H World Group Limited

Hello, everyone. Thank you for standing by. Welcome to Y2 Group's Q3 Earnings Conference Call. At this time, all plans are in the 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 further assistance, please press 0. I would now like to hand the call over to your first speaker today, Mr. Jason Chen from the company. Please go ahead.

Thank you. Good morning and good evening, everyone. Thanks for joining us today. Welcome to Baidu Group's 2021 Third Quarter Earnings Conference. Joining us today is our founder and chairman, Mr. Jiqi, our CEO, Mr. Jinghui, our president, Ms. Liu Xingxing, our CFO, Ms. Cheng Hui, and our Deputy CFO, Ms. Ye Fei. 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 Securities 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. Huazhou Group does not undertake any obligations to update any forward-looking statements except as required under 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 Huazhou Group's website at ir.huazhou.com. With that, now I will turn the call over to Mr. Ji Qi. Mr. Ji, please.

Good morning and good evening, everyone. Thank you for joining us today. This is an old saying in Chinese, which means a heavy shower rarely lasts for a day. I was optimistic at the beginning last year. And though the pandemic is just a heavy shower, not a light one. However, I didn't expect that it's more like the yellow plant seasons in Shanghai, told us back and forth. The persistent COVID-19 variation and recurrence from last year had brought serious impacts and uncertainties to the lodging industry. and also seriously affected consumers' traveling activities. It also had brought varying degrees of disruption to our hotel construction and opening progress from time to time. Undeniably, the longer-than-expected existence of COVID-19 had weakened franchisees' confidence and a willingness to invest in the lodging market. In the past few years, concerning the increasing influence of external online traffic, we have been consistently implementing a large-scale expansion in order to be more independent. However, recently we had witnessed the complexity and the challenges of global macroeconomy and international politics, worsened by COVID-19. At the same time, Chinese government has been continuously promoting the supply-side structural reform and optimization from quantity to quality, can change with such backdrop We reviewed our strategy and decided to adjust our growth from previously mega-scale growth to lean. Going forward, it means in addition to the absolute size of our hotel network, we will continuously provide better product and refined service to improve customers' experience. Our hotel products represent a truly craftsman spirit. It can be more durable, environmentally friendly, and bring sustainable benefits to our franchisees. Meantime, we will further utilize our core competencies, such as loyalty programs, technology, and supply chain capabilities to support our franchisees to overcome their recent difficulties. manage hotels more easily and achieve better profitability in the long run. The link growth strategy will be carried out by our new management team, CEO Mr. Junhui and President Ms. Liu Xingxing. Both of them have been with Huazhou for a long time and made tremendous contribution to the company. I would like to thank them for their strong commitment and the current challenging environment to take the new roles. And I believe that there will be a strong leadership team for Huazhou for the new chapter of growth. With that, I will turn the call to Jinghui to update our recent business development.

