H World Group Limited

Good day and thank you for standing by. Welcome to the H-World Third 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 11 on your telephone. You will then hear an automated message advising your hand is raised. Please be advised that today's conference is being recorded. And now I'd like to hand the conference over to Mr. Jason Chen, investor relations director. Thank you. Please go ahead, sir.

Thank you. Good morning and good evening, everyone. Thanks for joining us today. Welcome to Edgeworth Group third quarter 2022 earnings conference call. Joining us today is our chairman, Mr. Jiqi, our CEO, Mr. Jinghui, our President, Ms. Liu Xingxing, our CFO, Ms. Cheng 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 provisions 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. 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, as well as supplementary slide presentation, is available at ir.edgeworld.com. With that, now I will turn the call over to Mr. Ji Qi. Mr. Ji, please.

Good morning and good evening, everyone. Thank you for joining us today. We are happy to report that our China business will pop in the third quarter. recovered to 90% of 2019 level thanks to ending up leisure travel demand, as well as the gradual recovery of business travel. This recovery is closely associated with the relaxation of COVID policy this third quarter. However, with the recent increase of COVID cases, we may face more uncertainties. and the negative impact on our business recovery as a consequence of tightened control measures. In the third quarter, we reported that we carried out organizational restructuring and established six regional headquarters to focus on economic and middle-scale segments. In the third quarter, without further implementing regionalization strategies and strengthening our regional organizations. At the same time, we re-aligned the structure for upscale and luxury brands in China to provide more efficient management and oversight. With our long-term sustainable quality growth strategy we have been further emphasizing on improvement of products and service quality. We accelerated the exit from low-quality soft brands in economic segment. Moreover, we continuously upgraded our major brands such as Han Ting and Ji Hotel to renew into a new version with better design and quality. Looking back in the last three years, COVID has brought tremendous challenges to the Chinese lodging market. However, branded chain hotels were showing higher resilience than independent hotels. In fact, over the last three years, chain hotels were continuously and gaining more market shares and leading the recovery of the industry. We believe that the shift from independent hotels to branded hotels will further gain momentum and will help branded hotel chains to further consolidate the market. We were confident that we will benefit from this trend with our strong brands and quality products. With the recovery of many international travel markets, our Deutsche hospitality business achieved another good quarter with a further real-power improvement. Real-power in third quarter recovered to 102% compared to 2019 in this quarter. With the cost management and the organizational opening structure in place, we are in a good position to continuously improve our portability. Due to recent large sporadic resurgence of COVID in many provinces and cities in China, we see strict COVID measures continue to be carried out in order to cope with short-term turbulences. and preserve dry powder. We will further streamline operations, be prudent on capital spending, and allocate resources in a disciplined way. We will also work closely with our franchisees and partners to help them cope with the challenges during this special period. Together with friends and partners in our ecosystem, we will further strengthen the foundation and build the resilience of our company. With this, I will turn the call to Jinghui to discuss our STEM business development in detail. Thank you, Ji.

First, let's turn to the third page and look at the highlights of our business in the third map. First, under the influence of the epidemic, We successfully launched the 4.0 version of the HuazhouHui app. The continued recovery of DH international business. Thank you, Qiqi.

Firstly, please turn to page three. Let me briefly review our key achievements in the third quarter. Number one, our China business recovery continues despite COVID impact. Number two, continued network expansion with a focus on sustainable quality growth. Number three, on track on the development of upper middle skill and upskill segments. Number four, successful launch of new Edgework app with enhanced features. Number five, Dasha's fatalities business is on its recovery path. Now I will then discuss for each of both points in details in the following pages.

