H World Group Limited

Good day and thank you for standing by. Welcome to Huazhou Group Limited First Quarter 2022 Earnings Conference Call. At this time, all participants 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 any further assistance, please press star 0. And now I'd like to hand the conference over to Mr. Jason Chen, IR Director of Huazhou Group Limited. Thank you. Please go ahead, sir.

Thank you, Amber. Good morning and good evening, everyone. Thanks for joining us today. Welcome to Huazhou Group's first quarter 2022 earnings conference call. Joining us today is our founder and chairman, Mr. Jiqi, our CEO, Mr. Jinghui, our President, Ms. Liu Xingxing, 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 safe harbor provisions 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 under applicable laws. On the poll 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 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. I'm sorry. I think Mr. G's line is having some connection technical issues. Please give us a few minutes. Please wait. Sorry. Okay.

Please go ahead, Mr. G. Hello.

Hello.

Okay, we're back.

Can you hear us?

Yes, we can hear you.

Okay, we're going to disconnect from the main line and just use this number.

Hello?

Is this Amber?

Mr. G, you're live. Please go ahead.

Can you hear us?

Yes, we can.

Okay, we got disconnected.

Please go ahead. Your conference is live now. Please continue.

But it's not our, we are... It's not the right one.

No. We can actually hear you. Mr. Chi can just start.

Okay.

Hello?

You're live now. Please continue. Thank you.

Jason, are you there?

Yes, I'm here. I can hear you clearly.

Okay, Jason, I'm going to put Mr. Chibak into the line now. Okay, we are going to stay on this. Hold on. Okay, Jason, please go ahead.

Good morning and good evening, everyone. You may notice that the Omicron virus has been spreading widely in China in the past two to three months. The pandemic came suddenly and lasted a very long period this time. Its development trend and impacts are far over people's expectations. The pandemic outbreak and traffic control once again brought huge challenges and difficulties to our China's business operations. As the old saying, surviving is the fate of all life. Under the current situation, the first thing we should consider is how to overcome the current difficulties. On the premise of insurance safety and health of our customers and employees, as well as the meetings and cooperating with government requirements, we are initializing cost optimization, rental waiving of negotiation, and marketing and sales strategic adjustment to overcome the period. More importantly, our franchisees are facing more difficulties and pressures due to the pandemic. As franchisees are our important hotel partners, we need to provide support to help them to go through this difficult period together. Obviously, we are currently experiencing a long and cold winter. However, I always believe that every cold winter will bring a golden harvest. Over the past decade, Huazhou has faced many crises that will become stronger after each crisis. In addition, every cone has two sides. Although the winter is cold, it provides us a good opportunity to review what we have done and rethink what we should do in the future. First, we need to build our long-term core competencies by focusing on companies' limited resources to core strategies. Moreover, we should also take this opportunity to improve our internal skills through culture building, organizational upgrades, training of talent, customer experience improvement, the knowledge upgrades and the product development. By doing so, we can be very well prepared for the warmer season after the current cold winter. Impacts and uncertainties from pandemic, war, and global macro factors are avoidable. We need to insist on the things that we should insist on. and believe the truth that we should believe. In the long term, we will continuously center on customers, franchisees, and employees to implement our sustainable quality growth strategy and build our capability to ride through the economical circle in the long run. With that, I will turn the call to Jinghui Thank you, Jiqi. As Jiqi said, the epidemic prevention measures this year are still very strict.

Since March, the spread of Omicron in China has affected Shanghai, Jilin, and other cities and cities, affecting the recovery of the company. Please turn to the third page. This year, from January to February, the recovery trend of RERPA remains upward. But from March, it fell to 67% in 2019. At the bottom of April, the RERPA was only 53% in 2019. May was slightly better than April. So far, the RERPA has recovered 58%. The above data is the normal recovery of Jinyi branch stores. Thank you, Jiqi.

As Jiqi just mentioned, the COVID prevention measures remain very strict in China. Since March, the Omicron variant has been spreading widely in China, which resulted cities like Shanghai and Jilin in post-lockdown prevention measures again. It has been significantly affecting our rough power recovery since then. Please turn to page 3. Our REFPAR recovery was on track and in uptrend in January and February. However, it was seriously interrupted since March. The recovery declined to only 67% of 2019 level and further lowered to the bottom of 53% in April. May saw slight better REFPA recovery than April, with the month-to-date REFPA recover to roughly 58% of 2019 level. The REFPA number that I just mentioned only reflects our hotels in normal operations. If we included those hotels in the requisitions, our April and May REFPA recovery would be roughly at 65% for both months, which indicates roughly 7 to 12 percentage points better than hotels in normal operations. Since May, we are seeing the normal hotel is gradually improving in terms of the performance, and the impacts of the requisition is gradually decreasing.