Thank you. Thank you, Jiqi. As mentioned earlier, The future growth strategy of Huazhou will be adjusted from the previous large-scale growth to a new strategic model of rapid growth. In fact, as early as the outbreak of the epidemic in 2020, Huazhou began to upgrade its epidemic prevention. To ensure the safety of residents and residents, Huazhou Group requires the local hotels to strengthen their smart non-contact services, including self-servicing, robot delivery, zero-second defense, Thank you, Gigi. As mentioned by Gigi before, Huazhou's future growth strategy will be adjusted from megascale growth to lean growth. In fact, Huazhou has already implemented its COVID-19 prevention measures since the initial outbreak of COVID-19 back to 2020. In order to provide state safety to our customers, Huazhou has required all its hotels to use intelligent contactless services, including self-checking and checkout, robot delivery, online checking through Huazhou's app, and so on. It enabled our customers to spend less time in public and lobby areas to reduce the risk of virus transmission and cross-infection. In May 2020, Huazhou released Comfort 360 white paper, which is the first white paper in the China lodging industry. It is the first professional cleaning standard report for Chinese lodging industry. In the beginning of this year, with our concept of quality hotel, Huazhou further upgraded our Comfort 360 program. The upgraded version mainly focused on two areas. One is COVID-19 prevention safety, and the second one is the customer experiences. At the same time, We also used both of our online big data management and offline quality checks to ensure the implementation of this program. In details, Comfort 360 program will assess the hotel quality from four key dimensions to ensure a 360-degree great customer's experiences without any dark corners. Hotels can only be certified as quality hotel when complied with all four dimensions. which including central procurement standard, hotel facility standard, hygiene standard, and safety standard. As of now, 67% of our hotels in operation had complied with all above four standards. Hotels' products and service quality are very critical parts for our future lean growth strategy. Therefore, our Comfort 360 program will consistently be upgraded to ensure the best quality of hotel and services to be provided to our customers for better staying experiences. 请大家按照第五页。 Next, please turn to slide five. I will review our REFPAR recovery trends over the last year. Since January till now, COVID-19 recurred eight times totally in either small or large scale. As you can see from the figure, those large scale outbreak with spreading over to many provinces and cities have significantly impacted our REFPAR recovery. The recovery of the RERPA was 68% in 2019. As mentioned earlier, as the epidemic continues to recur, As Gigi mentioned in the beginning, the persistent COVID-19 recurrences and the traveling restrictions imposed by the government have significantly impacted our construction progress as well as franchisees' willingness on timely hotel openings. Please turn to slide six. The figure shows our monthly number of hotel openings for 2021, taking August and October as an example, which had a big impact from COVID-19 resurgence. Before the COVID-19 occurred, according to our pipeline and hotels in construction, our planned hotel openings were 169 and 134 hotels in each month respectively. However, due to the COVID-19 impact, there was a gap of over 80 hotels between our planned and actual number of hotel openings. Please turn to page 7. As you can see, our new signings have grown relatively healthy at 41% by the end of September 30th. The total new signings achieved over 2,100. In addition, our down-to-earth market strategy is also in effective promotion. We have a wide range of In addition, along with our lower tier cities' penetrations, our hotels in pipeline and in operations, which from the lower tier cities contribute over 57% and 54% respectively. In fact, undeniably, consistent resurgence of COVID-19 had put in a lot of impact to our franchisees' well-being and confidence. Compared to the first two quarters, our new signing speed slowed down a little bit in the third quarter. Therefore, in the current uncertain situations and market conditions, our franchisees become more careful. Please turn to slide eight. As Gigi said previously, our future growth will focus more on lean growth. For this strategy, Franchisees' operation, performance, and profitability is one of the most important parts. Therefore, we launched a new franchisee caring policy in June. The franchisees carrying policy, mainly including one, provided up to two months of 50% management fee discount for franchisees whose hotels are located in middle or high-risk areas in China. Secondly, the deferred payments on management fee and CRS fee. and certainly helped every qualified franchisees to obtain up to 1 million RMB bridge loan from financial institutions. Faju is the only hotel group which provides management fee discounts to franchisees in middle or high-risk areas in China in the industry. As one of the leading companies, we will go through the recent tough period together with our franchisees. 