But in the third quarter of this year, the recovery of China's RERPA is still good. The overall recovery is up to 90% in 2019, mainly because July and August benefited from the promotion of leisure tourism market needs. From September, business needs are also in continuous recovery. Of course, after entering October, the epidemic has repeatedly intensified, and the control measures have also become stricter. Therefore, the recovery in October

Please turn to page four. Although the continuous resurgence of COVID, we still achieved a relative good REFPA recovery in the third quarter in China, with the REFPA recover to 90% of 2019 level. This was mainly driven by kind of leisure demand in July and August, as well as gradual recovery of business traveling in the late September. However, We saw more sporadic resurgence of COVID since October, with stricter restructuring was imposed again. Our REF part in October only recovered to 74% of 2019 level. Please turn to page 5. The hotel network of the company continues to expand, and GMV continues to grow.

Up to the third quarter, China's hotels have a scale of 79.7 million, Please turn to page five.

Our hotel network further expanded and the GMV also continuously increased in the quarter. At the end of the third quarter, our number of hotel rooms grew by 10% year-over-year to 797,000, with China hotel rooms grew 11% year-over-year to 772,000. Our total GMV in the third quarter increased by 24% year-over-year to RMB 15.2 billion, where China GMV grew 22% year-over-year to RMB 13.5 billion.

The company's three-fourth-line strategy is also continuing to advance. Please turn to the sixth page. As of the end of the third quarter, the ratio of low-end city hotels in Huazhou Zaiying and Guandao hotels is 41% and 59% respectively, and is still improving. In the three-quarter new contract hotels, Our lower tier cities penetration strategy continues progressing. Please turn to page six. As of the end of the third quarter,

hotels from lower tier cities' contributions further increased to 41% and 59% of total hotels in operation and pipelines, respectively. Moreover, as you may notice that our number of new signings during the quarter was still lower than a year ago. That still shows that our franchisees' confidence level has not yet fully returned due to resurgence of COVID. 回顾疫情之后的几年。

From the data of the hotel industry, it can be seen that chain brand hotels are more stable compared to single hotels. There are more single hotels with low risk capacity. In 2020 and 2021, the number of close hotels was 22% and 13%. At the same time, the number of hotels in China has continued to rise. We also listed China's power consumption in 2020 and 2021, respectively 10% and 7%. It shows that our power consumption is much lower than the near power consumption of single hotels. The chain rate of the industry is also constantly increasing. From 19% in 2018 to 35% in 2021, the trend of accelerating the entire industry has not changed. As mentioned earlier, Please turn to page 7.

Looking back the last few years post-COVID, based on the China launching industry data, we observed that branded Chin hotels were showing better resilience than independent hotels. A lot of independent hotels with weaker anti-risk capabilities were actually closed, with roughly 22% and 13% of independent hotels actually closed in 2020 and 2021, respectively. During the same period, our hotel networks were still expanding. We also showed our closure ratio in the figures. Our closure ratio was 10% and 7% in 2020 and 2021, which were much lower compared to independent hotels. China Longjing Industries trend ratio continuously improved from only 19% in 2018 to 35% in 2021. Therefore, we think the trend of the further industry consolidation post-COVID remains unchanged. Moreover, as Mr. Ji mentioned in the beginning, more and more independent hotels started to prefer joining branded trend hotels, which could further bring more consolidation opportunities to us in the long run.

Please turn to page 8. In the course of development, we have to insist on the unwavering strategy of economic growth. Taking the Han Ting brand as an example, in the past few years, we have continued to upgrade our Han Ting products. We also found that the Han Ting products after upgrading, compared to the old products, can increase by an average of 20%. Please turn to page 8.

we still need to insist on our sustainable quality growth strategy for our long-term business development. For example, our hunting brand. We continuously upgrade our hunting products over the past few years. We found out that after upgrading to newer version, the rare part would improve by roughly 20% than older version, in average. At the end of the third quarter, Hanjin 2.7 versions and above accounted to roughly 59% of total Hanjin hotels in operation, improved by 25 percentage points in 2020 compared to 2020. At the same time, Hanjin's customer satisfaction score also improved along with product upgrading. From 4.5 in 2020, improved to 4.67 in the third quarter.