In the context of the pandemic, we have taken a series of measures to deal with the difficult situation. First, We are strengthening cost control in China. Please turn to page 4. There are three specific measures. The first is the optimization of manpower cost and cost. We have made further enhancements to the main platform department. Personnel arrangement will be reduced by 15% to 20%. The second is strategic focus. The resources will be invested in key strategies to reduce unnecessary expenses. The third is the reduction of rent under the epidemic.

Under the situation of the strict COVID prevention control, we are implementing several mitigation measures to overcome the difficulties. Firstly, we have started our reinforcement of cost control for domestic operations. Please turn to page 4. The cost of control will vary from three specific aspects. First, streamlining headcounts and expenses. We are further optimizing our headquarter with a plan of headcounts reduction by roughly 15% to 20%. Second, we are concentrating company's resources to our key strategies and reducing any unnecessary expenditures. Third, negotiating lease waivers or reductions due to the pandemic. We had formed a special team internally to conduct the lease waiver or reduction negotiation for both our lease and own hotels and the managed and franchised hotel to reduce the operational cost.

In the middle of April, the number of authentic stores reached its peak. As the epidemic gradually eased, the number of authentic stores is also gradually decreasing. From another perspective, providing authentic stores during the epidemic is also a win-win choice for the company. Because the regular business and leisure needs have dropped to the lowest, authentic needs can help the hotel to fill the guests, so that the hotel can continue to operate during the epidemic.

As one of the leading companies in the industry, we are also undertaking the corporate social responsibilities during the pandemic by providing many requisition hotels. Please turn to page five. Since early March, our number of hotels under requisition increased massively from just over 200 to the highest of more than 1,800 hotels. Since the pandemic is gradually under control recently, Our number of hotels under requisition start to decline from the peak in April. In fact, from another perspective, it is actually a win-win choice for us to provide hotels for requisition purpose during the pandemic period. Given the normal business and leisure traveling demand declined sharply due to the traffic restriction during the pandemic period, The requisition actually helps hotels to achieve relatively better occupancy rate and support the hotel's operational performance.

Due to the serious impact of the epidemic, the company has received more than 9,500 medical staff and more than 5,000 couriers during the lockdown. In addition, the company also provides products that meet the special needs of the epidemic, such as online guest rooms and home office rooms. In addition, on the marketing strategy, the company will adjust the marketing strategy of the original brand to the unified marketing strategy of the cross-brand. Please turn to page six.

Despite the pandemic impacts, we remain striving hard to grab any sales opportunities during the period to improve our performance. Firstly, we actively seek COVID-related accommodation needs, such as requisition hotels, as I just mentioned before. We actively seek any accommodation needs of quarantine, medical teams, delivery riders, governmental officers, and corporates. for both lease-and-own and managed and franchised hotels. Taking Shanghai as an example, where it's the most affected cities by the pandemic this time, our hotel served over 9,500 medical staffs and over 5,000 delivery riders during the lockdown period. In addition, we also initiated several creative product packages to meet the special needs during the pandemic, such as online class hotel rooms, work from hotels and so on. Secondly, we adjusted our sales strategy from previously brand-based to a new regional-based to unify sales and marketing strategy. By doing so, we can be more precisely targeted and explore local demands for specific regions, especially for those areas where it has less impact from the pandemic. Lastly, we extended expiration dates of our members' privileges and appoints and maintain their members' status to further improve our members' loyalty. At the same time, we are also actively cooperating with external traffic platforms and participating in various marketing campaigns organized by different OTA platforms to capture the recovery opportunities post-COVID through pre-sales activities.

This pandemic has caused the Shanghai headquarters to be almost physically paralyzed. However, the company is still able to operate efficiently in remote offices. Please turn to page 7. Huazhong as the base of Huazhou digitalization, allows hotel employees, platform employees, family members, suppliers to work efficiently in remote offices. Taking the example of the Shanghai headquarters platform employees, during the epidemic, the company held more than 10,000 online meetings with the Japanese military. The pandemic and the lockdown have resulted in a physical shutdown of our headquarters in Shanghai.

