H World Group Limited

Good day and thank you for standing by. Welcome to the H-World Group conference call. At this time, all participants are in the listen-only mode. After the speaker presentation, there will be a question and answer session. To ask a question, you will need to press star 1-1 on your telephone and wait for your name to be announced. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, to Mr. Jason Chen, Investor Relations Director. Please go ahead.

Thank you. Good morning and good evening, everyone. Thanks for joining us today. Welcome to Edgeworth Group's 2022 second quarter and first half earnings conference call. Joining us today is our founder and chairman, Mr. Ji 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 Security Litigation Reform Act of 1995. Forward-looking statements involve inherent risks and uncertainties. As such, Our results may be materially different from the views expressed today. A number of potential risks and uncertainties are outlined in our public findings with the SEC. Edgeworth Group does not undertake any obligations to update any forward-looking statements except as required and applicable laws. On the call today, we will also mention adjusted financial measures during the discussion of our performance. Reconciliations 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 slides presentation is available on Edgeworth Group's website at ir.edgeworth.com. With that, now I will turn the call over to Mr. Ji Qi. Mr. Ji, please.

Good morning and good evening, ladies and gentlemen. Second quarter of 2022 has been both a turbulent and promising period for our business. In China, large scale outbreak of COVID, especially in major cities like Shanghai, posed significant challenges to our hotel operations. We took all necessary measures to protect our customers and employees and the collaborative development in carrying out preventive procedures against the COVID spread. We provided support to our franchisees to help them overcome the difficulties as well. In order to maintain healthy cash flow positions in this disruptive period, The future conducted a cost reduction in a very disciplined way, including streamlining of our headquarters. On the other hand, our European business has experienced a very healthy recovery. Can I have a demand for travel either to both the EDR and occupancy? In the second quarter, rural power almost recovered to a similar level for the same period in 2018. The recovery trend continues in the third quarter. In the past several years, COVID, as well as geopolitical conflicts, has brought many disruptions and challenges to our business. Facing the uncertainties of the internal environment, we have been focusing on strengthening our core commitments and building a resilient organization which is able to ride through different economic cycles. We continue to focus on sustainable quality growth, ensuring quality, consistency, and improvement for our existing hotels and upcoming new openings are essential for our business. Therefore, we continue to remove inferior hotels, including sub-brands, from our hotel network. China, our core market, is a single large-scale market with vast potential. We refuse to increase our market penetration, especially in low-tier cities. In order to close to the local market and become more agile in our decision-making process, we established six regional headquarters. Each headquarters is equipped with a very experienced development and operational team, which will create a better understanding of the market as well as access to our customers, franchisees, and employees. We are confident that such a reconstruction The restructuring of our business management will allow us to accelerate our quality growth and provide more opportunities for our business partners in the local market. With that, I will turn the call to the Jinghui to discuss our recent business development in details, please.

Thank you, Jiqi. According to the rules, we will first review the recovery of Huazhu China's RERPA. Please turn to the third page. Due to the impact of the COVID-19 pandemic, in April this year, RERPA fell to a low point and returned to 53% in 2019. But after that, RERPA's recovery has shown an upward trend. The company has returned to 90% in 2019, especially considering that in July, the recovery of two places in Shanghai and Beijing was only five to six times the history. The recovery of other regions in the country has reached more than 95%.

Thank you, Chi-Chi. As usual, let me firstly review our business, China business REFPA recovery for the quarter. Please turn to page three. Due to the impact of COVID, our REFPA recovery reached the bottom in April at only 53% of 2019 level. However, since then, our REFPA recovery started to improve gradually in later months. Rough power in July recovered to 90% of 2019 level. Putting the consideration of our rough power in Beijing and Shanghai only recovered to the range of 50% to 60% of 2019 level in July. Other cities and provinces showed better rough power recovery with over 95% of 2019 level.

At the press conference of the first quarter, we mentioned strengthening the cost control of China. The second quarter has already achieved some results. Please turn to the fourth page. In terms of rent, the second quarter achieved a reduction of 60 million RMB. In terms of the improvement of the human resources cost of the headquarters, the second quarter has reduced by 10% compared to the beginning of the year. We also mentioned the ability of deep-rooted customers, contractors, and employees to build and pass through the cycle. In terms of the support of contractors, As we mentioned in our first quarter earnings conference call, we started to reinforce cost control measures for our China operations.

we had some achievements during the quarter. Please turn to page 4. On the rental expenses front, we achieved over 60 million RMB rental reduction in the second quarter. For overhead cost optimization in our headquarter, we reduced roughly 10% of headcounts in second quarter compared to the year beginning. We also mentioned previously that we would continuously center on customers, franchisees, and employees to build our capabilities to rise through the economic cycle. Therefore, in the second quarter, we provided totally RMB 120 million fee waivers for our franchisees to help them to overcome the difficulties. At the same time, In order to insist on implementing our sustainable quality growth strategy, we also adjusted and upgraded our organizational structure and continued to remove inferior hotels from our existing networks. 酒店是一个本地化的生意。随着华洲的酒店进入到越来越多相对空白或者薄弱的城市,我们越发意识到本地化管理的重要性。

The structure of Huazhou needs to be further upgraded. Please move to the fifth page. In the fourth quarter of last year, we established two branch companies in Huanan and Huaxi. The development of the two branch companies this year is good. Therefore, we will promote this experience to the whole country. We have established six regional branch companies, and we will take advantage of the limited supply of economic and medium-sized brands. From the management model that has been dominated by brand business in the past, to the management model that is dominated by the six major regions. There are three aspects to such a group structure adjustment. The first is to be closer to the local market, enhance the understanding of local customers, and make a quick and efficient response to the changes in the local market. The second is to form a regional system in the marketing and pricing strategy, shorten the decision-making process, and improve business efficiency.

Hotel business is a very localized business. As we are further penetrating into more and more less penetrated market, we started to realize the importance of localized management capability, as well as the essential to continue upgrading our organizational structure. Please turn to page 5. In the fourth quarter last year, we established South China Regional Headquarters and West China Regional Headquarters. These two regional offices are developing and performing well since then. Therefore, we applied these experiences to the whole country and established six regional headquarters this year. We changed our organizational structure from previous brand-based to regional-based management and operation for our economic and middle-skill brands. There are three key purposes of making such adjustments. Firstly, a localized team could have better understanding on local customers, franchisees, preference, and a faster reaction to the local market changes. Secondly, A localized regional office could achieve more synergy in terms of operation, sales, and marketing and management, higher operational efficiency, and a shorter decision-making process. Lastly, it would help us to accelerate our lower tier cities penetration and development in previously weak regions to achieve our long-term sustainable quality growth target.

We also insist that the economic development strategy is not moving. In the next one to two years, we will accelerate the withdrawal of the economic soft brand hotel market. Because after the past three years of market events, combined with our comprehensive judgment on the big trend of future Chinese market consumption upgrades, we have made a more firm decision. Please turn to the sixth page. You can see that in the past few seasons, we have made gradual decisions on low-quality economic soft brand duct hotels.

In terms of brand and products development, we also insist on sustainable growth strategy. Based on our own experiences and practice in the last three years, together with our judgment on the general trends of future consumption upgrading in the China market, we decided to accelerate exit from economic soft brand hotel marketing next one or two years. Please turn to page six. As you may notice that in previous few quarters, we had already cleaned up many inferior economic soft brand hotel pipelines. And in the next one or two years, we would continuously remove inferior hotels, including soft brand hotels, from our existing hotel networks to further improve our quality.

Please turn to page 7. Low-end cities continue to infiltrate. Since June 30, the number of low-end city hotels, Zaiying Hotel and Guandao Hotel, has been divided into 37% and 56%. Of the 561 hotels signed in the second quarter, 58% come from low-end cities. Please turn to page 7.

Our lower tier cities penetration continuously progressing. As of June 30th, 37% of hotels in operations and 56% of hotels in pipelines are contributed from lower tier cities. In the second quarter, 58% of total 561 new signings are from lower tier cities as well. City coverage also increased to 1,130 cities in the second quarter.