The overall hotel quality of the group is also continuing to increase. Please turn to page 9. Low-quality economic soft brand hotels and Hanting 1.0 products continue to decline in the proportion of Huazhou Group. With the third quarter of 2022, the proportion is only 14.3%. The customer satisfaction of the company's hotel as a whole is also increasing. From 4.54% in 2020,

Please turn to page 9. Not only Hanting brand, but also all our brands in our portfolio, we keep improving the overall hotel qualities. As you can see, low-quality soft brand economics hotels and Hanting 1.0 version contribution were gradually declining over the years. As of the third quarter, it only accounts for roughly 14.3% of our total hotels in operation. Hotel product quality improvements also led continuously customer satisfaction score improvements. It improved from 4.54% in 2020 to 4.68% in this quarter.

Please turn to page 10.

Our orange brand hotel achieved its 500 hotel milestone during the quarter, reaching 505 hotels by the end of the quarter. It becomes the third brand of Hanting and G Hotel in our group to achieve over 500 hotels.

Our Chinese high-end spring-level strategy is also steadily advancing. Please turn to page 11. In the field of Chinese high-end, Chengji Hotel has launched new products this season. Made in a transportation hub or prosperous business center, Chengji brands have brought the simple and classic practicality concept of luxury to China. Provide extremely efficient business and business experience for a wide range of business clients. Our upper mid-scale segment is also steadily progressing.

Please turn to page 11. We introduced a new version of Intercity brand during the quarter. Intercity will be mainly located in traffic hub or commercial center's location. It brings in German simplicity and problematism to hotels in China to provide high-efficient service to customers. Our two newly opened intercity hotels are located in Shenzhen and Wuhan.

In the high-end hotel industry, our Huajiantang brand is also gradually breaking through the tourism and holiday market. Please look forward to the 12th. After the acquisition, Huazhou successfully changed the brand operation mode of Huajiantang. For our upscale segment, we saw our Blossom House brand is quickly tapping into the leisure traveling market.

Please turn to page 12. Since our acquisition, we successfully transformed its business model from previously 90% of hotels are under lease model to roughly 67% of hotels are under asset line franchise-based model. Moreover, the brand also extends from a single Blonsam house brand to Blonsam lifestyle community and Blonsam collections, achieving a multi-brands developed model. Please turn to page 13.

We have re-adjusted the Huazhou app and successfully released the version of Huazhou 10.0. This upgrade is based on the Huazhou service and the full process of digitalized guest experience. In the previous high-efficiency service technology, we have further strengthened the interaction service experience with customers at different service points. Please turn to page 13.

We further upgraded our Edgeworld app and successfully launched its 4.0 version. This upgrade focused on HATU service and the full digitalization guest experiences, and further strengthening the interactive service experiences with guests at different touchpoints on the basis of consistent, highly efficient services. For example, our intelligent laundry function It allows customers to make reservations remotely and track the long-during process and status in real time. Such function could strengthen the perception of members' privileges and benefits. In the first nine months of 2022, there were totally 99 million customers have experienced our online service compared to only 27 million customers a year ago. Usage of online service also improved to 71% in October from 21% last year. 以上是我们华族中国部分三季度的业务重点。 下面有请国际业务CEO何继红为大家阐释DH近期运营相关的情况。 请继红。 Above are our key business development updates for the quarter. With that, I will now turn the call to our CEO of International Business, Ms. He Jihong, to discuss our DH business development during the quarter.

Can you hear me well, Jason? Hello?

Yes, please.