However, we are still able to maintain high working and operational efficiency through remote work. Please turn to page 7. EdgeTone, an internal information platform, provides a solid foundation and a connector to our hotel staffs, headquarter employees, franchisees, and suppliers for efficient remote work. For example, for our headquarter employees in Shanghai, there are over 10,000 online meetings were hosted. There are over 250,000 daily messages were sent and received, and over 7,000 online documents were used per day on Huatong platform. The pandemic and the lockdown demonstrated our digitalization capability. In the long run, we think the strong technology capability and cloud-based information platform will be critical foundation for our future broader regional and international business collaboration and synergy. Please turn to page 8.

From cost control to real-use hotels, to the marketing and long-term high-tech office under the pandemic, this is Huazhou's response to the pandemic. From a longer-term perspective, in case of uncertainty in the external environment, Huazhou is also building up the ability to go through the economic cycle through our customers, contractors and employees.

Please turn to page 8. From cost control to requisition hotels, to marketing and sales efforts during the pandemic, and then to highly efficient remote work, these are all measures that we have taken in the current pandemic period. From a longer-term perspective, despite the market conditions remain uncertain, we would continuously center on our customers franchisees, and employees to build capabilities to ride through the ups and downs of atomic cycles.

Firstly, it's by caring our customers. Please turn to page nine. I would like to share two letters of thanks from our customers recently. First letter is from our customers from Tangyin County.

He stayed in Huazhou's hotels due to the quarantine needs. He feels that our hotel provides the warmth of home and would become our loyal customers in the future. The second letter is from our customers in Shanghai who was trapped in Shanghai due to city lockdown. He has chosen Huazhou's hotel to stay not only because that he is a loyal member, but also his high trust in Huazhou. In conclusion, We will continuously upgrade and improve our products and service qualities to meet our customers' needs for better experiences and satisfaction.

Last year, Huazhou is the only company in the industry that continues to have a bonus fee relief policy. Last year, this year, for the continued bonus fee for high-risk areas and the one-off bonus fee for new hotel reservations, the company still has corresponding relief and land-saving policies. In addition, for the benefits and assistance policies of the country's launch, the company also has targeted assistance for donors to obtain relevant information and support, including to help them obtain political tax relief, Secondly, by caring franchisees, please turn to page 10.

Franchisees are our critical and reliable partners. Given the recent difficulties, we have provided a series of supportive measures and policies to help our franchisees to tide over the tough period. Last year, Huazhou was the only company which constantly provided fee waivers or reductions to franchisees. This year, we again provided new fee waiver or deferral payment policies for hotels in medium and high risk areas and also for the new sign hotels. Moreover, we also assist our franchisees to obtain relevant information and take advantage on any government's preferential and assistance policies released during the pandemic. We helped them to apply value-added tax refund or reduction, provided legal support for franchisees on rental waiver negotiation, and helped the franchisees to apply financial supports from external financial institutions. In addition, despite the street traffic restriction due to the pandemic outbreak, our supply chain teams still strive very hard to provide sufficient food and supplies to our many franchised hotels. to ensure their hotels in normal operations, as well as provided goods and supplies to hotels under construction in pipeline.

In addition, we also set up a special anti-epidemic fund to help infected employees, reward real electricity workers, and individuals with outstanding contributions during the epidemic.

Lastly, by caring employees, please turn to page 11. We always value our frontline staff as valuable assets for our company. Similar to what we had done in 2020, we returned our all frontline staff during the pandemic period to keep our hotels in operation. At the same time, we constantly focus on our employees' future career development. Even during the pandemic period, we had organized over 1,000 online training programs for our employees to further helping them improving their skill sets. In addition, We also established a special COVID fund to support or reward employees who are infected by COVID, who are working at requisition hotels, and who have any outstanding contributions during the period. Please turn to page 12. Despite the uncertainties, our long-term sustainable quality growth strategy remains unchanged.

We still insist on further lower-tier cities penetrations. Please turn to page 13. By the end of the first quarter, lower-tier cities' contribution was still improving.

