H World Group Limited

Ladies and gentlemen, thank you for standing by. And welcome to the HUAZOO Group 2021 Q4 and Full Year Earnings Conference Call. Please be advised that today's conference is being recorded. At this time, all participants are in a listen-only mode. It is now my pleasure to introduce IR Director Jason Chen.

Jason Chen Thank you, Andrew. Good morning and good evening, everyone. Thanks for joining us today. Welcome to Huazhou Group's 2021 Fourth Quarter and Full Year Earnings Conference Call. Joining us today is our Founder and Chairman, Mr. Ju Qi, our CEO, Mr. Jin Hui, our President, Ms. Liu Xingxin, our CFO, Ms. Chen Hui, our Deputy CFO, Ms. Ye Fei, and our CEO of International Business, Ms. He Ji Hong. 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 findings with the SEC. Huazhou Group does not undertake any obligations to update any forward-looking statements except as required and applicable laws. On the court today, we will also mention adjusted financial measures during the discussion of our performance. Reconciliation of those measures to comparable GAAP 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 slides presentation is available on Huazhou Group's website at ir.huazhou.com. With that, now I will turn the call over to Mr. Ji Ji. Mr. Ji, please.

Good morning and good evening, everyone. 2021. With another challenging year, constant variation and a resurgence of COVID-19 had brought many uncertainties to the lodging industry. At the same time, global macro conditions are also becoming increasingly complex. Since China's economic development strategy is changing from high-speed growth to high-quality development, We also adjusted our strategy from previous mega-scale growth to sustainable quality growth, focusing on high-quality hotel development. With the new strategy, we should be able to achieve sustainable and quality growth, create greater value to our customers, employees, and franchisees, and make the industry bigger. by leveraging on our unique 3-in-1 business model, which includes brand, traffic, and technology. Under the Sustainable Quality Growth Strategy, growth is still the main theme. However, the growth relies on two critical conditions. One is called precision or accuracy. By leveraging on Huazhou's strong technology, and innovative capability, as well as a people-oriented organization with strong executive ability, we can seek for more precise and accurate operations that achieve high efficiency and quality. Moreover, the precision also requires us to benchmark world-class companies on talent cultivation and reservation. in order to maximize the staff efficiency within the company. In addition, both products and service should also be changed from good enough to enough good, and more precisely for simplicity, concentration, perfection, and focus on core strategy. Success or failure is often determined by time details hotel business. Hence, precision becomes more and more important. Another condition is called value or benefit. It means value creation, long-term focus, and social benefit. Also, we are continuously focused on creating greater values to our stakeholders along the value chain of lodging. Also, we would insist on doing difficult but right things and being long-term focused. Last but not least, we would also focus on ESG development, environmental protection, carbon emission reduction, social welfare, and corporate social responsibility to bring long-term benefits to our customers, employees, franchisees, partners, shareholders, communities, and countries. With that, I will turn the call to Jinghui to discuss our business development and the space focus.

Thank you, Jiqi. As Chen Lu and Jiqi said, 2021 is full of challenges, but we still insist on our strategic direction and have achieved a series of achievements. Please turn to the fourth page. We redefined the standard of Anxin 360 and Hegemen store in terms of the expansion of Hegemen store. The number of hotels has increased by 1,041, reaching 7,830. The number of hotels has increased by 1,041, reaching 7,830. The number of hotels has increased by 7,830. The number of hotels has increased by 7,830. The number of hotels has increased by 7,830. The number of hotels has increased by 7,830. The number of hotels has increased by 7,830. The number of hotels has increased by 7,830. We launched the Huazhouhui 3.0 version to integrate customer service online and offline. Our corporate membership contribution reached 11% in the fourth quarter of 2021. Our central budget has also been further increased by 63% in the fourth quarter. In terms of global technology platforms, we continue to promote the application of global technology platforms in DH.

Thank you, Jiqi. As mentioned by Jiqi earlier, 2021 was again a challenging year. However, we continuously insist on implementing our strategies. and achieved several great achievements for the year. Please turn to slide four. On the quality hotel expansion front, we defined again our standard of Comfort 360 program and quality hotel. We achieved 7,830 hotels in operation by the end of this year with net openings of 1,041 hotels. We further penetrated into lower tier cities with roughly 200 new cities of coverage added during the year. Also, we successfully introduced the Indoor City and Max brand into China market. Moreover, through the joint venture with Sunac, we had opened 14 Steigenberger brand hotels in China in 2021. Lastly, Longshan House to further tap into the booming domestic leisure traveling market. In regards to our multi-dimensional direct sales, we had achieved another year of solid member growth of 14% to total 193 million members by the end of 2021. We also officially launched our EdgeWord app 3.0 version to integrate customer services from online to offline. Also, our room nights contributed from corporate customers further improved up to 11% in the fourth quarter 2021, and the CRS contribution further improved to 63% in the same quarter. Lastly, in terms of our global technology platform, we have started a gradual rollout of our one-globe digital platform for DHS Hotels.

