H World Group Limited

Good day and thank you for standing by. Welcome to H-World First Quarter 2023 Earnings Conference Call. At this time, all participants are in a 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. To redraw your question, please press star 11 again. Please be advised that today's conference is being recorded. And I'd like to hand the conference over to the IR Director, Mr. Jason Chen. Please go ahead, sir.

Thank you. Good morning and good evening, everyone. Thanks for joining us today. Welcome to Edgeworth Group 2023 First Quarter Earnings Conference Call. Joining us today is our founder and chairman, Mr. Jiqi, our CEO, Mr. Jinghui, our CFO, Ms. He Jihong, and our president, Ms. Liu Xingxing. Following their prepared remarks, management will be available to answer your questions. Before we continue, please note that discussion today will include forward-looking statements made under the safe harbor provision of the United States Private Securities Litigation Reform Act of 1995. Forward-looking statements involve inherent risks and uncertainties. As such, our results may be materially different from the views expressed today. A number of potential risks and uncertainties are outlined in our public filings with the SEC. Edgeward Group does not undertake any obligations to update any forward-looking statements except as required by 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 slide presentation, is available at IR.EdgeWorld.com. With that, now I will hand over the call to our CFO, Ms. He Ji Hong, for opening speech. Ms. He, please.

Good morning and good evening, ladies and gentlemen. Thank you for joining our first quarter 2023 earning call today. With the reopening in China, we have experienced a very positive growth in the first quarter of 2023. Our franchisees are rebuilding their confidence and accelerated investment in new hotels. After COVID, we observed people in China are willing to expand more experience-related activities like travel, similar to what happened in the rest of the world. In a nutshell, we had a very good start in this year, and we're very happy to report a strong performance in the first quarter of 2023. Mr. Jin Hui, CEO of H-World Group, will highlight the key achievements in this quarter, followed by elaboration of financial performance. As always, we will have a Q&A session after management presentation. With this, I now hand over to Mr. Jin Hui.

Thank you, Ji Hong. As usual, let's look back at the recovery of Huazhou RERPA in recent days. Please turn to page 3. Since the policy was opened in November last year, the RERPA of the company has been rising overall. From April 1 to April, Huazhou China's mixed RERPA has recovered 96%, 104%, 102%, and 127% respectively in 2019. It cannot be denied that Thank you, Ji Hong.

Let's firstly turn to page 3 to review our REFPA recovery in the recent months. Overall, REFPA has been trending up since the reopening in November last year. Our legacy Huazhou's blended REFPA in January, February, March, and April recovered to 96%, 140%, 120%, and 127% of 2019 level respectively. Please turn to the fourth page.

The long-term sustainable growth momentum is mainly based on the following three aspects. The first is the adjustment and optimization of organizational structure. By establishing regional branches, the operation is more precise and efficient, and the regional penetration capacity is further strengthened. The second is that there are still a lot of opportunities for development in low-end cities in China. At the same time, the economy is more resilient, which improves the payment capacity of low-end city residents. Please turn to page four.

We believe our sustainable long-term REVPAR growth will be driven by three key aspects. Firstly, our organizational restructuring and optimizations. The establishment of our regional headquarters enables more localized and efficient operations as well as achieving further market penetration and synergies in each region. Secondly, lower tier cities in China still appear plenty of growth opportunities, especially considering the local residents rising spending power supported by high economic resilience. Thirdly, we will continue our efforts on further product and service upgrade and improvement in order to achieve a higher price premium.

In the last quarter, we communicated with everyone about the strategic focus of the company this year, which is to focus on the growth strategy of the economy. And the growth of the economy is divided into three strategic directions. The first is the expansion of hotels based on high-quality door stores. Please turn to page 5. From the expansion of hotels, this year, the increase in confidence in the first quarter has gradually increased. Our new Qianyuan Hotel has reached 672 houses and has increased by 26%. There are 262 new stores, mainly affected by the epidemic. The opening is slow. There are 209 key stores. On the one hand, it is because we have closed low-quality economic soft brands and Hanting 1.0 products. On the other hand, there are 122 stores. On the other hand, as we mentioned last quarter, last year's fourth quarter was affected by the epidemic. Some hotels have not finished their closing process.