It contributed 37% and 55% of hotels in operations and pipelines, respectively. For the new signings in the first quarter, nearly half of them were attributed from lower tier cities. However, we have to be very honest to update you the most recent situation. Although our new signings still grow in the first quarter, The pandemic outbreak and lockdown seriously affected our new signings in April. The signing numbers in April declined significantly compared to last year.

尽管中国经营有压力,但DH的经营仍然在持续下降。 请大家翻到第14页。 今年1到4月,DH的REPA相较2019年的恢复度一直保持上升态势。 4月已经恢复到2019年的80%。

Although the pandemic tremendously affected our domestic operation, our Dutch hospitality business performance achieved a very robust recovery recently. Please turn to page 14. Our DH REFPAR recovery was constantly in uptrend from January to April, with April REFPAR recovered to 80% of 2019 level, and the recovery trend is further improving in May.

Please turn to page 15. As Germany and the rest of Europe's travel restrictions continue to be lifted, we can see that the DH export rate has increased from 31% in January to 51% in April. The return on demand for the first quarter is driven mainly by leisure demand. In the next few months, we also expect that with the recovery of various exhibitions in Europe, business will also gradually recover from demand. Because it is still in the recovery period, At the same time, it also faces inflation and inflationary impact. Therefore, DH will still take a series of measures in management, including costs, control costs, increase business efficiency, cash flow management, and ADR improvement. As for the long-term strategy after the epidemic, DH's main focus is to reduce business costs, increase profit rate level, and implement digitalized strategic improvement. The focus is to consider limited hotel development in Europe and build global

Please turn to page 15. Things to continue as easing of traveling restructuring in Germany and Europe. The edge's occupancy rate improved to 51% in April compared to only 30% in January. Lever traveling was the main driver for the strong recovery in the first quarter. We expect that business traveling will also gradually recover in the next couple of months. mainly driven by the resumption of meetings, conference, and exhibitions events. However, given the recovery is still at early stage, together with the current impacts of inflation in Europe, we would constantly implement our cost and revenue measures that we mentioned in previous few quarters. It mainly includes cost reduction, operational efficiency improvements, cash flow management, and ADR recovery. In terms of the strategic focus post-COVID, we will mainly focus on cost reduction for sustained margin improvement, execution of digital strategy for process efficiency and analytics, evaluating the growth potential of limited service hotel segment, and building up the edge reward global loyalty program.

With that, I will turn the floor to Ms.

Ye Fei to discuss our 2022 first quarter's operational and financial performance.