The recurrence of the epidemic continues to affect the recovery of RERPA. Please turn to page 5. Because China's epidemic prevention policy still maintains a dynamic and clean policy, therefore, every large-scale outbreak of the epidemic is accompanied by an increase in travel restrictions, and thus affects the recovery of RERPA. After the Spring Festival in February this year, we observed that the recovery of RERPA was good. The rate of recurrence of RERPA rose steadily every week. But due to the spread of the Omicron virus since March, the recovery period has been interrupted. The recovery rate of Rheopax was 64% in 2019.

Unfortunately, the circumstances of COVID-19 consistently affected our Rheopax recovery. Please turn to slide 5. Since China remains implementing zero-COVID policy, every resurgence of COVID in relative large scale would result in a stricter traveling restriction, and hence significantly affected our REFPA recovery. In February, post the Chinese New Year, we saw our REFPA recover steadily on a week-over-week basis. However, Since March, the highly infectious Omicron variant has been spreading rapidly in China, which interrupted our RevPAR recovery trend. As of March 22, our month-to-date RevPAR recovered to only 64% of the same period of 2019.

For the year 2022, we have defined four strategic targets around economic growth, including growth strategy, brand strategy, user strategy, and digital strategy. Next, I will present the detailed details of each strategic target.

Please turn to slide 6. Although we are facing many difficulties and challenges, we will unswervingly implement our sustainable quality growth strategy. We have formulated four strategic focuses for 2022, which include growth strategy, brand strategy, membership strategy, and the digitalization strategy. I will discuss details on each of these strategies in the following slides.

Please turn to page 7. The growth strategy has three main aspects. First, This turns to slide 7. Growth strategy mainly includes three areas. Firstly, the China focus to penetrate into lower tier cities.

Secondly, breakthrough into Huazhou's less penetrated market. Thirdly, further developing in upper-mid and upscale hotel segments.

As of 2021, we will continuously penetrate into the lower tier cities. Please turn to slide 8.

As of 2021,

there are 40% and 57% hotels contributed from lower tier cities for hotel in operations and pipeline respectively. We totally signed up 2,849 new hotels during 2021, with 55% of them came from lower tier cities. At the end of 2021, we had covered 1,062 cities in total, Our future target is to cover 2,200 cities, which means we still have around over 1,000 empty markets to be penetrated.

Please turn to slide nine.

Our next key focused regions to penetrate are southern and western parts of China. China's national strategy includes four economic development zones, as shown on the slide. We have good penetrations in Jingji, Yiji, Aglomeration, and the Changjiang Delta area. However, Chengdu, Chongqing Economic Circle, and Guangdong, Hong Kong, Macau, Great Bay area are still very much less penetrated for us. Last year, we had established our regional headquarters in Shenzhen and Chengdu to develop these two areas, attract local franchisees, and penetrate the local market. By doing so, we can achieve a more balanced development across our regions in China.

Finally, let's talk about the growth strategy in the mid- and high-end markets. Please turn to page 10. We have made breakthroughs in the mid- and high-end hotels through multiple brands. Lastly, I would like to discuss our upper-mid and up-skill hotel segment. Please turn to slide 10.

In the upper-mid segment, we insisted on using multi-brand strategy to develop the market. Our brands include Crystal Orange, Intercity, Madison, Manchin, Mercure, and Novotel. As of 2021, we have 454 upper-mid hotels in operation and 264 in pipeline. We are targeting to achieve over 1,000 hotels in operations and pipelines by the end of 2023.

In 2021, Huajiantang's new contract exceeded 35. Finally, through Meilun Meihuan, we explored China's high-end hotel storage market. In 2021, Meilun Meihuan launched a partnership with Shanghai Dongfang Hotel, which is the most core CBD area in Witan.

Our upscale hotel segment is also progressing steadily. This turn to slide 11. We divided our upscale hotels into three parts. Firstly, we are expanding the number of upscale hotels through the joint venture with Sunac. As of 2021, we achieved our first milestone of total 100 upscale hotels in operations and pipeline. Secondly, we use our Blossom House brands to further tap into the booming domestic leisure traveling market. During 2021, we signed up a total of 35 hotels of Lungsan House brand. Lastly, we are using Max Brands to seek for the conversion opportunities in China, focusing on China's existing market of independent upscale hotels. The best example is we had cooperated with Shanghai Nest Suites Orient Hotels by using Max Brands to enter the CBD area at The Bond in Shanghai.