Thank you. 229 Manxin brands have opened 100 Manxin hotels. At the same time, we are also using the US brands in the retail market to further explore the opportunity of pure retail in the market. The development of high-end hotels, I think, still needs further time to cultivate. Under the influence of the real estate industry, the new contract of new building property will be affected by further improvement. Please turn to page 8. Our up-middle and up-skill hotel segments are also progressing steadily. Unlike economic and middle-skill segments,

we keep our organizational structure unchanged for these two segments. We still use brand-based management and operational structure for these two segments, as each brand in the segment should have its unique and differentiated strategy on brand positioning, product innovation, as well as customer experience. In terms of the future development, we believe our upper-middle-scale segment is ready to harvest. By the end of June, we have a total of 445 upper-middle-scale hotels in operation and 229 in pipelines in China. Our lithium-brand machine achieved its 100th hotel opening milestone recently. At the same time, we are going to leverage more on our medicine brands to further seek the conversion opportunity in the existing market. Moving to the upscale segment, given the recent weak property market, undeniably, our new signings of newly built upscale hotels are negatively impacted. However, alternatively, we are also focusing more on finding local government corporations and conversion opportunities in the market to support the future development. Lastly, our Blossom House and the recently introduced Blossom House series brands are also well recognized and accepted by the market. It is ready to further tap into the booming domestic leisure market.

DH 发展势头持续向好,请大家翻到第九页。今年 DH 的热化恢复呈逐月双分趋势, May has returned to 99% in 2019, and June is 100%. And July has surpassed 2019, reaching 103%.

DH solid business recovery continues in the second quarter. Please turn to page 9. We saw DH red power recovery improve month over month. It recovered to 99% and 100% in May and June, and July REFPA had already exceeded 2019 level with recovery rate of 103%.

At the same time, DH has expected a turnaround in EBITDA in 2022. Please turn to page 10. Please turn to page 10. From the overall recovery level of the second quarter, DH mixed REFPA and same-electric REFPA recovered 86% and 96% in 2019 respectively. mainly because the price has increased by 10%. The price of the third quarter continues to hold. The growth of demand is mainly driven by the demand for leisure markets and the return on business demand. We have also carried out further cost control for DH, mainly including the reduction of total cost, the reduction of operating costs, the strict control of capital spending, and the control of energy costs. In terms of improving DH's organizational capability, More importantly, given the recent solid recovery, we are now expecting DH's recurring EBITDA to turn positive for the full year of 2022.

Please turn to page 10. In terms of the business recovery in the second quarter, it's planned to recover to 93% of 2019 level, mainly driven by roughly 10% increase in ADR. And the trend continues in the third quarter. The recovery was mainly driven by leisure traveling and also supported by PANDA corporate group demand. However, although the recent business recovery was quite solid, we continuously conduct strict cost control for DH, which mainly includes headquarter overhead cost reduction, operational efficiency improvements, HEPAX control, as well as energy efficiency improvements and the cost controls. Lastly, for longer term development, We continuously enhance DH's organizational capability through integration of EdgeWord Digital for distribution capability for efficiency and direct channel performance. We launch Edge Rewards membership program for better digital guest experiences and capture the limited service market share in Europe by further investing and developing Indoor City and Zili brands. With that, I will turn the call to Ye Fei to discuss our second quarter 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 second quarter 2022. As shown on page slide 22, Our hotel rooms expanded by 12% in the second quarter to 774,000 compared with the second quarter of 2021 of 692,000. Excluding DH, Lexi Hua Chu's hotel rooms expanded by 12% year-over-year to roughly 749,000 in this quarter. For our hotel turnover in the second quarter, Our total hotel turnover declined by 10% year-on-year to RMB 11.8 billion in this quarter. It was mainly due to the large-scale outbreak of Omicron variant since the late March in China, but partially offset by our continuous network expansion in China and strong business recovery of our European business. Excluding DH, Hotel turnover of Lexi Hua Zhu declined by 19% year-over-year to RMB $10.3 billion in this quarter. Turn to page 13. Lexi Hua Zhu blended RevPOP for Q2 declined by 31% compared to 2019 due to the impact of Omicron outbreak since mid-March. The ADR in Q2 2022 was down by 7.8% compared to 2019 at RMB While occupancy in Q2 was 22 percentage points lower than 2019. If excluding the impact of hotel under requisition, REFPA would have, if including the impact, REFPA would have recovered to 75% of 2019 level. Turn to page 14. Lexi DH business recovery further accelerated in the second quarter. Our Lexi DH blended rest part for Q2 grew by 233% to 66 euro compared with Q2 2021, although still behind the 2019 level. The occupancy improved by 35 percentage points compared with Q2 2021, And the ADR improved by 35% to €110, which actually exceeded the 2019 level by 10%. Please see our financial results on slide 15. Total revenue declined by 5.7% year-on-year to RMB 3.4 billion in Q2, mainly dragged by the 26% almost 27% of Lexi Huatu's revenue decline in Q2 to RMB 2.5 billion. Lexi DH recorded a strong revenue growth of 311% year-on-year to RMB 921 million. Revenue was in line with our previous guidance at the lower bottom. Decline of Lexi Huatu revenue was mainly due to the large scale of Omicron variant outbreak since March. Breaking down the revenue of Q2, leased and owned revenue increased by 3.5% year-on-year to RMB $2.4 billion. Excluding DH, leased and owned revenue of Lexi Huazhou was declined by 28.7% year-on-year to RMB $1.5 billion. Total revenue from Manage and Franchise Hotel declined by 25% to RMB $945 million. mainly dragged by the decline of Lexi Huazhou's business, but offset by the 100% year-on-year growth of Lexi DH. The 26.7 year-on-year decline of revenue from managed and franchised hotels Lexi Huazhou also includes roughly $200 million impact from managed receipt waiver provided to the franchisees and also less CRS contribution because the channel changed in this quarter. Due to the strong recovery of Lexie DH's business, the monetized and franchised revenue contribution temporarily shrank to 27.9% in Q2 2022, compared with 35% in Q2 2021 at group level. For Lexie Hua Zhu, Despite further expanding hotel networks with SLI model, our management fee waiver provided to franchisees and lower sales fee contributions in managed and franchise revenue actually reduced the contribution of the managed and franchise business contribution. Now let's move on to the cost and profitability session on slide 16. In Q2, The reported operating income was RMB 8 million compared to a positive RMB 629 million last year and a loss of 708 million a quarter before. The large decline of operating income year-on-year was mainly due to weaker China business performance. Excluding DH, the Lexi Huazhou's operating income in Q2 2022 was RMB 21 million, compared to positive income RMB $763 million last year and the negative RMB $416 million a quarter ago. The hotel operating cost for 2022 second quarter was RMB $3 billion, increased by 8.5% year-on-year. For Legacy Huazhou, it recorded RMB $2.2 billion hotel operating cost indicating a 1.5% year-over-year decline or a 3.9% decline on a Q-over-Q basis. Besides the variable cost savings associated with lower occupancy, a major driver is also roughly RMB $60 million rental cost reduction, which is going to continue in the next few quarters. For Legacy DH, it recorded RMB $804 million hotel acquitting cost indicating a 49% year-to-year growth. The increase was mainly due to the increase of variable costs associated with business recovery, such as labor, F&B, consumer growth, variable rents, and et cetera. Other factors also including the impairment cost of terminated lease agreement in this quarter and the less rental reduction compared to the same quarter last year. Our pre-opening cost increased by 93% year-to-year to RMB 31 million in Q2, mainly due to more limited service lease and own hotel under construction during this quarter in China. However, the absolute dollar amount of pre-opening cost remains low as our future expansion of upscale hotels were mainly used as a live model, which we mentioned in previous quarters as well. Our SG&A in Q2 declined by 7.8 year-on-year and 12.7 Q-on-Q to RMB 510 million, driven by the decrease in the LEXI-HuaZhu but offset by the increase in LEXI-DH. Excluding DH, the SG&A for LEXI-HuaZhu declined by 21% year-on-year to RMB 332 million, The decline was mainly attributable to the cost control measures by streaming line headcounts and expenses in headquarter offices, as well as less selling expenses, along with weak China business performance. On the other hand, DH selling expenses increased is actually aligned with business recovery. Other operating income in Q2 decreased by 57% a year to RMB 153 million because there's much less subsidy received from German government compared to the same quarter last year. Turning to page 17, our adjusted EBITDA was RMB 53 million in Q2 compared to RMB 1 billion a year ago. DH EBITDA turned positive in Q2 2022 to RMB 30 million compared to a loss of $72 million in 2021, driven by the accelerated business recovery. Excluding DH, Lexi Huazhou recorded an adjusted EBITDA of RMB $23 million compared to RMB $1.1 billion in Q1 2021. This is mainly due to the impact of large-scale Omicron virus outbreak in this quarter and also there were roughly rmb 400 million foreign exchange loss brought by the um the asset depreciation which are denominated by euro including our shares in accor our loans to dh and etc however this adjustment is not and temporary in q2 2022 We recorded adjusted net loss of RMB $84 million, narrowed from a loss of RMB $662 million a quarter ago. Excluding DH, Lexi Huatu recorded adjusted net loss of $32 million, narrowed from a loss of RMB $339 million a quarter ago. Coming to the cash position, our net debt reduced to RMB $5.7 billion by the end of Q2 from RMB 6 billion last quarter. It was mainly due to the cash generated from operation in this quarter. Our cash balance was 4.7 billion and the unutilized bank facility was 3 billion. Given the COVID impact remains uncertain in the foreseeable future, we remain cautious on CapEx and OPEX spending to reserve cash. In addition, We have successfully refinanced our upcoming syndication loan with a total outstanding amount of 340 million euros. Also, we have prepared to meet the possible redemption of 2017 convertible bond later this year. Turn to page 20 on guidance. In the third quarter of 2022, How do we expect revenue to grow 13% to 17% compared to the third quarter of 2021, or to grow 5% to 9% if excluding DH on the assumption that there's no large-scale Omicron outbreak again, as we mentioned before? With that, let's open up for Q&A. Thank you. Thank you.

