upscale hotels, higher hotel-level personnel costs as we expand growing our hotel networks rapidly. and the higher DNA deprecation and amortization costs, which were related to the upscale hotel openings and upgrading of existing hotels. As we mentioned in the previous quarter, our future expansion of upscale hotels will mainly use SLI's model. Therefore, our pre-opening costs declined by 84% year-on-year and 20% queue-on-queue to only RMB 16 million in the second quarter of 2021. Our SG&A in the second quarter of 2021 increased by 49% year-on-year to RMB 553 million, mainly driven by the increase of Lexi Huazhu. Excluding DH, the SG&A for Huazhu increased by 71% year-on-year to RMB 423 million. The increase was mainly attributable to the increase of selling and marketing expenses due to the revenue recovery, the increase of headcounts for our BDT support penetration into lower tier cities, the increase of personal cost for upscale business units, and the increase of the IT investment as well. Other operating income in the second quarter of 2021 increased by 121%. to RMB 362 million, mainly due to the 38 million euro subsidy received from the German government. This is related to the 2020 lockdown period. Turning to page 15, our adjusted EBITDA income turned positive to RMB 1 billion, compared to a loss of RMB 97 million a year ago. DH's EBITDA loss in the second quarter was RMB 73 million, narrowed from RMB 235 million last year, mainly due to the government subsidy. Excluding DH, Lexi Huazhu recorded adjusted EBITDA income of 1.1 billion RMB, rolled by 709% in the second quarter of 2020. In the second quarter of 2021, We recorded adjusted net income of RMB 464 million compared to a loss of RMB 476 a year ago. Excluding DH, Lexi Huatu recorded an adjusted net income of RMB 579 million compared with RMB 253 million loss in the second quarter of 2020. The non-GAAP pro forma adjustment mentioned on this page included unrealized gain or losses from fair value change of equities related to some of our investments. Coming to the cash position, we further lowered our net debt of RMB $4.4 billion by the end of the second quarter, compared with RMB $5.2 billion by the end of the first quarter, and there's no risk of breaching the financial covenants of the U.S. dollar $1 billion syndication loan. Our cash balance was RMB 6.2 billion, and the unutilized bank facilities was RMB 6.8 billion. This cash and bank facilities would allow us to further pay down Huazhong's bank debt in 2021 and also 2022 CB, and also will be used to weather any unforeseen circumstances. Coming to DH's update on page 18, the recovery is coming to the right direction, although the path is bumpy. Vaccination commenced since December 2020 has been speeding up in the second quarter of 2021. Restrictions were eased especially toward people who recovered from COVID-19 infection and people with either complete injection or negative test results. As of August 23rd, About 64% of the German population have received at least one shot, and 59% of the whole population were fully vaccinated. GHS occupancy rises continuously from about 19% in Q1, 24% in Q2, and now it's about 50% in the August summertime. The recovery ratio compared to 2019 is about 54% in July and 67% in August months to date. Meantime, DH is taking further actions to reduce costs and preserve cash, including negotiating for lease waivers, streaming line overhead at both hotel and headquarter levels. The impact of the extension of the lockdown would be also partially offset by the short-term worker allowance and also the special government subsidy, of which 38 million euro subsidies have been successfully received and recorded in Q2 relating to the 2020 lockdown. The company is still working towards more government subsidies, which would be related to the 2021 lockdown. The company's cash position is sufficient and still has another 12 million euro credit line available. Turning to page 19 on guidance. Considering the impact of COVID-19 resurgence in Guangdong and traffic control in Beijing since late May, and the impact of Delta variant spreading from Nanjing to several cities in China recently, we lowered our Q3 and full-year revenue guidance. For the third quarter of 2021, how do we expect net revenue growth to be in the range of 8% to 12% compared to the third quarter of 2020, and a 4% to 8% if excluding DH. To provide a more meaningful guidance excluding the impact of COVID-19, I do expect net revenue growth will be in the range of 12% to 16% compared to pre-COVID-19 results in the third quarter of 2019. And the net revenue reduction will be in the range of 3% to 7% if excluding DH. For the full year of 2021, We now expect the net revenue growth to the range of a 29 to 33% or to the range from 34 to 38% if excluding DH. To provide a more meaningful guidance excluding the impact of COVID-19, we expect the net revenue growth will be in the range of 17 to 21% compared with pre-COVID-19 results of 2029. or to the range from 2 to 6% if excluding DH. Please note that our current revenue guidance is based on the expectation that the recent Delta variant of COVID-19 resurgence can be well sustained by the beginning of September. However, given the future situation of pandemic is still uncertain and unpredictable, we may need to adjust our guidance accordingly. We also keep the gross opening target of 1,600 and 1,800 hotels unchanged, but the signing speed of the new pipeline and the construction of new hotels in the next few months will be affected as well. With that, let's open up for Q&A.