我们今年开业的高档酒店截至9月30号,华助新开了10个高档酒店,新签约了44个高档酒店。 新开和新签约的品牌涵盖了世博格、花间堂、送品等多个高档品牌。 Moving to our progress of Upskill Hotel development, please turn to page 9. The pictures in the slide show some of our upscale hotels opened during this year. As of September 30, Huazhou totally opened 10 upscale hotels and signed up 44 upscale hotels. Those opened and signed hotels cover various brands, such as Steigenberger, Blossom House, Song Hotel, and so on. Moving to page 10, in addition to above, Our joint venture company, Yonglin Huazhou, is recently rebranding around 20 obscure hotels, which were previously operated or managed by other hotel groups. In addition, we had already transferred the co-system of these obscure hotels to Huazhou's own system within only 30 days, achieving another milestone. To rebrand around 20 obscure hotels within such a short time period could significantly help Huazhou to further penetrate into high-end hotel segments and grab more market share there. However, undeniably, this also brings many challenges to Huazhou. For the high-end hotel segment, we are still in the experimental stage. Huazhou is good at operating the limited service hotels, but for the obscure hotels, there are still some shortcomings, such as branding, operations, talent cultivation, and organizational adjustment, which brings many challenges to the company on how to figure out a great way to better operate the obscure hotels. However, we are very confident that Huazhou has the capability to do its own way for a unique operation in the market. Moving to slide 11, we continuously invest in our IT development. Our IT investment mainly focuses on two aspects, to see for the customer and to be for our franchisees. 在2C层面,我们致力于直销能力的建设,打造全渠道营销能力。 在2B的层面,我们致力于对每个门店实现从开店选址、酒店、营建、后期运营等全方位赋能。 At 2C level, we are devoting our further strengthening our direct sales capability and building up an omni-channel marketing and selling system. And 2B level, we are devoting to achieving a full cycle empowerment for our franchisees through hotel location selection, hotel construction, hotel operation, and so on. Although Huazhou's IT capability is at the top of the industry, we still see many areas that can continue to improve and improve. For example, in this area, our single-storey sales and customer capacity still need to be further strengthened, and further improve accurate revenue management and digitalization work. There is still a huge potential for improvement. Although Huazhou's IT capability is in the leading position in the market, we're still seeing a lot of rooms for further improvements. For example, for the 42C site, our single hotel sales capability and customers' acquisitions capability can be further improved. Also, a more precise revenue management as well as various digitalization application across all hotels and organizations still see plenty of room for the improvements. For 2B sites, a better urban planning and a more precise location identification are also seeing many improving potentials. Putting them together, we would further leverage our technology and the data capability to drive more precise business empowerment to achieve our lean growth strategy in the future. As I mentioned before, Also, the persistence of COVID-19 recurrence impacted our business operations. We are happy to see our members, our loyalty programs, especially our corporate members' contribution achieved another great result for the third quarter. Please turn to page 12. In terms of the number of members, as of the end of 2021, the number of members has reached nearly 1.9 billion. Under the premise of high-tech, the number of members As of now, our total number of members continuously grow to nearly 190 million, even considering the high base. Please turn to page 13. Our CRS contribution also improved from 56% in third quarter 2020 to 60% in third quarter 2021. At the same time, along with our lower tier cities penetration strategy, the CRS contribution in lower tier cities is very close to the higher tier cities. As of the third quarter of 2021, CRS contribution in Tier 3 and below cities achieved 59%, which is only one percentage point below compared to Tier 1 and Tier 2 cities at 60%. In the fourth quarter, we see that our corporate customer contribution is also increasing. From 9.6% in the third quarter of 2020, it has increased to 11.8% in the third quarter of 2021. Especially in high-end and above hotels, the share of corporate customer contribution has increased even more. Please turn to page 14. The room nights contributed by our corporate customers are also further increased from only 9.6% in third quarter last year to 11.8% in this quarter. Especially in the up-middle and up-skill hotel, the increase in corporate customers' contribution is more significant. As of the end of the quarter, the room nights contributed by corporate customers for our up-middle and up-skill hotel segment achieved 30.2% and 35.4% respectively, both improved by 5 percentage points compared to the same period of last year. With that, I will turn it over to EFA to discuss our third quarter operation and financial performance.