China China China

In terms of our brand strategy, we also divide it into three parts. Please turn to slide 12. First one is the product upgrade. We constantly upgrade our products for different brands to enhance the brand recognitions and the product quality. For example, our flagship economic brand, Hunting, we continuously upgrade the product and introduce new versions to the market. Second one is on the flagship hotels. We selectively invest and open our flagship hotels in the core cities at core locations to improve our brand awareness. For example, we opened our new version of Crystal Orange 2.0 flagship hotels in Shanghai last year. Lastly, we sharpen our brand positioning. Each Huazhou's brand should have its unique positioning to provide differentiated products and services to its own target customers. in order to gradually transit from product and function leading in the past to brand leading in the future. For example, hunting is targeting the mass market and customers who are seeking for the highest value for money. Orange brand represents healthy, energetic, and sunny. Nihao brand should become China's new youngster's first choice when they choose the hotel.

Now let's move to the membership strategy. Please turn to slide 13.

We remain focusing on our direct sales channels, which mainly through our in-house sales, corporate customers, and across industry lines to attract new customers and expand our membership basis. Our EdgeWard is the critical core platform on conducting a deep customer's operations.

Please turn to the next slide. In the past few years, the number of members of Huazhou has continued to grow. From 2015 to 2021, our membership growth rate is 26%.

Listen to page 14. Over the last few years, our membership continuously grows steadily. We had achieved a figure of 26% growth from the year of 2015 to the year of 2021.

Our CRS contribution also continuously improved.

Please turn to slide 15. For the full year of 2021, the CRS contribution improved by 3 percentage points year-over-year to 58%. More importantly, our CRS contributions in lower-tier cities are only slightly lower than the Tier 1 and Tier 2 cities.

Please turn to slide 16. Please turn to slide 16. The contributions from the corporate customers also further improved.

For the full year of 2021, room nights contributed from the corporate customers accounted for roughly 11.9%, 2.5 percentage points improved from 2020. Specifically, the corporate customers' contributions also gradually improved in the up-mid and up-skill segments.

Please turn to page 17 of the digital strategy. In the past, Huazhou has realized the digitalization of limited service hotels and put a lot of hotel businesses on the edge of the cloud, forming a chain management model. Today, when we look back at this development period, we find that there is still a lot of content that can be further digitized and managed. Therefore, the first strategy for digitalization is to realize the full digitalization of the limited service hotel door store level.

Let's now move to the digitalization strategy. Please turn to slide 17. Over the past several years of development, the Huat Lu had already achieved several digitalization processes for its limited service hotels at the hotel level. Transferring many offline functions to online created the chain management model. Today, when we deeply reviewed our previously development process, we find out that there are still many content and functions at hotel level that can be further operated and managed digitally. Therefore, the first part of our digitalization strategy is to achieve the comprehensive digitalization of our limited service hotels at the offline hotel level.

Please turn to slide 18. In the future, we think the comprehensive digitalization can include

The digital sales, online guest experiences, quality management, GOP management, lifetime franchisee services, and extra. More digitalizations can further improve the management efficiency and capabilities.

Please turn to slide 19. In terms of the full-service hotel, its business model is different to limited-service hotels.

It is also a very new area for Huatou to experiment. Therefore, the second part of our digitalization strategy is to transform the full-service hotels from single hotel management to cloud-based digital chain hotel management model. We are experimenting to build up a digital shared platform to move offline functions at hotel level, such as human resources, accounting and finance, and supply chain management to online. in order to achieve an online shared service platform among many full-service upscale hotels.

Before I finish my speech today, I would like to emphasize the importance of ESG for China. Please turn to the second slide. Under the current situation, the Chinese government has proposed carbon neutralization ESG will also become an important part of China's long-term strategic planning system. Last year, we also released the first ESG report. Future companies will continue to disclose ESG's relevant content. At the same time, all departments of the company are also evaluating ESG's relevant issues for sustainable development, seeking opportunities for sustainable development in various fields.

Before I finish my preface remarks, I would like to emphasize again on the importance of ESG for Huatu. Please turn to slide 20. Under the background of China's carbon utilization target, as well as increasing concern on sustainable growth globally, Huatu has already incorporated ESG into our long-term strategic planning. Last year, we had released our first-ever ESG report since listing, and the release will continue in the future. At the same time, Hua Chu has also started a very comprehensive internal assessment among each business division to seek the potential of improvement in any ESG-related matters.

Thank you, Jinghui.