Thank you, Jinghui. Good morning or good evening to everyone wherever you are. Let's move on to our operational and financial review for the first quarter of 2022. As shown on slide 17, Our hotel network expanded by 15% in the first quarter of 2022 to 765K rooms compared to 663K rooms in Q1 2021. Excluding DH, Legacy Huazhou's hotel network expanded by 16% year-on-year to roughly 740K rooms, in which mid-scale hotels contribute most of the growth. For our hotel turnover in the first quarter of 2022, our total hotel revenue grew at 16% year-to-year to RMB 9.5 billion. This was mainly due to our continuous network expansion in China and strong business recovery of our European business. Lexi Huazhu Hotel turnover grew 11% year-to-year to RMB 8.8 billion in the quarter, and DH recorded a 170% growth to the turnover of RMB 683 million. Turn to page 18. The blended rep part of Lexi Huazhou for Q1 declined 25% compared to 2019. The ADR in Q1 was up by 1.2% compared to 2019 level as RMB 224, mainly driven by the mixed change from mid-scale and upper mid-scale hotels. But the occupancy in Q1 is 21 percentage points lower compared to 2019 due to the impact of Omicron virus outbreak since mid-March. Turn to page 19. Legacy DH business is still impacted by Omicron virus in the beginning of this year. However, due to the opening up in the Germany since mid-February, its red part recovery was accelerating since then. Therefore, DH Splendid Rack Power for Q1 2022 grew 158% to €33 compared with Q1 2021. The occupancy improved by 19 percentage points compared with Q1 2021, and the ADR improved by 28% to €88. Please see our financial results on slide 20. Total revenue grew by 15% year-over-year to RMB 2.7 billion in Q1 2022, mainly driven by 165% revenue growth of legacy DH in Q1 2022. Excluding DH, legacy HuaZhu recorded a 4.6% year-over-year revenue growth to RMB 2.3 billion. Revenue was in line with our previous guidance. Leased and owned revenue of Lexi Huazhou was flattish at RMB 1.3 billion, caused by the large scale of Omicron virus outbreak since March. Net revenue from monetized and franchised hotels grew by 9% to RMB 974 million, mainly driven by the net work growth of over 1,100 monetized hotels. DH's revenue growth is mainly driven by lease hotel recovery. Therefore, overall, the group's managed and franchise revenue contribution temporarily shrank to 37% in Q1 2022, compared with 38% in Q1 2021 at group level. However, for legacy Hua Zhu, due to further expansion with asset-light model, the managed and franchise revenue contribution further expanded to 43% compared with 41% a year ago. Now let's move to the cost and profitability section on slide 21. In Q1 2022, the reported operating loss was $708 million compared to a loss of RMB $575 million last year and a positive $39 million a quarter ago. mainly due to the weaker China business performance. Excluding DH, Lexing Huatu's operating loss in Q1 2022 was RMB $416 million compared to RMB $172 million last year and a positive income of $60 million a quarter ago. The hotel operating cost for Q1 2022 was RMB $2.8 billion, increased by 14% year-over-year. For Lexi Huazhu, it recorded RMB 2.3 billion hotel operating cost, indicating a 11.7% year-on-year growth. The increase was mainly attributable to higher rental cost of the newly opened lease hotels, higher personal cost as we keep growing hotel networks, and a higher DNA depreciation amortization cost, which were related to the upscale hotel opening and upgrading of existing hotels. as well as the consolidation impact of Citigo acquisition. For Lexi DH, it recorded RMB 558 million hotel operating costs, indicating a 25% year-to-year growth. The increase was mainly due to the variable cost increase along with business recovery. Our pre-opening costs increased by 24% year-to-year to RMB $26 million in Q1 2022, from $21 million last year. The absolute dollar amount of pre-opening costs remains low, as our future expansion will mainly use asset-life models, as mentioned in previous quarters as well. Our SGNA in Q1 2022 increased by 34% year-to-year to RMB 584 million, driven by the increase in both Lexi Huazhu and the Lexi DH. SGNA for Lexi Huazhu increased by 29% to RMB 424 million. The increase was mainly attributable to the increase of headcounts for our BD team to support penetration into the lower tier cities operation team in southern and western China, sales team for corporate customer expansion, enhanced IT team, as well as the expansion of upscale hotel division. However, given the significant impact of recent Omicron outbreak, we have started implementing strict cost control measures by streamlining overheads like headcounts and expenses. SG&A increased 48% compared with last year, driven by the OTA commission increase alongside with business recovery and one-time restructuring cost of the organization. Turning to page 22, our adjusted EBITDA loss was RMB $333 million in Q1 2022 compared to a loss of RMB $133 million a year ago. DH's EBITDA loss narrowed in Q1 to $240 million, compared to a loss of RMB $340 million last year, thanks to the reopening in Germany, which accelerated business recovery. Excluding DH, Lexi Hua Tu recorded an adjusted EBITDA loss of $93 million, compared to a positive EBITDA of RMB $207 million in Q1 2021. due to the impact of the large scale of the crow outbreak and also the higher cost. In Q1 2022, we recorded adjusted net loss of RMB $662 million, enlarged from a loss of RMB $451 million a year ago. Excluding DH, Lexi Huadu recorded an adjusted net loss of RMB $339 million compared to a loss of $150 million in Q1 2021. Coming to the cash position, our net debt increased to RMB $6 billion by the end of Q1 from RMB $4.7 billion last quarter. It was mainly due to the decline in cash from operations this quarter. Our cash balance was RMB $4.1 billion, and the unutilized bank facilities or 3 billion RMB. Given the COVID impact remains uncertain in the foreseeable future, we have reduced the CAPEX and expenses budget to reserve cash. In addition, we are also prepared to meet our upcoming city question loan repayment and possible redemption of 2017 convertible bond through various available funding sources. Turning to page 25 on guidance. Since March, this highly infectious Omicron virus has been spreading rapidly in China, which seriously affects our business performance now. Also, the current COVID prevention policy has rendered business performance more unpredictable in the foreseeable future. Under such circumstances, we will suspend providing or updating guidance in respect of any revenue and hotel openings until the situation sustainably improves. Nevertheless, we will continue to provide quarterly guidance based on our best understanding of the most recent situation. In the second quarter of 2022, module group expects revenue to decline 2% to 6% compared to the second quarter of 2021, or to decline 23% to 27% if excluding DH. mainly due to the large impact from the Omicron outbreak in China. DH itself expects a three times revenue increase since its recovery is on a healthy track. Again, above guidance only reflects our current view, which is subject to further change. With that, let's open up for Q&A.