As a reminder, to ask a question, you will need to press star 1 on your telephone. To withdraw your question, press the pound or cash key. Please stand by while we compile the Q&A roster. Your first question comes from the line of Yan Hou from PH Capital. Please ask your question.

Yeah, good morning, management. I have two questions. Would you please give us some color on the member situation? So in QQ, how many members newly added? And what is your, you know, channel for member acquisition? So that is number one question. Number two, in your Q3 guidance, what do you see in China in terms of traveling, you know, hotel, you know, demands as well as COVID? It seems like, you know, the COVID here and there always pop up. So I just wonder how, you know, in this guidance, you know, how much do you already see in your guidance? You know, what's the base for your Q3 guidance, domestic guidance? Thank you.

Let me just switch to the English. I think I can answer the first question, and then send to Mr. Jinghui for the second question.

In Q2, from the membership recruitment, the number was 6 million increased. Okay.

Anyway, I think that we continue the best practice to develop a new member, to develop a member recruitment, such as something like the hotel-based from the all-service touching point. just to be transferred to the member and how to make sure the, how to make sure something like the frequency, okay?

But I think the second way, this is we encourage our team and just to develop like the B2B and the B2C. from the local CLTs and corporate CLTs. And number three, this is the most important, but something with the innovation. This is, we do a lot of partnership with the B2B2C or B2B2B, such as just Alipay and WeChat and even like DD. We do this kind of partnership with many useful ways to do the external, I mean, how to say, membership recruitment.

That's for my question, for number one. Thank you.

Let me answer the second question. Indeed, the Chinese government has adopted relatively strict traffic control and strict epidemic prevention measures. This is a big problem for our future financial prediction and financial recovery. The current financial recovery rate is based on the historical data analysis that can be obtained under the control of the whole epidemic. We predict that the entire recovery rate of this year's third quarter will be between 70% to 75%. For our Q3 revenue guidance, we have to admit that the Chinese government has imposed a very strict travel restriction and provision control measurement has really affected our business performance recently. For the Q3 guidance and the four-year guidance, our current estimate and expectation for the REFPA recovery for the third quarter on the same hotel level, we are expecting the REFPA in third quarter will be recovered to 70% to 75% of 2019 level and 90% to 95% of right in fourth quarter of 2019 level. Again, as I mentioned previously in my prepared remarks, our current focus and the revenue guidance are very much based on there will be no massive COVID-19 resurgence happen again in the remaining of this year. Thank you.

Thank you. That's all my question.

Your next question comes from the line of Praveen Chowdhury from Morgan Stanley. Please ask your question.

Hi, thanks so much for taking my call. I have two questions. The first one is about lower tier cities. I just wanted to understand what are the challenges that you are facing in lower tier cities. It seems like it's going very well based on the pipeline, but if you can talk about any challenges that you're facing in future. And the second one relates to the other strategy, which is upscale strategy. Wanted to understand what portion of upscale hotel opening would be in lease and operating versus franchise and managed. The reason for asking this question is to understand how long will it take before you can have a good size of these hotels, and during that time, what kind of cost do you have to incur Remember, previously you used to have very big pre-opening expenses. Should we worry about similar expenses going forward? Thank you.

However, there will be some new challenges. The main challenge is the local sales capability and the adaptation of the brand to meet the customer needs. In this respect, we are also actively expanding the corresponding work and the entire adjustment of the adaptation to better meet the customer needs and the customer sales channels of the downstream market. Okay, so for the lower tier cities, actually the lower tier cities' financial situation is progressing pretty well, but we have to say that we are still facing some of the challenges, especially for the local sales and also matching and meeting the local customers' demands. For these areas, we are continuously adjusting our strategies and especially on the sales team to improve this area for helping us to further penetrate. In addition, we also are trying to building up localized employment and staff team, and also supporting our lower tier cities penetration as well. 为此下层区域的发展,我们将对局部的基于中国省级的管理做出一些组织升级和改造。 We will be doing quite a lot of organizational restructuring, especially for those lower tier cities in different districts and areas.