As we discussed in our last quarter's earnings call, the sustainable quality growth is our core strategic focus in 2023. Under this core strategy, we will focus on three key areas. First is our high-quality hotel network expansion. Please turn to page 5. In the first quarter, excluding the soft economic hotels, we signed up 617 new hotels during the quarter, up 26% year over year, which reflects our franchisees' confidence level is gradually improving in the first quarter. During the same period, we opened 262 new hotels, which was slightly down year over year, mainly due to COVID impact. On the hotel closure front, we closed a total of 209 hotels in the first quarter, including 122 inferior economic soft brands and hunting 1.0 version hotels to further improve the quality of our entire hotel portfolios. In addition, as we mentioned in the last quarter, some hotel closure processes were uncompleted in the fourth quarter 2022 due to COVID impact and therefore were delayed to this year.

Please turn to page 6. The penetration of the company in low-end cities is also continuing. Since the first quarter of this year, the number of hotel resorts in the company has been 8,464, of which 39% are located in low-end cities, which is a 2% increase. The number of hotel corridors in the company is 2,304, of which 56% are located in low-end cities, which is a 1% increase. Please turn to page 6.

We continued implementing our lower tier cities penetration strategy. As of March 2023, we have a total of 8,464 hotels in operation, of which 39% were in the lower tier cities, up 2 percentage points year over year. And we have 2,304 hotels in the pipeline, with lower tier cities contributing around 56%, up one percentage point year over year. The number of city coverage for both hotels in operations and in pipeline increased to 1,132 cities, compared to 1,089 cities a year ago.

The company's second strategic direction is the breakthrough development of medium-sized and medium-high-end brands. Please turn to page 7 and page 8. In terms of medium-sized brands, the company has launched Orange 3.0, a new product. The hotel is orange as the main tone, with the concept of joy, and the healthy movement, environment, and sustainable development of life are included. The details of the hotel do not reflect the environment and sustainable lifestyle. The whole guest room materials and guest products are used to reduce materials and resources. In short, Juzi Hotel conveys a positive and happy attitude towards life and the pursuit of green environment. It provides customers with a lively, more sunny and positive living experience. It also meets the needs of young consumers for design, experience, and vitality. With the formation of a good complement to all brands, Juzi will further expand

Our second strategy is to further break through in the mid-scale and upper mid-scale segment. Please turn to page 7 and page 8. For our mid-scale segment, we launched Orange Hotel 3.0 version with the orange as the theme color, emphasizing the concept of LOHAS, meaning Lifestyle of Health and Sustainability. Orange 3.0 version brings together the healthy vitality and environmental sustainability. Every detail in the hotel conveys the idea of an environmental friendly and sustainable lifestyle. For example, every kind of material we used in hotel renovation and the consumable products we provided to our guests in the hotel room are all degradable and renewable. In summary, our new Orange Hotel 3.0 version expresses a positive and happy lifestyle and pursues the concept of green and environmentally friendly. It provides a more energetic, sunny, and fresh accommodation experience to our customers. We believe our new Orange Hotel is well positioned to meet younger customers' demands on nice design, experience, and vitality. and becomes a good complementary product to our G-Hotel. And we believe the orange brand should further enhance Edgeworth's competitiveness in the middle-scale hotel segment.

Please turn to page 9 and 10. In terms of Chinese makeup brands, the company will introduce the Intucity brand under DH into China, becoming the Chenji brand. The brand is located in Wuhan, Zhengzhou, Shenzhen, and Shanghai. The first step in the development of the brand has been developed in many places. Inc.City, a German company, serves business people in the legendary Chen Ji. It is closely related to the development of European railways and has a layout in Europe's major transportation hub. Huazhou has a deep understanding of China, and Chen Ji's introduction is a very good example of this. Xi Ji once said that we are not recruiting German brands to China, but that China is a German brand. Therefore, the Chenji brand will not only pass on the intensity of the European market, but also need to evolve the insight and brand of consumers in China. The high-efficiency, quality, and simple German brand will be promoted as an extreme commercial brand. Chenji Hotel in China is mainly focused on core business and transportation. The hotel's guest room design is mainly in black and white, and the simple design is based on practical functions. For the new generation of business elites in China, Please turn to page 910.