Thank you. Good morning or good evening to everyone, wherever you are. Let's move on to our operational and financial review for the third quarter of 2021. As shown on slide 16, our hotel network expanded by 14% in Q3 to $723K compared with $634K in last year. Excluding DH, Lexi Hua Zhu's hotel network expanded by 14% year-on-year to roughly $700K in the third quarter of 2021. For our hotel turnover in the third quarter, our total hotel turnover grew at 15% year-on-year to RMB $12.2 billion in the third quarter. This was mainly due to our continuous network expansion in China and the recovery of DH's operation, while offset by the negative impacts of COVID-19 resurgence in Nanjing since late July. Excluding DH, Lexi Huazhou Hotel Network grew 14% year-over-year to RMB $12.2 billion in the third quarter. DH's year-over-year growth is around 32%. more attributable to the improvement in hotel occupancy. Turn to page 17. Legacy Huatu's splendid rep power for the third quarter 2021 declined 18% compared to 2019. The ADR in the third quarter was slattish compared to the one in 2019 at RMB 246. While occupancy in the third quarter is 16 percentage point lower compared to 2019, it was mainly due to the COVID-19 resurgence in Nanjing, as mentioned above. Turn to page 18. Our legacy DH business saw continuous recovery in the third quarter 2021. Therefore, our legacy DH blended RP REF PAR for the third quarter 2021 grew 36 percentage to the 48 euro compared with the third quarter of 2020. The occupancy improved by 11 percentage points compared with the third quarter 2020, and ADR improved by 6% to Euro 99. For the same period of 2019, actually the RAF part is Euro dollar 774. So that means there's still a long way for the recovery. Please see our financial results on slide 19. Total net revenue grew by 12% year-on-year to RMB $3.5 billion in the third quarter 2021. Excluding DH, Lexi Huat recorded a 7% year-on-year growth rate to RMB $2.9 billion, which was in line with our previous guidance. Lexi Huat recorded a slower revenue growth, mainly due to the COVID-19 resurgence in Nanjing starting from late July and August. Breaking down the revenue of third quarter, lease and owned revenue increased by 10% year-on-year to RMB $2.3 billion revenue. Excluding DH, the lease and owned revenue of Lexi Huazhou grew by 4% year-on-year to RMB $1.8 billion. Net revenue from monetized and franchise hotel grew by 13% to RMB 1.1 billion, mainly driven by the strong growth of network expansion in China. Due to the further expanding hotel networks with SLI model, the monetized and franchise revenue contribution enlarged to 32% in the third quarter of 2021 at the group level, Currently, we can say the main driver is due to the managed and franchise business in China. Now let's move on to the cost and profitability session on slide 20. The hotel operating cost for the third quarter 21 was 2.9 billion RMB, increased by 17% year-on-year. For Lexi Huazhou, it recorded RMB 2.3 billion hotel operating cost. indicating a 17% year-on-year growth. The increase was mainly attributed to, first, higher rental cost of the new upscale and upper-mid-scale hotels and the recently acquired Citigo portfolio in May. Second, higher hotel-level personnel costs as well as we keep growing hotel network rapidly. And third, some reclassification costs from SG&A to other hotel operating costs. For legacy DH, it recorded RMB 630 million hotel operating cost, indicating a 15% year-on-year growth. The increase was mainly due to variable costs increased along with the business recovery, such as short-time workers, food and beverage, and consumables. As we mentioned in the previous quarters, our future expansion of upscale will mainly use SLI model. Our pre-opening costs declined by 64% year-on-year to only RMB 15 million in third quarter 2021. Having said that, with caution, we are still evaluating and investing in these hotels at good location at right price. Our SG&A in the third quarter 2021 increased by 14% to RMB 577 million, mainly driven by the increase of Lexi Huajun's Excluding DH, the SG&A for Legacy Huazhou increased by 29 yuan a year to RMB 435 million. This was mainly due to the more headcounts for various departments, such as BG team to further penetrate into low-tier cities, corporate sales team to boost direct sales from corporate accounts, upscale business units to support our leapfrog in this new era, And lastly, technology team for various projects in both China and DH. In third quarter 2021, the reported operating income was RMB 72 million compared to a loss of 201 million last year and a positive 629 million a quarter before. The year-on-year improvement was mainly driven by the DH business recovery and long-time non-cash goodwill impairment of RMB 437 million booked in the third quarter 2020, but offset by the weaker China business performance. Apart from COVID-19's impact for China business, the quarter-over-quarter profit declined was due to the RMB 20 million government subsidy received during the third quarter for DH compared to over 300 million RMB booked in Q2. Excluding DH, Lexi Huazhou's operating income in the third quarter 2021 was $239 million compared to $523 million last year and $763 million a quarter ago. Turn to page 21, our adjusted EBITDA income, RMB 385 million in the third quarter of 2021, compared to RMB 184 million a year ago. DH's EBITDA loss in the third quarter of 2021 was RMB 115 million, narrowing from RMB 669 million last year. Similar reason mentioned at the previous slide. Excluding DH, Lexi Huadu recorded an adjusted EBITDA income of $500 million, declined by 41% in third quarter of 2020 due to the impact of COVID-19 resurgence in Nanjing. In the third quarter of 2021, we recorded adjusted net loss of RMB 46 million, narrowed from a loss of RMB 218 a year ago Excluding DH, Lexie Huazhou recorded an adjusted net income of RMB 117 million, declining from RMB 476 million in 2020 third quarter. The non-GAAP pro forma adjustment mentioned on this page included unrealized gain of losses from fair value change of equities related to some of our investments, Coming to the cash position on page 22, our net debt remains healthily at RMB 5.2 billion at the end of Q3, and there's no risk of breaching the financial covenants of the US dollar 1 billion syndication loans. Our cash balance is RMB 5.4 billion, and the unutilized bank facilities worth RMB 7 billion. The cash position will allow Huazhou to further pay down the bank debt in 2022 and also be used to weather any unforeseen circumstances. Now let's zoom in a bit into DH. As of November 23rd, 2021, 71% of the entire German population has received at least one and 68% of population was fully vaccinated. Along with the growing inoculation rate and the receding third wave COVID since August, restriction was gradually eased for people who are fully vaccinated or who have recovered from the COVID. D-age business recovery started in the second quarter and continued in the third quarter during the summertime now even stronger in October. However, considering the re-emergency of the fourth COVID wave in Europe right now, with dramatically rising seven-day incidence rate since early November, the recovery trend becomes unpredictable again. It was determined by the unfolding of the pandemic and the future government policies on travel restrictions. As far as I know, the German government has urged the unvaccinated people to be vaccinated as soon as possible because there are still around 30% people in order to protect themselves and others. Meanwhile, DH is continuing to implement further cost reduction and cash flow measures, especially regarding personnel and their lease costs. The impacts of the further lockdowns will be partially offset by the extension of government subsidy. In addition to the subsidy recorded in Q2 relating to the 2020 lockdown, in October, DH has submitted a new application for government subsidy related to 2021 lockdown. Turning to page 24 on guidance, considering the latest round of COVID-19's impact since late October and also the fourth wave in Germany, what we expect for the fourth quarter of 2021, the net revenue growth will be in the range of six to 10% compared to the fourth quarter of 2020, a reduction of four to 8% if excluding the age. To provide a more meaningful guidance, excluding the impact of COVID-19, to expect the net revenue growth will be in the range of 12 to 16 percent compared to the COVID-19's pre-COVID-19 results in the fourth quarter of 2019, or net revenue reduction to be in the range of 7 to 11 percent, excluding DH. Referring to the above-mentioned impact, our full-year revenue guidance is lower to the range from 22 to 25 percent. from a 20 to 26 percentage or a range from 26 to 30 percentage if excluding DH. To provide a more meaningful guidance excluding impacts of COVID-19, what we expect net revenue growth will be in the range of 11 to 15 percent compared to the pre-COVID-19 results of 2019 or a reduction from 0 to 4 percent if excluding DH. With that, let's open up for Q&A. Thank you.