With that, I will turn the call to EFA to discuss our first quarter and the full year of 2021 operational and financial performance. Ms. Yeo, please. Ms.

Thank you. I dropped the gun a little bit. Good morning and good evening to everyone. Let's move on to our operational and financial review for the fourth quarter and the full year of 2021. As shown on slide 22, Our combined hotel networks expanded by 15% in 2021 to 753K rooms of 7,830 hotels, compared with 652K rooms of 6,789 hotels in 2020. Excluding DH, Lexi Huazhou's hotel network expanded by 16% year-on-year, to roughly 728K rooms of 7,706 hotels in 2021. For our hotel turnover in 2021, our total hotel turnover grew at 36% year-on-year to RMB 45 billion in 2021. This was mainly due to our continuous network expansion in China and low base of 2020. Excluding DH, Lexi Huazhu hotel turnover grew 38% year-on-year to RMB 42.7 billion in 2021. Turn to page 23. Lexi Huazhu blended REF PAR for Q4 21 with RMB 163, 14% lower than 2019 level, The ADR in Q4 was up by 3% compared to 2019 level at RMB 239, while the occupancy in Q4 is 14 percentage points lower compared to 2019. This was mainly due to COVID-19 resurgence in November 2019. For the full year 2021, Lexi-Huazhou blended REF PAR was RMB 172, a decline by 13% from 2019, but an increase of 1.6% from 2021. The ADR was RMB 239, up by 2% compared to 2019, while occupancy is 12 percentage point lower compared to 2019. It was mainly due to the several outbreaks of COVID through the years of 2021, especially in the later half. Turn to page 24. Despite the recovery in the fourth quarter was interrupted by Omicron variant since November, our legacy DH business saw strong recovery in Q4 2021 on a yearly basis. DH's blended REVPAR for Q4 2021 rebounded by 153% to €43 compared with Q4 2020. The occupancy improved by 24 percentage points compared with Q4 2020. And the ADR improved by 24% to €94, only 3% lower than 2019 level. For the full year, DH blended the REF PAR slightly increased by 4% to €32 compared to 2020, mainly driven by 3% increased ADR. Occupancy rate was roughly flattish at 35% between 2020 and 2021, as the first quarter of 2020 was pre-COVID in Europe. Please see our financial results on slide 25. Total net revenue grew by 9% year-over-year to RMB 3.4 billion in the fourth quarter 21, mainly driven by 130% increase of DH's revenue in Q4 21. However, Legacy Huatu recorded a 2% year-over-year revenue decline to RMB 2.8 billion. In line with our previous guidance, Due to COVID-19 resurgence in over 20 provinces since November, China's leased and owned hotels saw a 13% year-to-year decline in revenue, offset partially by an 8% year-to-year growth of monetized and franchised revenue. For the full year of 2021, total net revenue grew by 25 year-to-year to RMB $12.8 billion. Excluding DH, Lexi Huazhou recorded a 30% year-on-year revenue growth to RMB $11.2 billion, in line with our previous guidance. Breaking down the full-year revenue, revenue from leased and owned hotels increased by 17% year-on-year to RMB $8.1 billion, and revenue from managed and franchised hotels grew by 40% to RMB $4.4 billion. The SLI's managed and franchised business contributed 34% of total revenue in 2021, compared to 31% in 2020 at group level. For the moment, this is mainly driven by the legacy Huazhou's managed and franchise business, whose portion also increased from 36% to 39% in 2021. Now, let's move to the cost and profitability session on slide 26. In Q4 21, the reported operating income was RMB 39 million compared to a loss of 134 million RMB last year and positive 72 million a quarter before. The year-on-year improvement was mainly driven by the DH business recovery and the 60 million Euro government subsidies received in Q4. but offset by the weaker China business performance. Excluding DH, Lexi Huazhou's operating income in Q4 was RMB 60 million compared to 305 million RMB last year and 239 million RMB a quarter ago. On a four-year basis, The reported operating income turned positive to RMB 164 million from a loss of RMB 1.7 billion last year. Despite several resurgences of COVID during 2021, Lexi Huaju recorded an operating income of RMB 891 million compared to a loss of RMB 100 million last year. LexDH narrowed its loss significantly from RMB 1.6 billion in 2020 to RMB 727 million in 2021, thanks to the government subsidy, totally European dollar 101 million received in the second and fourth quarter. The total hotel operating cost for fourth quarter 2021 was RMB 3.2 billion. increased by 16% year-on-year. The cost increase included a non-cash impairment loss of RMB 257 million, which was mainly related to DH. For Lexi Huazhu, it recorded RMB 2.3 billion hotel operating costs, indicating a 13% year-on-year growth. The increase was mainly attributable to higher rental cost of new upscale and upper-mid hotels, higher personal costs as we're expanding our hotel network rapidly, and higher DNA costs, which were related to the upscale and upper-mid hotels opening and also upgrading of existing hotels, as well as the consolidation impact of a recent Citigroup acquisition. For Lexi DH, it recorded RMB 866 million hotel operating costs, indicating a 28% year-on-year growth. The increase was mainly due to variable