For our upper-midfield segment, we successfully introduced DH's intercity brands to China. We recently opened four new intercity hotels in Wuhan, Zhengzhou, Shenzhen, and Shanghai. These grand openings are very important steps for intercity's future scalable development in China. Intercity hotels in Germany mainly target and service business travelers who frequently travel between cities. The hotel development is closely aligned with the railway development process in Europe, covering major transportation hubs in Europe. In-depth development in China market is always our key focus and introducing intercity brands in China market will reflect As our chairman, Mr. Jiqi, once said, we are not simply introducing the German brands to China. Instead, we are interpreting the German brands in China. Therefore, industry brands in China not only integrate the European features but also conduct the local brand evolutions and observation on consumer behavior to refine the intercity brand DNA, which is offering the ultimate business travel experiences from German features of efficiency, quality, and safety. In China, intercity hotels will be mainly located in major commercial centers and transportation hubs. The theme color of the hotel room is black and white and gray. and the design is very simple but highly functional. With the Intercity brand, we aim to provide Chinese new generation business travelers a better experience with high-quality stay, workspace, service, and food.

For a long time, Huazhou has been focusing on the development of membership and self-employment channels. In the first quarter of this year, we have seen that the daily number of Huazhou apps and small programs has been doubled and tripled before the epidemic, and the percentage of predefined channels from the central government has also risen to 62%, which has increased by 15% before the epidemic. I need to remind everyone that Our third strategy is to further upgrade and strengthen our organizational and digitalized operational capability.

Please turn to page 11. We have always put great emphasis on membership program development and direct sales capabilities. We are very pleased to see our EdgeWord app and EdgeWord mini programs daily active users in the first quarter of 2023 increased by two times and three times compared to the first quarter of 2019, respectively. In addition, our direct booking through our CIS system reached a record high of 62% up 15 percentage points compared to the first quarter of 2019. It is worth noting that our CRS contribution includes booking through our own channels only and excluding contribution from OTAs and other third-party distribution platforms. Here concludes our business review and update for the first quarter of 2023. With that, I will now turn the call over to our CFO, Ms. He Jihong, to discuss our financial performance for the quarter.

Thank you, Chengfei. I'm now going to elaborate a key financial achievement in this quarter. Please turn to page 13. Our hotel network continues to expand. In first quarter 2023, the number of rooms achieved 7% growth compared to the same period last year, and it stands at 820,099 rooms. Hotel turnover achieved 71% growth compared to first quarter 2022, and it stands at more than RMB 16 billion. Please turn to page 14. Legacy Huazhou blended revenue recovered to RMB 210. This is an 18% increase compared to first quarter 2019, and 58% compared to first quarter 2022. The revenue growth, the REFPA growth is largely driven by ADR increase, which shows a 25% compared to the first quarter 2019, and 24% compared to first quarter 2022. Our average occupancy rate stands at a 76% in this quarter. Please turn to page 15. Legacy DH blended revenue recovered to Euro 55. This is an increase of 66% compared to first quarter 2022. The recovery is driven by both ADR and occupancy. As first quarter 2022, we still face a quite heavy COVID impact in many countries where DH operates. Please turn to page 16. H-World revenue grew to remain be 4.48 billion in first quarter 2023. This is an increase of 67% compared to first quarter 2022, slightly above our guidance. Legacy Huazhou revenue grew 58% year on year to remain be 3.59 billion, and the Legacy DH revenue grew 818% in the same period achieving RMB $886 million. This reflects the REFPA recovery trajectory thanks to the reopening of China and the rest of the world, continued product upgrade, as well as the market penetration and synergy achieved through regional offices in China. Please turn to page 17. Our operating income in the first quarter of 2023 grew to RMB $664 million compared to a loss of RMB $708 million in Q1 2022. Legacy Huazhou achieved RMB $822 million, turning into positive territory compared to a loss of RMB $416 million in Q1 2022. Legacy DH still made a loss in Q1 2023 but it narrowed its loss by maybe 140 million compared to the same period last year. As a group, we maintained a total SG&A cost at 13.8% of our total revenue, with China at only about 12% in the first quarter. We are very disciplined about our SG&A cost as a percentage of our revenue, and it is under our close monitoring constantly. In Germany and the European countries, we need to cope with costs in an inflationary environment, which has some impact on our profitability. Please turn to page 18. In the first quarter 2023, our adjusted EBITDA recovered to RMB 1.65 billion. This is a significant increase from a negative RMB 333 in the first quarter 2022. This adjusted EBITDA included around RMB 500 million gains from sales and core shares in the first quarter. Adjusted net income was RMB 1 billion in this quarter, compared to negative RMB 662 million in the same period last year. The strong EBITDA and the net income performance are mainly contributed by recovery of Chinese business. Operating cash flow stands at RMB 1.84 billion, a strong increase compared to cash outflow in the same period last year. Please turn to page 19. Our liquidity position is quite strong. As of 31st March 2023, we have a net cash of RMB 957 million. Our cash balance stands at RMB 10.4 billion, and we have an unutilized bank facility at RMB 2 billion. Please turn to next page. Our revenue guidance for second quarter 2023 is 51 to 55% growth compared to second quarter 2022. Excluding DH, the revenue of Legacy Huazhou is projected at a growth rate of 64 to 68%. This implies our RESPAR guidance announced early this year remains unchanged. We are confident about the market recovery and the performance for the rest of this year.