Thank you. Ladies and gentlemen, we will now begin the question and answer session. If you wish to ask a question now, please press star 1 on your telephone and invite for your name to be announced. If you wish to withdraw your request, please press the pound or hash key. Please stand by while we compile the question and answer the roster. Once again, there's star 1 for questions. Our first question comes from the line of Billy Ng from Bank of America. Please go ahead.

Hello, everyone. Hello, Director. Hello, Director. First of all, I have two questions. The first question is about our pipeline. I saw that in the PowerPoint, in the first four months, the company actually increased by almost 400% in the first 10 months. In this early stage, have you seen any slowdowns? Because this number is actually very good in this environment. Have you seen any danger of slowdowns? And then, actually when we see from the presentation, we saw that there were about 700 new signups year to date up to April, which actually on track for almost like 2000 for this year. So my question is, have you seen very recently any slowdown from the new sign-up, and also if you can give some colors on the new opening as well. Like I remember in 1Q, you guys opened 300 hotels. Just wonder, have you seen slowdown on new opening in the last couple of weeks, on the last couple of months? Thanks. That's my first question.

Thank you for your question. Let me answer this question first. Since last year, we have been developing Thanks for your questions. Yes, I think you are right. In the first quarter, given we have been investing quite a

quite a lot of resource and expenses in terms of expanding our BD team last year. So we actually achieved relatively great new signings for the first quarter. But since the Omicron outbreak starting from the late March, this has very obviously impacted our new signings due to the pandemic, due to the strict traffic control, as well as the franchisees' confidence level is declining as well. So definitely we are seeing some of the slowdown of the new signing recently. And in terms of the construction, again, the pandemic has huge impact on the construction as well, especially on the transportation limits and the supply chain management due to the traffic control. And especially for the months of April and May, the construction process has been slowed significantly, which is going to have some negative impact on our new openings for the year.

Thank you. And then my second question, 我第二個問題就是, 其實剛才也有提到過, 公司會在未來會比較, 在成本上控制會多一點的, SG&A也好,各方面也好, 我想問就是有沒有一個具體的數字可以分享, 就是未來九個月, 相對於1Q的那個run rate, 我們可以expect有多少的一個, My second question is regarding to the streamlining cost and just wonder if you have a little bit more detail in terms of the numbers and in the next few quarters, what kind of run rates we can expect compared to the first quarter if we comparing the SG&A number or the hotel operating cost number.

Yes, we have encountered a very big challenge. But Huazhou firmly believes that the strategy of deepening China and managing the economy will change. But it will still make the whole organization a success, especially for the people on the main platform. It is this stage of work. I can reveal a specific number. The success rate of such a person on the platform of the whole company is about 20%. However, in the future, we may still make progress. to reduce the number of staff on our platform. But I would like to emphasize that the retention of the first-line staff and the first-line staff of operations is still a strategy that China has to insist on doing, because this is China's most valuable management wealth. So it is divided into two parts. The first part is that our headquarters will carry out further promotion and reduction of management costs. We plan to reduce staff by more than 20%. Yes, so basically the pandemic definitely gave us a lot of challenges and difficulties, but we still insist on our China focus as well as long-term sustainable quality growth strategies unchanged.

In terms of the cost savings, what I can share to you is that we are going to focus on our headquarter in terms of the streamline of the head comps. So we are planning to reduce the head comps by at least 20 percent and we will further to see if we need to reduce any more according to the market conditions. But, however, as I mentioned in my presentation, so the frontline and operational staffs are very valuable assets for us. So we will still retain those frontline staff and operational staffs. Our cost savings will be mainly focused on our headquarters. Thank you.

Thank you.

All right. Thank you. Next question comes from Link. CJ from CICC, please go ahead.

So my first question is regarding the extension to southern China. How is it progressing? Is there anything above or below expectations?

Okay, I'll answer the first question first. Indeed, the southern region is relatively weak in the past, but for China, whether it's the economic version or the future hotel development version, it's a very important market. China has started the entire southern strategy in the past year. I am very happy to tell you that although the total number of signings has been affected by the epidemic, it is not as good as we expected, but our signings in the first quarter have surpassed the current level.