Okay, thank you. Thank you, Jinghui and Jason. My name is Ji Hong. I'm responsible for international business at Huazhou. In our international business, we're very happy to report that we have continuous recovery in the third quarter. Our blended REVPAR increased to 102% compared to the same quarter in 2019, with this recovery trend continuing October as well. The recovery is primarily brought by ADR, which was increased by 17% compared to the same quarter in 2019. This demand continues to be driven by transient leisure travel and pent-up corporate group businesses. In the third quarter, our team in Deutsche Hospitality continues to focus on cost management and the margin improvement. As a result, we can report the third quarter EBITDA of 94 million RMB, a significant improvement compared to the loss of 115 million in the third quarter 2021 and an achievement of 213% increase compared to second quarter 2022. This margin improvement was driven by hard quarter overhead reductions, operational efficiency improvement alongside with the REVPAR growth. At the same time, we're carrying out several energy management initiatives in our hotels to cope with the increasing energy costs in Europe, especially in Germany. In the third quarter, we added 23% system-side growth of hotel rooms compared to the third quarter of 2019. We launched our new website with all brands and a new issue rewards program to focus on loyalty development and a direct booking channel. We rolled out several new digital products to improve technology deployment. We're currently focusing on digital sleep to further improve efficiency of our budget hotels through technology deployment. With this, I'm handing over to Miss EFA for the third quarter financial results.