As a reminder, to ask a question, you will need to press star one one on your telephone and wait for your name to be announced. Please stand by while we compile the Q&A roster. I show our first question comes from the line of Billy Knife from Bank of America. Your line is open.

Hi, good morning. Hi, good morning. Hi, good morning. Hi, good morning. Hi, good morning. what is the assumption of the recovery trend of blended rough power? My first question, I will ask one more time in English, basically just want to know whether the recovery trend that we have seen in July, that continue in August and September, and what kind of blended rough power assumption that we were using when we provided the revenue guidance growth for this quarter. Thanks.

Hi, Billy. This is Fei.

To your question, we estimate roughly like 85% blended RASPAR recovery compared to 2019 for the third quarter.

Thanks. And for the August and September, do you think that will be better than July in terms of recovery or worse?

Actually, I think the August is actually slightly better than 85%. It's like 88% if we talk about the recovery compared to 2019.

Thank you. That's very useful. Okay, I'm Jinghui. Let me answer this question. Indeed, in the second quarter, we recorded a contract speed of more than 500 stores.

This is partly due to the situation of the signing of the first quarter. In fact, after the epidemic, we can see that the impact of the epidemic and some of the impact of the Chinese economy are continuing to show. We saw that the signing speed of major cities in China is actually slowing down. Especially in the provincial and second-tier cities in China, such an impact of the epidemic has been repeated. That's it. I did. I don't know what I said. It's a, it's a, it's a, it's a, it's a, it's a. For the second quarter, we actually signed up roughly over 500 new hotels during the quarter, but some of them are from the previous quarter's backlogs.

In fact, given the impacts of the COVID as well as the economic conditions, a lot of cities, especially for those major cities, we are seeing some slowdown undeniably. It will have some negative impacts on the new signings for the near future. But entering into the third quarter, given the probation policy has gradually lifted or improved our new openings, as well as construction for the hotels have less impacted from the COVID. But putting all those things together, together with the COVID and economic conditions, especially for those tier one, tier two cities, definitely the impact is going to last for a while. Thank you.

Thank you.

Next question, please.

Thank you. Our next question comes from the line of Simon Chung from Goldman Sachs. Your line is open.

Thank you for your presentation. I also have two questions. The first one is, you just mentioned that you will speed up the release of the software brand market. I remember a few weeks ago, you also mentioned this issue. But on the other hand, your other competitors actually speed up this aspect. So my first question is relation to the accelerations of the exceeding of the soft brand hotel. Having seen some of the other competitors actually accelerating the positioning of these market segments, I am wondering what is the strong rationale or reasoning behind accelerating the existing market and what is the major challenge that they can foresee in the next one or two years? Thank you.

Thank you. I will answer this question. I think many of the participants here are very concerned about the adjustment of our business strategy. I think we are also concerned about the strategy developed by Huazhou and other companies in different markets. I think this is also a deep consideration of the market and future self-development strategies of different companies. Huazhou wants to build sustainable high-quality development, which is the core of our business strategy. I think in the past few seasons, whether it's a machine or our management team has been releasing such firm and rapid strategic adjustments for our investors. Based on a few very clear considerations, first of all, we believe that China's, from our market experience and feedback, China's consumer growth is actually continuing to develop in various low-end markets. The people, the citizens, pursue this quality of life and a good life is their main trend. Secondly, I think the need for the government's supervision and compliance of the low-end market and software brands is also in such a continuous... I should say, in the process of supervision. So we are also considering this. Thirdly, of course, it comes from our confidence in the growth of the high-quality national market. In the past few seasons, you can see that whether it's in Hanting, Nihao, EBS, these constructions, Okay, so yeah, we think there's a lot of investors are curious on this part.

We also noticed that one of our peers, we are using very different thinking and developing strategies compared to our peers. As our management team as well as our chairman emphasized several times in the previous few quarters that we're going to insist on implementing our sustainable quality growth strategy under these conditions. So that makes the key decisions. So there are three reasons behind. One, in China, our judgment on the future trends of the consumption that actually, especially in the lower tier cities, we are seeing and observing that consumption upgrading are the major trends in the near future. People in those cities are requiring high quality and a better life. high quality products and enjoy the better life is the major trends in the future as well. Secondly, we are also seeing that the governments are actually putting more strict compliance requirements and the regulation on those inferior products, not only hotels, but also other industry as well. We think our strategy change align with the government theme also on the quality growth in the future. And thirdly, it's our high confidence in terms of our high quality economic hotel product development, including Hantin, Ibis, as well as other major brands as well. So that's why we make our decision that we're going to accelerate, exist from the software brand economic segment in the next one or two years.

好的,謝謝。另外一個問題想問的就是,你們剛才講到那個區域分公司那個問題。 想請教一下,我記得你上次做那個cost saving做得很不錯。 那現在做這個區域公司,對你的成本以及那個收入,我們應該怎麼去想這個問題呢? 如果從可能未來幾個季度去看的話。 So my second question is in relation to the setup of the six regional headquarters. The company obviously was very successful in terms of, you know, controlling the cost in the last quarter. I'm wondering, you know, what would be the implications of this, you know, new regional office setup to both the cost as well as the revenue in the coming quarters? Thank you.

We are very... I am Qinghui. Let me answer this question. We have adopted regional management for the national market and the medium-sized market for limited services. I think this is easy for everyone to understand because it is closer to the customer. As the management of our downstream market becomes more and more remote, we hope that our efficient operating organization can be closer to our consumers, closer to our farmers, and at the same time build local talent supply chain and local marketing resources. to promote our sustainable and sustainable down payment strategy. This goal should be very clear to everyone. In the entire organizational transformation, we are very, very concerned about our cost issue. We actually put a lot of management resources and talents of the general department platforms down. Our down payment is not only our development down payment, but also the down payment of our entire management resources. Yeah, as you may know that we actually

making the economic and the middle-scale limited service brands to the regional office and a change in organizational structure from previous brand-based to the regional-based. It is very obviously that it will be much closer to our local customers, franchisees, and it becomes higher efficiency in terms of the management and operation, especially in the lower-tier cities. And also it will enable us to build up a more comprehensive localized supply chain creating some synergies in terms of the sales and marketing strategies as well. Definitely, we have our focus on the cost control. In fact, despite we are building six regional offices, but actually we have assigned some of the peoples and talents from our previous headquarters to the regional offices. because we are not only assigned people from the development front, but also the management front as well. And in terms of the overall cost control measures, so we can continuously control our total cost, especially under these conditions. Thank you.

Thank you, Mr. Guan. Thank you.

These two questions are quite good. I would like to make some additions. Thank you. The first question is about the software brand. At that time, the software brand Oyo came to China and spent a lot of money, even a lot. As one of the leading hotel companies in China's limited service brand, Thank you. These two are very good questions. This is Qiqi. So in regards to the soft brand,

Probably everyone knows that back to a few years ago, there was another brand called OYO, very aggressively entered in China and becomes one of the largest hotel groups at that year. It makes our thinking about their strategy, and we also need to react on their aggressiveness. That's why we also use a very defensive strategy to protect their competition.