Thank you. As a reminder, if you'd like to ask questions, please press star 1 on your telephone. To withdraw your question, press the power or hash key. Please stand by while we compile the Q&A roster. First question comes from the line of Billy Ng of Bank of America. Please go ahead.

Thanks, and good morning, management team. I have two questions. The first question is we noticed the opening pipeline. The company now has 2,800 of hotels in the pipeline. I just want to get the view from the management that among the 2,800 hotels, how many of them could be open within the next 12 months? And are there any hotels at risk given the current situation? Some of the franchisees or signups may change their mind and to drop their project. That's my first question. And then I have a second question.

OK, this is about the whole process and efficiency. Indeed, as I mentioned before, due to the impact of the epidemic on the entire supply chain, it caused us to slow down the supply of a large number of domestic stores during the two high-end times. So the supply period of 6 to 7 months was correspondingly extended, which increased the uncertainty of our opening progress. But overall, our pipeline The efficiency and health overall is good, but it depends on the future. Will the epidemic still be widespread nationwide? So we have maintained this very confident opening process. In six to eight months, it will gradually switch to opening stores. At the same time, we must pay attention to the uncertainty of the epidemic. Okay, I think in terms of our pipeline covered to the opening for the next year, as I mentioned previously, given the impact of the COVID last year, both the supply chain as well as the construction progress has been impacted significantly. The previous planned construction period, which was roughly to six to seven months, which was delayed by the COVID impact, increased some of the uncertainties. However, for our total pipeline, we still think the majority of them can be converted without the COVID impact, but we'll still be very cautious to continuously evaluating the situation for the next year.

Thanks. My second question is actually related to the high-end hotel. It seems like the company already has at least 10 high-end hotels in operation. So like that, I just wonder if you can provide a bit more color and update on these hotels in terms of their RAFPA, their GOP rate and margin, and then also in terms of tick rate, what kind of tick rates can we get from them? Thanks.

We now have all the high-end hotels in the business in the form of wholesale maintenance management. Therefore, the entire fee rate can refer to Wanhao, Zhouji, and similar brands in China in terms of such a fee model and income model. Currently, the opening of high-end hotels So the current business is still in the peak of the market. In terms of GOP management, Huazhou is still very advantageous. Our management of the entire business cost In terms of our high-end hotels, in terms of the take rates, So given that our high-end hotel management are using the full management contract, you can just refer to those international brands such as Marriott and ISG. We charge the similar rates compared to those international players. In terms of the operation situation, as I mentioned before, given the COVID impact, those newly opened hotels have been significantly impacted by COVID. and we are still in a wrap-up period for those newly opened high-end hotels. However, in terms of the operation in the future, we're still going to leverage our Hwatu's core competence in terms of the high-efficient operations to reduce the cost and IT empowerment IT capability to empower all those high-end hotels through the shared service. We believe that we can achieve the GOP 20% higher compared to other players in the future. In addition, we are very happy to see that since the initial open of our Staten Burger hotels in Jinan, we achieved 100% occupancy rate within one month. And also, our membership or our CIS contribution for the obscure hotels also achieved 30%.