costs increased along with business recovery, as well as non-cash impairment loss of 257 million RMB mentioned above. On a full-year basis, total hotel operating costs grew 16% year-on-year to RMB 11.3 billion, mainly driven by 20% a year growth of Lexi Hua Zhu, with similar reasons mentioned above. As we mentioned in previous quarters, our future expansion of upscale hotel will mainly use SLI model. Therefore, our pre-opening cost declined by 19% a year to only RMB 30 million in Q4. the pre-opening costs significantly declined by 72% year-to-year to only RMB 81 million for the full year of 2021. Our SG&A in Q4 increased by 21% year-to-year to RMB 624 million, driven by the increase in both Lexi Huazhu and the Lexi DH. Excluding DH, SG&A for Lexi Huazhu increased by 8% year-to-year to RMB $437 million. The increase was mainly attributable to the increase of headcounts for our sales team, IT team, BD team, and last but not least, the upscale business unit, which are the areas we strategically invest in. As you can see from the chart, the increase of SG&A is mainly driven by Lexi Huazhu, while DHCide recorded 2% savings from 2020. which also has part of the reclassification impact from the DH side. Turning to page 27, our adjusted EBITDA income was RMB 278 million in Q4, compared to RMB 375 million a year ago. If we exclude the non-cash impact loss of 257 million, which was mainly related to DH, The adjusted EBITDA would have been RMB 535 million, representing a 43% year-to-year growth. DH EBITDA turned positive in Q4-21 to RMB 69 million compared to a loss of RMB 389 million last year, thanks to the business recovery and government subsidy, but offset by the non-cash impairment loss. Excluding DH, Lexi Huatru recorded an adjusted EBITDA income of RMB 209 million, declined by 73% in Q4 2020 due to the impact of COVID-19's resurgence in the fourth quarter. Full-year adjusted EBITDA turned positive of RMB 1.6 billion from a loss of RMB 244 million in 2020. This was mainly driven by the 81% of growth of Lexi Huazhou's adjusted EBITDA of $2 billion, as well as a narrowed adjusted EBITDA loss of RMB 461 million. In Q4 2021, we recorded an adjusted net loss of RMB 227 million, enlarged from a loss of RMB 8 million in Q4 2020. Excluding BH, Lexi Huazhu recorded an adjusted loss of RMB 187 million compared to a net income of RMB 300 million in Q4 2020. Adjusted net loss for the full year narrowed from RMB 1.8 billion in 2020 to RMB 260 million in 2021. Lexi Huazhu turned positive profit of RMB 358 million compared to a loss of RMB 459 million a year ago. Coming to the cash position, our net debt remains healthy at RMB 4.7 billion by the end of Q4, and there's no risk of breaching the financial covenants of the remaining amount of EU dollar 338 million syndication loan. Our cash balance was RMB 5.1 billion and the unutilized bank facilities were RMB 3.3 billion. Given the COVID impact remains uncertain in the foreseeable future, we'll keep cautious on capital spending and discretional spending to preserve cash. A few more words on DH. Since November last year, DH's recovery trend was again interrupted by Omicron variant. Its occupancy rate dropped by 3 percentage point to 46% compared to a quarter ago. However, as German government unfolded the initial opening plan since mid-Feb, and later applied to March 4th, it should help to re-accelerate our recovery in the future. However, we would remain cautious and still implement the mitigation measures of further emphasis on efficiency improvements, negotiation of lease waiver, personal cost optimization, deferral of major capex. Additionally, the short-time worker compensation would continue to be valid until June 30, 2022. Turn to page 31 on guidance. As you may know, since March 2022, the highly infectious Omicron virus has been spreading rapidly in China, which seriously affected our business performance. And China's zero COVID policy also adds great uncertainty to the business recovery. Moreover, the war between Ukraine and Russia may negatively impact our European business. Therefore, the guidance can be of short-term view and only reflect our current understanding of the situation. In terms of our hotel opening plan in 2022, after reviewing our existing pipeline and hotels under construction, we now expect to open around 1,500 hotels and close around 500 to 550 hotels for the year. This is built on the presumption that COVID spread will be contained in a reasonable timeframe in China. In terms of revenue guidance, for the first quarter of 2022, we expect revenue growth to be in the range of 11% to 15% compared to the first quarter of 2021, or to the range of 1% to 5% if excluding DH. For the full year of 2022, We expect the revenue growth to range from 15% to 20% compared to the full year of 2021, or to the range from 4% to 9% if excluding DH. Again, above guidance only reflects our current view, which are subject to change. Last but not least, considering current conditions, we may from time to time make repurchase of our securities including American depository shares and convertible notes in open market transactions, private negotiated transactions, or otherwise, subject to market conditions and other factors. With that, let's open for the Q&A.