After a while, we found that these small and medium hotels may need service management. It's not even marketing. It's not even marketing. It's not even marketing. It's not even marketing. It's not even marketing. It's not even marketing. It's not even marketing. It's not even marketing. It's not even marketing. This is called the stable strategy of this solution. Instead, through some technical support, for example, we have a lot of E-series, a lot of technical output, even including supply chain. Through this method, we can provide support to these central hotels, provide service output, and change our strategy. This is a very big change for us. Then you will see that in the past few seasons, in the future few seasons, within one or two years, our opening number is not so beautiful or not so beautiful. But I think it doesn't matter. Using this epidemic, we just adjusted it. Our opening number is not our goal. We want to use the core capabilities of the company Over the last several years' experience and practice, we actually realized that those very small-scale hotels, they actually don't need the management

not the management, not the PMS, not the technology at all. So we are also not willing to sacrifice our brand to helping them or to putting them in our networks. So in the future, we could have some alternatives such as we will empower them by using our technology capability, our supply chain capability to help them to operate in the industry. In the near future, probably in the next two years, in terms of the growth openings, our group's new openings might not be that bright or outstanding or large-scale. We mentioned several times that we emphasize on the quality growth. By leveraging and by using the opportunity of the COVID, we actually need to clean up all those inferior hotels and make some necessary adjustments internally as well. In fact, the new openings are not only our key target in the long term. Our key target in the long term should be our capability to overcome the risk and our capability to be sustainable growth.

The other 9.9% companies are still making softwares, including Oyo, which is doing pretty well in India. Okay.

Other companies are still expanding the software brand strategy, as well as OUS, also doing very well in India, because every company has their own strategy. I don't give more comments on this.

Regarding the outcome of the organization, people think, wow, they have a lot of companies, and they have a lot of people. In fact, I have seen it in the United States and Europe. I've been to South America. In fact, the market in China is already... The depth of the market in Guangdong is already so deep that it must be close to those... China's Tibet and Shanghai. China's, for example, Shaanxi, Gansu, and Jiangsu and Zhejiang. Many places are not the same. We are a unified market, but some of the characteristics are still different. It's not the same. So we have to go deep into those places to make the right path, including recruitment of personnel, and communication with partners. In the past, it was all the headquarter mode. We are the same. It's a headquarter thinking. Our headquarter thinking is unreasonable. This industry is very hellish. It's a bit like the headquarter originalization. Today, the boss of our six universities is our CEO. These are all cadres that we sent out from Shanghai or the headquarters. They are all tough. In the future, many cadres will be selected from the original structure and formed our regional headquarters. They will find a lot of people and raise a lot of people. They are very strict with the cost control of the workers. This is a step that the Chinese government should not do for 30,000 to 20,000 people. In terms of our organizational restructuring, people might be curious that whether we are going to hire a lot of people or increase the headcount massively. But in fact, we are not.

I have studied a lot in terms of the United States market, Europe market, as well as the South American market. Actually, comparing to China, China is big enough. and actually each provinces and regions have very different cultures and very differentiated, such as if you compare Shanghai to Tibet or Shaanxi to Jiangsu provinces, those areas are very much different. So therefore, in terms of to further penetrate into the local market, we have to move forward of our organizational structure to be more closer to the local market. In fact, there's a lot of people such as the CEO of those six regional headquarters, all assigned from our headquarters. And we are having more of talent will be promoted from headquarters to be assigned to the regional offices So each of the regional offices will have a very strict cost control. They won't be hiring too much of the people. Actually, putting it all together, in terms of reaching our target to have 10,000 to 20,000 hotels in total in the future, it is very necessary for us to have those regional offices to further support to achieve this target in the future. Next question, please.

Thank you. As a reminder, to ask a question, you need to press star 1-1 on your telephone and wait for your name to be announced. I show our next question. It comes from the line of CG Lin from CICC. CG Lin, your line is open. Thank you.

Okay, thank you, Manager Peng. Congratulations to us for obtaining a relatively significant control and control effect. I have a question about the mid-high end. We mentioned that the mid-high end market has a lot of space, and we also talked about the season of revenue. So, in the past few years, what preparations have the company made to achieve this rapid expansion? And generally speaking, the customer will focus more on membership rights. Then, what do we think about the design of membership rights? So I have a question regarding mid to upscale markets. We mentioned before there's still potential for China's mid to upscale market. So what operations have us made in recent years in order to accelerate expansions in this event in the future? And generally customers of mid to upscale hotels member benefits. So how do we design our member benefits? Thank you.

Okay, let me answer this question.

In the report, I talked to the shareholders and analysts about the development in China. We have done a lot of preparation work in the past few years and continued to accumulate. Because from the past limited service pursuit efficiency and cost leading strategy, such an organization and team ability has been transformed into a brand and customer experience as a guide for such a new market. We did sell a lot of such capabilities. We also broke through the comfort zone in the past. So in general, we are actively preparing for both. The first is on the product development and construction of the entire brand strategy. We are in Suijing, Meiju, Chengji, Manxing. In the past, companies should say that the development of these products and the development of the entire brand strategy should say that they have made very significant progress. Secondly, it is about surrounding the customer experience as a guide for the entire operation and management of the entire organization structure and talent development. We have done a lot of preparation. We now have two or three business units, crystal Manchurian business unit, Chenji Meiji business unit, and Meilun business unit. We are actively building around the service and experience as a guide for the entire training and consciousness adjustment of talents. This is also actively pushing. So the progress we have achieved is due to, I think, the accumulation of brand and talent. Of course, I believe we still have a lot of work to do. We are still very confident that China, along with the consumer economy, is still very rich in such a wide market in the core city, and there is also a lot of momentum in the middle and high-end supply, This is a very good question. It is also the boundary that we are trying to break. Secondly, regarding the high-end service and experience of Huazhou, we did some thinking. On the one hand, we need to consider the consistent experience of Huazhou. There are some core experiences, such as Amazon Premium. Some very standard, very strong customer experience points. At the same time, we use some service experiences of high-end hotels and door-to-door scenarios. We have opened some local such a member service experience afternoon tea based on door-to-door hotel scenarios. For example, more of this kind of service experience design based on high-end business scenarios. I think all the industry members have done the corresponding work. Of course, we are doing a complete thinking and design of the rights and experience of Chinese high-end, high-end, and holiday market members, and the feedback of customers in Europe and Europe. I think very soon, in the next half year or so, we will have a further delivery and upgrade of such a member experience for the entire Chinese high-end, high-end, and holiday market.

In terms of our mid-skill and up-middle skill development, as I mentioned in my prepared remarks previously, we are keep progressing steadily. In fact, we have been preparing for this segment for last few years. Huatu was very good at in terms of the operating for the limited service, especially in the economic and the middle skill segments before. We are good at in terms of the cost control, high efficiency, but for the upper middle skill, it's going to change from those to the branding and the customer experiences. That's why we spent a few years to experimenting and discussing internally and adjusting our strategy accordingly. In fact, for this particular segment, we have several points. Firstly, as in regarding to the products, continuously products and the branding upgrades, we have totally six brands, including the Crystal Orange, Mercure, Intercity, and medicine and machine and novelty as well to have further differentiated customers' experiences. And also in terms of the operation and organization structures, we have three key business units. The Crystal Orange and the are the first business units, and Intercity and Mercure are the second business units. and medicine that the business units are using to catching the conversion opportunity in the existing market. For our membership program and also the member privileges, especially for the upper middle skill segment, we do have some internal discussions. And first of all, we will keep the core experiences unchanged, just like Amazon Prime, the members. There's a very, very strong key core customer experience for each of the membership programs, but also in terms of the upper middle scale that we also leverage on each of the brands and the hotel to provide different privileges and customer experiences in addition to the core privileges. For example, the afternoon tea, it really depends on each of the brands and hotels itself. And in probably next half a year or six months, we will also have more adjustments and discussion and thinking on the membership programs together with the DOS Hospitality. Yes, thank you.

That's very clear. Thank you.

Thank you. That concludes the Q&A session. At this time, I'd like to turn the call back over to Mr. Jason Chen, Investor Relations Director, for closing remarks.

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

This concludes today's conference call. Thank you for participating. You may now disconnect. you Thank you. Thank you. Good day and thank you for standing by. Welcome to the H-World Group conference call. At this time, all participants are in the listen-only mode. After the speaker presentation, there will be a question and answer session. To ask a question, you will need to press star 1-1 on your telephone and wait for your name to be announced. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, to Mr. Jason Chen, Investor Relations Director. Please go ahead.