Yeah, so as you may know that the southern part of China, Huazhou was pretty weak previously. However, this region is not only important for the entire China economic, but also it's a very important market for Huazhou. Despite the impact of the pandemic, the Omicron outbreak, since March. So I'm very glad to tell you that, you know, despite the new signings has been some, you know, negatively impacted by the Omicron, but it is not yet achieved to our internal expectation. However, our new signings in the first quarter has already exceeded our compared to our peers. So Huazhou is the one who has the largest new signings in southern part of China in the first quarter.

So my second question is that generally speaking, the reduced supply is a positive factor for the industry recovery. Meanwhile, the sub-macro and consumption environment may be an active factor. So how should we expect the coming industry recovery? Thank you.

Thank you for your question. As you know, China's economic recovery and policy are strongly related. including the government, are still using more dynamic business measures to deal with the pandemic. Although we have launched very strong local customer acquisition and acquisition, of course, we have to see the volatility of the market. For this, we have made many mistakes. On the one hand, I think that to deal with this uncertainty, Huazhou still has to improve its localization, marketing, and member development capabilities. China China China China China China China China Yeah, I think as you may know that the business recovery in China is very much tied up with the policy.

You know, in terms of the pandemic provision, China is continuously using the dynamic zero COVID policy. which is putting some of the uncertainties in the foreseeable futures. However, despite the uncertain market conditions, we are still insisting on our own strategies which including our local sales capability to capture the local demand as well as during the pandemic we have to capture some of unusual business traveling demand which including those corporates which needs the hotels for the resumption of production and the work and also as I just mentioned before the cost of control as well as improved efficiency will remain a key focus in the near future. Thank you.

Thank you, management. Thank you. Our next question comes from the line of Dan Xu from Morgan Stanley. Please go ahead.

感谢管理层给我这个提问的机会。 我是大摩的酒店分析师, 许显达Dan。 I would like to ask Mr. Guan about the issue of liquidity and capital resources. I would like to ask Mr. Guan about the current debt that has not been repaid. We have a transfer of about US$4.75 billion and the remaining US$3.38 billion of bank credit. I would like to ask Mr. Guan about the current repayment plan for November and December and the current progress. Because we are very concerned. Thank you very much. Please allow me to translate my question. First, I would like to thank you very much, the management, for this opportunity to ask the question. It's Dan from Morgan Stanley. My question is about the debt management. So can you share with us the current plan and progress for the 475 million US dollar convertible bond expiring in November this year and the remaining of that 338 million euro credit facility expiring in December this year. What are the current plans and the progress please? Thank you very much.

Thank you for the question. Certainly we have various approach to solve these issues. Number one, we have offshore cash on our balance sheet. And second is we are preparing a new bank loan to repay the current upcoming due bank loan in the later half of this year. And also regarding the potential redemption of the CB, we also have a similar approach like bank loans and also other financial approach to solve the issues. Currently, everything looks good.

Thank you. Thank you very much. That's my only question. Thank you.

Thank you. Our next question comes from Simon Zhou from GomezX. Please go ahead.

Hello. Thank you, Manager Chen. I have two questions. The first question I would like to ask is, From the point of view of signing, adding electricity, and the recovery of RAFPA, if you look at the current epidemic and the previous epidemic in the past two years, what is the biggest difference? Because you just mentioned that maybe from April, we saw that the opening and signing may be a little slower, but the previous few times, I don't think we can see the slowdown. I'd like to know what you think is the difference between this and the last few times. If, for example, we are now in Shanghai and we are starting to slowly pass through, how long do you think it will take for us to see the speed of charging increase a little bit faster? So my first question is in relation to the new hotel sign-up, the addition of the hotel completion as well as the rough power recovery. I wanted to get a sense how is the cycle this time around different from the last several shutdowns when there is also a viral resurgence. And, you know, if the management can provide us with some sort of guidance or expectations, how quick the recovery this time around is going to be now that, you know, we have Shanghai gradually reopened as well. So that's my first question.