Thank you. Ladies and gentlemen, if you have a question, you will need to press star 1 on your telephone. If your question has been answered or you wish to remove yourself from the queue, Please press the pound key. Once again, to ask a question, press star 1. Our first question comes from the line of Billy and Gee with Bank of America.

Good morning. 大家好。 金总,金总,叶总,Jason,早上好。 我有两个问题。 第一个问题其实就想理解多一下就是在PPT里面提到的那个生殖的问题。 In the past, every time we saw a product upgrade, there was a significant improvement in the rough part. For investors, the return was not bad. What is the current return for the new product? Is there still a chance to improve the rough part? I'm just wondering, in terms of the product upgrade, I think in the PPT, you guys mentioned that it's one of the growth drivers. So we understand that in the past, like, product upgrades actually can significantly enhance rock top. But is that still the case going forward? And is that the case? And also, in terms of the plan for doing product upgrades, are we helping the existing franchisees to do a large-scale upgrade?

Okay. Let me answer the first question first. Regarding the work of quality improvement, it is actually a very important strategy to cater to the entire consumer, the consumer's continuous improvement. For Chinese people, not only in Hanting, Quanji, but also in Juzi, We have made continuous improvements and upgrades to the product in order to better approach the trend of consumers continuing to improve their consumption of quality. In this process, we can clearly see, for example, after the improvement of products such as Han Ting, Realpa has received a great improvement. So the product upgrading is our key strategy to cater into the consumption upgrade trend in China. It's happening not only to Hanting, G Hotel, but also like Orange and High Inn.

我相信通过这样的财品提升得到了绝大多数中国国民的喜爱。 Arguably, Huazhu is the only one pushing the economy product upgrade in China, which is also well received by the customers of us. 请继续第二个问题。

The second question is also a bit short. We can see that the epidemic in China has been the most difficult in the past two years. Have you seen this wave of the epidemic affecting the wishes of the business owners and their opening speed? If this wave, for example, needs to be resolved in one or two months, So I think my second question is basically we notice right now Omicron outbreak is pretty severe in China. So I'm just wondering whether this outbreak has impacted the incentives of the franchisees and whether they decide to open for this year has changed.

Yes, the epidemic... China, due to the government continuing to clean up the dynamic, the epidemic will inevitably have a certain impact on the entire economy and the investment community of the business owners. We have seen such a situation in March. But I would like to emphasize a few aspects. First, China has a very large area of land. Even in the current situation, there is a very big difference in each city. There are a lot of low-end markets in the central and western regions. In fact, the current business is still good. We are still continuing to promote the development strategy of our downstream market. At the same time, due to the impact of the epidemic, we have more than 850 stores that are in real use. OK.

Certainly, you're right. The current COVID situation and also China's zero COVID policy has the negative impact of our performance and also the franchisees' interest, especially reflected in the March number. But having said that, I would also mention two factors as a mitigation. First of all, China is a very big and large market country, Actually, our hotels in the lower tier city has been running good, and this further stimulating the signing of the new hotels in those markets. That's number one. Two is the further requisition of our hotels by the current government bureau. Currently, more than 1,850 hotels are under requisition. It's roughly 12% of our hotel portfolio. This is very important to help our franchisees to go through current tough time, especially for the franchisees in the Tier 1 or Tier 2 cities.

Thank you. Thank you. And our next question comes from the line of Siji Lin with CICC.

Thank you, Manager Ceng. I have two questions. The first one is, how much is the REFRA expected to recover behind the revenue guidance for the second year and the whole year? The second one is, we saw that ADR was ahead of OCC in 2021. How should we look at the trend of ADR in the future when the epidemic subsides? Because in fact, one kind of judgment is that ADR will continue to improve, because the pursuit of brandization and standardization is inevitable. So my first question is that for the full-year referral guidance, what's the implying referral recovery rate? And my second question is that we know that ADR recovered faster than OCC in 2021. What's the trend of ADR in the future when we recover from COVID-19? Because some people say ADR may continue to increase because people pursue for better quality and strong brands, but some may not think so considering the soft consumption environment. So that's my two questions. Thank you.