Thank you, Jihong. Good morning or good evening to everyone. Let's move on to our operational and financial review for the third quarter of 2022. As shown on slide 17, Lexi Huaju blended the REF PAR for Q3 actually performed well, only 10% off from 2019, mainly dragged by the occupancy rate. The ADR 2022 Q3 was up by 3% on a year-over-year basis, and the REF PAR was up by 9%. Turn to page 18. Lex CDH business recovery further accelerated in third quarter, as Ji Hong mentioned. Our Lex CDH blended REF PAR for Q3 grew by 57% to 76 euro compared with Q3 2021, and also grew by 2% compared with the 2019 level. The occupancy improved by 17 percentage points compared with Q3 2021, but still 9.6 percentage points lower than 2019 level. The ADR improved by 15% year over year to EUR$114, which actually exceeded the 2019 level by 17%. Driven by the pent-up demand in Europe, and also price increase to against cost inflation. Please see our financial results on slide 19. Total revenue grew by 16% year-over-year to RMB 4.1 billion in Q3, mainly driven by the 7.7% year-over-year revenue growth of Lexi Hua to RMB 3.2 billion. and 68 year-over-year revenue growth of Lexi DH to RMB $932 million. Revenue was in line with our previous guidance. Lexi Huatu revenue growth was mainly supported by the leisure demand in the summer holiday during July and August and the gradual recovery of the business traveling in late September, as well as a low base from last year. Breaking down of the revenue in Q3 leased and owned revenue grew 15% year-over-year to RMB $2.7 billion. Excluding DH, leased and owned revenue of Lexi Hua Zhu grew by 0.5% year-over-year to RMB $1.3 billion because we shut down some loss-making hotels during this quarter. Revenue from managed and franchised hotels declined by 16% to RMB $1.3 billion mainly driven by 16% revenue growth of Lexi Huazhou and 22% revenue growth of Lexi DH. The 16% year-over-year growth of revenue from the Managed and Franchise Hotel of Lexi Huazhou also included roughly $120 million RMB impact from the management fee waiver provided to the franchisees during this quarter. Due to the strong business recovery of Lexi DH's leased and owned hotels during this quarter, at the group level, the managed and franchise revenue contribution was flattish at 32% in Q3 compared to last year. But China only, although considering the managing fee waiver provided to our franchisees, our managed and franchise revenue contribution in the third quarter further expanded to 40%. compared to 38% in Q3 last year, thanks to our continuous network expansion with SLI model. Now let's move to the cost and profitability section on slide 20. In Q3 2022, the reported operating income was RMB 500 million compared to only RMB 72 million last year and RMB 8 million a quarter before. The significant increase of the operating income year-over-year was mainly due to better China business performance and the recovery of DH business. Excluding DH, Legacy Huazhou's operating income in Q3 was RMB $449 million, grow by 88% year-over-year, and improved significantly from RMB $21 million a quarter ago. The hotel operating cost for Q3 was RMB $3 billion. increased by 6.6% year-over-year. For Lexi Hua Chu, it recorded RMB 2.3 billion hotel operating costs, almost flattish from last year. The increase was mainly from variable costs such as utility, salaries, performance-based bonuses for hotel GM, and more GM recruited as our hotel network expands. But we offset the cost by roughly RMB $130 million rental reduction, which doubled the amount we achieved in Q2. For Lexi DH, we recorded RMB $744 million hotel operating cost, indicating 18% year-over-year growth. The increase was mainly due to the increase of variable costs associated with business recovery, such as labor, FMB, variable rents, and et cetera. but we have less rental reduction compared to the same quarter last year as business recovered. Our pre-opening cost was RMB 25 million in Q3, mainly due to the limited service lease and owned hotels under construction during this quarter, including the flagship intercity hotels. This number is expected to be small as we raise the hurdle for the lease hotels and very much focus on the SLI model. Our SG&A in Q3 increased by 1.6% year-over-year and 15% Q-over-Q to RMB $586 million. Including DH, SG&A for LexiHua2 was flattish on a year-over-year basis to RMB $435 million, in which the labor cost was roughly the same as last year, while the headcounts were already trimmed during this time. Further efficient improvement is on the way. The 31% Q over Q increase was due to the resumption of business in Shanghai headquarter vis-a-vis the lockdown in Q2. On DH side, overall the selling expenses increased along with the business recovery and it generated higher efficiency as the selling expenses as percentage of revenue actually declined by 2% from quarter to quarter. Although other operating income in Q3 2022 increased by 90% year-over-year to RMB 76 million, mainly due to more subsidy received from government for our China business side. Turn to page 21. Our adjusted EBITDA was RMB 491 million in Q3 2022, compared to RMB 385 million a year ago. DH achieved better profitability in Q3 with EBITDA at RMB 94 million compared with the loss of RMB 116 million last year. Excluding DH, Lexi Huazhou recorded an adjusted EBITDA of RMB 397 million, declined by 20% year-over-year, but significantly improved from RMB 23 million a quarter ago. The year-over-year decline was mainly due to The RMB 340 million Forex loss brought by the depreciation of Eurodollar versus our accounting currency USD, which largely is a non-cash loss. If we exclude the Forex loss, the EBITDA would be over RMB 150 million higher than 2021. In Q3 2022, we recorded adjusted net loss of RMB 375 million. enlarged from the loss of RMB $46 million a year ago and the loss of RMB $84 million a quarter ago. Excluding DH, Lexie Huatu recorded an adjusted net loss of $389 million, enlarged from a loss of $39 million a quarter ago. The net loss was mainly due to Forex loss, as I mentioned previously, and also the timing adjustment of effective tax to be paid in China between the quarters. Adjusted net profit of Lexi DH turned positive for RMB 14 million for the first time in Q3 compared to the net loss of RMB 164 million a year ago. Coming to the cash position, Our net debt increased slightly to RMB 6 billion in Q3 from RMB 5.7 billion in previous quarter. It was mainly due to some bank facilities withdrawing this quarter. Our cash balance improved to RMB 5.2 billion in the quarter from the RMB 4.7 billion a quarter ago. The unutilized bank facility, RMB 2.9 billion. Given the COVID impact remains uncertain, we are very cautious on CAPEX and OPEX spending to preserve cash. In addition, we have successfully redeemed our convertible note with amount of US dollar 475 million recently through both the combination of bank facilities and cash generated from operation. Turning to page 24 on guidance. Given lately there are more resurgences of COVID happened in many provinces and cities Each word expects revenue to grow 7% to 11% in the fourth quarter of 2022 compared to the fourth quarter of 2021, or to decline 1% to 5% if excluding DH. Again, above guidance only reflect our current view, which is subject to change. With that, let's open for Q&A. Thanks.

Thank you. We will now begin the question and answer session. As a reminder, to ask a question, you need to press star 11 on your telephone. Please stand by while we compile the Q&A roster. Our first question comes from the line of Dan Xu from Morgan Stanley. Please ask your question, Dan.