Yeah, thanks, Jihong. So now we can open for the Q&A session. Operator, please.

Certainly. As a reminder, to ask a question, please press star 11 on your telephone and wait for your name to be announced. To withdraw your question, please press star 11 again. Please stand by while we compile the Q&A roster. Once again, that's star 11 for questions. Our first question comes from the line of Ronald Leung from Bank of America. Please go ahead, Ronald.

Hello, good morning, management. Thank you for taking my question. 我有兩個問題,我就先用中文問,然後再用英文問吧。 首先我的第一個問題就是管理層對於二季度的RAF power recovery, 現在的預期是什麼? 這個是第一個問題,二季度的RAF power recovery。 The second question is about the management's view on the supply of this market. Because since this year, the recovery of this RAFPA has been quite good. Maybe some hotels will return to this market. So what is the management's view on this overall supply? Will they be worried that these new supplies will affect the recovery of this RAFPA? Hi, good morning, management. Let me ask my questions in English. My first question is, what is management expectation for Rafta recovery in the second quarter? The second question is about the supply outlook for the hotel industry. The Rafta recovery has been solid. Some franchisees or hotel owners are planning to reopen their hotels in the upcoming year. So do expect the increase in the hotel supply will hurt the RASPAR recovery. Thank you very much.

I would like to answer the first question. Regarding the second quarter, we have maintained the prediction range of RASPAR from 110 to 115 in the beginning of the year. This is the first question. The second question is about market supply. Indeed, we have seen that in the past quarter, the entire Chinese market uh, uh, uh, uh, uh, uh, Thirdly, I think this hotel industry has never been without competition. The hotel industry has been a market competitive industry for a long time. Huazhou is concerned about the long-term improvement of brand, product, organization, and management capabilities to continue the competitive capabilities of Huazhou in the Chinese market. We hope that through these core people, we can grab more market share in the future. Thank you.

Okay, so thank you. So firstly, I will answer the first question. So for the revenue guidance for the second quarter of this year, so it implies the REFPA, blended REFPA recovery compared to the same period of 2019, which is in the range of 110% to 115%, which is in line with our annual guidance in terms of the REFPA recovery. And for the second questions, Yes, for the first quarter we are observing some of the supply gradually increase but in relatively slower paces. But given the recent macro conditions as well as the property market cyclical issues, we are not seeing a large increase in the supply at least in the short term. Even though we are seeing some of the supply is gradually, you know, coming back into the market, but the clear trend is the branded hotel penetration or the chain ratio continuously improved. And this is actually, you know, keep the main pieces of the market unchanged. And certainly in terms of the competition, we think the competition is always there, no matter before or post COVID. But for us, we will continuously emphasize on building up our core competencies through improved branding products and service, as well as our organizational capability to increase our entire competitiveness in the market. Thank you.