Thank you. Good morning and good evening, everyone. Thanks for joining us today. Welcome to Edgeworth Group's 2022 Second Quarter and First Half Earnings Conference Call. Joining us today is our Founder and Chairman, Mr. Ji 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 Security Litigation Reform Act of 1995. Forward-looking statements involve inherent risks and uncertainties. As such, Our results may be materially different from the views expressed today. A number of potential risks and uncertainties are outlined in our public findings with the SEC. Ashworth Group does not undertake any obligations to update any forward-looking statements except as required and applicable laws. On the call today, we will also mention adjusted financial measures during the discussion of our performance. Reconciliations 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 slides presentation is available on Edgeworth Group's website at ir.edgeworth.com. With that, now I will turn the call over to Mr. Ji Qi. Mr. Ji, please.

Good morning and good evening, ladies and gentlemen. The second quarter of 2022 has been both a turbulent and promising period for our business. In China, large-scale outbreaks of COVID, especially in major cities like Shanghai, posed significant challenges to our hotel operations. We took all necessary measures to protect our customers and employees and collaborate with the government in carrying out preventive procedures against the COVID spread. We provided support to our franchisees to help them overcome the difficulties as well. In order to maintain healthy cash flow positions in this disruptive period, the future conducted a cost reduction in a very disciplined way, including streamlining of our headquarters. On the other hand, our European business has experienced a very healthy recovery, can have a demand for travel either to growth both EDR and occupancy. Taking a quarter of a path, almost recovered to a similar level for the same period in 2018. The recovery trend continues in the third quarter. In the past several years, COVID, as well as geopolitical conflicts, has brought many disruptions and challenges to our business. Facing the uncertainties of the internal environment, we have been focusing on strengthening our core conditions and building a resilient organization which is able to drive through different economic cycles. We continue to focus on sustainable quality growth, ensuring quality, consistency, and improvement for our investing hotels and upcoming new openings are essential for our business. Therefore, we continue to remove inferior hotels, including sub-brands, from our hotel network. China, our core market, is a single large-scale market with vast potential. We refuse to increase our market penetration, especially in low-tier cities. In order to close to the local market and become more agile in our decision-making process, we established six regional headquarters. Each headquarters is equipped with a very experienced development and operational team, which will create a better understanding of the market as well as access to our customers, franchisees, and employees. We are confident that such a reconstruction This structure of our business management will allow us to accelerate our quality growth and provide more opportunities for our business partners in the local markets. With that, I will turn the call to Jinghui to discuss our recent business development in details, please.

Thank you, Jiqi. As usual, we will first review the recovery of China's RERPA. Please turn to the third page. Due to the impact of the COVID-19 pandemic, this year's RERPA fell to a low point in April, and returned to 53% in 2019. But after the recovery of RERPA, it showed an upward trend. The company has returned to 90% in 2019, especially considering that in July, the recovery of two places in Shanghai and Beijing was only five to six times the history. Thank you, Jiqi.

As usual, let me firstly review our China business rest part recovery for the quarter. Please turn to page 3. Due to the impact of COVID, our rest part recovery reached the bottom in April at only 53% of 2019 level. However, since then, Our REFPA recovery started to improve gradually in later months. REFPA in July recovered to 90% of 2019 level. Putting the consideration of our REFPA in Beijing and Shanghai only recovered to the range of 50% to 60% of 2019 level in July. Other cities and provinces showed better REFPA recovery with over 95% of 2019 level.

In the financial report of the first quarter, we mentioned the cost control to strengthen China. The second quarter has already achieved some results. Please turn to the fourth page. In terms of rent, the second quarter achieved a reduction of 60 million RMB. In terms of the improvement of human resources in the headquarters, the second quarter has reduced by 10% compared to the beginning of the year. We also mentioned that through deep-rooted customers, housekeepers and employees, As we mentioned in our first quarter earnings conference call,

we started to reinforce cost control measures for our China operations. In fact, we had some achievements during the quarter. Please turn to page four. On the rental expenses front, we achieved over 60 million RMB rental reduction in the second quarter. For overhead cost optimization in our headquarter, we reduced roughly 10% of headcounts in second quarter compared to the year beginning. We also mentioned previously that we would continuously center on customers, franchisees, and employees to build our capabilities to rise through the economic cycle. Therefore, in the second quarter, we provided totally RMB 120 million fee waivers for our franchisees to help them to overcome the difficulties. At the same time, In order to insist on implementing our sustainable quality growth strategy, we also adjusted and upgraded our organizational structure and continued to remove inferior hotels from our existing networks. 酒店是一个本地化的生意。随着华洲的酒店进入到越来越多相对空白或者薄弱的城市,我们越发意识到本地化管理的重要性。

The structure of Huazhou needs to be further upgraded. Please move to the fifth page. In the fourth quarter of last year, we established two branch companies in Huanan and Huaxi. The development of the two branch companies this year is good. Therefore, we will promote this experience to the whole country. We have established six regional branch companies, and we will take advantage of the management model of economic and medium-sized brands to the management model that is dominated by the six major regions. There are three aspects to such a group structure adjustment. The first is to be closer to the local market, enhance the understanding of local customers and customers, and make a quick and efficient response to the changes in the local market. The second is to form a regional system on the marketing and pricing strategy, shorten the decision-making process, and improve business efficiency. The third is to build a more solid foundation for the development and growth of the Bo Ruo area.

Hotel business is a very localized business. As we are further penetrating into more and more less penetrated market, we started to realize the importance of localized management capability, as well as the essential to continue upgrading our organizational structure. Please turn to page 5. In the fourth quarter last year, we established South China Regional Headquarters and West China Regional Headquarters. These two regional offices are developing and performing well since then. Therefore, we applied these experiences to the whole country and established six regional headquarters this year. We changed our organizational structure from previous brand-based to regional-based management and operation for our economic and middle-skill brands. There are three key purposes of making such adjustments. Firstly, a localized team could have better understanding on local customers, franchisees, preference, and a faster reaction to the local market changes. Secondly, A localized regional office could achieve more synergy in terms of operation, sales, and marketing and management, higher operational efficiency, and a shorter decision-making process. Lastly, it would help us to accelerate our lower tier cities penetration and development in previously weak regions to achieve our long-term sustainable quality growth target.

We also insist that the economic development strategy is not moving. In the next one to two years, we will accelerate the withdrawal of the economic soft brand hotel market. Because after the past three years of market events, combined with our comprehensive judgment on the big trend of future Chinese market consumption upgrades, we have made such a decision more firm. Please turn to the sixth page. You can see that in the past few seasons, we have made gradual decisions on low-quality economic soft brand duct hotels.

In terms of brand and products development, we also insist on sustainable growth strategy. Based on our own experiences and practice in the last three years, together with our judgment on the general trends of future consumption upgrading in the China market, we decided to accelerate exit from economic soft brand hotel marketing next one or two years. Please turn to page six. As you may notice that in previous few quarters, we had already cleaned up many inferior economic soft brand hotel pipelines. And in the next one or two years, we would continuously remove inferior hotels, including soft brand hotels, from our existing hotel networks to further improve our quality.

Please turn to page 7. Low-end cities continue to infiltrate. As of June 30, the number of low-end city hotels, Zaiying Hotel and Guandao Hotel, respectively, is 37% and 56%. Of the 561 hotels signed in the second quarter, 58% come from low-end cities. Please turn to page 7.

Our lower tier cities penetration continuously progressing. As of June 30th, 37% of hotels in operations and 56% of hotels in pipelines are contributed from lower tier cities. In the second quarter, 58% of total 561 new signings are from lower-tier cities as well. City coverage also increased to 1,130 cities in the second quarter.