Hi, good morning. Can you hear me? Thank you for giving me this opportunity. I have two questions. The first question is about China. I would like to ask you about the trend of REFPA in China since the fourth quarter. Because we saw a slight decline in October, which is 74%. May I ask, as of now, in November, the current situation, the trend of REFPA, and the negative 1% to 5% of China's revenue guidance in the fourth quarter, is it relative to the fourth quarter? What kind of REFPA expectations do we have? And what are the expectations for the opening of the store? Thank you.

Sorry, please allow me to repeat my question in English.

This is Dan from Morgan Stanley. I have two questions. My first question is on legacy huazhou, China domestic business. I would like to ask about the recent REFPA trend. For October, we saw that there was some decline in REFPA due to more tightening measures. So October REFPA was 74% of 2019. I would like to ask about the trend in November and also for the fourth quarter revenue guidance, especially for Legacy Huazhou. What did management factor in terms of REFPA and also hotel opening expectation?

Thank you.

Okay. Let me answer the first question. After the fourth quarter, the epidemic in China is indeed in a state of spread, and the control of different cities is also continuing to move. Therefore, with such a situation, China's heat rate recovery is expected to be between 70% and 75% in the fourth quarter. The second question is about the impact of opening up on the entire heat income. To answer your first question,

Given more sporadic resurgence of COVID happen in China in many cities and provinces and we are seeing or strict restrictions carried out by the local governments again to maintain the zero policy in China. So we are now expecting the first quarter our recovery could be in a range of 70% to 75% for our China business. In terms of the opening, in the first quarter, given the recent COVID impact, the opening will be somewhere affected as well. However, if you ask about the growth opening effects on the revenue, actually the fourth quarter new opening has very limited impacts on the revenue for the fourth quarter. Majority of the impacts will be from, again, the REFPA recovery, which is largely impacted by the recent COVID resurgence. Thank you.

Thank you, Mr. Ding, and Jason's answer. My second question is about overseas DH. In the context of the increase in European energy costs and inflation, Mr. He just mentioned that the management has an energy response response measure in this regard. I would like to ask if you can give us more guidance in this regard. Because we see that the operating cost of DH in the third quarter is actually a little lower than that in the second quarter. My second question is about overseas DH business. So against the backdrop of surging inflation in Europe, and can management share with us more about the energy efficiency measures implemented by DH? We saw DH operating expense actually declined 40% Q and Q in third quarter. What is the trend in fourth quarter and should we expect further increase during the winter?

Thank you. Thank you, Dan, for your question.

I will address the issues of international businesses. Your question is quite complicated, so I tried to dissect in different areas. Actually, we are focusing, first of all, on top line management. So we're focusing on revenue management, really to generate top line results and increase ADR where possible, which is really in line with all the international hotel management group, especially with inflationary results. At the same time, of course, we'll continue our operational improvement program that we already started this year, including operational cost management, especially in headquarters, efficiency improvement, which is at the hotel level, as well as energy efficiency management that you mentioned. At the same time, actually, we are also conducting our portfolio review as well about really the performance of our assets. The energy efficiency management on the hotel level are very granular and very operational. For example, you do not turn on the aircon when it's not necessary. You turn down the heat when it is too warm, and you turn off the light when there's nobody in. So we really try to penetrate to all the operations, day-to-day operations. to cut down our energy costs. At the same time, we are also negotiating with the energy supply company where we can fix the cost, and we will fix them, and where we see a possibility to work with the flexible pricing, we will do that. Basically, we are working in a short-term fixed price and in the mid- to long-term more flexible pricing. But just to assure you that we are really working very closely with the energy supply companies to manage our cost. Some of these effects we reported this quarter, actually you should be able to continue to observe them in the fourth quarter and the next year as well. especially in some of the efficiency improvement program and the overhead cost reduction, the four-year result will only start to show after the one-time kind of write-off. I hope that addressed your question, Dan.

That's very clear. Thank you, Michelle.

Great. Thank you for your question. Our next question comes from the line of Ronald Leung from Bank of America. Hi, can you hear me? Yes, please go ahead.