The most interesting and interesting thing about the market itself is that it is in the middle-high and middle-high market. We think the high market is an era of mass integration, not an era of growth. We all know that the high market has long been a tool for real estate investors and the government, not a real investment tool. Or is it a business model that works well? This ship volume is huge. Our future focus is to do a lot of business with Longcheng. We use a lot of money to build a few stores. But our main goal is to integrate and infiltrate the large ship volume market in China. Including one line, two lines, and three or four lines. We have a lot of There are many ways to do it, including collaboration with YaGao, collaboration with Shenzhen, and collaboration with our own quality brands. In the future, there are other ways to do it. At a higher level, we will find a new way to do it. From management, talent, and expansion, but the traditional mode will stop. We think that in the lease mode, it won't work in the high-end. In the high-end, we may use特许, may use management, may even use forked service fees, may use Mongolia to do this kind of technical service. Our high-end is currently a solution that accumulates knowledge, research, and discussion, not a collection solution.

So for Hua Chu, we divided the hotel segment into four segments, which include the economic middle scale, upper middle scale, as well as the upscale. Within these four segments, we always think the most interesting part as well as the attractive area is those upper middle scale and below, and include those economic middle and upper middle scale. And for the upscale segment for China market, it's more like a consolidation story. As you may know that the upscale hotel segments in China was kind of a supplementary for the property developers as well as for the government. It's not a real market-driven investment many years ago. There's a lot of existing hotels in the market. For Huazhou, we have been cooperating with Sunax through the joint venture, and we will do some incremental hotels in this area, but in the longer term, we are also trying to consolidate the market by leveraging our capabilities. For the developing model, we will no longer use the lease and own business model. We'd rather choose a franchise or hotel management contract, which is the asset line. In current stage, we are still exploring and learning and doing the research in the upscale hotel segment rather than the timing that we are going to get some return from those investments. Thank you.

Your next question comes from the line of Yulin Zhang from Haitong International. Please ask your question.

Hello. Good morning, management. Thank you for taking my question. My question is regarding the DH hotel. I was wondering to what extent you can improve the margin profile of DH hotel by the digitalization, as you just mentioned. Any quantitative metrics would be helpful. Thank you.

For the DH, the progress, okay. I think up to today, we just fulfilled the one global digital platform ready.

And now this is for the, we already launched a massive in the DH for all the hotels. As we shared before, the one digital platform is not only focused on the business operation efficiency, but also just to do something like the loyalty and even the CRS contribution. So we hope that we can improve the CRS contribution from the before, I think, the The very orange, the version now around the 1% or 2%. We hope that we can achieve in the coming new year to achieve around the 20%.

This is the target, the biggest target. On the other hand, we're not only just to focus for the CRS contribution, but also to pay the serious attention to the global loyalty platform, such as the recruitment, the membership recruitment.

And according to the current plan, we would like to officially launch the new global loyalty program. We call it, this is an H word, will be released officially at the beginning of October. So it's a system program, not only focused for the one point, We hope that we can very quickly just deploy the one digital platform for all hotels in DH, and then we can achieve the business value in the coming year by the business integration program, by the operation efficiency improvement program, by the CRS contribution, and the global loyalty. That's all. Thank you. Hi. This is Mei. I just wanted to, you know, build on Xixi's point. I think you asked a very good question. Right now I think it's still too early to tell you the margin improvement of digitalization because we are still in the first phase of setting up the infrastructure and preparing for the rollout. Right now the company's focus is still sharpening the brand and reducing the loss of operation and then bringing the brand back to Asia. But your question is very important, and it's also our midterm target as well. I think, you know, putting into more digital equipment and also solutions can help strongly support the company's streaming line, its organization. Right now, we have a rough target that we probably need to reduce, I mean, optimize like 20% to 30% of the staff both in the headquarter and also the operation level, you know, through the several years program. And I believe this will contribute at least, you know, several percentage points regarding the margin improvement.

Thank you. That's very helpful.

Your next question comes from the line of Simon Chung from Goldman Sachs. Please ask your question.

Hi. Thanks for the presentation. I got two questions. I remember in the first quarter you mentioned something related to the cleanup of the hotel, in particular on Yilan, some of the lower branded hotel. I wanted to get a sense about the update and it's grateful to see that you maintain your growth net guidance for year 1.6 to 1.8 thousand. I wanted to get a sense, you know, how is the trend looking like perhaps quarter to date in the third quarter and your competitive level of achieving that target. You know, what sort of assumption you have paid in in order to achieve that guidance. That's the first question. The second one, If I use your forward guidance, you know, the revenue guidance excluding or not excluding DH, it's seemingly like that you're expecting, you know, the revenue for DH would jump to around quite 600 million RMB in the fourth quarter compared to, I think, second quarter you're running at about 254 million. So doubling, I think that's basically all driven by RevPath, supposedly. So at that level, would you expect your EBITDA to be breaking even for your DH operation individually?