Please turn to page 8. The development of the medium-high and high-end markets is also in progress. From the organizational structure, it differs from the economic medium-high regionalized management model. Medium-high and high-end brands or the management model of the brand business department. Because the brand business department needs to rely on their own brand strategy to control the unique operating tone of different brands, product development, and customer experience. From the brand development point of view, medium-high-end brands have now entered the harvest period. As of the end of June, medium-high-end brands have reached 445 in China's number of retail hotels, 229 Manxin brands have opened 100 Manxin hotels. At the same time, we are also using the positioning of American brands in the retail market to further explore the opportunity of pure retail in the market. The development of high-end hotels, I think, still needs further time to cultivate. Under the influence of the real estate industry, the new construction of property and new signings will be affected by further improvement. Please turn to page 8. Our up-middle and up-scale hotel segments are also progressing steadily. Unlike economic and middle-scale segments,

we keep our organizational structure unchanged for these two segments. We still use brand-based management and operational structure for these two segments, as each brand in the segment should have its unique and differentiated strategy on brand positioning, product innovation, as well as customer experience. In terms of the future development, we believe our upper-middle-scale segment is ready to harvest. By the end of June, we have total 445 upper-middle-scale hotels in operation and 229 in pipelines in China. Our leisure brand Manxin achieved its 100th hotel opening milestone recently. At the same time, we are going to leverage more on our medicine brands to further seek the conversion opportunity in the existing market. Moving to the upscale segment, given the recent weak property market, undeniably, our new signings of newly built upscale hotels are negatively impacted. However, alternatively, we are also focusing more on finding local government corporations and conversion opportunities in the market to support the future development. Lastly, our Blossom House and the recently introduced Blossom House series brands are also well recognized and accepted by the market. It is ready to further tap into the booming domestic leisure market.

DH 发展势头持续向好,请大家翻到第九页。 今年 DH 的热化恢复呈逐月双分趋势, May has returned to 99% in 2019. June is 100%. And July has surpassed 2019, reaching 103%.

DH solid business recovery continues in the second quarter. Please turn to page 9. We saw DH REF power recovery improve month over month. It recovered to 99% and 100% in May and June. and July REFPA had already exceeded 2019 level with recovery rate of 103%.

At the same time, DH has expected a turnaround in EBITDA in 2022. Please turn to page 10. Please turn to page 10. From the recovery level of the overall second quarter, DH mixed REFPA and same-electric REFPA respectively recovered 86% and 96% in 2019. mainly because the price rose by 10%. The price of the third quarter continues to stagnate. The growth of demand is mainly driven by the demand for leisure markets and the demand for commercial circulation. We have also carried out further cost control for DH, mainly including the reduction of total cost, the reduction of operating costs, the strict control of capital spending, and the control of energy costs. In terms of improving DH's organizational capability, More importantly, given the recent solid recovery, we are now expecting DH's recurring EBITDA to turn positive for the full year of 2022.

Please turn to page 10. In terms of the business recovery in the second quarter, it's planned to recover to 93% of 2019 level, mainly driven by roughly 10% increase in ADR. And the trend continues in the third quarter. The recovery was mainly driven by leisure traveling and also supported by PANDA corporate group demand. However, although the recent business recovery was quite solid, we continuously conduct three cost control for DH, which mainly include headquarter overhead cost reduction, operational efficiency improvements, HEPAX control, as well as energy efficiency improvements and the cost controls. Lastly, for longer term development, We continuously enhance DH's organizational capability through integration of EdgeWord digital or distribution capability for efficiency and direct channel performance. We launch Edge Rewards membership program for better digital guest experiences and capture the limited service market share in Europe by further investing and developing Indoor City and Zili brands. With that, I will turn the call to Ye Fei to discuss our second quarter operational and financial performance.

Thank you, Jingfei. Good morning or good evening to everyone, wherever you are. Let's move on to our operational and financial review for the second quarter 2022. As shown on page slide 22, 12, our hotel rooms expanded by 12% in the second quarter to 774,000 compared with the second quarter of 2021 of 692,000. Excluding DH, Lexi Hua Chu's hotel rooms expanded by 12% yield year to roughly 749,000 in this quarter. For our hotel turnover in the second quarter, Our total hotel turnover declined by 10% year-on-year to RMB 11.8 billion in this quarter. It was mainly due to the large-scale outbreak of Omicron variant since the late March in China, but partially offset by our continuous network expansion in China and strong business recovery of our European business. Hotel turnover of Lexi Huazhu declined by 19% year-over-year to RMB 10.3 billion in this quarter. Turn to page 13. Lexi Huazhu blended REF PARP for Q2 declined by 31% compared to 2019 due to the impact of Omicron outbreak since mid-March. The ADR in Q2 2022 was down by 7.8% compared to 2019 as RMB While occupancy in Q2 was 22 percentage points lower than 2019. If excluding the impact of hotel under requisition, REFPA would have, if including the impact, REFPA would have recovered to 75% of 2019 level. Turn to page 14. Lexi DH business recovery further accelerated in the second quarter. Our Lexi DH blended rest part for Q2 grew by 233% to 66 euro compared with Q2 2021, although still behind the 2019 level. The occupancy improved by 35 percentage points compared with Q2 2021, And the ADR improved by 35% to €110, which actually exceeded the 2019 level by 10%. Please see our financial results on slide 15. Total revenue declined by 5.7% year-on-year to RMB 3.4 billion in Q2, mainly dragged by the 26% almost 27% of Lexi Huatu's revenue decline in Q2 to RMB 2.5 billion. Lexi DH recorded a strong revenue growth of 311% year-on-year to RMB 921 million. Revenue was in line with our previous guidance at the lower bottom. Decline of Lexi Huatu revenue was mainly due to the large scale of current violent outbreak since March, Breaking down the revenue of Q2, leased and owned revenue increased by 3.5% year-on-year to RMB $2.4 billion. Excluding DH, leased and owned revenue of Lexi Hua Zhu was declined by 28.7% year-on-year to RMB $1.5 billion. Total revenue from Manage and Franchise Hotel declined by 25% to RMB $945 million. mainly dragged by the decline of Lexi Huazhou's business, but offset by the 100% year-on-year growth of Lexi DH. The 26.7 year-on-year decline of revenue from Managed and Franchise Hotel Lexi Huazhou also includes roughly $200 million impact from managed receipt waiver provided to franchisees and also less CRS contribution because the channel changed in this quarter. Due to the strong recovery of Lexie DH's business, the monetized and franchised revenue contribution temporarily shrank to 27.9% in Q2 2022, compared with 35% in Q2 2021 at group level. For Lexie Huazhou, Despite further expanding hotel networks with SLI model, our management fee waiver provided to franchisees and lower sales fee contributions in managed and franchise revenue actually reduced the contribution of the managed and franchise business contribution. Now let's move on to the cost and profitability session on slide 16. The reported operating income was RMB 8 million, compared to a positive RMB 629 million last year, and a loss of 708 million a quarter before. The large decline of operating income year-on-year was mainly due to weaker China business performance. Excluding DH, the legacy Huazhou's operating income in Q2 2022 was RMB 21 million, compared to positive income RMB $763 million last year and the negative RMB $416 million a quarter ago. The hotel operating cost for 2022 second quarter was RMB $3 billion, increased by 8.5% year-on-year. For Legacy Huazhou, it recorded RMB $2.2 billion hotel operating cost indicating a 1.5% year-over-year decline or a 3.9% decline on a Q-over-Q basis. Besides the variable cost savings associated with lower occupancy, a major driver is also roughly RMB 60 million rental cost reduction, which is going to continue in the next few quarters. For Legacy DH, it recorded RMB 804 million hotel acquitting costs indicating a 49% year-to-year growth. The increase was mainly due to the increase of variable cost associated with business recovery, such as labor, F&B, consumer growth, variable rents, and et cetera. Other factors also including the impairment cost of terminated lease agreement in this quarter and the less rental reduction compared to the same quarter last year. Our pre-opening cost increased by 93% year-to-year to RMB 31 million in Q2, mainly due to more limited service lease and own hotel under construction during this quarter in China. However, the absolute dollar amount of pre-opening cost remains low as our future expansion of upscale hotels were mainly used as a live model, which we mentioned in previous quarters as well. Our SG&A in Q2 declined by 7.8 year-on-year and 12.7 Q-on-Q to RMB 510 million, driven by the decrease in the LEXI Huazhou but offset by the increase in LEXI DH. Excluding DH, the SG&A for LEXI Huazhou declined by 21% year-on-year to RMB 332 million, The decline was mainly attributable to the cost control measures by streaming line headcounts and expenses in headquarter offices, as well as less selling expenses, along with weak China business performance. On the other hand, DH selling expenses increased is actually aligned with business recovery. Other operating income in Q2 decreased by 57% a year to RMB 153 million because there's much less subsidy received from German government compared to the same quarter last year. Turning to page 17, our adjusted EBITDA was RMB 53 million in Q2 compared to RMB 1 billion a year ago. DH EBITDA turned positive in Q2 2022 to RMB 30 million compared to a loss of $72 million in 2021, driven by the accelerated business recovery. Excluding DH, Lexi Huazhou recorded an adjusted EBITDA of RMB $23 million compared to RMB $1.1 billion in Q1 2021. This is mainly due to the impact of large-scale Omicron virus outbreak in this quarter and also there were roughly RMB 400 million foreign exchange loss brought by the asset depreciation which are denominated by Euro including our shares in Accor, our loans to DH and etc. However, this adjustment is not and temporary. In Q2 2022, We recorded adjusted net loss of RMB 84 million, narrowed from a loss of RMB 662 million a quarter ago. Excluding DH, Lexi Huatu recorded adjusted net loss of 32 million, narrowed from a loss of RMB 339 million a quarter ago. Coming to the cash position, our net debt reduced to RMB 5.7 billion by the end of Q2 from RMB $6 billion last quarter. It was mainly due to the cash generated from operation in this quarter. Our cash balance was $4.7 billion, and the unutilized bank facility was $3 billion. Given the COVID impact remains uncertain in the foreseeable future, we remain cautious on CAPEX and OPEX spending to reserve cash. In addition, We have successfully refinanced our upcoming syndication loan with a total outstanding amount of 340 million euros. Also, we have prepared to meet the possible redemption of 2017 convertible bond later this year. Turn to page 20 on guidance. In the third quarter of 2022, How do we expect revenue to grow 13% to 17% compared to the third quarter of 2021, or to grow 5% to 9% if excluding DH on the assumption that there's no large-scale Omicron outbreak again, as we mentioned before? With that, let's open up for Q&A. Thank you.