Thank you. China, China, South China Sea, and I think this may be the case in China as a whole. As for the Shanghai epidemic, because from today, from tomorrow, we can fully resume work in Shanghai. Of course, with the recovery of the supply chain, I believe that in June, many construction sites and construction projects will be restored. Of course, the recovery of the contract, I think, is not only the adjustment of the epidemic policy, but also the recovery of the entire confidence of the market. I think this event needs some time. My optimistic judgment should take a quarter of an hour. Okay, thanks for your questions.

I have to be very honest to you. So this round of, you know, Omicron outbreak has been, you know, after two years since the initial outbreak back to 2020. So it has been two years, you know, that franchisees are suffering as well as the potential investors of the hotel industry. So basically their confidence, their cash flow has significantly impacted over the last two to three years. As I mentioned in my prepared remarks, so we have been seeing the new signings, the market sentiment, the investors' confidence level has been declining in April. Although we are still striving very hard to penetrate into some of the regions which has less impacts from the outbreak, such as the middle part of China, southern part of China, however, the overall confidence level or the market sentiment is relatively weak at this moment, as well as some of the negative impacts from the real estate industry. So we cannot deny those facts. In terms of the Shanghai, starting from tomorrow, everything should be gradually resumed to normal. I believe along with the supply chain transportation gradually resumed, the construction work should be gradually resumed as well, starting from next month. However, in terms of the new signings, I think it's going to take much longer because it's not directly related to the pandemic because it takes more time to rebuild investors' confidence level. So I think my best estimate for now, I believe it's going to take around one quarter to resume to normal. Thank you.

Okay, thank you. 我另外一个问题是想问DH的,看到你比如说给第二季度的基因,如果我back out去算一下的话,可能你给第二季度跟上一年去比的话,可能你的收入可能翻三倍左右吧? And then your REFPA may also be more than $40. My question is, if it really comes true, do you think your EBITDA will turn into a positive number in the second quarter? Thank you. Sorry, so my second question related to DH. If I, you know, based on the company guidance for the second quarter, I back it up, supposedly, you know, the DH guidance for revenue is going to grow at about three times on a year-on-year basis. And that RFR should exceed, you know, about $70, $0. And under these circumstances, if achieved, would you be able to achieve EBITDA positive in the second quarter for DH? Thank you.

Yes, certainly I think, you know, the DH is on a very healthy recovery trajectory, you know, quarter by quarter. I think we are, you know, we are budgeting like a growth line, you know, probably toward the Q4 of 2020. We're targeting like a 90% recovery compared to 2019. So I think there's a chance for us, you know, from the whole year perspective, we think, there's a chance for us to, you know, go back to the EBITDA positive line. But certainly that's our target.

So you're saying that not only would you see EBITDA positive in the second quarter, there might actually be a possibility that you get to positive EBITDA for the full year, for the age?

Yeah, I'm just talking about the full year target, but for the Q2, you know, it's still a recovery mode, so it might be a little bit early to say that. Yeah. We will discuss more details once ready.

Okay. And this is, thanks a lot. 谢谢管理层,谢谢。 Right, thank you.

Our next question comes from Liu Lewen from CSE. Please go ahead.

And my question is about our regional headquarter, especially like in Shenzhen and Chengdu. Can you draw some colors of this regional headquarter. Thank you.

谢谢你的问题。 我们确实关注到酒店管理是一个非常local的行业。 对于进一步随着华族分根中国实现市场和品牌充分渗透的过程, 我们希望在靠近客户,靠近我们员工,靠近我们加盟上的地方, 建立更为敏捷,管理更为全面的经营组织。 This work has been planning for the past two years. Last week, we just started the establishment of new areas. In the second and third seasons of Huazhou this year, we will continue to improve, especially under the epidemic, the new management model dominated by regional management. Especially under the epidemic, we also see that such a management model has also achieved very good epidemic prevention and marketing success.

Thanks for your questions. As you may know that the hotel management is actually a hotel business, a very localized business. Along with our strategy with China Focus, we are trying to penetrate in every market in China, in not only the hotels but also the brands. So we want to be as close as possible to our targeted market, our customers, and our franchisees as well as the employees. So actually, last week, we have just established some new regional headquarters. And in the remaining of this year, especially during the pandemic period, we will be more using the regional-based management mode. And we are seeing that actually it becomes more efficient, especially during the pandemic period. Thank you.

Right, thank you. We have reached the end of the question and answer session. I'll now turn the call back to the management team for closing remarks.

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

Thank you. This concludes our conference for today. Thank you for participating. You may all disconnect.