Thank you very much.

Thank you. Our next question comes from the line of Sijie Lin from CICC. Please ask your question, Sijie.

Thank you, Manager Tang. I have two questions. The first one is a follow-up question on rapid recovery. Do we think the recovery of ADR drive is positive? and will there be a long-term lack of business OCC? The second question is, after seeing the recovery of the first quarter, what is the situation of the new contract of the second quarter, and how is the mood of the farmers? So I'll translate my questions into English. So my first question is a follow-up question on RAFPA recovery. So do we think the current ADR-driven recovery is healthy and sustainable? and will the gap in OCC recovery, especially for business demand, exist for long? And my second question is that what's the pace of hotel's new signings and the franchisees' sentiment in Q2 after they saw Q1's recovery? Thank you.

Okay. Of course, it also reflects a lot of the growth of consumer power, especially in some tourist and holiday markets. Consumers are willing to pay for better products and services. This hospital also performed more clearly than before. Secondly, regarding the OCC of business, we did see such a gap. This is related to the cycle and development of China's macroeconomic economy. We also saw some statistical analysis and saw that China's business rate will fully recover by 2024. Okay, now I will answer the first question in terms of the RevPath.

Clearly, REFPA is a combination of the ADR and the OCC. In terms of the ADR, undeniably, in the first quarter, I think the REFPA recovery was mainly driven by the ADR, and this is actually very much in line with the entire global long-term market recovery post-COVID-19. And this is somewhere reflects the higher spending capability as well as the impact of the inflation. But I think, well, relatively, I think the ADR growth at this moment is still quite healthy. But again, we observed, especially in the leisure market, people are becoming more willing to pay a premium for a good quality product and a good service. and this will support the ADR growth. In terms of the business traveling, yes, the demand for the business traveling still have some gap compared to pre-COVID. And according to some of the public study, we are expecting the business recovery, business traveling will be fully recovered to the pre-COVID level in around 2024. Therefore, as a group, we will be planning according to this trend.

Regarding the situation of the joiners, after the three-year epidemic, I think many of the joiners in Huazhou have become more stable and mature than before. They have a clearer understanding of the market fluctuations and have more plans for the uncertainty of the future. So for the past joiners in Huazhou, at present, the entire market atmosphere is relatively stable and mature. In addition, we can also see very clearly that Okay, in terms of the franchisees' confidence, so after the three years of COVID, we think our existing franchisees are becoming more stable and more matured.

and they have better knowledge in terms of the volatility and uncertainties. So we think they are very stable at this moment and the confidence is gradually improving as well. But we are also very happy to see, especially in the lower tier cities markets, we have a lot of new franchisees joining us. And those franchises might not be previously in the hotel industry. Some of them are the local property developers or some of them are from some other industries who are willing to join us. Thank you.

Thank you, management. Thank you. Our next question comes from the line of Lydia Lin from Citi. Please go ahead, Lydia.

Thank you. So I would like to ask the company about the profit and loss of DH's business all year round, how to further reduce losses, and what new progress has DH's integration work achieved so far? This is a business related to overseas. The second business is actually a wrapper, because I just mentioned that there is a gap in the OCC, including the opening presentation in front of it. which is a long-term R&P growth. So I would like to ask the management, for the long-term R&P growth of our company, how stable it is, and can you share with us? Hi, management. I'm Lydia from Citi. So here I have two questions. The first one is on your overseas business. So DH business actually is doing some loss making in first quarter. So I want to check with management your view on the DH outlook for year and also how to further narrow the loss and also any updates on the integration of DH business. And my second question is on the Red Park growth. So what's your view on your sustainable long-term Red Park growth looking forward? Thank you.