Can you hear me? 我想請問這樣有沒有更影響到這個加盟商的情緒呢? 如果可以的話,可以分享一下過往幾個月的酒店簽約的情況是怎麼樣嗎? Please allow me to ask the question in English. So over the past few months, there was still COVID outbreak across various cities and provinces in China. Do you see that this would further negatively impact the franchisee sentiment? And if possible, could you share the monthly hotel sign-ups over the past few months? Thank you very much.

Let me answer this question first. Indeed, China's ongoing epidemic management has a significant impact on the entire market. We can't deny this. China's contract speed at the end of the third quarter and the end of the fourth quarter is probably about 80% normal. Of course, we also see some positive situations. In China, we still have two major markets in the operating market. One is in the first and second-tier cities, and the other is in the third-tier cities. In general, the impact of the three or four-line epidemic prevention and confidence is far less than that of the first and second-line cities, because the current epidemic mainly broke out and was mainly in the first and second-line and provincial cities. So we also noticed a different situation in different cities. The recovery of the confidence of the joiners may still have to wait for the whole epidemic control to relax and the whole OK.

So, yes, to address your question. So basically, we agree that the current restriction due to COVID has continuously affected our franchisees' confidence sentiment. So in terms of the new signings, we are seeing the recent new signings in third quarter and fourth quarter are roughly at 80% compared to a normal period. However, you know, we look at that things in different ways because China is big. So we are seeing that quite different development trends if you divided the country into tier one, tier two cities and the lower tier cities. In fact, we are seeing that in the lower tier cities, actually the confidence sentiment impact and COVID in cap are much smaller compared to those tier one and tier two cities because more resurgence of COVID happened in those tier one, tier two cities. So that's why the confidence level for the franchisees in lower tier cities are relatively better compared to those in the tier one and tier two cities. And I think if you are talking about the full recovery, so we still need to wait until the further ease of the COVID restriction and the improvement of the economic condition in the upcoming futures. However, for us, in terms of our strategy, we will not, not because of the weak market condition or low confidence level, we will insist on implementing our strategy in terms of the lower tier cities penetrations as well as, you know, further penetrating or, you know, increase our market share in the upper mid scale segment. Thank you.

Okay. Thank you, John. Thank you, Jason. My next question is about the development of the company in the Huanan market. The Huanan market is a very important market, but the market share of the company is relatively small. Can you share with us the recent progress in the Huanan market? Does the company have a medium-term goal to develop in the Huanan market? I asked my question in English. So the southeast market in China is one of the regional markets that the company has put great emphasis on. So could you share the latest development in the southeast market? And if possible, could you share the mid to long term development target in the southeast market of China? Thank you very much.

Yes, the entire Huanan market is the main focus of Huazhou's future regional development. Huazhou has made some preparations in the past year. The first is the downfall and advance of our entire regional organization. In the past year, we have prepared a group of core cadres from Shanghai and localization to build a southern company. The whole organization has been basically formed. The second is that we are actively planning on the localization of the entire talent. And the localization of sales and product power. Because the needs of customers in the southern market and the past in Shanghai and the north may still be different. So we are close to the users. The work to match our brand and product power is also basically available. In the past year, Huazhou has been growing in the south. Our goal is the same as other areas, to achieve a market penetration rate of 20% in the future. So this work is taking place in several areas. We are in Shenzhen, Guangzhou and the core areas of the south. Okay, thank you for your questions. So in terms of the southern part of China,

Yes, it is one of the most important regions that we are going to further penetrate. In order to achieve this, we have been making a lot of preparations over the last year. The most important thing is that we did a very significant organizational restructuring and we moved the entire organization down to the the regions as well as move a lot of the middle management team from the Shanghai headquarters to the local market. At the same time, we are also building up localized based talent pools and trying to make, for example, the localized marketing strategy, localized supply chain management to meet the customer demand in that particular market because those customers' demands are somewhere different compared to what we have been seeing in eastern part of China like Shanghai. In terms of the long-term targets, again similar to other regions, we are targeting 20% of the market share in southern part of China as well. Actually, we have been opening several flagship stores in core cities in southern part of China, like Shenzhen, Guangzhou, by using our Hanjing Ji Hotel, as well as Orange and Crystal Orange, to provide some of the showcase in that market. So we are hoping that in the next three to five years, we will be achieving a very good development in that particular region. Thank you.