Thank you. As a reminder, to ask a question, you will need to press star one one on your telephone and wait for your name to be announced. Please stand by while we compile the Q&A roster. I show our first question comes from the line of Billy Knife from Bank of America. Your line is open.

Hi, good morning. Hi, good morning. Hi, good morning. Hi, good morning. Hi, good morning. Blended Roth Power恢复的程度的一个什么样的一个 assumption. 我第一个问题我现在用英语再问多一次就是 basically just want to know whether the recovery trend that we've seen in we have seen in July that continue in August and September and what kind of Blended Roth Power assumption that we were using when we provided the revenue guidance growth for this quarter. Thanks.

Hi, Billy. This is Fei.

To your question, we estimate roughly like 85% blended RASPAR recovery compared to 2019 for the third quarter.

Thanks. And for the August and September, do you think that will be better than July in terms of recovery or worse?

Actually, I think the August is actually slightly better than 85%. It's like 88% if we talk about the recovery compared to 2019.

Thank you. That's very useful. OK, I'm Jinghui. Let me answer this question. Indeed, in the second quarter, we recorded a contract of more than 500 stores.

A part of the reason is the situation of the signing of the contract. In fact, after the epidemic, we can see that the impact of the epidemic and some of the impact of the Chinese economy are continuing to show. We saw that the signing speed of major cities in China is actually slowing down. Especially in the provincial and second-tier cities in China, such an impact of the epidemic is repeated. But in the third quarter, with the improvement of the COVID-19 policy in China, and the easing of the flow rate, we have gained some guarantees in terms of opening speed. That is, the construction of the project and its impact will be significantly reduced than in the first and second quarters. So it should be a conclusion that the impact of the pandemic and the economy will definitely affect our future development. This impact

For the second quarter, we actually signed up roughly over 500 new hotels during the quarter, but some of them are from the previous quarter's backlogs. In fact, given the impacts of the COVID as well as the economic conditions, A lot of cities, especially for those major cities, we are seeing some slowdown undeniably. It will have some negative impacts on the new signings for the near future. But entering into the third quarter, given the probation policy has gradually lifted or improved, our new openings as well as construction for the hotels have less impacted from the COVID-19. But putting all those things together, together with the COVID and economic conditions, especially for those tier one, tier two cities, definitely the impact is going to last for a while. Thank you.

Thank you.

Next question, please.

Thank you. Our next question comes from the line of Simon Chung from Goldman Sachs. Your line is open.

Thank you for your presentation. I also have two questions. The first one is, you just mentioned that you will speed up the market of software brands. I remember a few weeks ago, you also mentioned this issue. But on the other hand, your other competitors actually speed up this issue. So my first question is relation to the accelerations of the exceeding of the, you know, soft brand hotel. Having seen, you know, some of the other competitors actually accelerating, you know, the positioning of these, you know, market segments, I'm wondering whether, you know, what is the strong rationale or reasoning behind accelerating the existing market and what's the major challenge that they can foresee in the next one or two years? Thank you.

This is the core of the strategy. I think in the past few seasons, whether it's J-7 or our management team, we have been releasing such firm and rapid strategic adjustments for our investors. Based on a few very clear thoughts, first, we think that China's, from our market experience and feedback, China's consumer growth is actually continuing to develop in various low-end markets. The people, the citizens, pursue a quality of life and a good life. This is their main trend. Secondly, I think for the low-end market and the soft brand, the government's various supervision and compliance needs are also in such a continuous improvement of supervision. So we also consider this. Thirdly, of course, it comes from our confidence in the growth of high-quality citizens in the market. In the past few seasons, we have seen the growth trend of Hanping, Nihao, and EBS. So I think for these three reasons, we have taken a firm step to accelerate the market in the software brand. It is based on our thoughts and decisions on our future sustainable growth strategy. Thank you.

Okay, so yeah, we think there's a lot of investors are curious on this part. We also noticed that one of our peers, we are using very different thinking and developing strategies compared to our peers. As our management team as well as our chairman emphasized the several on implementing our sustainable quality growth strategy under these conditions. So that makes the key decisions. So there are three reasons behind. One, in China, our judgment on the future trends of the consumption that actually, especially in the lower tier cities, we are seeing and observing that consumption upgrading are the major trends in the near future. People in those cities are requiring high quality and a better life, high quality products and enjoy the better life as the major trends in the future as well. Secondly, we are also seeing that the governments are actually putting more strict compliance requirements and the regulation on those inferior products, not only hotels but also other industry as well. We think our strategy change align with the government theme also on the quality growth in the future. And certainly, it's our high confidence in terms of our high quality economic hotel product development, including Hunting, Ibis, as well as other major brands as well. So that's why we make our decision that we can accelerate exist from the software-brand economic segment in the next one or two years.

Okay, thank you. Another question I want to ask is, you just talked about the regional division company issue. I want to ask, I remember you did a good job last time on cost savings. Now, doing this regional division company, how should we think about your cost and income? If we look at it from the future, So my second question is in relation to the setup of the six regional headquarters. The company obviously was very successful in terms of, you know, controlling the cost in the last quarter. I'm wondering, you know, what would be the implications of this, you know, new regional office setup to both the cost as well as the revenue in the coming quarters? Thank you.

We are very... I am Qinghui. Let me answer this question. We have adopted regional management for the national market and the central market for limited services. I think this is easy for everyone to understand because it is closer to the customer. As we go down the market, such a management environment is getting further and further away. We hope that our efficient operating organization can be closer to our consumers, closer to our business owners. At the same time, to build local talent supply chain, local marketing resources, to promote our sustainable and sustainable down payment strategy. This goal should be very clear to everyone. In the entire organizational transformation, we are very, very concerned about our cost issue. We actually put a lot of management resources and talents on the bottom of the headquarters platform. Our down payment is not only our development down payment, but also the down payment of our entire management resources. Yeah, as you may know that we actually making the economic and the middle skill limited service brands

to the regional office and a change in organizational structure from previous brand based to the regional based. It is very obviously that it will be much closer to our local customers, franchisees, and it becomes higher efficiency in terms of the management and operation, especially in the lower tier cities. And also it will enable us to build up a more comprehensive localized supply chain, creating some synergies in terms of the sales and marketing strategies as well. Definitely, we have our focus on the cost control. In fact, despite we are building six regional offices, but actually we have assigned some of the peoples and talents from our previous headquarters to the regional offices because we are not only assigned people from the development front, but also the management front as well. And in terms of the overall cost control measures, so we can continuously control our total cost, especially under these conditions. Thank you.

Thank you.

The first question is about the software brand. At that time, the software brand Oyo came to China and spent a lot of money. The company is very big. As one of the leading hotel companies in China's limited service brand, we must also do some thinking. We took protective measures. We made a software brand. Thank you.

These two are very good questions. This is Qiqi. So in regards to the soft brand, probably everyone knows that back to a few years ago, there was another brand called OYO, very aggressively entered in China. and becomes one of the largest hotel groups at that year. It makes our thinking about their strategy, and we also need to react on their aggressiveness. That's why we also use a very defensive strategy to protect their competition.