Okay, thank you, Lydia. This is Ji Hong. I'm going to answer your question first about the DH business. First quarter, you see a loss. It's because of the seasonality. We all understand that, especially in European countries, the seasonality is quite strong and volatile. So in the first quarter, the revenue, was lower due to the seasonality and at the same time the cost because also of the energy cost and the inflationary environment increased our cost. For the whole year we are very confident that we will continue to increase our performance on the revenue side and continue to control our cost and we are confident that for the whole year our EBITDA will come back to the positive territory. And the second question regarding the REVPAR, you can observe from the history of Huazhou, we have been improving REVPAR year by year. This is not only the same store, but also the product upgrade and the product mix as well. And typically, companies' REFPA will grow with the economic growth as well. So for the past several years, and we are confident that in the future, our REFPA will continue to grow with the bigger economic environment.

Thank you. Thank you. Our next question comes from the line of Lina Yan from HSBC. Please ask your question, Lina.

Hi. Actually, there is still a little problem with the cost-effectiveness. In addition, the gap between supply and demand will gradually shrink. The REVPAR guidance given in the second quarter is also between 110 and 115. So, I don't know if the management level of this company has already seen that ADR is actually the trend of price increase, or the trend of price increase is a little weak. This is the first question. The second question can be shared in detail. We just talked about the power of VAPA growth because we are upgrading our hotel's product portfolio. But this can be clarified. How many hotels have been renovated and what is the difference compared to 2019? What is the power of VAPA improvement? Can you share this? Hi, Lina, can you translate yourself? Yeah, I will translate my question myself. So first question is on the VEPA drivers. especially on the pricing power for the ADR. So we have seen very strong ADR increase in first quarter, driven by inelastic demand. But going forward, we will see the supply-demand gap to narrow, and also the funding power is not as strong as the economy has shown. So also management-guided REVPAR in second quarter will be $150. 110% and 115% of 2019 level. Does that imply management also see like a weakening trend in ADR? Or what kind of change in the mentality of the ADR trend like going forward? And second question is on the impact of portfolio upgrade on Redpar. Management mentioned it's like a key driver for Red Pack as well. So can you quantify the impact, for example, like the percentage of hotels upgraded in our portfolio versus 2019? And what is the impact to the Red Pack growth versus 2019? Third question is, you commented that business travel hasn't recovered to 2019 level, but can you give us more details on the like a recovery in business travel, like even year-on-year or versus 2019? Yeah, that's my question. Thank you.

Okay, I'll answer this question. Everyone may be more focused on the recovery of Royal Park and the market. Let me make a statement. Huazhou has been doing the entire budget since the beginning of this year, I would like to share a few points with you. First of all, China's market, as we enter the summer market, as we enter the tourist market, as we enter the global market, the variety of the market is still relatively large. It is undeniable that in the trade market, due to the economic environment and the period of recovery, There is a certain gap and a necessary time for recovery. But China also shows that due to the relatively strong internal demand and consumption of super-economy, especially in the central government to continue to expand the strategy of internal demand, you can see the live barbecue in April, right? In January, the flood season of the western version, right? and so on, we can see that China is continuously promoting domestic demand and tourism consumption markets. This is a mistake, but it has definitely improved the opportunity to make a profit in the diversified market. We also pay attention to April. In fact, although China's aviation has not recovered, but in April, China's high-speed rail travel numbers It has been more than 2019, and it has shown such a growth in the mobility of domestic consumers among more people. So, the improvement of Huazhou Royal Spa comes from many aspects. On the one hand, it comes from the improvement of the entire regional organization. Of course, it comes from the improvement of products and brands. It also comes from the growth of our entire high-end hotels. Okay, thanks for your questions.