Thank you, Jason.

Thank you for your question. Our next question comes from the line of Simon Zheng from Goldman Sachs. Please ask your question, Simon.

Hello, can you hear me? Yes. Okay, thank you. I have two questions. The first question I want to ask you is, I think I saw your ADL in the past few months compared to 2019, it is still doing quite well. The question I want to ask is because you just said that under the epidemic, many single hotels have recently closed a lot. My first question is related to the price of ADR. We have observed that over the last couple of quarters, the ADR has been very resilient. In fact, it's actually exceeding the 2019 level. Given the fact that there's a lot of independent hotels being closed over the last couple of quarters, given COVID, would management see the opportunity for them to raise price after the COVID is over? Thank you. Yes, regarding the ADR issue, I think it benefits from two dimensions.

One is external, and the other is internal. With the deepening of regional management in Huazhou, we have built a price system between different brands within Huazhou and a regional joint marketing structure. The reason for this is that our ADR has been adjusted and ensured long-term growth. This work is indeed an important part of the ADR management work. At the same time, it is also affected by some external markets, including this increase in inflation, including the weakening of the entire single hotel, which will give us some space for market ADR improvement. So the problem is that ADR is a very important core revenue management content. OK, thank you.

Yes, for the ADR, actually, it has benefited from both external and internal factors. For our internal factors, this is actually aligned with our regional management that we have been doing over the last few months. So internally, we have been using pricing synergy, brand synergy, and original synergy to create a better ADR to assure that for a longer term, healthier and sustainable growth. And it becomes a very important part of the long-term revenue management. This is one. And for the external factors, Yeah, this is due to several factors like higher inflation, as well as the impact of the continuous closure of the independent hotels that also from the external side to provide some of the room for our further improving the ADRs in the longer term. Thank you.

Okay, thank you, Mr. Guan. Another question I want to ask is about the brand's strategy. Just now, you said that the number of hotels has exceeded 500. Then, with Hanting and G-hotel, three brands have exceeded 500. I want to ask, in the future, do you think you should build a few larger brands, or like other competitors, maybe increase the number of brands, or... The next question is in relation to the brand strategies. Observe and also saw in the presentation that now you have three brands where you have more than 500 stores, including Hunting G Hotel and Orange. I'm wondering whether the company would want to concentrate in those three brands or several key brands, or just like other competitors, they're going to be diversified and expanded into a lot more different brands. Thank you.

Okay, let me answer the question about the thinking of the brand strategy. Huazhou emphasizes a core logic in the brand strategy, All the brands have to belong to each other. We hope that in the limited service, middle and high-end, as well as in our high-end strategy, we can cultivate and reproduce the brands that belong to each other in China. In the past, we have cultivated Hanping in the national market. We are also actively cultivating Nihao in the lower market. In the middle market, we have also developed the first To answer your questions, in terms of our brand strategy,

Our key thing behind this is that in each of the segments, we were trying to build up the number one or number two brands in the market. So in terms of our economic segments, we have been successfully established a very strong brand, which is Hanjin. And we are also establishing now the Nihao brands specifically for the lower tier cities penetration. And in terms of the middle scale segment, Our G Hotel has been very famous and popular in the market and leading top brands in the middle scale segment. And we are seeing pretty good progress on the development of Orange Hotel. And we hope that it's going to be creating another one in that particular segment. So basically, for each of the segments, we want to have one or two brands which is on the top list of the brands and which can create a very popular brand that our customers like and helps our franchisees to make money. Thank you.

Okay, thank you.

Great, thank you very much for all your questions. We have now reached the end of the question and answer session. I'll now turn the conference back to the management team for closing remarks.

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

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