After a while, we found that these small and medium hotels In fact, they may not need management or even marketing. They may not be able to do the most basic customer experience. For example, hardware products, service level, PMX system, and some internal technical structures. I think Huazhou is not willing to, or in fact, is not able to provide services to so many large companies. We are also not willing to help our brands Because there are so many things that are not consistent and not in line with our core strategy. Instead, through some technical support, for example, we have a lot of E-series in Mongolia, a lot of technical output in Mongolia, and even supply chain. Through this way, we can provide support and service output to these small and medium-sized hotels, and change our strategy. This is a very big change for us. So you will see that in the past few seasons, in the future few seasons, within one or two years, our opening numbers are not as beautiful or as good as they used to be. But I think it doesn't matter. Because of the pandemic, we have adjusted our opening numbers. Our opening numbers are not our goal. We want to use the core capabilities of the company Over the last several years' experience and practice, we actually realized that those very small-scale hotels, they actually don't need the management

not the management, not the PMS, not the technology at all. So we are also not willing to sacrifice our brand to helping them or to putting them in our networks. So in the future, we could have some alternatives such as we will empower them by using our technology capability, our supply chain capability to help them to operate in the industry. In the near future, probably in the next two years, in terms of the growth openings, our group's new openings might not be that bright or outstanding or large-scale. We mentioned several times that we emphasize on the quality growth. By leveraging and by using the opportunity of the COVID, we actually need to clean up all those inferior hotels and make some necessary adjustments internally as well. In fact, the new openings are not only our key target in the long term. Our key target in the long term should be our capability to overcome the risk and our capability to be sustainable growth.

Other 9.9% companies are still making softwares, including Oyo, which is doing well in India. Yes. Okay.

Other companies are still expanding the software brand strategy, as well as OUS is also doing very well in India, because every company has their own strategy. I don't give more comments on this.

Regarding the outcome of the organization, people think, wow, they have a lot of companies, and they have a lot of people. In fact, I have seen it in the United States and Europe. For example, in South America, I basically ran a circle. In China, the market is actually already, the market in Guangdong and Shenzhen is already big enough to be close to those, for example, Tibet and Shanghai in China. China's, for example, Shaanxi, Gansu, these places, and Jiangsu and Zhejiang, many places are not the same. We are a unified market, but some of the characteristics of the whole are still different. It's not the same. So we have to go deep into those places to make the right decisions, and recruit people, and communicate with partners. In the past, it was the headquarters model. We are also like this. It's the headquarters thinking. Our headquarters thinking is unreasonable. This industry is very hellish. It's a bit like the headquarters originalization. Today, the boss of our six regions is our CEO. These are all the cadres that we sent out from Shanghai or the headquarters. They are all tough. In the future, many cadres will be selected from the original structure and formed our regional headquarters. They will find a lot of people and raise a lot of people. They are very strict about the cost control. This is a must-do for 30,000 to 20,000 people in Huazhou. In terms of our organizational restructuring, people might be curious that whether we are going to hire a lot of people or increase the headcount massively. But in fact, we are not.

I have studied a lot in terms of the United States market, Europe market, as well as the South American market. Actually, comparing to China, China is big enough. and actually each provinces and regions have very different cultures and very differentiated such as if you compare Shanghai to Tibet or Shaanxi to Jiangsu provinces, those areas are very much different. So therefore, in terms of to further penetrate into the local market, we have to move forward of our organizational structure to be more closer to the local market In fact, there's a lot of people such as the CEO of those six regional headquarters, all assigned from our headquarters. And we are having more of talent will be promoted from headquarters to be assigned to the regional offices. So each of the regional offices will have a very strict cost control. They won't be hiring too much of the people. Actually, putting all together, in terms of reaching our target to have 10,000 to 20,000 hotels in total in the future, it is very necessary for us to have those regional offices to further support to achieve this target in the future. Next question, please.

Thank you. As a reminder, to ask a question, you need to press star 1-1 on your telephone and wait for your name to be announced. I show our next question. It comes from the line of CG Lin from CICC. CG Lin, your line is open. Thank you.

Okay, thank you, Manager Peng. Congratulations on us getting a relatively significant control of the cost. I have a question about the mid-high-end. We mentioned that the mid-high-end market has a lot of space, and we also talked about the season of revenue. So, in the past few years, what preparations have the company made to achieve this rapid expansion? And generally speaking, the customer will focus more on membership rights. Then, what do we think about the design of membership rights? So I have a question regarding mid-to-upscale markets. We mentioned before there's still potential for China's mid-to-upscale market. So what preparations have us made in recent years in order to accelerate expansions in this event in the future? And generally, customers of mid-to-upscale hotels remember benefits. So how do we design our member benefits? Thank you.

Okay, let me answer this question.

In the report, I talked with the shareholders and analysts about our development in the high-end sector. In the past few years, we have done a lot of preparation work and continuous accumulation, because from the past limited service, pursuit of efficiency and cost leading strategy, such an organization and team ability has been transformed into a brand and customer experience as a guide for such a new market. We have indeed crossed a lot of such boundaries of ability, and we have also broken past comfort zones. So in general, we have made active preparations on both sides. The first is on the product development and construction of the entire brand strategy. We have achieved very significant progress in Suijing, Meiju, Chengji, Manxing, and in the past few years in these product development and the entire brand strategy. Secondly, we have done a lot of preparation around customer experience for the entire operation and management of the entire organization structure and talent cultivation of the island. We now have two or three business units, the crystal Manxing business unit, the Chenji Meiji business unit and the Meilun business unit. We are actively building around the middle and high end. such a service and experience as a guide, the whole training of talents and the adjustment of the whole consciousness, this is also actively pushing. So the progress achieved is due to, I think, the accumulation of brands and the unprofessional performance of talents. Of course, I believe we still have a lot of work to do in a sustainable way. We are still very confident that in the mid- and high-end, China, along with the consumer economy, in the core city market, still has a very wide market. And there are also a lot of gains in the mid- and high-end supply, update and turnover of Meilun. I think this is a very good question. It is also the boundary of our ability to break through such a slide. The second is about the slide meeting. In terms of high-end service and experience, we have done some thinking. On the one hand, we have to consider the consistent experience of the entire Huazhou. There are some core experiences, such as Amazon Premium. These are some very standard, very strong customer experience points. At the same time, we use some service experiences of high-end hotels and door-to-door scenarios. We have opened up some local-based scenarios based on door-to-door hotel scenarios uh, uh, I think all the industry members have done this work. Of course, we are doing a complete thinking and design for the full and experience of members of the mid-high and high-end and the holiday market, as well as some promotion and customer feedback in Europe. I think very soon, in the next half a year or so, we will further develop and upgrade the experience of members of the entire mid-high and high-end and the holiday market.

In terms of our mid-skill and up-middle skill development, as I mentioned in my prepared remarks previously, we are keep progressing steadily. In fact, we have been preparing for this segment for the last few years. Huatu was very good at in terms of the operating for the limited service, especially in the economic and the middle skill segments before. We are good at in terms of the cost control, high efficiency, but for the upper middle skill, it's going to change from those to the branding and the customer experiences. That's why we spent a few years to experimenting and discussing internally and adjusting our strategy accordingly. In fact, for this particular segment, we have several points. Firstly, as in regarding to the products, continuously products and the branding upgrades, we have totally six brands, including the Crystal Orange, Mercure, Intercity, and Madison and Manxing and Novotel as well to have further differentiated customer experiences. And also in terms of the operation and organization structures, we have three key business units. The Crystal Orange and Manxing are the first business units, and Intercity and Mercure are the second business units. and medicine that the business units are using to catching the conversion opportunity in the existing market for our membership program and also the member privileges especially for the upper middle skill segment. We do have some internal discussions. And first of all, we will keep the core experiences unchanged, just like Amazon Prime, the members. There's a very, very strong key core customers experience for each of the membership programs, but also in terms of the upper middle scale that we also leverage on each of the brands and the hotel to provide different privileges and customer experiences in addition to the core privileges. For example, the afternoon tea, it really depends on each of the brands and hotels itself. And in probably next half a year or six months, we will also have more adjustments and discussion and thinking on the membership programs together with the DOS Hospitality. Yes, thank you.

That's very clear. Thank you.

Thank you. That concludes the Q&A session. At this time, I'd like to turn the call back over to Mr. Jason Chen, Investor Relations Director, for closing remarks.

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

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