Yeah, we understand that quite a lot of you are concerned about the RFPAR and the ADR, so that's why I would like to elaborate a bit more details and express and emphasize our views again by taking these opportunities. So for us, since the year beginning, during our budgeting process and during our first, during our annual last year earnings conference call, so our views keeps with the cautiously optimistic unchanged. And I hope you can understand this. So our views has been no change since then. And in terms of the RERC part and ADR, I think it is quite a complex combination, especially for us. And talking about the China market, we have the lower tier cities, we have the leisure market, we have the upper scale, we have the upper mid and the middle scale. It's a very diversified market. Undeniably, talking about the business traveling, given the impact of the economic cycle and some of the business traveling demand are not fully coming back yet, But we do see a lot of local demand, especially from the leisure traveling demand side is quite strong since the year beginning to now. And you can also realize that a lot of activities happen in here and there, such as the barbecue events in Zhibo City. and the festival in Xishuangbanna, which is also supported by the government on the leisure traveling activities. And another front is if you're looking at the until recovery in the April, we observed that that airline business actually is not fully recovered, but if you're looking at the railway I think they are very much well recovered or even exceeded the 2019 level, supporting quite strong problem in demand as well. And for us, again, in terms of the long-term sustainable REVPARC roles, we still concentrating on building our co-competencies through branding products and services. and we have different product mix and we also not only the upper mid-scale but also the lower tier cities penetration and it's a very complex combination for us. So if you remember like maybe two years ago you asked us whether your lower tier cities penetration will negatively affect our rough park roads in the future. So that's why, given we are doing a lot of developments in China, not only the lower tier cities, but also the upper mid and upscale. So I think this is very complicated and it's very difficult to us to predict, give a very accurate guidance at this moment. Thank you.

This new crown, I remember, about the recovery of this Ropapa, it's like this. When the new crown is over, we all want to have a resurgence. Whether it's the rate of payment or the ADR, a person's intention to increase the supply chain can be reduced. But in this case, we have appeared a little in the quarter. But it doesn't make us as high as we expected, not as high as we expected. I think this is very normal. I think a country has gone through such a three-year adjustment, whether it's the economy, or confidence, or some leisure consumption, there is a process of various confidence and various recovery. From the outside, it also takes a while to recover. So far, in Europe, we have been to Europe a lot, and the recovery is not so normal, not so good, a process. And China has only been through three years. Europe has been through more than a year, a year and a half. So we have to be patient with this recovery. This is the first one. The second one is China. You can see that the air traffic rate of the plane is not ideal. But the high-speed rail is not bad. We haven't seen our own car yet. I guess the travel of the car, especially in the short distance, in the four-level range, in the low-level range, the amount of driving may not be low. China's recovery is a multi-layered, multi-area, different kind of chaos. In this kind of change, we can see that the cheaper the price is, the stricter it is. In the future, China's economy, you are all analysts who understand more than we do, who are more professional than us. No matter how it is, I think the lower the price, the stronger it is. Whether it's the COVID-19, the financial crisis, or the storm, there are all kinds of things. This basic consumption is very negative. China's recovery in this wave has a very obvious feature. I think it's spending little money to buy a big piece of goods. We can see all kinds of data. They are all very cautious. A high-end hotel may have a lower recovery time. But in the future changes, its resilience will be lower. This is what I think of these recoveries. A lot of people look at China and come to China to see it. This is my understanding. Huazhou is not a company that needs to be driven by ADR all day long. You have to raise prices all day long. At the end, the consumers will leave you. What Jianhui said is that through our whole system, all the ecological circles can benefit. Jiang Mengsheng can make money, the taxpayers don't have to spend too much money, and the ADR doesn't have to increase. Yes, I think this is a strategy for the future. We want everyone to be able to grow up a little bit in this ecosystem, a little bit of recovery. This is a company on a large scale. OK.

Yeah, so because China experienced the three years of COVID, so obviously, you know, at the initial reopening, especially in the first quarter, definitely there are some, a lot of, you know, pandemic demand. People are, you know, keen to traveling and keen to go outside and business. and the franchisees are keen to, you know, resume the business as quick as possible. So definitely the confidence and the consumption power at this moment was quite strong. And the reasons, you know, basically some of the gap or some of the gaps slide slowed down recently we think it is quite quite normal if you compare to to the global market because we traveled quite a lot to to europe um if you see um you know the europe recovery uh currently uh it's not as strong as as before um and especially considering china experienced the three years of covet but i think europe market experience only one half years So we think we should give the market a bit patience in terms of the sustainable recovery going forward. As Jinghui mentioned before, so we observed actually the airline, the occupancy rates for the airline is not recovering to the pre-COVID level. But, you know, the railway station is performing very, railway businesses is recovering very well. And we're still seeing a lot of, you know, traveling demands here and there. And we didn't see any statistic on the self-driving traveling activities, but we strongly believe that it should be quite strong. So therefore, no matter during the COVID or post-COVID, we're still seeing that people are keen to, you know, traveling around no matter on the leisure or business side. In the longer term, we think the hotels with relatively lower price will be more resilient, no matter during COVID or financial crisis or any other crisis condition. So basically, talking about like, for example, the economic segment will be more resilient compared to the upscale. And the recent consumption trend was very interesting, taking the barbecue events in Cebu as an example. we observe that people generally want to spend a little bit of money to buy a big happiness and people who are willing to spend a big chunk of money under this condition are not very high and therefore we think the upscale segments will be taking even longer time to recover. For us, we are not only caring about ADR, we care more on building up core competencies and the entire ecosystem. And, you know, we want to provide the benefits to all our partners, no matter our customers and franchisees in our ecosystem, and everyone will be getting benefits. So we think we should be a little bit patient for the long-term growth potential for the entire long-term markets And we are not only striving to increase the ADR because it is also very difficult to expect ADR or predict ADR trends in the future because there's a lot of factors going to affect the ADR movement. Thank you.