Okay, let me answer the first question first. Regarding the guidance for 2022, our RERPA is the guidance for the entire year, which is roughly 81% to 84% in 2019. We have considered the repeated effects of the epidemic throughout the year. We have done some detailed analysis of the data and internal judgments for these factors. It is based on some judgments to make such a guidance. Regarding the change of the entire consumer market caused by the epidemic and the economic situation, did you mention that it will affect the sensitivity of the price of business trips or the softening of the entire consumer market? We think that the bottom line of China's economy is still good. In January and February, the recovery of the entire Spring Festival is actually good. There is still a lot of demand for travel and business in the market, including new tourism and repair markets. This pandemic will indeed increase the sensitivity of some companies to price. I think this is the advantage of Huazhou. Huazhou's whole series of brands, based on these high cost-effectiveness and efficiency capabilities, I believe that after the pandemic, it will be more efficient for more hotel owners in China. Okay. So to answer your question, in terms of revenue guidance, for the Lexi China side, we budgeted 81% to 84% of the RAPR

recovery compared to 2019 level. It is based on our internal assessment and also the evaluation of the impact of COVID. And regarding to your second question of consumer markets and also the corporate markets reaction, yes, we admit there's a challenge of further sensitivity of the customers, price sensitivity, especially regarding the corporate customers From our latest number, especially in January and February Chinese Festival, actually the recovery is pretty decent, both for the leisure travel and also business travel. I would say from Huazhou Group, we have full spectrum of products. Actually, this creates a very good opportunity for us to capture all kinds of customers, especially those who become more price sensitive, because we have our own competitive edge in terms of a high-efficient and low-cost business model, creating both value for our franchisees and also customers. Thank you. Let's wait for the next question.

And our next question comes from the line of Leah Pan with Goldman Sachs.

Hello, can you hear me? Sorry, it's not Leah, it's Simon. Can you hear me?

Yes, Simon.

I'm sorry. I have two questions. The first question is, I saw that you mentioned earlier that your cost seems to be under a bit of pressure. Because I saw that the EBITDA margin in China seems to have a bit of a drop. I would like to ask you, if you look at 2022, what is the trend of EBITDA that you are looking at now? And what is the pressure in terms of cost? This is the first question. The second question, you just mentioned that you have 7,000 stores in China and 1,000 cities. You also mentioned that your area is relatively small in Huanan and Huaxi. I would like to ask if there is a concentration of 1st, 2nd, or 3rd-tier cities. So the question was related to your cost and also the margin pressure because we saw a bit of a margin dilution. last year for the China operations, wondering whether you would have any guidance on the cost as well as the margins. And secondly, in relation to your 7,000 hotel in 1,000 cities and expanding into another 1,000 cities, geographically, we know that you have a huge exposure in northern and eastern part of China. Wondering whether you have any concentrations, guidance, or expectation in the first tier, second, or even third tier cities. Thank you.

Indeed, we have developed a lot of business strategies in China, deepening China and internationalization. We have made a lot of industry innovations. In terms of cost management, we have paid attention to SG&A, including some cost optimization spaces. In fact, we have proposed a strategy of economic growth this year. In fact, it is very important to focus on the core business, to put a lot of limited resources and costs and focus on long-term and valuable strategies. Our management team is already working on this. I believe we will soon see some changes in the future through some data. We are very much based on the strategic focus on deep-rooted China, the lower-level market, and some of the digitalization strategies of China. To achieve our higher efficiency financial performance. We are also looking forward to such content. Regarding the second question, regarding the development, we have indeed mentioned that in the past, the Huaxi and Huanan markets, due to the lack of management environment and management investment resources, caused us to have a situation where the penetration rate and market share rate are not high. In fact, in the future, there are 2,200 cities that we can set up in China. This is calculated through some data models. 2200 of them include 1, 2, 3, 4, and 5 lines, all of which are more than the number of lines. In the future, we will have about 55% of our stores coming from 3, 4, and 5-line cities, because China's territory is very vast. Forty-five percent will still come from the first and second-tier cities, including breakthroughs of different types of new brands, including our Spoke, including our crystal, Chenji. These brands continue to penetrate the first and second-tier cities. We still see a huge increase in this in the first and second-tier. And the trend of the second-tier market, the recent real part, the whole trend is very good. So it should be said that in China, we are still in a stage of comprehensive penetration. Whether it's in Let me translate the second question first.