Thank you. 关于宜来确实是原来专注在中国的经济型非标市场或软品牌的这个市场。 We have deployed a large number of brands in China. We hope that China's economic market will have a future that is fully occupied.

For this reason, we are building and breaking new brands in different economic markets. In the future, we will gradually carry out high-end control. We will gradually eliminate many products that do not meet the standard. For Eli Brand, as you may know, it was our software brand. It used to penetrate into the economic segment. But you may also know that we have many other brands in this segment, including Nihao, Haiyin, And we are using different products to further penetrate and enlarge our market share in this segment. And for Eli, for sure that we are continuously going to do a quality control and eliminating those unqualified Eli from our operations as well as pipeline.

So, Simon, I wanted to clarify your question regarding the DH. I think your first one is asking about the guidance for the fourth quarter of DH's revenue. Is that correct? And also, the second one is that you wanted to understand the development of DH in Europe.

Yeah, yeah, correct. Because, you know, I'm just using your full-year guidance versus your third-quarter guidance. Seemingly, you're baking in quite a bit of a step up in terms of fourth-quarter revenue expectations. So, if that were to be achieved, then would you be able to turn the EBITDA offer even by fourth quarter this year? That's really the question.

I think, first of all, I think the fourth quarter probably we are generally positive about, you know, DH improvement of occupancy, but we still be cautious about the recovery given there might be a fourth wave of Delta variant on the way. So I think, yeah, based on our guidance, you know, the revenue for the fourth quarter is certainly, you know, will be the highest among all the quarters. But however, it's still, you know, I think it's still not reached the break-even point yet. But having said that, the company is still working hard on striving for another government subsidy, which is related to the 2021 lockdown. That's DH. And on the development of DH's brand, first of all, as we mentioned before, we're bringing DH's major brand back to China, particularly Steigenberger and also Porsche Design, et cetera, and also Intracity and also the Maxx. Max brand as an upscale brand as well. That's number one. And in Europe, we are positive about the market consolidation in the lower tier segments, especially the economy and mid-scale segments. And DH's brand actually enjoys a pretty good market reputation, especially in terms of intercity in Germany and Zilib in the northern part of Europe. So we're going to continue to grow these two brands combining both lease model and also management franchise model in Europe. In the meantime, we'll also sharpen the top brands like the Steigenberger and the Max by further improving the product design and also infrastructure facilities as well in order to establish the Steigenberger as a truly upscale brand in the European market and also trying to find the right expansion model across the globe.

And that's it. Thanks a lot. That's very helpful. Thank you.

Your next question comes from the lineup. Bruce, me from UBS. Please ask your question.

Hi, management. Thanks for taking my question. So I have two small questions. The first one is, as you previously mentioned, one of the challenges you're when penetrating into lower tier cities is to meet different franchisees' demand on brand. So may I ask, currently for the hotels in pipeline and new signing in lower tier cities, how much are from the core brands such as Hanty and G-Hotel, and how much is soft brand? And my second question is that if we look at the same brand, so how is the take rate in lower tier cities compared with tier one and tier two cities? Thank you.

In the market development of Xiateng, Hanting and Quanji are still our most important brands. Hanting Quanji currently accounts for about 70% to 75% of the entire Xiateng's development. The rest of the multi-brands or multilayer brands are also in different Xiateng processes, including Xingcheng, Juzi, Nihao, For our current lower tier cities penetration, currently from our new signings, G Hotel and Hunting Brand are still the key brands for the penetration, and they count roughly 70% to 75% of the new signings. And some other brands, such as Starways, Orange, as well as Nihao, are also progressing pretty well. Sorry, can you please repeat your second question?

Sure. So my second question is, if we look at the same brands, for example, as an example, so how is the tick rate, for example, the franchise fees compared between lower tier cities and tier one and tier two cities? So I just want to understand in the margin comparison between the lower tier cities and tier one cities.

Our take rate for hunting and the G hotel brands in the lower tier cities are very close to the higher tier cities or at similar level. As you may see that our CRS contribution in the lower tier city are very close to the higher tier city. Therefore, at the percentage perspectives, the charge rate or the take rates are very similar to each other. Thank you.

Thank you. Thank you. That's all my questions.

I would like to head the conference back to today's presenters. For any closing remarks, please continue.

Thank you, everyone, for taking your time with us today, and we look forward to connecting with you again in the upcoming quarter. Thank you and goodbye.

This concludes today's conference call. Thank you for participating. You may now disconnect.