Right. Thank you. Our next question comes from the line of Xin Mei from Huatai. Please go ahead, Xin.

This is how we run the organization for a year or two. What problems do we encounter during this process? How does the company solve them? How does the organization support some new, especially high-end and mid-end brands, such as Orange 3.0 and Intercity? Thanks for the opportunity. Can you explain how the organization structure supports the development of the new brands such as Orange 3.0 or Orange Crystal Intercity? Are there any problems in the operation of this organizational structure and how can the management solve them? Thank you.

I am very happy that someone asked about the organization's problem. I will correct it. Huazhou's organization's transformation has been just fine for a year. After a year of trial and error, we have achieved, I should say, a lot of business results today. The improvement also depends on the optimization and promotion of our organization. I would like to mention the original intention of the organization's promotion of our six business companies. Because Huazhou has divided the future core strategy into several segments. In the past, Huazhou has been a very good limited service hotel. Our strategy is to achieve deep China through business growth. So we did six business companies in China last year to achieve deep China business growth, to improve our business partners, to improve our customers, to improve our operating efficiency. to improve our operating costs, etc. Of course, to improve the ability of the region's economic growth. So it should be said that we have achieved very good results in the limited service market. If there is a shortage, then it is in our entire transformation. The storage and growth of our provincial talents needs time. It needs to give them more time and opportunities to cultivate. So this part of the ability is also constantly The third question is actually the relationship between the limited service of this regional company and the breakthrough of Zhonggaozhan. Zhonggaozhan Business Department is another organization that we have built. It is based on a brand vertical management model. Such an organization is not the same as the market for limited service. The co-operation between us is limited. Our regional companies at the same time promote the development of these Zhonggaozhan companies without participating in management. The management is still focused on the high-end brand business department, looking forward to the breakthrough of our high-end brand strategy through the brand strategy and service experience strategy. So this is the relationship between the two organizations. So if you want to ask about the results of the regionalization of limited service hotels, I am very happy to tell you that we should say that we have achieved very good progress. Of course, we are still on the ability of talent and organization, and there is room for further improvement.

Thanks for your questions. I'm very glad you asked about our organizational restructuring. Firstly, I would like to clarify it is just one year since we conducted our organizational restructuring since last year. I would elaborate more on the purpose of building up this six regional headquarters. So as you may know that one of our core strategy is to fully penetrating in China market in the limited service segment together with our sustainable quality growth strategy. So by doing this, by setting up this six regional headquarters, we are very happy to see a very initial good outcomes over the last year. The regional headquarters are more close to our franchisees and customers and achieving a higher operational optimization as well as the synergies. And in talking about the upper mid-segment, so basically the upper mid-segment or upper mid-brands are still using the vertical organizational structure, but the regional headquarters will help or support the upper mid-segment in terms of the development, but the management will remain within each of the brands and in the headquarters. If you're talking about some of the challenges or, you know, and talking about some challenges, currently we still think, I think in terms of the talent reserve is not still enough, but we think it's going to take some to further building it up. Thank you.

Thank you. I'm showing no further questions. 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 the upcoming quarter. Thank you. Bye-bye.

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