Thank you. Thank you, Jason.

Thank you for the questions. Next question, so I'll come from the line, Rubin Pang of UBS. Please go ahead.

Thank you, Jason. I'll answer the question. I'll ask it in Chinese first. The first question is, recently, Chinese real estate companies have encountered a lot of problems. Will the cooperation between the company and Rongchang be affected? 我再用英文問一下。 Now the Chinese real estate enterprise has been suffering from a lot of issues, and will the cooperation between the company and Senec be influenced?

Thank you. Actually, I personally discussed with the management team with SUNAC recently uh... in Undeniably, the Chinese real estate industry has been impacted quite significantly given the macro and the political changes and the new policies, especially for the residential property. That definitely will cause some of the concern on the liquidity of those real estate companies, which is there is the likelihood that some of the real estate companies will choose to sell their commercial properties. However, I would like to remind you that the hotel's assets are naturally flexible. However, under the premise of this flexibility, the operating efficiency and profitability of the hotel will become the mainstream focus of the industry, rather than the surplus of the previous real estate. Therefore, I think that But I would remind a little bit because for the hotel property, it has relatively high liquidity compared to others. And given the current situation, the hotel property will concern more on the efficient operations, which is Huazhou's core competency. So therefore, we think at the current situation, Huazhou has the core competency to provide the high efficient operations, which could be potentially benefit from this. 更高的GOP,更多的中国客源的占比, The higher GOP, the higher portion from the Chinese customers and IT capability will be the key dimensions for those hotel operators or hotel owners to consider. Therefore, currently, our joint venture with Sunac, Yongle Huazhou, this joint venture company has no impact from the current situation and the current market conditions. We still hope and confident that we can further enlarge our skill and provide better operations through this joint venture management company. I hope there will be a relatively large scale new hotel opening within this joint venture company next year.

Thank you. The next question comes from the line of Simon Cheung of Goldman Sachs. Please go ahead.

Hello. Thanks for taking my question. I think I have two questions. Just on the first one, I understand the message about the difficulty to secure a contract as well as opening a hotel given the COVID situation. I just wanted to get a sense to what extent was also driven by maybe the housing market downturn or two, and also the liquidity situations in China. And then I have another follow-up. 目前应该讲我们可以看到

As the epidemic repeated, the supply volume of the whole market, the original supply volume of single hotels, was shrinking. This is indeed a situation, but it gave Huazhou more opportunities in the recovery stage. We can see that as the epidemic weakened recently, the recovery of the recent business is still relatively obvious. In other words, after the whole epidemic, Given the persistent COVID-19 recurrence over the last year, actually we can definitely see there is a supply decline, especially for the independent hotels. Well, this actually provides some of the good opportunities for HOT2 posted currently to consolidate the industry. As we can see, currently I think since the late November, currently the situation in China gets much better, and we also see a strong business recovery currently. Therefore, in the future, we still believe that no matter the demand or the supply and decline, we will also create a very healthy market condition for us. Especially for the economic and the middle-skill limited service hotel segment, we still see there's a lot of demand coming through. And in addition, there's also within the province travel, the leisure traveling within a province is still having a quite strong demand. In the upper middle and upscale hotel segment, we're also working hard to try to convert those existing hotels. We have been doing a lot of this kind of work since the year beginning. Thank you.

Thanks for the answer. My second question is related to, I guess, exactly to your earlier point about the opportunity to consolidate the markets. I wanted to get a sense how management is thinking, you know, about potentially using a balance given, you know, the difficulty to gain more net ads, you know, organically. And also, you know, if you can provide us with some hotel ad guidance. Has that been changed for the full year? Or even if you can give us some color for even next year if possible. Thanks a lot.

OK. OK. In terms of them and their opportunities, Huatu always keep open-minded to this kind of opportunity. We are very happy to see some of the potential opportunity which can help us to fulfill the brand, different hotel segments, And we are very proactively looking for this opportunity. For details, I think Ms. Yifei could discuss more later. Apart from very simple M&A, we also use different ways such as management and joint venture or cooperation in different area in China. We have been working on this for the entire 2021 and we have some great details can be shared to the market shortly.

All right. Thanks a lot. Much appreciated. Thank you.

Thank you for the question. In the interest of time, I would like to hand the call back to the management for closing.

Thank you, everyone, for taking your time with us today, and we look forward to contact with you again in the upcoming quarter. Thank you. Bye-bye.

That does conclude the conference call for today. Thank you for your participation. You may now disconnect your lines.