So first of all, certainly the lower tier city is much less penetrated compared to the up tier cities. The 1,000 incremental cities will mainly coming from third tier city, fourth and fifth, even like county, you know. And secondly, we are, you know, relatively, you know, we have lower market share in the southern China and the western China. So there's a lot of further growth area for Huazhou as well. So to summary, you know, in our further, you know, in our portfolio, it will be 55% coming from lower tier city and below, and 45% will coming from tier one, tier two cities. And our strategy is full penetration through all tier of cities in China through full spectrum of brands. For example, we're going to enhance our penetration in Tier 1 and Tier 2 by more upscale and mid-upscale products like Steigenberger, Blossom House, and et cetera. And at the same time, we will increase our market share by economy and mid-scale brands in lower tier cities and, for example, Huntington's and G Hotel. That's the answer to the second question. For the first question, certainly, We admit there's mounting pressure in terms of EBITDA because the revenue is under pressure for this sudden change of COVID situation. That's number one. Two, also, internally, we have analyzed there's a further improvement areas of cost management even along our key strategy, further penetration, upscale and upper mid-scale, and also digitalization. Under the sustainable and quality growth overarching strategy, we'll focus on the key areas and further improve the cost efficiency. We're going to develop more detailed measures in the next period of time.

好的,谢谢管理层,谢谢。 Thank you, Simon.

Thank you. And our next question comes from the line of Lena Yan with HSBC. Hello? 还在,请讲。

Okay, I just have one question. Do you have an estimate for the break-even revenue, like the level of break-even revenue for Huazhou Legacy and DH? And also, do you have like a break-even rev par level for that?

Sorry, you're asking a break-even rev par for Huazhou and DH separately?

Yes, yes, yes, yes.

Historically, you know, we have a ballpark estimate. For China side, it's around 130 RMB. And for the DH side, it's roughly around, like, 60 to 65 euro. Okay, and do you have a break-even, like, revenue for these two? Now what I'm talking about is relatively, it's about, you know, the EBITDA breaking even level as we gave to the market before. Certainly, it will be subject to the COVID recovery. It's going to be moving very quickly, I think.

Okay, okay. Thank you very much.

Thank you.

Internet.

Internet. Our next question comes from the line of Bruce Mee with UBS.

Hello, everyone. I have two questions. The first question is about the situation in the first quarter. Although it is affected by the pandemic in March, our RELPA has been greatly affected. But in the first and second quarter, because there is no national holiday policy, RELPA recovery is still possible. So I would like to ask, in the first quarter of this year, How is the current income growth or recovery? This is my first question. Let me translate the first question. Hi, management. I have two questions. And the first question is on the revenue performance for the first two months in Q1 this year. Despite the COVID resurgence disruption in March, we saw that the recovery in the January and February is relatively better. So can I ask about the revenue performance in January and February this year?

I think there will be some growth from the point of view of smart electricity compared to the same period last year. There will be more than 20% growth. Yes. And then from this, it's probably such a situation. I think we can talk about some more detailed details at that time.

Yes, the whole recovery in January and February should be It's still in the forecast, although it's still affected by some of the epidemic. In February, we saw a recovery of about 83% compared to 2019.

Yes, especially on February 15th.

Yes, especially after the Spring Festival, the recovery was actually pretty good. But in March, the Omicron epidemic affected the whole country, and the recovery rate dropped to about 64%. That's the current situation.

Okay, thank you. My second question is also about the cost side. I see that in the 4th quarter, the price has decreased compared to the previous few quarters. Among them, the increase in labor, rent, and other costs is the main growth project. I would like to confirm that the increase in labor and rent is caused by the increase in the number of直營店? And what is the main source of the growth in our other costs? And how much impact will our city-goals have on our cost? Let me translate it. My second question is on the cost front. So I saw that the gross margin in Q4 declined compared with the previous quarters. And I saw that the main reason is due to the increase in rental personnel and other costs. So may I double check that is the increase in rental and personal cost is mainly due to the increase in number of lease and own hotels and what's the main contributor in the other cost and how much is the impact on cost increase from the acquisition of Citigo? Thank you.

Actually, you're right. The impact of... The cost increase mainly comes from the upscale and upper-mid hotels in the leased hotels. And certainly, as we mentioned later, the continued growth model will be asset-light, so we're going to control the further investment in this area. Citigroup has a very relatively – the acquisition size is small, so the contribution to the cost side is relatively limited. It's just more than like 10 million RMB level. It's a limited contribution.

We really hope to further deepen the future of the Chinese market, to further advance the organizational structure and management capabilities of our users and the market. In this transition process, there may be a little bit of a gap in manpower cost. In the transition process of platforms and regional companies, we are implementing this work, so it will also to a certain extent lead to the manpower cost in the transition process last year. Thank you. I'll now turn the call back over to IR Director Jason Chen for any closing remarks.

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 again. Bye bye.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating and you may now disconnect.